BA 453 Midterm

focus

Concentrate on a specific market and use either a cost leadership or differentiation strategy • Geography, customer type, etc. • Use either cost leadership (low scale economies) or differentiation (exploit distinct knowledge, specialization) • Innovation, speed

Corporate Objective

Create Economic Value

John Connelly went to the grocery store to buy some butter. As he was looking at the butter offerings, he noticed that Pam cooking spray was advertised as $1.00 less for the same amount of product. John purchased the spray. The spray is considered to be a what? A. A complement B. A mobility product C. A replacement D. A substitute

D

Non-price competition such as today's rivalry between Coca-Cola and Pepsi refers to: A. When one firm cuts prices to gain market share, the competition will do the same. B. When a firm is driving costs down in order to gain competitive advantages through lower prices. C. When a firm has no pricing power that leads to a competitive disadvantage. D. When a firm is offering unique products and services as opposed to competing on price.

D

The competitive threat of potential entry is NOT strong when _____________. A.there will be expected competitive retaliation B.there are sizable economies of scale C.there are strong brand preferences and customers are loyal D.All of these

D

resources and capabilities for focus

Deep knowledge of niche Underlying differentiation (or cost) capabilities to meet customer needs

Industry Life Cycle

Embryonic: Educate customers, develop channels, finalize designs - 1 company Growth: Big increase in demand, prices decline Shakeout: Rivalry increases, price wars Mature: Saturated markets, consolidation, all demand is replacement (overcapacity=> oligopolies) Decline: Growth is negative, rivalry driven by exit barriers

Organized to capture

Exploit competitive potential (structure, coordinating systems)

Oligopoly

Few large firms - interdependent (Express mail, soft drinks) Some pricing power Differentiated products High entry barriers

Industry structures are not stable over time. The U.S. banking industry has seen major consolidation in recent years. We would expect the result of this dynamic change to be what?

Generally lower industry profits

Ecological Variables

Global warming Sustainable Economic Growth Carbon Footprint Fossil Fuel Consumption Pollution of air & water Toxins in food and products

Political Variables

Governments Influence Behaviors of firms Campaigns by candidates for office Taxation at local, state, federal levels Political pressure on firms • Negotiations on pharmaceutical prices • Modify home loans

The factors that are important to focus on when mapping strategic groups include:

Identifying the top competitive factors in your market, such as expenditures on research and development, pricing, distribution channels, and customers Choosing two key dimensions from these factors for the horizontal and vertical axes, plotting your rivals along these axes, and looking for differences among the competition Analyzing the firms that are closest to your organization on the map, because they will give your firm the strongest rivalry

Economic Variables

Interest Rates Employment Levels Inflation Rates Currency & Money Supply Disposable & Discretionary Income

Socio Cultural Variables

Lifestyle Changes Career Expectations Demographics Increase in temporary workers Geographic distribution of global population

Monopolistic Competition

Many firms - differentiated products (Computer hardware, organic foods) Some pricing power Medium entry barriers

Perfect Competition

Many small firms - commodity products (pet supply stores)

implications for managers of differentiation

Marketing and service functions are vital - need to be in constant touch with customers. Need to invest in source of differentiation (technology, marketing). Monitor competitors and industry condition

implications for managers of focus

Marketing and service functions are vital - selecting the right niche is tough. Need to grow and evolve with customers. May need to continue to introduce new products to fill needs Monitor competitors - especially bigger ones if you become successful.

Competitive rivalry among firms in the same strategic group is generally

More intense than competition between strategic groups

implications of managers of cost leadership

Need cost advantages in all functions all along the value chain (especially Operations) Monitor competitors and industry conditions for imitation potential Keep tabs on customers so offerings aren't too far from their real needs.

PESTEl Model limitations

Neglects innovation and change Ignores firm influences on forces Excludes firm differences (which may be more important for determining profitability)

Monopoly

One supplier - often government approved (Utilities for electricity, gas, and water) Considerable pricing power Unique Product Very high entry barriers

Rare

Only a few firms possess; Toyota has lean manufacturing which has a temporary competitive advantage

Intangible resources

Organizational assets that are difficult to identify and account for and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources.

Six sigma, lean manufacturing, and generic engineering are examples of ____ that delivers new ways to produce or deliver existing products or services.

Proccess innovations

Technological Variables

Productivity Improvements Focus of Technological Efforts Industrial Spending for R&D Patent Protection Digital Communications Biotechnology Nanotechnology

Resource immobility

Resources tend to be "sticky" & don't move easily

Valuation Principle

The value of a commodity or an asset to the firm or its investors determined by its competitive market price

Most profitable industries

Tobacco, pharmaceuticals, software, soft drinks

Costly to imitate

Unable to buy or develop at a reasonable price

NPV Rule

When making an investment decision, take the alternative with the highest NPV. You can then borrow or lend to shift cash flows through time and find the preferred pattern of cash flow.

Dynamic Capabilities

an organization's capacity to purposefully create, extend or modify resources

Product innovation

change in the appearance or the performance of a product or service or the creation of a new one.

Process Innovation

change in the way a product or service is conceived, manufactured, or disseminated.

External Factors

competitors, government, stakeholders, technology

cost drivers

input factors economies of scale learning curves experience curves

input factors

lower cost money, labor, or materials

business strategy

more likely to lead to competitive advantage if if either the firm performs similar activities differently, or performs different activities than other firms

Value drivers

product features customer service customization complements

Generally, as the level of _____ innovation declines, the level of ____ innovation increases

product; process

resource based view

resources tend to be sticky and do not move easily from firm to firm; therefore, the resources difference that exist between firms are difficult to replicate and can last a long time

Core Competencies

that which contributes to customer value, is different, and is extendable

sustaining/incremental innovation

the creation of products, services, or technologies that modify existing ones

Radical or Disruptive Innovations

the creation of products, services, or technologies, that replace existing ones

Internal Factors

unique firm characteristics and capabilities; coordination of divisions and activities; determining and implementing strategies

Economic value created

value - cost; the great (v-c) = competitive advantage

Strategy Implementation

• Allocate necessary resources • Design the organization to bring intended strategies to reality

Valuable

• Attractive features • Lower costs (& price)

Valuation Components

• Cash Flow From Operations • Discount Rate

Why is one firm more successful than another?

• Develop and sustain a competitive advantage • Focus on things that are hard to imitate • Delivers above average returns

how to use cost leadership

• Economies of scale & high asset utilization • Learning curve and process technology • Vertical integration / disintegration •Interrelationships/Value Chain linkages • Location of activity • Service, promotion, sales policies support • Constant effort to reduce costs • Operations, Materials Mgmt, Info Systems

why not to choose both cost leadership and differentiation

• Fail to choose and implement a coherent strategy consistent with resources, capabilities, competencies. • No competitive advantage, low profits • Environment changed - didn't respond • Wrong choices • Competitors entered • Focuser trying to grow - can't serve the larger market

how to use focus

• Find a group of underserved customers • Discover opportunities to do a narrow task well and cheaply • Fill gaps left by established firms

Cost Drivers

• Fixed • Semi-Variable • Variable • Non-Recurring

why to choose cost leadership and differentiation

• Flexible manufacturing: high variety but keeps costs low; customers have limited set of options • Internet and info technologies: customers do their own service - lower costs; marketing, logistics - cheap and custom • Globalization: manufacture in low cost areas, but still have product differentiation;higher variety of customers - some willing to pay more

Support activities

• Indirectly add value • activities of the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities Includes general administration, HRM, technology development, procurement

Cost Structures

• Payroll Centered (Direct) • Payroll Centered (Support) • Inventory • Space/Rent • Marketing/Advertising

Environmental Factors that affect firms in an industry

• Political, Economic, Sociocultural, Technological, Ecological, Legal

differentiation

• Provide distinct goods at a premium price, but still in proximity of competitors' prices • Products offered at higher quality levels and/or with unique product features and characteristics • Quality, Innovation, Speed

cost leadership

• Provide goods at lower cost, but comparable quality • Relatively standardized products, with features acceptable to "average" customer • Internal focus - efficiency, quality

Value Drivers

• Sales Growth Rate • Operating Margin • Working Capital • Cost of Capital

Revenue Sources

• Single Stream • Multiple Streams • Interdependent • Loss Leader

Situational Analysis

• Strategic Goals • Internal and external environment of the firm

Management Decisions

• Strategy • Operations • Investments • Financing

Revenue Models

• Subscription/Membership • Volume or Unit-Based • Advertising-Based • Licensing & Syndication • Transaction Fee

how to differentiate

• Superior quality, performance, inputs • Design - rapid innovation, new technologies • Uniquely available - prestige or exclusivity • Higher level of service, information about customers • Increase buyer value

Strategic groups

• Use to analyze industry structure, especially rivalry • Axes can be quality, markets, distribution channels, technology, buyers, product lines, etc. (4Ps) • Groups of firms that behave similarly • More competition within, rather than between • Mobility barriers, but can move between groups • Each group has distinct opportunities, threats, 5 forces, profitability

Strategy Formulation

• What industries and markets should we compete in? • How should we compete in those industries and markets

pros of focus

•Broader competitors ignore the niche •Can improve other value-adding services to further specialize and tie in customers •May gain unique advantages serving a specialized market segment -> monopolistic

pros of cost leadership

•Convince competitors not to engage in price wars •Provides a barrier to entry •Can handle supplier price increases

customer service

•ID unmet customer needs & satisfy them •Four Seasons Hotels and Toyota Lexus brand are examples

economies of scale

•Increased output decreased cost per unit •Spread fixed costs

pros of differentiation

•Insulate from rivalry •Consumers are less price sensitive •Can increase market share; create markets •Loyalty barriers develop

cons of focus

•Larger firms may intrude •Niche may disappear - tastes change, technology •May be difficult to find growth opportunities

cons of differentiation

•May be hard to sustain price premium •Threat of products becoming commodities •Customer tastes can change

product features

•Most important & clearest drivers •Unique product features>> higher price •Rolex example

cons of cost leadership

•Requires large asset base and capital investment •Can create myopia to industry changes •Typically, only one player can do •May lose touch with customer needs

customization

•Tailoring for specific customers •"Mass customization" Dell and 3D printing examples

learning curves

"Learn by doing" Steeper curve more learning aircraft manufacturing and cardiac surgeons are examples

Barriers to imitations

1. Better expectations of future values (buy resources at a low cost) 2. Path dependence: Current alternatives are limited by past decisions 3. Causal ambiguity: Cause of success or failure are not apparent 4. Social complexity: Two or more systems interact creating many possibilities

How SWOT combines internal and external analyses

1. Internal strengths and weaknesses from VRIO 2. External opportunities and threats from PESTEL or competitive forces analysis

1. If Smith Pharmaceuticals has a 15% return on invested capital (RoIC), what do you need to know to determine if it has a competitive advantage? A. It must be compared to the RoIC of the competitors and industry. B. Nothing, 15% is a terrific return for the shareholders. C. It must be evaluated for depreciation of the capital. D. It must be compared to the history of the firm's RoIC over a number of years.

A

2. When competitors cooperate with one another to achieve strategic objectives, this is called? A. Co-opetition B. A merger C. Functional tasks D. A strategic initiative

A

3. Strategic __________ is staking out a unique and valuable spot that allows the firm to meet customer demands. A. Positioning B. Advantage C. Goal D. Segmentation

A

An ideal competitive environment from a profit-making standpoint is when: A. Rivalry is moderate, and high entry barriers and good substitutes do not exist. B. Rivalry is high, entry barriers are low, and there are many substitutes. C. Rivalry is high, buyers and sellers have strong bargaining power, and entry barriers are low. D. Rivalry is moderate, entry and exit barriers are low, and there are many substitutes.

A

Exit barriers are obstacles that determine how easily a firm can leave the industry. When exit barriers are high, what happens to industry attractiveness? A.It decreases. B.It increases. C.It becomes a complement. D.It has no impact.

A

In 1996, GM, Toyota, and Honda introduced electric vehicles into the California market. This was in response to a regulation passed by the state in 1990 requiring some percentage of zero-emissions vehicles from auto companies be sold in the state. When the regulation was rescinded in the late 1990s, all three firms pulled their electric vehicles out of the market. GM terminated its electric vehicle program, whereas Toyota and Honda used it to introduce hybrid cars only a few years later. Which of the following is NOT a valid conclusion to draw from this series of events? A. Government regulations are always bad for U.S. businesses. B. Government regulations can influence business strategies. C. GM made a strategic error by closing its electric-vehicle program. D. Toyota and Honda used the regulation as a catalyst for new lines of cars.

A

The resource-based view is in sharp contrast to which model of industry competition. A. Perfect competition B. Monopoly C. Oligopoly D. Monopolistic competition

A

When it comes to a firm's value chain activities and the essence of strategy, a firm should ask itself: A. Which activities should be done? And more importantly, what should not be done? B. Where can costs be minimized to reflect the greatest profitability? C. What tangible assets can be acquired to increase competitive advantage? D. What are the best practices of the closest competitor and can they be easily adapted by the firm?

A

Dynamic capabilities

A firm can modify its resource base to gain & sustain a competitive advantage Intangible resources Resource stocks and flows are a useful view

complements

Add value when consumed in tandem

Primary activities of supply chain

Adds value directly into transforming inputs into outputs Contribute to the physical creation of the product or service, its sale and transfer to the buyer, and its service after the sale. Includes inbound logistics, operations, outbound logistics, marketing and sales, service

Legal Variables

Antitrust Regulations Tort Reform Environmental Protection Laws Hiring and Promotion Laws Americans with Disabilities Act of 1990 Sarbanes-Oxley Act of 2002

Generally, perfectly competitive industries such as paper and steel (commodities) are deemed to be ________ in profits to more differentiated industries like pharmaceuticals and cosmetics. A. superior B. inferior C. similar D. indeterminate

B

The five-forces-plus-complements model is useful in understanding industry profit potential, but it is only a snapshot in time. Managers must also consider ___________. A. the cost structure B. the industry dynamics C. the competitive landscape D. the strategic group

B

When firms that provide key raw materials to an industry can frequently negotiate for higher prices, the: A. Bargaining power of buyers is high. B. Bargaining power of suppliers is high. C. Barriers to entry are low. D. Bargaining power of suppliers is low.

B

Resource heterogeneity

Bundles of resources and capabilities differ across firms

A ____________ is a product or service that can help raise demand in an industry by indirectly enhancing performance or decreasing prices. A. core competency B. substitute C. complement D. component

C

A business model is the translation of strategy into action, which details the firm's competitive tactics and initiatives. Another way to say this is ___________. A. It's reliant on co-opetition to be successful B. It's a crowdsourcing process for the firm C. It's how the firm intends to make money D. It's how network effects are taken into account

C

All of the following are aspects of sociocultural factors influencing industry attractiveness EXCEPT: A. The growth rate of the population B. The age distribution of the population C. Environmental protection laws D. Lifestyle changes

C

All of the following are tangible resources EXCEPT: A. Production equipment. B. Distribution centers. C. A firm's reputation. D. A firm's headquarters building.

C

An industry with three firms and a differentiated product is most likely a(n) ________, while an industry with three thousand firms and a differentiated product is most likely a(n) ________ industry. A. perfect competition; oligopolistic B. monopoly; perfectly competitive C. oligopoly; monopolistic competitive D. oligopoly; perfectly competitive

C

Currently, lean manufacturing is a __________ but ____________ resource, which leads to competitive parity. A. Valuable; rare B. Common; tangible C. Valuable; common D. Rare; tangible

C

One of the strategic goals of management is to develop a resource base that is primarily: A. Flexible, responsive, and efficient B. Variable, rare, costly to initiate, and orderly C. Valuable, rare, costly to imitate, and organized to capture value D. Unique and difficult to imitate

C

Which of the following is a major decision that was generated from a change in corporate strategy? A. Changing Google's pricing model on its Google Ads products B. Providing superior customer service at Neiman Marcus retail stores C. Selling IBM's personal computer business to the Chinese firm Lenovo D. Applying for patents on Pfizer's cholesterol-lowering drug Lipitor

C

Which of the following would NOT indicate that buyers are a strong competitive force? A.They can integrate backward. B.They can purchase from several sellers. C.They are reliant on the industry's product. D.They buy in large quantities.

C

experience curves

Combine economy of scale & learning curves Technology allows movement to steeper curve Combination can leapfrog in competitive advantage