MGT 247 Final Exam Review

Shakeout Stage

rate of growth declines, firms begin to intensely compete, only strongest competitors survive

cost of input factors

raw materials, capital, labor, IT services

Differentiation

value is provided to customers through unique features and characteristics of an organization's products rather than by the lowest price

Value Chain Analysis

- Views a firm as a series of business processes that each add value to the product or service - internal activities a firm engages in when transforming inputs into outputs

The Five Phases of an Industry Lifecycle

1. Introduction 2. Growth 3. Shakeout 4. Maturity 5. Decline supply and demand changes as industries age each stage requires different competencies

Types of Corporate Diversification

1. Single Business 2. Dominant Business 3. Related Diversification 4. Unrelated Diversification

Why do firms need to grow?

1. increase profits 2. lower costs 3. increase market power 4. reduce risk through diversification 5. motivate management

examples of blue ocean strategy

Tesla and JetBlue first mover advantage

strategic position

profile based on value creation and cost in a specific product market

harvest

reduce further investments

What are the three main benefits of merging?

reduction in competitive industry, lower costs, increase differentiation

inside directors

usually consists of CEO, COO, CFO

tension

value creation and pressure to keep cost in check

internal transaction costs

- Recruiting and retaining employees - Paying salaries and benefits - costs tend to increase with organizational size and complexity

market mechanism

- individuals and firms guided by market prices - make independent decisions to buy and sell goods and services

When to use vertical integration

- issues with raw materials - to enhance customer experience - vertical market failure (transactions are too risky or costly)

external transaction costs

- negotiating, monitoring, and enforcing contracts - executing business outside the internal boundaries of the firm

principal

- owner of a firm - goal: create shareholder value

partner selection and alliance formation

-Benefits must exceed costs -Partner compatibility (cultural fit) and commitment (willingness to offer resources and absorb short term sacrifices) are necessary

Primary activities in the value chain

-Direct: making and selling - transforms inputs into outputs as the firm moves a product or service horizontally along the internal (inbound logistics, operations, outbound logistics, marketing and sales, service)

restructuring

-Reorganizing & divesting business units & activities -Refocuses a company on its core competencies - growth share matrix

strategic tradeoffs

-choices between a cost or value position -Purpose- maximize the firms economic value creation and profit margin

Risks of Vertical Integration

-increasing costs, reducing quality, reducing flexibility, - increasing the potential for legal repercussions

Benefits of Vertical Integration

-lowering costs -improving quality -facilitating scheduling and planning -facilitating investments in specialized assets -securing critical supplies and distribution channels

How can diversification enhance firm performance?

-provide economies of scale (reduce costs) -exploit economies of scope (increase value)

Why do firms enter strategic alliances?

-strengthen competitive position -enter new markets -hedge against uncertainty -access critical complementary assets -learn new capabilities

diseconomies

costs are becoming more expensive and efficiency is going down

technology development

Activities completed to improve product and the processes used to manufacture it

inbound logistics

Activities used to receive, store, and disseminate inputs to a product

Business Ethics

An agreed-upon code of conduct in business, based on societal norms.

in house costs > market costs

BUY - firm should consider purchasing instead - less integration

Blue Ocean Strategy

Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs

merger

Combination of two or more companies into a single firm. Usually involve companies of similar size. One company is the dominant firm.

how to respond to disruptive innovation

Continue to innovate (Stay ahead of the competition), Guard against disruptive innovation (Protect the low end of the market), Disrupt yourself Rather than wait for others to disrupt you (reverse innovation)

Inter-firm Alliances

Created to exploit complementaries between resources and capabilities owned by different companies

borrow

Enter a contract/ strategic alliance

Radical Innovation

Entirely new knowledge base to target new markets and technology

Growth-share matrix

Evaluates a company's SBUs in terms of market growth rate and relative market share

Four strategic options to pursue

Exit, harvest, maintain, consolidate

Why are strategic alliances attractive?

Firm goals can be achieved faster and at lower costs. •Complement or augment the value chain •Less complex legally •Can help a firm gain and sustain a competitive advantage

A good and bad example of mergers

Good: Disney/ Pixar, Bad: Sears/ Kmart

alliance design and governance

Governance mechanisms: •Contractual agreement •Equity alliances •Joint venture Inter-organizational trust is critical.

4 types of strategy mergers

Horizontal mergers, geographical mergers, vertical mergers, diversifying mergers

closeness

How close do you need to be to your external resource partner? Equity alliances, joint ventures, mergers, acquisitions

Relevance

How relevant are the firm's existing internal resources to solving the resource gap?

Tradability

How tradable are the targeted resources that may be available externally?

Integration

How well can you integrate the targeted firm, should you determine you need to acquire the resource partner

When are internal resources relevant?

If they are similar to those the firm needs, they are superior to those of the competitors, or they pass the VRIO

Why do firms need growth?

Increase profits, lower costs, increase market power, reduce risk, motivate management

innovation is a competitive weapon because...

Innovation can create and destroy value. (Traditional networks vs. cable providers •Cable providers vs. streaming content •Typewriters to PC's to mobile devices Innovation often comes in waves.)

disruptive innovation

Leverages new technologies in existing markets New product / process meets existing customer needs

in house costs < market costs

MAKE - vertically integrate - own production of inputs - or own output distribution channels

Why do firms merge?

Meeting with a competitor, at the same stage in the value chain

Is there usually a competitive advantage to mergers and acquisitions?

No.

Vertical Integration

Practice where a single entity controls the entire process of a product, from the raw materials to distribution

Two components of value chain analysis

Primary and support activities

Issues with Build-Borrow-or-Buy Framework

Relevance, tradability, closeness, integration

introduction stage

Research and development, strategic objective, capital intensive, network effects

What are the responsibilities of the board of directors?

Strategic oversight and guidance, CEO selection/ evaluation/ compensation, guide executive compensation, review/ monitor/ evaluate/ approve strategic initiatives, risk assessment/ mitigation

Alternatives to Vertical Integration

Taper integration; strategic outsourcing (moving internal value chain activities to other firms)

Vertical Scope

What range or stages of the value chain should the firm participate

How should we compete

Who: which customer segments? What: customer needs will we satisfy? Why: do we want to satisfy them? How: will we satisfy our customers' needs?

hierarchy of authority

a clear chain of command found in a bureaucracy

joint venture

a form of equity alliance where partners form a new company they jointly own. Standalone organization

strategic alliance

a voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services

Buy

acquire new resources, capabilities, and competencies

procurement

activities completed to purchase inputs

service

activities designed to enhance or maintain a product's value

operations

activities involved with collecting, storing, and physically distributing product

human resources

activities that support entire value chain

Marketing and Sales

activities to facilitate purchase of products and to induce consumers to do so

dominant business diversification

additional business activity pursued

related constrained diversification strategy

all businesses share competencies

Capatilist economy

an economic system in which the market determines production, distribution, and price decisions, and property is privately owned Ex: USA - market mechanism, administrative mechanism

exit

bankruptcy/ liquidation

How do firms achieve growth?

build, borrow, buy

incremental innovation

builds on established knowledge, results from steady improvement, targets existing markets and technology

consolidate

buy rivals

Advantages of inter-firm alliances

can be created and dissolved quickly, purchase and scope can change quickly, risk sharing

Forward vertical integration

changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain

Backward vertical integration

changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain

Cost Leadership

compete for a wider customer based on price

crossing the chasm framework

conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group. many innovators do not successfully transition from one stage of the industry life cycle to the next.

related diversification

creating or acquiring companies that share similar products, manufacturing, marketing, technology, or cultures (related constrained/ related linked)

administrative mechanism (firm)

decisions concerning production and resource allocation are made by managers

Corporate Strategy

decisions leaders make, goal directed actions

economies of scale

decrease in cost per unit as output decreases

decline stage

demand falls rapidly, four strategic options to pursue

growth stage

demand increases rapidly, product/ service standards emerge

economies of scope and scale

describes a competitive advantage that large entities have over smaller entities

early adopters

enter during growth stage, demand driven by imagination and creativity

late majority

enter during maturity stage (wait until standards have emerged), represent majority of the market

early majority

enter during shakeout stage, weigh the benefits and costs carefully

Laggards

enter during the decline stage, demand small

Technology Enthusiasts

enter market during introduction stage

Architectural Innovation

existing technologies leveraged into a new market

universal norms

fairness, honesty, reciprocity,

maturity stage

few large firms (economies of scale), market reached max (industry growth is zero or negative)

product design

how a product is conceived, planned, and produced

Product Scope

how specialized the firm is in terms of the range of products it supplies

Innovation Process

idea, invention, innovation, imitation

intangible

impression the product or service makes on a customer

experience curve effects

improvements to technology and production processes

horizontal merger

increase profits via cost economies and market power within the same market

Support Activities in the Value Chain

indirect: infrastructure and everything else (procurement, technology development, human resources), necessary to sustain primary activities

Build

internal development

Entrepreneurs

introduce change, undertake economic risk to innovate

vertical merger

involve the acquisition of either a supplier or customer (merging content and distribution)

learning curve effects

less time to produce output with experience

single business diversification

low level of diversification

agent

manager or employee who should act on behalf of the principal

unrelated diversification

no businesses share competencies

Strategic alliances can be governed by...

non-equity alliances, equity alliances, joint ventures

what is a successful business strategy

o Leverages the firms strengths o Mitigates firm weakness o Helps firm- exploit external opportunities, avoid external threats

Focused Differentiation

organizations not only compete based on differentiation but also select a small segment of the market to provide goods and services

focused low cost

organizations not only compete on price by also select a small segment of the market to provide goods and services to

Three Alliance-Related Tasks Must Be Managed Concurrently

partner selection and alliance formation, alliance design and governance, post- formation alliance management

equity alliance

partnership in which at least one partner takes partial ownership in the other

economies of scope

producing two outputs at less cost

product- market diversification

product and geographic diversification

important drivers

product features, customer service, complements ***complements add value

board of directors

represent the interests of the shareholders, tasked with providing insight, consist of inside and outside directors

Outside directors

senior executives from other firms

Who elects the board of directors?

shareholders

principal-agent problem

situation in which an agent performing activities on behalf of a principal pursues his or her own interests

tangible

size, color, materials, performance

related linked diversification strategy

some businesses share competencies

maintain

support at a given level

transaction costs

the costs that parties incur in the process of agreeing to and following through on a bargain

business level strategy

the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market

Corporate Governance

the mechanisms to direct and control and enterprise/ ensure it pursues strategic goals successfully and legally, offers checks and balances, attempts to address the principal agent problem

Diversifying merger

the merging of firms involved in completely different business activities

acquisition

the purchase of a company by another company. can be hostile when the target firm does not wish to be acquired

strategic entrepreneurship

the pursuit of innovation using tools, creating new or exploiting existing opportunities

social entrepreneurship

the pursuit of social goals while creating a profitable business, goal is to provide knowledge on a very large scale

Why do firms acquire other firms?

to gain access to new markets and distribution channels (to overcome entry barriers, to gain access to a new capability or competency, to acquire customers and employees) to preempt rivals

geographical scope

what is the optimal geographical spread of activities for the firm (regional, national, international)

learning curve percentages

§ 90% Learning curve- when doubling outputs unit cost goes down 10% § 80% curve- 20% deduction

what happens during a learning curve

§ Experience curve repetition § Increased individual skills and improved organization routines

cost leadership goals

· Reduce cost below competitors · Offer adequate value · Reduce prices for customers · Optimize the value chain for low cost

geographic diversification

•Increase in variety of markets / geographic regions •Regional, national, or international markets

product diversification

•Increase in variety of products / services •Active in several product markets