Strategic Management

What is meant by architectural advantage?

"Firms can benefit from innovation by managing the industry's architecture carefully so they become the "bottlenecks" of their industry" - Jacobides

What is the difference between 'red ocean' and 'blue ocean' strategies?

'Red ocean' is existing industries or markets whereas 'blue ocean' is unknown industries or markets and tends to be difficult to imitate.

Diversification creates value if there are linkages between different businesses. These linkages can have different forms. The most important are?

(1) Economies of scope; (2) Parenting advantage, and; (3) Internal capital and labour markets.

Michael Porter refines the two sources of superior profitability into "three essential tests" that determine whether diversification will truly create shareholder value. Mention them.

(1) The attractiveness test: The industries chosen for diversification must be structurally attractive or capable of being made attractive; (2) The cost-of-entry test: The cost of entry must not capitalize all the future profits; (3) The better-off test: Either the new unit must gain competitive advantage from its link with the corporation or vice versa.

Which two conditions must be present for a resource or capability to establish a competitive advantage?

1. Relevance meaning that a resource or capability must be relevant to the key success factors in the market - in particular, it must be capable of creating value for customers. 2. Scarcity meaning that if a resource or capability is widely available within the industry, it may be necessary in order to compete but it will not be an adequate basis for competitive advantage.

What is an multinational enterprise (MNE)?

A firm becomes an multinational enterprise (MNE) when the firm is present in more than one country or by undertaking Foreign Direct Investment (FDI)

How can a firm minimize its vulnerability to weaknesses?

A firm can (1) Invest in its weaknesses; (2) Outsource to firms with strengths in these activities; (3) Partner with firms with complementary resources and capabilities, or; (4) Target market/customer segments where core weaknesses have smallest impact.

How can a firm exploit its key strengths?

A firm can (1) Target market/customer segments where core strengths have biggest impact; (2) Replicate in new locations, or; (3) Diversify into new markets.

What is the difference between a fixed claimant an a shareholder (residual claimant)?

A fixed claimant get a fixed wage while as a shareholder you get paid depending on how well the firm is doing. Therefore shareholders have a larger incentive to increase the value of the firm.

Which two approaches are most commonly used to identify a firm's organizational capabilities?

A functional analysis and a value chain analysis.

What is a functional analysis?

A functional analysis identifies organizational capabilities within each of the firm's functional areas.

Describe Ikujiro Nonaka's theory of knowledge creation.

A knowledge spiral is created by knowledge conversion between: (1) Tacit and explicit knowledge; (2) Individuals and organizational levels, and; (3) Transition from craft to industrial enterprise.

In relation to vertical integration, define market mechanism.

A market mechanism is where individuals and firms, guided by market prices, make independent decisions to buy and sell goods and services. Bonus: Adam Smiths "invisible hand"

What is a network externality?

A network externality exists whenever the value of a product to an individual customer depends on the number of other users of that product. Bonus: In markets subject to network externalities, control over standards is the primary basis for competitive advantage. Double bonus: Once a certain threshold is reached, cumulative forces become unstoppable - the result is a winner-takes-all market = once a technology or system gains market leadership, it attracts more and more users. Conversely, once market leadership is lost, a downward spiral is likely.

What is a residual claimant?

A residual claimant is a shareholder.

Define a shareholder.

A shareholder owns part of a public company through shares of stock. Shareholders are always stakeholders in a corporation, but stakeholders are not always shareholders.

Mention some of the most important stakeholders.

A stakeholder can be suppliers, employees, consumers/customers, shareholders and governments/NGO's.

Define a stakeholder.

A stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation. These reasons often mean that the stakeholder has a greater need for the company to succeed over a longer term.

Define a synergy.

A synergy is the interaction or cooperation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects.

What is a technical standard and how do they emerge?

A technical standard is a technology or specification that is important for compatibility. They emerge where there are network effects the need for users to connect in some way with one another. Network effects cause each customer to choose the same technology as everyone else to avoid being stranded.

What is a value chain analysis?

A value chain analysis identifies a sequential chain of the main activities that the firm undertakes. Bonus: Michael Porter's generic value chain distinguishes between primary activities (those involved with the transformation of inputs and interface with the customer) and support activities. Porter's broadly defined value chain activities can be disaggregated to provide a more detailed identification of the firm's activities (and the capabilities that correspond to each activity). Thus, marketing might include market research, test marketing, advertising, promotion, pricing, and dealer relations.

What is the primary determinant of realized strategy according to Henry Mintzberg?

According to Mintzberg the primary determinant of realized strategy is strategic decisions that emerge from the individual interpretation of intended strategy and adaptation to the circumstances.

What are the two kinds of profit?

Accounting profit and economic profit.

What are the advantages and disadvantages of Greenfield Investment?

Advantages: No need to find a partner + by doing everything on your own you have the possibility to phase investment. Disadvantages: Can be very risky and costly.

What are the advantages and disadvantages of Joint Venture?

Advantages: The company you are joining is already established and you receive know-how knowledge + access to resources and capabilities. Furthermore you minimize your risk. Disadvantages: Working with another firm can create conflicts and longer decision-making process. In addition, you lose control and it can be difficult finding a partner - a "match" - with the same ambitions and values.

What are the advantages and disadvantages of Merger and Acquisition?

Advantages: You pull the resources and capabilities of two different firms together which creates rapid growth. Disadvantages: It is difficult to find a firm to buy and the risks are higher.

In relation to vertical integration, define administrative mechanism.

An administrative mechanism is where decisions concerning production and resource allocation are made by managers and carried out through hierarchies. Bonus: Alfred Chandlers "the visible hand"

Define the eclectic paradigm (or OLI framework).

An eclectic paradigm, also known as the ownership, location, internationalization or OLI framework, is a three-tiered evaluation framework that companies can follow when attempting to determine if it is beneficial to pursue foreign direct investment (FDI).

Define an industry.

An industry is a group of firms that supplies a market. Industry analysis, looks at industry profitability being determined by competition in two markets: product markets and input markets.

Define intangible resources. Give examples.

An intangible resource is an asset that lacks physical substance and is therefore usually very hard to evaluate. Examples: Patents, copyrights, trade secrets, technical and scientific employees, brands, relationships i.e. customer loyalty, franchises, goodwill, trademarks and culture.

Define organizational ambidexterity.

An organization that can simultaneously exploit existing competences while exploring new opportunities for future development.

Describe the transaction costs theory.

At times, it may be more cost-effective for an organization to operate from a different market location while they keep doing the work in-house. If the business decides to outsource the production, it may require negotiating partnerships with local producers. However, taking an outsourcing route only makes financial sense if the contracting company can meet the organization's needs and quality standards at a lower cost. Criticism: explains how to efficiently use assets; less so how to acquire assets. Bonus: Dunning's response: should not include transaction costs, but all costs.

What is backward-looking performance measures?

Backward-looking performance measures accounting ratios: historical evaluation derived from information provided in year reports i.e. rate of return on capital (ROE and ROA), cost of capital and profit growth.

What is benchmarking?

Benchmarking is the process of comparing one's processes and performance to those of other companies. It offers an objective and quantitative way for a firm to assess its resources and capabilities relative to its competitors'.

What is the risk and return of making a strategic alliance?

Benefits of flexibility. Risk of informal structure.

What is the risk and return of internal commercialization?

Biggest investment requirement and corresponding risks. Benefits of control.

What is a blue ocean strategy?

Blue ocean strategy is the simultaneous pursuit of differentiation and low cost to open up a new market space and create new demand. It is about creating and capturing uncontested market space, thereby making the competition irrelevant.

Define capabilities.

Capabilities are also called competences. An organization's capacity to perform a particular task or function - involves coordinated behaviour. Firms need capabilities to effectively combine resources.

Define capacity utilization.

Capacity utilization is the ability to quickly adjust capacity to demand leads to cost efficiencies, as both over- and underutilization are costly.

What is meant by casual ambiguity?

Casual ambiguity refers to the difficulty facing any observer of diagnosing the sources of the competitive advantage of a firm with superior performance. It means that potential rivals face the problem of uncertain imitability.

Describe game theory and its connection to the criticism of Porters five forces framework.

Central to the criticisms of Porter's five forces is its failure to take full account of competitive interactions between competitors. Game theory allows us to model this competitive interaction.

Define codifiable knowledge.

Codifiable knowledge: that which can be written down - it is the opposite of tacit knowledge.

How does a company create shared value?

Companies should think about: (1) Reconceiving products and markets; (2) Redefining productivity in the value chain, and; (3) Enabling local cluster developments.

What is a competency trap?

Competency traps are the barrier to change which results from an organization developing high levels of capability in particular activities.

In connection to competitive advantage, what is the effect of internal change?

Competitive advantage are generated internally through innovation which creates competitive advantage for the innovator while undermining the competitive advantages of previous market leaders.

Define transferability in relation to resources and capabilities.

Competitive advantage is undermined by competitive imitation. If resources and capabilities are transferable between firms i.e. if they can be bought and sold, then any competitive advantage that is based upon them will be eroded.

Define competitive advantage.

Competitive advantage is when two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit. Bonus: Competitive advantage is dynamic = created by and destructed by change.

Define complements.

Complements is where two products complement one another, profit will increase because customers value 'the whole system' and not the product alone.

Define consumer surplus.

Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good/service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price).

What does value added not take into account?

Consumer surplus.

What is contextual ambidexterity?

Contextual ambidexterity involves the same organizational units and the same organizational members pursuing both exploratory and exploitative activities.

Corporate strategy is concerned with decisions over three scopes of the firm's activities, including?

Corporate strategy is concerned with: (1) Product scope (diversification); (2) Geographical scope (multi-nationality), and; (3) Vertical scope (vertical integration).

What is cospecialized resources?

Cospecialized resources are the best explanation for why firms are more likely to sustain their competitive advantage because they are difficult to imitate/duplicate.

Define cost advantage.

Cost advantage means supplying an identical product/service at a lower cost.

What is meant by cost drivers?

Cost drivers are any factor which causes a change in the cost of an activity.

What is meant by cost of capital and how is it calculated?

Cost of capital refers to the opportunity cost of making a specific investment. Hence, money now is worth more than money in the future. Calculated = capital employed * weighted average cost of capital

Describe the resource-based approach.

Differences in resources can explain the relative performance of firms. These resources are the basis of a sustainable competitive advantage, if they are valuable, rare, difficult to imitate and without strategically equivalent valuable resources.

Define differentiation advantage.

Differentiation advantage means supplying a product/service that is differentiated in such a way that the customer is willing to pay a price premium that exceeds the additional cost of the differentiation.

How is differentiation by a firm achieved?

Differentiation by a firm from its competitors is achieved when it provides something unique that is valuable to buyers beyond simply offering a low price.

On the supply side, differentiation depends on signaling, what does that mean?

Differentiation is only effective if it is communicated to customers. By signaling quality, firms can induce consumers to pay the higher price, avoiding a prisoner dilemma.

What is the advantage of using differentiation compared to simply lowering the cost (cost advantage)?

Differentiation offers a more secure and sustainable basis for competitive advantage than low cost does. Furthermore, differentiation is not vulnerable to the emergence of new competitors.

What does disruptive innovation mean?

Disruptive innovation refers to a technology whose application significantly affects the way a market or industry functions.

Define diversification.

Diversification is like sex: its attractions are obvious, often irresistible, yet the experience is often disappointing ;) Despite so many failures, the urge to diversify continues to captivate managers.

Define dominant design.

Dominant design refers to the overall configuration of a product or system.

Which three characteristics of resources and capabilities determine the sustainability of the competitive advantage they offer?

Durability, transferability and replicability.

What is dynamic capabilities?

Dynamic capabilities is a firm's ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.

What is dynamic capabilities?

Dynamic capabilities is the highest level of the capability hierarchy. It is capabilities that allow the modification and adaptation of lower-level operational and functional capabilities.

A typical measure of economic profit is economic value added (EVA), how is it calculated?

EVA = net operating profit after tax - cost of capital

What is meant by economic profit?

Economic profit is a purer measure of profit which is a more precise measure of a firm's ability to generate surplus value, as it takes into account the cost of capital.

What is the difference between economic profit and accounting profit?

Economic profit takes into account the cost of capital; accounting profit does not.

Define economies of learning or learning curve.

Economies of learning derive from the fact that repetition develops both individual skills and organizational routines. A learning curve is a concept that graphically depicts the relationship between the cost and output over a defined period of time, normally to represent the repetitive task of an employee or worker.

Define economies of scale.

Economies of scale exist when more units of a good or service can be produced on a larger scale, yet with (on average) fewer input costs. Economies of scale arise from three principal sources: (1) Technical input-output relationships; (2) Indivisibilities e.g. advertising, and; (3) Specialization e.g. management consulting.

What are the seven cost drivers?

Economies of scale, economies of learning, production techniques, product design, input costs, capacity utilization and residual efficiency.

Define economies of scope.

Economies of scope are economic factors that make the simultaneous manufacturing of different products more cost-effective than manufacturing them on their own.

Who created the stakeholder approach.

Edward Freeman: "Task of balancing and integrating multiple relationships and multiple objectives" - Freeman (2004). In response to Sundaram and Inkpen (2004), Freeman et al. defended the stakeholder approach (and basically threw all their arguments in the garbage).

Any external change creates entrepreneurial opportunities, what does that mean?

Entrepreneurial opportunities are usually defined as situations where products and services can be sold at a price greater than the cost of their production. Entrepreneurial responsiveness involves one of two key capabilities: (1) The ability to anticipate changes in the external environment, and; (2) Quick-response capability.

How does a firm establish competitive advantage?

Establishing competitive advantage involves formulating and implementing a strategy that exploits a firm's unique strengths. In other words, a competitive advantage is sustainable when other firms are unable to duplicate the benefits of the value creating strategy. Bonus: Schumpeterian competition can nullify sustainable competitive advantage.

What is an example of intangible differentiation?

Examples of intangible differentiation are social, emotional, psychological, and esthetic considerations that are present in most customer choices. Bonus: Customers buys an identity.

What is an example of tangible differentiation?

Examples of tangible differentiation are size, shape, color, design, material, and performance attributes such as reliability, consistency, taste, speed, durability, and safety.

What is the difference between explicit and tacit knowledge?

Explicit knowledge is easy and cheap to transfer, while tacit knowledge is difficult to articulate or codify.

What is brand extension?

Exploiting a strong brand across additional products is called brand extension.

In connection to competitive advantage, what is the effect of external change?

External change can create competitive advantage if it has differential effects on companies. For an external change to create competitive advantage, the change must have differential effects on companies because of their different resources and capabilities or strategic positioning.

What does FDI stand for?

FDI stands for Foreign direct investment (FDI) and is an investment made by a firm or individual in one country into business interests located in another country.

What are the main characteristics of a market in oligopoly?

Few firms Significant entry/exit barriers Potential for product differentiation

How is a firms value calculated?

Firm value = income from current assets + growth option to expand into new markets in the future.

What is the 'rare' dimension in Barneys VRIO model?

Firm's need rare resources - if a particular valuable resource is possessed by large numbers of firms, then each of these firms have the capability of exploiting that resource in the same way, thereby implementing a common strategy that gives no one a competitive advantage.

What is a fixed claimant?

Fixed claimant are employees, bondholders and suppliers.

Define emergence.

Flexible responses to changing circumstances.

According to the OLI framework, which advantages must be evident for FDI to be beneficial?

For FDI to be beneficial, the following advantages must be evident: (1) Ownership advantages; (2) Location/comparative advantages, and; (3) Internalization advantages.

What is forward-looking performance measures?

Forward-looking performance measures stock market value: if the goal is to maximize profit over the lifetime of the firm, then to evaluate the performance of a firm we need to look at its stream of profit (cash flows) over the rest of its life through stock market valuation.

What does successful strategies tend to embody (four elements)?

Four elements: (1) Clear, long-term goals; (2) Profound understanding of the external environment; (3) Astute appraisal of internal resources and capabilities, and; (4) Effective implementation.

What does Friedman say about distance?

Friedman says that distance no longer matters.

Explain the game theory model.

Game theory model is the interaction between players, where the action of one player is dependent on the action of the other - it permits the framing of strategic decisions and predicts the outcome of competitive situations. Bonus: Using game theory, we can explain five ways in which firms can influence the outcome of the competitive game: cooperation, deterrence, commitment, changing the structure of the game being played, and signaling. Double bonus: The disadvantages are limited applicability due to restrictive assumptions, frequently no equilibrium or multiple equilibria, better able to explain the past than to predict the future.

Define Greenfield Investment.

Greenfield Investment basically means doing everything yourself.

What are the two main drivers in the industry life cycle?

Growth and knowledge.

What are the main motives for diversification?

Growth and risk reduction - however, the only valid motive for diversification is if it creates value.

The two critical assumptions of RBV are that resources must also be heterogeneous and immobile, what does that mean?

Heterogeneous: If firms possess exactly the same, resources every strategy can be duplicated by other firms. Therefore, RBV assumes that companies should be heterogeneous and use different bundles of resources in order to achieve competitive advantage. Immobile: If a firms resources are perfectly mobile, any resource that allows some firms to implement a strategy can easily be acquired by other firms. Therefore, RBV assumes that resources should not be mobile.

What is hold up?

Hold up is a situation where two parties refrain from market exchange because of concerns that they may give the other party increased bargaining power. Because of 'hold up' transaction costs are prohibitively high. Hence, transaction specific investments require vertical integration.

Which question is the business (or competitive) strategy concerned with?

How should we compete?

What does hubris mean?

Hubris means that a company's success in one line of business tends to result in the top management team becoming overly confident of its ability to achieve similar success in other businesses.

Define human resources. Give examples.

Human Resources is also the function in an organization that deals with the people and issues related to people . Examples: Training, experience, adaptability, commitment and loyalty of employees.

Rich D'Aveni argues that hypercompetition is a general feature of industries today, what is it?

Hypercompetition is intense and rapid competitive moves, in which competitors must move quickly to build advantages and erode the advantages of their rivals.

Define replicability in relation to resources and capabilities.

If a firm cannot buy a resource or capability, it must build it. Bonus: Capabilities based on complex organizational routines are less easy to copy.

What is Porter and Kramers main argument in their article 'The Big Idea'?

In the article called 'The Big Idea', Porter and Kramer states that: "The purpose of the corporation needs to be redefined as creating shared value, not just profits per se." Conclusion from the article: NOT ALL societal problems can be solved through shared value solutions. But shared value offers corporations the opportunity to utilize their skills, resources, and management capability to lead social progress in ways that even the best-intentioned governmental and social sector organizations can rarely match. In the process, businesses can earn the respect of society again

How does innovation diffuse on the demand side?

Innovation diffuses on the demand side, through customers purchasing the good/service.

How does innovation diffuse on the supply side?

Innovation diffuses on the supply side, through imitation by competitors.

Define innovation.

Innovation is the initial commercialization of invention by producing and marketing a new good or service or by using a new method of production.

What is meant by internalization advantage in the OLI framework?

Internalization advantages signal when it is better for an organization to produce a particular product in-house, versus contracting with a third-party.

Define invention.

Invention is the creation of new products and processes through the development of new knowledge or from new combinations of existing knowledge.

For competitive advantage to be sustained over time, barriers to imitation must exist. Rumelt uses the term isolating mechanisms, what does that mean?

Isolating mechanisms is used to describe the barriers that prevent the erosion of the superior profitability of individual firms. The following are isolating mechanisms that prevents the erosion of competitive advantage: deterrence, pre-emption and resources that are valuable, rare, impossible to imitate and without strategically equivalent valuable resources.

What does strategy describe?

It describes where a firm is competing, how it is competing, and the direction in which it is developing.

What are the advantages of economic profit as a performance measure (there are two)?

It is a more demanding performance discipline for managers and it improves the allocation of capital between the different businesses of the firm by taking account of the real costs of more capital-intensive businesses.

What is the main criticism of the SWOT.

It is difficult to distinguish between strengths/weaknesses and opportunities/threats.

Who developed the eclectic paradigm?

John Dunning

Define Joint Venture.

Joint Venture (JV) means finding and working together with a local partner.

What are the key success factors in the growth stage, in the industry life cycle?

Key success factor are brand building, product development and process innovation.

What are the key success factors in the introduction stage, in the industry life cycle?

Key success factor are product innovation and establishing legitimacy.

According to Grant, what is the most suitable option for exploiting an invention?

Licensing

What is the risk and return of outsourcing certain functions?

Limits capital investment, but may create dependence on suppliers/partners.

What is the risk and return of licensing?

Little investment risk but returns also limited. Risk that the licensee either lacks motivation or steals the innovation.

What is meant by location advantages in the OLI framework?

Location/comparative advantages focuses on where firms locate. Companies must assess whether there is a comparative advantage to performing specific functions at a particular location. Factors that influences location advantages: transportation costs, labour costs, productivity, natural resources, knowledge, agglomeration, institutional quality, presence of indigenous firms.

Outline the different types of vertical relationships.

Long-term contracts, consumer/supplier relationships, franchises and joint ventures.

Draw a typical supply and demand curve in perfect competition.

Mangler uploaded image.

Draw and describe the five forces framework.

Mangler uploaded image.

What are the main characteristics of a market in perfect competition?

Many firms No barriers Homogeneous product

Define Mergers and Acquisition (M&A).

Mergers and Acquisition (M&A) means pulling the resources of two different firms together.

On the supply side, differentiation depends on the provision of uniqueness, describe the several sources of uniqueness as depicted by Michael Porter.

Michael Porter identifies several sources of uniqueness, including: product features, complementary services, intensity of marketing, technology embodied in design and manufacture, quality of purchased inputs, procedures that influence the costumer experience, skill of employees, location and the degree of vertical integration.

Who created the shareholder theory?

Milton Friedman. According to Friedman the only way to conduct a responsible business is to focus on creating profit and create value for shareholders: "There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it engages in open and free competition, without deception or fraud." (Friedman, 1962)

Mention the three types of establishing a FDI project.

Modes of establishing a FDI project can be classified into 3 types: (1) Greenfield Investment; (2) Mergers and Acquisition, and; (3) Joint Venture.

Define the two types of profit (or rent) i.e. monopoly rents and Ricardian rents.

Monopoly rents are profits arising from market power. Ricardian rents are profits rising from superior resource. Ricardian rents are more welfare enhancing.

What is the difference between systematic and non-systematic risk?

Non-systematic risk is specific to the firm, while systematic risk is correlated with overall stock market returns.

What are the main characteristics of a monopolistic market?

One firm High barriers Potential for product differentiation

What makes organizational change difficult (there are 5 main reasons)?

Organizational change is difficult because: (1) Organizational routines makes it difficult to develop new ones; (2) Changes threatens existing social and political structures; (3) Firms often find comfort in imitating one another in order to gain legitimacy; (4) Organizations tend to limit search to areas close to their existing activities, and; (5) Close-fitting organizational features are barriers to change.

What is meant by ownership advantages in the OLI framework?

Ownership advantages include proprietary information and various ownership rights of a company. These may consist of branding, copyright, trademark or patent rights, plus the use and management of internally-available skills.

What does the letters in the CAGE framework stand for?

Pankaj Ghemawat proposes four key components of distance between countries: (1) Cultural distance; (2) Administrative distance; (3) Geographic distance, and; (4) Economic distance.

What does Ghemawat say about distance?

Pankaj Ghemawat says that most of the costs and risks of internationalization result from distance. In other words, distance do matter.

What is platform-based markets?

Platform-based markets is multi-sided markets that serve two or more distinct groups of customers who value each other's participation.

Define process innovation.

Process innovation is using new methods of production

Define producer surplus.

Producer surplus is the difference between how much of a good the producer is willing to supply versus how much he/she receives in the trade.

Define product innovation.

Product innovation is producing or marketing a new good or service

Define profit.

Profit is the surplus of revenues over costs available for distribution to the owners of the firm.

Define rational design.

Purposeful planning.

How is rate of return on assets (ROA) calculated?

ROA = net income divided with the average of total assets

How is rate of return on equity (ROE) calculated?

ROE = net income divided with shareholders equity

What does raison d'être mean? Connect it to how firms should look at customers.

Raison d'être definition means a reason for existence. Look at the customers and view them not as a source of buying power and a threat to profitability but as the raison d'être of the industry and its underlying source of profit.

Define regime of appropriability.

Regime of appropriability is used to describe the conditions that influence the distribution of the value created by innovation.

What does relatedness mean?

Relatedness refers to similarities between industries in technologies and markets.

Define residual efficiency.

Residual efficiencies relate to the extent to which the firm approaches its efficiency frontier of optimal operation which depends on the firm's ability to eliminate "organizational slack" or "X-inefficiency".

Define resources.

Resources are all assets owned by the firm that enable a firm to consider and implement strategies that improve its efficiency and effectiveness.

What is the 'valuable' dimension in Barneys VRIO model?

Resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness.

What does reverse innovation mean?

Reverse innovation is the strategy of innovating in emerging (or developing) markets and then distributing/marketing these innovations in developed markets.

What is Schumpeter's process of creative destruction?

Schumpeter describes creative destruction as the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

What is the difference between search goods and experience goods?

Search goods are goods whose qualities and characteristics can be ascertained by inspection while experience goods are goods whose qualities and characteristics are only recognized after consumption.

What is meant by shared value?

Shared value is policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. Shared value creation focuses on identifying and expanding the connections between societal and economic progress.

Define the shareholder approach.

Shareholder theory posits that firms should maximize the value created for their shareholders: "The preferred objective function for the corporation must continue to be the one that says, maximize shareholder value" - Sundaram & Inkpen (2004) This is from an article we were suppose to read...

What is the risk and return of joint ventures?

Shares investment and risk. Furthermore it can provide a company with access to local contacts and knowledge. Risk of partner disagreement and culture clash.

What is meant by strategic asset seeking FDI?

Strategic asset seeking FDI is designed to protect or augment the existing ownership advantages of the investing firm and/or reduce those of their competitors.

What is meant by strategic fit?

Strategic fit is the consistency of a firm's strategy with its external and internal environment, especially with its goals and values, resources and capabilities, and structure and systems. Bonus: Comes from the same idea as the contingency theory: there is no single best way of organizing or managing.

Define strategic innovation.

Strategic innovation is new approaches to serve customers and competing with rivals.

What does innovatory strategies typically involve?

Strategic innovation typically involves (1) Creating whole new markets/industries; (2) Creating new customer segments, and/or; (3) New sources of competitive advantage.

What is meant by strategic positioning?

Strategic positioning means anticipating change. Firms can choose a favorable positioning within the industry.

Which three factors does strategically important resources and capabilities dependent on in order to generate substantial profit?

Strategically important resources and capabilities are those with the potential to generate substantial profit. This depends on three factors: their potential to establish a competitive advantage, to sustain that competitive advantage, and to appropriate the returns from the competitive advantage.

How is strategy made?

Strategy is made through combining purposeful planning (rational design) and flexible responses to changing circumstances (emergence).

What is structural ambidexterity?

Structural ambidexterity is where exploration and exploitation are undertaken in separate organizational units, on the basis that it is usually easier to foster change initiatives in new organizational units rather in existing ones.

Define tacitness.

Tacitness is the degree to which knowledge needed to imitate is tacit.

Differentiation include tangible and intangible dimensions, describe the two.

Tangible differentiation is concerned with the observable characteristics of a product or service that are relevant to customers' preferences and choice processes. Intangible differentiation arise because the value that customers perceive in a product is seldom determined solely by observable product features or objective performance criteria.

Define tangible resources. Give examples.

Tangible resources are financial resources and physical items. These items can be easily liquidated and have a set value. Examples: cash, securities, borrowing, capacity, plant, equipment, land, mineral reserves, inventory, machinery or buildings.

Define technical standards.

Technical standards is a specification that becomes the norm for a product/process when there are network effects, thereby ensuring compatibility.

Describe the Ashridge Portfolio Display.

The Ashridge portfolio display is based on the concept of parenting advantage. It takes into account that the value potential of a business does not just depend on the characteristics of the business, but also in the characteristics of the parent. The display focusses on creating a fit between the business and its parent company: On the x-axes there is the potential for the parent to add value to the business. On the y-axes there is the potential for value destruction from a misfit between needs of the business and patent's corporate management style.

Describe the BCG matrix.

The BCG matrix talks about Dogs, Stars, Cows, Question marks. The two dimensions are relative market share and real rate of market growth.

Describe the SWOT analysis.

The SWOT analysis classifies the factors relevant for a firm's strategic decision making into four categories: strengths, weaknesses, opportunities and threats.

What is a capability?

The ability to adapt to new circumstances.

What is the administrative distance in the CAGE framework?

The administrative dimension is the historical and present legal and political association between the countries. Examples: Differences in colonial ties, common membership of international organizations, discriminatory government policies and institutional strength/weakness. Bonus: The integration of the European Union is the leading example of deliberate efforts to diminish administrative and political distance among trading partners.

What does the capital asset pricing model (CAPM) state?

The capital asset pricing model (CAPM) states that the risk that is relevant to determining the price of a security is not the overall risk (variance) of the security's return but the systematic risk - that part of the variance of the return that is correlated with overall stock market returns. This is measured by the security's beta coefficient.

What characterizes the fourth phase, the decline stage, in the industry life cycle?

The characteristics in the decline stage are: (1) Obsolescence, and; (2) Little innovation.

What characterizes the second phase, the growth stage, in the industry life cycle?

The characteristics in the growth stage are: (1) Market penetration accelerates as technical improvements and increased efficiency open up the mass market; (2) Standardization around a dominant design and technological standard, and; (3) Rapid process innovation.

What characterizes the first phase, the introduction stage, in the industry life cycle?

The characteristics in the introduction (or emergence stage) are: (1) Limited sales/demand; (2) Low market penetration; (3) Few customers, and; (4) Quickly advancing product technology.

What characterizes the third phase, the maturity stage, in the industry life cycle?

The characteristics in the maturity stage are: (1) Increasing market saturation; (2) Demand is wholly for replacement; (3) Well-diffused technologies know-how, and; (4) Quest for technological improvements.

Which three sets of players forms the core of the firm's industry environment?

The core of the firm's business environment is formed by its relationships with three sets of players: customers, suppliers, and competitors.

What are the costs of vertical integration?

The costs of vertical integration are among others: (1) Strategic differences between different vertical stages create management difficulties; (2) Incentive problems; (3) Limits flexibility, and; (4) Compounding of risk.

What is the cultural distance in the CAGE framework?

The cultural dimension is invisible in nature but has a huge impact on the values and behaviors of the people of the country that affects the international strategy and sales of the firm. Examples: Differences in language, consumer preferences, religious beliefs, race and social norms.

What is the economic distance in the CAGE framework?

The economic dimension concerns the differences between the countries relating consumer incomes, costs and quality in general.

Why should a firm use Michael Porters 5 forces framework?

The five forces framework allows us to determine an industry's potential for profit.

What are the five main arguments for a shareholder approach?

The five main arguments: (1) Maximizing shareholder value positively affects the value of the firm, because it forces managers to go beyond satisfying effort levels that would go beyond the requirements of 'fixed claimants'; (2) It creates appropriate incentives for managers to take risks, meaning that shareholders only care about systematic risk which results in less risk aversion; (3) Having more than one objective function (i.e. many stakeholders) is a recipe for confusion; (4) It is easier to make shareholders out of stakeholders than vice-versa, and; (5) The law protects stakeholders.

What are the four different types of FDI?

The four different types of FDI are: (1) Market seeking; (2) Resource seeking; (3) Efficiency seeking, and; (4) Strategic asset seeking.

Which four key components determine the innovators ability to profit from innovation?

The four key components: (1) Property rights in innovation; (2) Tacitness and complexity; (3) Lead time, and; (4) Complementary resources.

What is the geographic distance in the CAGE framework?

The further you are from a country, the harder it will be to conduct business in that country. But geographic distance is not simply a matter of how far away the country is, it is also other geographic attributes Examples: The country's size, average within-country distances to borders, access to waterways and the ocean, and a country's transportation and communications infrastructures.

What is the golden rule of corporate strategy?

The golden rule of corporate strategy: Portfolio balance is not enough - there must be synergies!

What is the sixth force to Porters framework?

The importance of complements. Reasoning: Porter's industry analysis identifies supplements as one of the five forces of industry attractiveness. However, economic theory identifies two types of relationships between different products: supplements and complements. While the presence of substitutes reduces the value of a product, complements increases the value, hence why it is the sixth force.

What is the key success factor in the maturity stage, in the industry life cycle?

The key success factor is to improve cost efficiency.

What is the key success factor in the decline stage, in the industry life cycle?

The key success factor is to keep administrative costs low.

What is the knowledge-based view?

The knowledge-based view of the firm argue that firms is a pool of knowledge where the primary challenge for management is to integrate the knowledge of individuals into the production of goods and services. Hence, knowledge as a source of competitive advantage.

What are the main arguments for a stakeholder approach (there are 5)?

The main arguments for a stakeholder approach: (1) Shareholders are stakeholders meaning that theories are not as oppositional as presented; (2) It is in each stakeholder's interest for firm's to take risks; (3) Focusing on one objective is not realistic in a complex world; (4) Shareholders are stakeholders, and; (5) Not clear whether non-shareholding stakeholders are less protected by law/court.

What is strategy?

The means by which individuals or organizations achieve their objectives.

Define durability in relation to resources and capabilities.

The more durable a resource, the greater is its ability to support a competitive advantage over the long term.

What are the benefits of vertical integration?

The most important benefits of vertical integration are among others: (1) Technical economies from integrating processes; (2) Superior coordination; (3) Control of the quality of the product/service; (4) Capture buyer/supplier's margins, and; (5) Barriers of entry.

According to Eisenhardt and Martin, what characteristics would dynamic capabilities ideally have in high-velocity industries?

The organization's routines should involve experiential actions to learn quickly about the current situation.

What is the parenting advantage as described by Michael Goold, Andrew Campbell?

The parenting advantage is creating more value than your competitors would with the same businesses.

What are the primary components of a strategy analysis?

The primary components are: (1) Goals; (2) Industry analysis; (3) Analysis of resources and capabilities, and; (4) Strategy implementation through the design of structures and systems.

What is the main problem with the functional analysis and the value chain analysis?

The problem of both approaches is that, they may fail to identify those idiosyncratic capabilities that are truly distinctive and critical to an organization's competitive advantage.

Explain the product life cycle.

The product life cycle allows us to understand the forces driving industry evolution and to anticipate their impact on industry structure and the basis of competitive advantage. It is comprised into four phases: (1) Introduction; (2) Growth; (3) Maturity, (4) Decline.

Describe Barneys resource-based view (RBV).

The resource-based view (RBV) is a model that sees resources as key to superior firm performance. If a resource exhibits VRIO attributes, the resource enables the firm to gain and sustain competitive advantage.

What is the 'organized' dimension in Barneys VRIO model?

The resources itself do not confer any advantage for a company if it's not organized to capture the value from them.

Define path dependency.

The simple fact that history matters. More specifically, it implies that an organization's strategy and structure and management's options for the future are determined by its past decisions and actions. Bonus: Configuration of capabilities is largely determined by the circumstances under which firms were founded i.e. path dependency.

What are the advantages and disadvantages of using the BCG Growth-Share matrix?

The simplicity of the BCG matrix is both its usefulness and its limitation. It can be prepared very easily and offers a clear picture of a firm's business portfolio in relation to some important strategic characteristics. Moreover, the analysis is versatile, meaning that it can be applied not only to business units but also to products, geographical markets, brands, and customers.

Define the stakeholder approach.

The stakeholder approach is about maximizing stakeholder value.

Which three factors determines the profits earned by the firms in an industry?

The three factors are: (1) The value of the product to customers; (2) The intensity of competition, and; (3) The bargaining power of industry members relative to their suppliers and buyers.

What are the three types of dynamic capabilities?

The three types of dynamic capabilities are: (1) Sensing: the identification and assessment of opportunities and threats; (2) Seizing: the mobilization of resources to address opportunities and threats, and; (3) Reconfiguring: the continuous renewal of assets.

What are the advantages with the BCG and Ashridge matrices?

The value of the matrices are: (1) Simplicity; (2) Focuses on the big picture; (3) Widely applicable to businesses, products, countries and distribution channels, and; (4) They can be augmented (expanded).

Define the four key areas within a performance analysis.

There are four key areas where analysis of profit performance can guide strategy: 1. First task is to appraise a firm's current and past performance 2. Diagnosing the sources of poor performance 3. Selecting strategies on the basis of their profit prospects 4. Setting performance targets

What are the three main problems with the BCG and Ashridge matrices?

There are three main problems with the matrices: (1) Simplicity: Tend to oversimplify the factors determining industry attractiveness and competitive advantage; (2) Ambiguity: The positioning of a business depends critically upon how a market is defined, and; (3) Ignores synergy: The analysis takes no account of any interdependencies between businesses.

What is the difference between static and dynamic advantages?

There are two types of ownership advantages. Static advantages is income generating resources and capabilities possessed by a firm at a given point in time, while dynamic advantages needs to sustain and increase its income generating assets over time.

What are the four VRIO attributes as depicted by Barney?

To have the potential for creating a sustainable competitive advantage resources must be: valuable, rare, impossible to imitate and organized.

What are the pre-requisites for success in an industry?

To survive and prosper in an industry, a firm must meet two criteria's by making analysis of demand and competition. To do so a firm should ask: what do customers want? And how does the firm survive competition?

Which three broad categories are transaction costs divided in?

Transaction costs are divided into three broad categories: (1) Search and information costs; (2) Bargaining costs, and; (3) Policing and enforcement costs.

What are the main characteristics of a market in duopoly?

Two firms Entry/exit barriers Potential for product differentiation

What is the 'imitate' dimension in Barneys VRIO model?

Valuable and rare organizational resources can only be sources of sustained competitive advantage if firms that do not possess these resources cannot obtain them. Firms resources can be imperfectly imitable for one or combination of three reasons: (a) The ability of a firm to obtain a resource is dependent upon unique historical conditions; (b) The link between the resources possessed by a firm and a firm's sustained competitive advantage is causally ambiguous, or; (c) The resource generating a firms advantage is socially complex.

What is meant by value added?

Value added is equal to all the firm's payments to factors of production.

How can value be created (two ways)?

Value can be created in two ways: (1) By production (transforming products that are less valued by consumers into products that are more valued), and; (2) By commerce (repositioning them in space and time).

Define value.

Value is the monetary worth of a product or asset. Bonus: Value is not necessarily equal to the price (value is personal whereas price is fixed).

X is a firm's ownership and control of multiple vertical stages in the supply of a product. What does X stand for?

Vertical integration

According to transaction cost economics, vertical integration depends on what?

Vertical integration depends on administrative vs. transaction costs.

Define vertical integration.

Vertical integration is a firm's ownership and control of multiple vertical stages in the supply of a product. The extent of a firm's vertical integration is indicated by the number of stages of the industry's value chain.

What does cost of capital (WACC) measure?

WACC measures the weight of debt and the true cost of borrowing money or raising funds through equity to finance new capital purchases and expansions based on the company's current level of debt and equity structure.

Newcomers pose the greatest threat during periods of technological change. New technology is especially challenging to incumbents when?

When it is "competence destroying," "architectural," and "disruptive".

Which question is the corporate (or companywide) strategy concerned with?

Where should we compete?

What is Joseph Schumpeter's argument against Porters five forces framework?

Whereas according to the 5-forces framework, industry structure determines competition, Schumpeter argues that it is competitive strategy which determines industry structure. And if competition is a dynamic process in which industry structure is constantly changing, the 5-forces framework does not offer a stable basis on which to predict competition and industry attractiveness.

How does an organization create the conditions for innovation?

While invention depends on creativity, innovation requires collaboration and cross-functional integration.