Strategic Management Exam 1

Bargaining Power of Buyers (5 forces analysis)

-Buyers have bargaining power (able to control the price they charge you); firms/people that buy from these suppliers/manufacturers Buyers can force down prices, bargain for higher quality/more services, or play/pit competitors against each other --> erode industry profitability Power of buyers is high when...: -It is concentrated or purchases large volumes relative to seller sales: If a large % of supplier's sales are purchased by a single buyer, the importance of the buyer's business to the supplier increases; Large-volume buyers are also powerful in industries with high fixed costs (steel manufacturing) -When concentration of buyers relative to supplier is high -The products it purchases from the industry are standard/undifferentiated: (switch from one supplier to another) are in large volumes --> buyer present a big threat to us because they can easily switch to another competitor; Confident they can always find alternative suppliers, buyers play one company against the other, as in commodity grain products -When product differentiation of supplier is low -Buyer faced low profit and few switching costs : allows buyers to switch easily and forces them to be more selective abt what products they buy -Switching costs lock the buyer to particular sellers, but the buyer's power is enhanced if the seller faces high switching costs -Low profits create incentives to lower purchasing costs, but highly profitable buyers are generally less-price sensitive -When extent of buyer's profits and switching costs are low The buyer poses a credible threat of backward integration: if buyers are not satisfied with our price/quality they can back coordinate the grid and do what we do/produce their own (manufacturer loses business with them) -If buyers either are partially integrated or pose a credible threat of backward integration, they are typically able to secure bargaining concessions -When the threat of backward integration by buyers is high The industry's product is unimportant and not affected by the quality of the buyer's products/services: if product we sell isn't important to buyer and their quality, they have a lot of power because they can switch or find another product --> makes buyer more price-sensitive -When the importance of supplier's input to quality of buyer's final product is low

Threat of New Entrants (5 forces analysis)

-Possibility that the profits of established firms in the industry may be eroded by new competitors; extent of threat depends on existing barriers to entry (things that protect us and the industry from a new competitor appearing) and the combined reactions from existing competitors: Threat of new entrants is high when these characteristics are low: -Economies of scale: the bigger the amt of production, the lower the cost per unit, competitors must produce a lot (millions of products) to be able to match the cost per unit and pass savings to their consumers; spreading the costs of production over the # of units produced -The cost of a product per unit declines as the absolute volume per period increases -->Deters entry by forcing the entrant to come in at a large scale and risk strong reaction from existing firms or come in at small scale and accept a cost advantage EX: car manufacturing, Tesla -Product differentiation: when products we have in the industry are so unique, so competitors must match its features to make it in industry; when existing competitors have strong brand identification and customer loyalty; Creates a barrier to entry by forcing entrants to spend heavily to overcome existing customer loyalties -Capital requirements: the materials/different aspects required to be purchase before starting a business; the need to invest large financial resources to compete creates a barrier to entry, esp. if capital is required for risky/unrecoverable up-front ads or R&D EX: starting a new airline, must buy several planes --> must have a lot of money -Switching costs: the cost that a buyer faces when a customer switches from one product/service to another (cost can be financial, psychological, time/effort, etc.); barrier to entry -Access to distribution channels: the new entrant's need to secure distribution for its production can create a barrier to entry -Cost disadvantages independent of scale: some existing competitors may have advantages that are independent of size/economies of scale, these derive from: -Proprietary products, favorable access to raw materials, government subsidies, favorable government policies The more barriers we exist, the less the threat of an entrants and vice versa (important if it's really high because must develop strategies to combat current and new competitors) -Managers often tend to overestimate the barriers of entry in many industries

Intensity of Rivalry among Competitors in an Industry (5 forces analysis)

-Rivalry: refers to how intensely firms compete with one another and occurs when competitors sense the pressure or act on an opportunity to improve their position; differs across industries (EX: Kia vs. Hyundai, Ford vs Chevy) -Indicators of intense rivalry: Price Competition: competing companies may find themselves unable to raise prices to account for inflation/financial tech upgrades Advertising R&D (research and development) Intensity of Competitive rivalry is high when...: -Numerous/equally balanced competitors (If market is really split among many firms, larger firms or equally sized competitors fighting for the same customers (number of competitors is high)) -Slow industry growth: (If industry is growing slow, it creates rivalry because there's very little growth for new customers so must take them away from our competition) High fixed or shortage costs: (High fixed costs create strong pressures for all firms to increase capacity Excess capacity often leads to escalating price ceiling When fixed and shortage costs is high) Lack of differentiation or switching costs: (When the product/service is perceived as a commodity/near commodity, the buyer's choice is typically based on price/service --> resulting in pressures for intense price/service competition and lack of switching costs has same effect (When product differentiation is low)) Capacity augmented in large increments (Where economies of scale require that capacity must be added in large increments, capacity additions can be very disruptive to the industry's supply/demand balance) High exit barriers -Exit barriers: economic, strategic, and emotional factors that keep firms competing even though they may be earning low/negative returns on their investments (Some are specialized assets, fixed costs of exit, strategic interrelationships (relationships between business units and other within a company in terms of image, marketing, shared facilities, etc.), emotional barriers, and government/social pressures (gov't concern of exit out of concern for a job loss)) -Business/Airlines can't exit the industry or it ceases to exist -When exit barriers and strategic stakes are high

3 elements that make up strategy

1. A Clear and Critical diagnosis of the competitive challenge: Accomplished through analysis of the firm's internal and external environments 2. A guiding policy or overarching approach to address the competitive challenge: -Accomplished through strategy formulation and results in corporate, business, and functional strategy; -Must be consistent, often backed with strategic commitments (such as sizable investments/changes to an organization's incentive/reward system) and provide clear guidance for employees 3. A set of coherent actions to implement the firm's guiding policy: -Accomplished through strategy implementation]

3 important stakeholder attributes

1. Power: when stakeholder can get the company to do something that it wouldn't otherwise do. 2. Legitimate claims: perceived to be legally valid or otherwise appropriate, just keep them informed, low power 3. Urgent claims: require a company's immediate attention and response, low power

five types of financial ratios

1. Short-term solvency or liquidity Current ratio= current assets/current liabilities Quick ratio= (current assets - inventory)/ current liabilities Cash ratio= cash/current liabilities 2. Long-term solvency measures Total debt ratio= (total assets- total equity)/ total assets Debt-equity ratio= total debt/total equity Equity multiplier= total assets/ total equity Times interest earned ratio = EBIT/ interest Cash coverage ratio= (EBIT + Depreciation)/ interest 3. Asset management or turnover Inventory turnover= cost of goods sold/inventory Days' sales in inventory= 365 days/inventory turnover Receivables turnover= sales/accounts receivable Days' sales in receivables = 365 days/ receivables turnover Total asset turnover= sales/total assets Capital intensity= total assets/sales 4. Profitability Profit margin= net income/sales Return on assets (ROA)= net income/total assets Return on equity (ROE)= net income/total equity ROE= (Net income/ sales) x (Sales/Assets) x (assets/equity) 5. Market value Price-earnings ratio= prices per share/ earnings per share Market-to-book ratio= market value per share/ book value per share -Financial ratios can help to understand firm performance by allowing them to eval their financial performance and compare it to other companies in industry and their historical data.

5 steps of stakeholder impact analysis

1. identify stakeholders 2. identify stakeholder's interests 3. identify opportunities and threats 4. identify social responsibilities 5. address stakeholder concerns

limitation of the balanced scorecard analysis

A focus on improving balance across a set of criteria can yield consistent performance, but: -It's not a "quick fix" - needs proper execution and long-term planning -Organizational scorecards must be aligned with individuals' scorecards -Needs a commitment to learning and personal ambitions must be excluded -Needs employee involvement in continuous process improvement (s -Needs cultural change -Needs a focus on nonfinancial rather than financial measures -Needs data on actual performance (how well we do with our employees, unbiased data to discover what our employees need, think and how we can help)

AFI Framework

A model that links 3 interdependent tasks- analyze, formulate, and implement- that together help managers plan/implement a strategy that can improve performance and result in competitive advantage Effectively managing the strategy process is the result of Analysis (A) of the external and internal environments (Strategic Leadership & the Strategy Process, External/internel Analysis, Competitive Advantage, Firm Performance, and Business Models) Formulation (F) of an appropriate business and corporate strategy (Business Strategy, Corporate Strategy, & Global Strategy) Implementation (I) of the formulated strategy through structure, culture, and controls (Organizational Design and Corporate Governance & Business Ethics) -These 3 tasks are the pillars of research/knowledge of strategic management; high independent and occur simultaneously -This framework: Explains and predicts differences in firm performance Helps leaders formulate/implement a strategy that can result in superior performance

strategy

A set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors; to achieve superior performance, companies compete for resources.

Value-Chain Analysis

A strategic analysis of an organization that views the organization as the sequential process of value-creating activities --> useful for understanding the building blocks of competitive advantage consists of primary and support activities.

3 management tasks that are required to successfully create/ implement strategy

Analysis (A) of the external and internal environments Formulation (F) of an appropriate business and corporate strategy Implementation (I) of the formulated strategy through structure, culture, and controls

comparisons necessary to assess firm performance (financial ratio analysis)

Analysis of how ratios change over time (Historical comparison) and how they're interrelated --> performance is relative to past data -Eval a firm's financial position/performance over time, which provides a means of eval trends -EX: a firm that takes on too much long-term debt to finance operations will see an immediate impact on its indicators of long-term financial leverage (And the additional debt will negatively affect the firm's short-term liquidity ratio (current and quick) since the firm must pay interest and principal on the additional debt each year; The interest expenses deducted from rev reduce the firm's profitability) Comparison with industry norms/performance -A firm's current ratio/profitability may appear impressive at firm but might not when compared with industry standards/norms -Comparing your firm w/all other industry firms assesses relative performance -The industry norms for a return on assets also highlight differences among industries Comparison with key competitors -Firms with similar strategies are members of a strategic group in an industry --> making competition more intense among competitors within groups than across groups -Can gain valuable insights into a firm's financial/competitive position if you make comparisons between a firm and its most direct rivals

Balanced Scorecard Analysis

Balance Scorecard Analysis: a method of eval a firm's performance using performance measures from the customer, internal, innovation and learning, and financial perspectives; provides managers with fast but comprehensive view of the business Show problems arising before financial analysis A meaningful integration of many issues that come into evaluating performance; includes financial measures that reflect the results of actions already taken, but it complements these indicators w/ measures of customer satisfaction, internal processes, and the organization's innovation and improvement activities - operational measures that drive future financial performance. Many important transactions (investments in R&D, employee training/development, advertising/promotions) may greatly expand a firm's market potential and create long-term shareholder value --> investments not reflected in positively in financial reports The approach recognizes how the interests of a variety of stakeholders can be interrelated. Talk to, surveys, meetings with: Employees. Owners. Customer satisfaction. Internal processes. Innovation, learning and improvement activities. Financial perspectives.

causal ambiguity and social complexity (sources of imitability)

Causal ambiguity: impossible to explain what caused a relationship to exist or how to re-create it, no causal relationship -If we can't understand it, it's difficult for competitors to imitate it -EX: Google illustrating the challenge to identify the specific set of actions, it took to build its image and culture or how to match it. Social complexity: resources that result from social engineering and the complex structures that reside in our company, including networks of employees, interpersonal relations, organizational culture, and reputation with suppliers/customers. -To imitate this resource capability, they must replicate this social complexity of your company which is almost impossible -For instance, people may want to partner with a firm because they've heard the firm is a credible company built through a culture of trust.

To assess competitive advantage, we compare firm performance to a benchmark

Compare firm to competitors in the same industry (performance of other firms in same industry) Compare the firm to the industry average.

4. identify social responsibilities (stakeholder impact analysis step)

Corporate Social Responsibility: framework helps firms recognize and address the economic, legal, ethical and philanthropic expectations that society has of business enterprises Strategic leaders must understand that society grants shareholders the right/privilege to create a publicly traded stock company and firm owes something to society 4 Components: Economic responsibilities: business enterprise is first and foremost an economic institution; investors expect good return on risk, capital creditors expect firm to repay debts, consumers expect safe products at appropriate prices/quality, suppliers expect to be paid in full on time, gov't expects firm to pay taxes and manage natural resources Legal responsibilities: Laws/regulations are a society's codified ethics, embodying notions of right/wrong; enforcing property rights and contracts --> define minimize acceptable standard -Strategic leaders must ensure their firms obey all laws/regulations including but not limited to labor, consumer protection, and environmental laws -Patient Protection and Affordable Care Act (PPACA) or Obamacare: firms with 50+ full-time employees must offer affordable health insurance to their employees/dependents or pay a fine for each worker Ethical responsibilities: Go beyond its legal responsibilities --> embody the full scope of expectations, norms, values of its stakeholders and strategic leaders are called upon to do what society deems just and fair Philanthropic responsibilities: Often subsumed under idea of corporate citizenship: notion of voluntarily giving back to society

External Stakeholders

Customers, Suppliers, Alliance Partners, Creditors, Unions, Communities, Governments (at various levels), and the Media

6 areas of the general environment that should be analyzed in an external assessment

Demographic Sociocultural Political/Legal Technology Economic Global

Technology (General Environment)

Developments in tech lead to new products/services and improve how they are produced/delivered to the end user; innovation and state of knowledge in industrial arts, engineering, applied science, and pure science, and their interaction w/ society Can create new industries and alter the boundaries/kill existing ones; elements: (Genetic engineering, Internet tech, Three-dimensional (3D) printing, Research in synthetic/artificial and exotic materials, Pollution and global warming, Miniaturization of computing technologies, Wireless communications, Nanotechnology, Physiolytics, Medical monitoring, Big Data Analytics)

what makes a resource difficult to imitate

Difficult to imitate or copy due to physical uniqueness, path dependency, causal ambiguity, or social complexity --> constrains competition Having a resource that competitors can easily copy generates only temporary value. An advantage of inimitability won't last forever and competitors will discover a way to copy the most valuable resources, but managers can forestall them and sustain profits for a while 4 sources of Imitability: Physical uniqueness Path dependency Causal ambiguity Social complexity

what makes a resource difficult to substitute

Difficult to substitute with no strategically equivalent resources or capabilities. Non-substitutability: there is no strategically equivalent valuable resources that are themselves not rare or inimitable. -2 valuable firm resources are strategically equivalent when each one can be exploited separately to implement the same strategies Substitutability may take at least 2 forms: 1 Even though a company cannot exactly imitate someone else's resource, it may be able to develop an equivalent/similar resource from another source that enables it to develop and implement the same strategy or develop its own unique yet similar management team 2. Very different firm resources can become strategic substitutes causing resources (premier retail locations) to become less valuable EX: the way Amazon's internet capabilities allow it to compete against competitors' premier brick-and-mortar locations, Uber vs. Taxi

Internal Stakeholders

Employees (executives, managers, workers), Stockholders, Board Members

Companies compete for:

Financial & Human Capital Profitable Growth Donations The best customers The best staffing Competitions Media Attention ETC

Financial Ratio Analysis

Financial Ratio Analysis: a technique for measuring the performance of a firm according to its balance sheet, income statement, and market valuation. When performing a financial ratio analysis, you must take into account the firm's performance from a historical perspective (not just at one point in time) as well as how it compares with both industry norms and key competitors. Firms must satisfy a broad range of stakeholders (including employees, customers, and owners) to ensure their long-term viability Balance sheet, Income statement, Market valuation, historical comparison, Comparison with industry norms/performance, Comparison with key competitors

Economic (General Environment)

Forces affect all industries from suppliers of raw materials to manufacturers of finished goods/services and organizations in the service, wholesale, retail, government and nonprofit sectors Key Economic indicators: -Interest rates (Increases have a negative impact on industries that produce necessities such as prescription drugs/common grocery items) -Unemployment -Consumer Price Index (CPI) -Trends in GDP (gross domestic product) and how it affects our organizations -NDI (Net disposable income) -Changes in stock market/equity market valuations (When stock market indexes increase, consumers' discretionary income rises and there's often an increased demand for luxury items and when they decrease, the demand for these items shrink) -National debt: (Ppl have less income --> make more affordable purchases (positive effect on these companies) -Need to understand what effect they have and how they can change

Sociocultural (General Environment)

Forces influence the values, beliefs, and lifestyles of a society Enhance sales of products/services in many industries but depress sales in others -More women in the workforce -Increase in temporary workers -Greater concern for healthy diets/ physical fitness --> what will promote a healthier lifestyle? -Greater concern for the environment -Postponement of family formation

Global (General Environment)

Forces that are outside our country that offer both opportunities/risks; influences from foreign countries including foreign market opportunities, foreign-based competition, and expanded capital markets Provides both opportunities to access larger potential markets and a broad based of production factors like -Raw materials, labor, skilled managers, and tech professionals -Such endeavors carry many political, social, and economic risks EX of key elements: -Changes in global trade -Currency exchange rates -Emergence of Indian and Chinese economies -Trade agreements among regional blocs (NAFTA, EU, ASEAN) -Creation of the WTO (leading to decreasing tariffs/free trade in services) -Increased risks associated with terrorism -Increases in trade across national boundaries (Provides benefits to air cargo/shipping industries but have minimum impact on service industries (bookkeeping, routine medical services) -Rapid rise of the middle class in emerging countries

How might forecasting impact the development of strategies for the firm?

Forecasting would impact the development of firm strategies by making them more accurate and effective as they're driven with data and history now. This allows firms to fully reach their goals and objectives. A danger of forecasting is that managers may view uncertainty as black & white and ignore important gray areas. The problem is that underestimating uncertainty can lead to strategies that neither defend against threats nor take advantage of opportunities.

Effects of Digital Economy

Globalization of business Disintermediation of markets -Online transactions allow firms to more directly interact with suppliers/customers and become less reliant on distributors/retailers to reach end consumers as well as on intermediaries when interacting with suppliers -Changes have increased efficiency of vertical chain from raw material and suppliers to end customers Reducing the asset intensity of business operations -By facilitating the ease of transactions and allowing distant firms to coordinate operations, firms can more easily ally with outside firms to provide critical business operations) Reduced the need for firms to invest in expensive operations Increasing collaboration -Online systems allow greater connectedness/collab both within and across firm boundaries and between suppliers/customers and complimentary product/service firms Increasing customer expectations -Customers are now more knowledgeable and more fickle than in the past Infusion of Internet technology into products -The ease of internet connection has facilitated the rise of the "Internet of Things" (allows devices to interact with each other and users to access products from anywhere in the world_ -Has led to products that send performance info to manufacturers who then communicated with users about service needs Creation of completely new markets -Fostered the creation of the social network industry, platform-oriented retailers (Etsy, Priceline), sharing economy business (ride-sharing services), and the cloud computing industry

What strategy is NOT

Grandiose statements: -Statements of desire and wishful thinking are not strategy --> provide little managerial guidance and often lead to goal conflict/confusion -Frequently fails to address economic fundamentals -An effective vision/mission is needed to lay the foundation for a good strategy (must be backed by strategic actions that allow firm to address competitive challenge with clear consideration of economic fundamentals like value creation/costs) -EX: "We will be number 1," "We will win." A failure to face a competitive challenge: -If a firm doesn't define a clear competitive challenge, employees have no way of assessing whether they are making progress in addressing it -EX: Blockbuster didn't address the competitive challenges posed by new players Netflix, Redbox, Amazon Prime, and Hulu. Operational effectiveness, competitive benchmarking, or tactical tools: -People casually refer to a host of diff policies/initiatives as some sort of strategy: "pricing strategy," "operations strategy," "brand strategy", "marketing strategy" -All these elements may be a necessary part of a firm's functional/global initiatives to support its competitive strategy, but they're not sufficient to achieve competitive advantage

Key objectives of a Five Forces analysis

Helps you decide whether your firm should remain/exit an industry It provides rationale for increasing/decreasing resource commitments Helps you assess how to improve your firm's competitive position with regard to the forces Shows how to develop strong relationships with your distribution channels May decide to find suppliers who satisfy the price/performance criteria needed to make a top product/service

How interrelationships of activities within the firm and with key outside stakeholders create value

Interrelationships within the firm's activities create value bc diff departments of a company, especially HR, are needed to collaborate/develop relationships w/ for the diff activities to understand one another and to have a cohesive and fully functioning company. Interrelationships w/ key outside stakeholders are also critical in creating organizational value as they help supply a firm with products and support -strong relationships w/ them could enable more efficient outbound logistics, production scheduling, and raw material ordering, and allow customers to better manage their inbound logistics.

interrelationships and strategic exchange relationships

Interrelationships: collaborative and strategic exchange relationships between value-chain activities either (a) within firms or (b) between firms. Strategic exchange relationships involve exchange of resources such as info, ppl, tech, or money that contribute to the success of the firm. -EX: within the firm, how effective human resource practices can support the entire value chain. Also see Strategy Spotlight 3.3 on how a strategy to include sustainability as a focus for business operations required firms to build in support for this throughout the value chain.

purpose of strategy

It provides an integrative overview of the most important internal and external factors to be taken into account by an organization. -It is a general direction set for the company and its various components to achieve a desired state in the future; strategy results from the detailed strategic planning process. - It is about delivering superior value, while containing the cost to create it, or by offering similar value at a lower cost.

strategic positioning trade-offs

Managers must make conscious trade-offs -How to allocate resources? -Which activities to pursue? EX: the retail industry: -Walmart: cost leader - big box outlet, low prices. -Nordstrom: differentiator - professional salespeople, luxury setting. A clear strategic profile (in terms of product differentiation, cost, and customer service) allows each retailer to meet specific customer needs -Competition focuses on creating value for customers (through lower prices or better service and selection) rather than destroying rivals --> strategy is not a zero-sum game, and everyone can win

Strategic Positioning

Managers stake out a unique position within an industry that allows the firm to provide value to customers, while controlling costs. Value creation minus costs equal economic contribution -The greater the diff between value creation and cost, the greater the firm's economic contribution -Enhances the likelihood of competitive advantage

importance of managing stakeholders

Managing stakeholders is important because effective stakeholder management benefits firm performance: -Satisfied stakeholders are more cooperative/ more likely to reveal info that can further increase the firm's value creation or lower its costs -Can lead to greater organizational adaptability/flexibility -The likelihood of negative outcomes can be reduced --> creating more predictable/stable returns -Firms can build strong reputations that are rewarded in the marketplace by business partners, employees, and customers

Demographic (General Environment)

Most easily understood and quantifiable elements of the general environment; at root for many changes in society Impact of a demographic trend varies across industries; elements include: -Aging pop --> are we sure that our product/service serves people of certain ages (older people) and adds value? -Rising affluence (wealth) -Changes in ethnic composition -Geographic distribution of population -Greater disparities in income levels

Value Creation

Occurs when companies with a good strategy are able to provide products or services to consumers at a price point that they can afford while keeping their costs in check, thus making a profit at the same time both parties benefit from this trade as each captures a part of the value created.

3. identify opportunities and threats (stakeholder impact analysis step)

Opportunities and threats can be a concern for stakeholders too In best case scenarios, managers transform such threat into opportunities EX: Consumer boycotts- Nestle infant formula boycott in developing countries

Stakeholders

Organizations, groups, and individuals that can affect or be affected by a firm's actions.

perceptual acuity

Perceptual acuity: the ability to sense what is coming before the fog clears- Ram Charan (advisors of many Fortune 500 CEOs) Perceptual acuity is important bc detecting early warning signals and keeping pace with changes in external environment can sustain a competitive advantage and managers are more successful

Physical uniqueness and path dependency (sources of imitability)

Physical uniqueness: resources so physically unique that it's impossible to imitate/duplicate EX: a beautiful resort location, mineral rights, or patents. Path Dependency: hard to duplicate because of all that has happened/steps along the path followed in the development and/or accumulation of resources; a characteristic of resources that is developed and/or accumulated through a unique series of events -The benefits from experience and learning through trial and error cannot be duplicated overnight. -EX: college degree requires finishing high school, 4 years of college, and a high GPA to graduate

Political/Legal (General Environment)

Processes and legislation influence environmental regulations with which industries must comply: Government legislation can also have a significant impact on the governance of corporations -Tort reform -Americans with Disabilities Act (ADA) of 1990 -Deregulation of utilities and other industries -Increases in federally mandated minimum wages -Taxation at local, state, and federal levels -Legislation on corporate governance reforms in bookkeeping, stock options, etc. (The U.S Congress passed the Sarbanes-Oxley Act of 2002, which greatly increases the accountability of auditors, executives, and corporate lawyers --> Act responded to the widespread perception existing governance mechanisms failed to protect the interest of shareholders, employees, and creditors; Legislation can also affect firms in the high-tech sector of the economy by expanding the number of temporary visas available for highly skilled foreign professionals) -Affordable Care Act (Obamacare)

Rewards of Superior Value Creation

Profitability & Market Share

What must a firm do to create competitive advantage?

Provide goods or services that consumers value more highly than those of its competitors, OR are similar to the competitors' at a lower price.

what makes a resource rare

Rare or uncommon relative to competitors; difficult to exploit In order for our resource capability to create competitive advantage, it must be unique relative to its current and potential competitors Some strategies require a mix of multiple types of resources (tangible assets, intangible assets, and organizational competencies)

value net analysis

Represents all players in the game and analyzes how their interactions affect a firm's ability to generate and appropriate value Vertical dimension= includes suppliers and customers who firm has direct transactions with Horizontal dimension= substitutes and compliments, players with whom a firm interacts but may not necessarily transact Complementors: single most important contribution/concept Compliments: products/services that have a potential impact on the value of a firm's products/services --> complementors produce compliments

Characteristics of resources that provide the basis for competitive advantage

Resources that are valuable, rare, difficult to imitate, and have no substitutes provide the basis for sustainable competitive advantage.

SWOT analysis

SWOT analysis: a basic technique/framework for understanding the business environment of a particular firm by analyzing the general environment and the firm's industry/ competitive environment -A firm's internal conditions = Strengths and Weaknesses. (Where the firm excels/good at or where it may be lacking relative to competitors/vulnerable,Some weaknesses we can correct/improve and some are inherent in the strategy/category you choose (tech materials will be more expensive --> higher prices)) -Any environmental or external conditions = Opportunities and Threats. (Opportunities and threats come from general environment and/or specific industry's competitive environment; In general environment, one might experience developments that are beneficial for most companies (improving economic conditions that lower borrowing costs or trends that benefit some and harm others)) After environmental scanning, monitoring, intelligence-gathering, and forecasting has been done, a SWOT analysis is used to perform a more in-depth analysis to see how all this affects its strategy. It does this by compiling the strengths, weaknesses, opportunities, and threats of an organization. -A firm's strategy must build on its strengths, remedy the weaknesses or work around them, take advantage of the opportunities presented by the environment, and protect the firm from the threats.

purpose of stakeholder analysis

Stakeholder Impact Analysis: provides a decision tool with which strategic leaders can recognize, prioritize, and address the stakeholder needs; helps the firm achieve a competitive advantage while acting as a good corporate citizen Key challenge of stakeholder strategy is to effectively balance the needs of various stakeholders and ensure that its primary stakeholders (firm's shareholders and investors) achieve their objectives Firm also need to recognize/address the concerns of other stakeholders (employees, suppliers, customers) in an ethical/fair manner

Stakeholders vs. Stockholders

Stockholders are always stakeholders in a corporation, but stakeholders are not always stockholders. A stockholder owns part of a public company through shares of stock, while a stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation.

how strategic groups are useful in competitive dynamics in an industry

Strategic groups can be analytical tools and useful in understanding competitive dynamics in an industry -Helps identify barriers to mobility that protect a group from attacks by other groups. (Mobility barriers: factors that deter the movement of firms from one strategic position to another) -Helps identify groups whose competitive position may be marginal or tenuous. (May anticipate that these competitors may exit the industry or try to move into another group) -Helps chart the future direction of firms' strategies. (Arrow eliminating from each strategic group can represent the direction in which the group (or firms within it) seems to be moving; If all strategic groups are moving in a similar direction, this could indicate a high degree of future volatility/intensity of competition) -Helps to think through the implications of each industry trend for the strategic group as a whole. (If the trend is decreasing the viability of a group, need to know what direction the strategic group should move, if the trend is increasing/decreasing entry barriers, and if the trend decreases the ability of one group to separate itself from other groups --> can help make predicitons about industry evolution) The question is how to group firms in an industry based on similarities in their resources and strategies. -Identifying the strategic group your organization is in helps to decide where threats or opportunities may lie.

1. identify stakeholders (stakeholder impact analysis step)

Strategic leaders focus on stakeholders that currently have or potential can have a material effect on a company --> identifies the most powerful internal/external stakeholders and their needs A second group of stakeholders includes customers, suppliers, and unions, local communities, and media List everyone

5. address stakeholder concerns

Strategic leaders need to decide the appropriate course of action for the firm --> the attributes of power, legitimacy and urgency helps to prioritize the legitimate claims and address accordingly

2. identify stakeholders' interests (stakeholder impact analysis step)

Strategic leaders need to specify and assess the interests/claims of the pertinent stakeholders using the power, legitimacy, and urgency criteria Shareholders have the most legitimate claim on a company's profits -However the wall separating the claims of ownership (shareholders) and of management (employees) have been eroding and many companies incentives top execs with employee stock ownership plans (purchase stock at discounted rate or use company stock as investment vehicle) Can be significant variation in the power a stakeholder may exert on the firm and many public companies pay more attention to large investors than to millions of smaller, individual investors -Shareholder activists (Bill Ackman, Carl Icahn, Daniel Loeb) buy equity stakes in a corp that they believe is underperforming to put public pressure on a company to change its strategy --> have much more power over a firm bc they can buy and sell a large # of shares at once or exercise block-voting rights in the corporate governance process, frequently demand seats on company's board too

Threat of Substitute Products/Services (5 forces analysis)

Substitute products/ services limit the potential returns of an industry; EX: old cars vs n ew cars, Uber vs Lift -Substitutes place a ceiling on prices that firms in an industry can profitability charge (If product is above the price of the substitute, then consumers are able to switch to the substitute,The more attractive the price/performance ratio, the more the substitute erodes industry profits) Substitutes come from another industry Substitutes can perform the same function as the industry's offerings -DiffAirplanes/ cars can transport a person from point A to point B The threat of substitute products is high when: -Differentiation of the substitute products is high -Rate of improvement in price-performance relationship of substitute products is high

Substitute vs Compliment goods

Substitutes: products/services outside the industry that perform the same function as the industry's offerings; limiting potential returns of an industry by placing a ceiling on the prices Compliment: products/services that have an impact on the value of a firm's products or services; can be purchased together

Bargaining Power of suppliers (5 forces analysis)

Suppliers can exert bargaining power by threatening to raise prices or reduce the quality of purchased goods/services --> industry that people buy from (glass manufacturers Powerful suppliers can squeeze the profitability of firms so far that they can't recover the costs of raw material inputs Power of Suppliers is high when...: Only a few firms dominate the industry and buyers have little choice of who to choose from: -Suppliers selling to fragmented industries influence prices, quality, and terms -When concentration relative to buyer industry is high There is no competition from substitute products and the supplier group is not obliged to content with substitute products for sale to the industry: -The power of even large powerful suppliers can be checked if they compete with substitutes -When availability of substitute products is low Suppliers sell to several industries and the industry is not an important customer of the supplier group: -A particular industry does not represent a significant fraction of its sales, so suppliers are more prone to exert power -When importance of customer to supplier is low Buyer quality is affected by industry product: -When such inputs are important to the success of the buyer's manufacturing process/product quality, the bargaining power of suppliers is high The supplier group's products are differentiated or it has built up switching costs for the buyer: -Differentiation or switching costs facing the buyers cut off their options to play one supplier against another When differentiation of supplier's products/services and switching costs of the buyer are high The supplier group poses a credible threat of forward integration: -Provides a check against the industry's ability to improve the terms by which it purchases -When threat of forward integration by the supplier is high

strategic management

The integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage.

SWOT analysis purpose

To fully understand the business environment of a firm, one must analyze both the general environment and the firm's industry & competitive environment. Gathering industry info and understanding competitive dynamics among the diff companies in your industry is key to successful strategic management this is one of the most basic techniques for analyzing firm and industry conditions; it is a framework for analyzing a company's internal and external environments.

what makes a resource valuable

Valuable in formulating and implementing strategies to improve efficiency/ effectiveness; exploits opportunities and neutralizes/minimizes threats in the firm's environment Our resource capability needs to offer some kind of value to customers that they're willing to pay for Firm attributes must be valuable in order to be considered resources and potential sources of competitive advantage --> complimentary relationship among environmental models (SWOT and five-forces analysis) and the resource-based model

value and how it's created in organization

Value: the amt buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm's products commands and the quantity it can sell Value is created within an organization through the operation of primary and support activities. A firm is profitable and valuable when the value received exceeds the total costs of creating the product or service.

Competitive Advantage

a firm that achieves superior performance relative to other competitors in the same industry or the industry average has this -Competitive advantage is always relative, not absolute. -Create value which reflected by how much consumers are willing to pay for products - costs you incur -Price: price your customers pay -Cost: cost you incur or pay for production/labor Price- Cost= Profit

Sustainable Competitive Advantage

a firm that is able to outperform its competitors or the industry average over a prolonged period. -Biggest threat to a good strategy is imitation of your business --> taking business away from you so you need to sustain your strategy (Requires understanding of your market and competitors and how the world is evolving) EX: Apple over Samsung in the smartphone industry

Competitive Disadvantage

a firm that underperforms its rivals or the industry average Occurs when the resource is not valuable, rare, easy to imitate, and there are substitutes --> cause people to go out of business because no one values what they have and they aren't able to generate revenue

Competitive Intelligence

a firm's activities of collecting and interpreting data on competitors, defining and understanding the industry, and identifying competitors' strengths and weaknesses Develop once we understand those changes; helps firms define/understand their industry. -Identifies rivals' strengths & weaknesses. (Involve collecting data on competitors and Interpreting intelligence data --> convert into info- more difficult than collecting) Helps firms avoid surprises by anticipating competitors' moves and decreasing response time Keeping track of competitors has become easier today with the amount of info that is available on the internet Be careful - aggressive efforts to gather competitive intelligence may lead to unethical or illegal behaviors. -Can steal data, pretend to be someone else to steal competitor's data, etc -Can't profit in long-term if unethical Execs must be careful to avoid spending so much time/effort in tracking actions of traditional competitors that they ignore new competitors Broad environmental changes/events may have a dramatic impact on a firm's viability

Environmental Monitoring

a firm's analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities after we understand what's happening -May be trends that the firm came across by accident or ones that were brought to its attention from outside the organization -Monitoring trends enables firms to evaluate how dramatically environmental trends are changing the competitive landscape - what do you want to track? -Firms need to CHOOSE the trends identified via the scanning activity and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process -Understanding sequences of measurable facts/events. -Understanding streams of activities or trends from outside the organization. EX: Johnson & Johnson tracking percentage of GDP spent on health care, or number of active hospital beds.

forward integration

a form of vertical integration whereby a firm expands activities to include control of the direct distribution of its products EX: a farmer sells his/her crops at the local market rather than to a distribution center for eventual sale to a supermarket

Scenario Analysis

a more in-depth approach to environmental forecasting that involves experts' detailed assessments of societal trends and draws on a range of disciplines/interests, among them economics, sociology, psychology, politics, technology, or other dimensions of the external environment Scenario analysis formulates strategy by looking at several possibilities of how trends can affect our organization then creating a response/strategy to resolve them -Usually begins with a discussion of participants' thoughts on ways in which societal trends, economics, politics, and technology affect an issue -Then based on these assessments future possible events are projected/predicted -Does not rely on extrapolation of historical trends, but instead seeks to explore possible developments that may only be connected to the past

Strategic Groups

clusters of firms that share similar strategies; dimensions used to map these firms: -Breadth of product & geographic scope. -Price/quality. -Degree of vertical integration. -Type of distribution (dealers, mass merchandisers, private label, etc.)

Organizational Capabilities

competencies or skills that a firm employs to transform inputs into outputs; use resources we have to create a product/service with them; use/combine Capacity to combine tangible and intangible resources, using organizational processes to attain desired ends. -Outstanding customer service. -Excellent product development capabilities. -Innovativeness of products and services, and flexibility in manufacturing processes -Ability to hire, motivate, and retain human capital. -Ability to use any resource or combine several resources EX: Zara's ability to incorporate new technologies and processes to enhance its capability to meet evolving customer needs in the face of competition from online retailers. See Case Ascena. EX: capability= ability to drive a car

Human Resource Management (support activities of value-chain analysis)

consists of activities involved in recruiting, hiring, training and development, and compensation of all types of personnel Focuses: -Effective employee recruiting, development, and retention mechanisms -Quality relations w/ trade unions (important role in organizations) -Reward/incentive programs to motivate all employees Supports both individual primary and support activities (hiring of engineers/scientists) and the entire value chain (negotiations with labor unions) EX: JetBlue Airways developed a highly innovative recruitment program for flight attendants to attract college grads to commit to careers as flight attendants

Competitive Environment

consists of factors in the task or industry environment that are particularly relevant to and affect a firm's strategy. -Competitors (existing or potential)--> those considering entry into an entirely new industry and potential competitors may include a supplier considering forward integration -Customers (or buyers) -Suppliers (Including those considering forward integration) The nature of the competition in the industry, as well as firm profitability is often directly influenced by developments in the competitive market Industry: a group of firms that produce similar goods or services. Forward integration

general environment

everything out of our industry and competitive environment, composed of factors that are both hard to predict and difficult to control; factors external to an industry, and usually beyond a firm's control, that affect a firm's strategy. Dominic Barton's highlights 4 Challenges for CEO's: -Geographic tensions around the globe have replaced the political stability of the past decades -Technology moves several times faster than management, not only creating new opportunities but also threats for many companies -Cybersecurity and the related efforts to protect computer systems/networks is a big priority for CEOs -Economic powers around the world are shifting

General Administration (support activities of value-chain analysis)

general management, planning, finance, accounting, legal and government affairs, quality management, and information systems; activities that support the entire value chain and not individual activities Focuses: -Effective planning systems to attain overall goals/objectives -Excellent relations w/ diverse stakeholder groups -Effective information tech to coordinate and integrate value-creating activities across the value chain -Ability of top management to anticipate and act on key environmental trends/events, create strong values, culture, and reputations Administration (unlike the other support activities) typically supports the entire value chain and not individual activities Sometimes viewed only as overhead, it can be a powerful source of competitive advantage and strong effective leadership of top execs can make a significant contribution to a organization's success EX: in a telephone operating company, negotiations and maintaining ongoing relations with regulatory bodies can be among the most important activities for competitive advantage EX: expectations of a nice hotel that you don't notice until they're gone (dirty bed) and a lot of people made it happen this way

Service (primary activities of value-chain analysis)

includes all activities associated with providing service to enhance/maintain the value of the product; follow up calls, warranty work, customer service management These include: -Installation and repair -Training -Parts supply -Product adjustment Factors to consider include: -How quick our response is to customer needs -Quality of service personnel, ongoing training -Important bc our customers expect post product/service follow-up

Stakeholder Strategy

integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage Unit of analysis is the web of exchange relationships a firm has with its stakeholders Allows firms to analyze/manage how various external/internal stakeholders interact to jointly create and trade value Core tenet is that a single-minded focus on stakeholders alone exposes a firm to under due risks --> stakeholder interest can undermine economic performance and threaten enterprise survival -A strategic leader must understand the complex web of exchange relationships and firm can proactively shape the relationships to maximize joint value create and manage distribution of larger pie in fair manner

Environmental Scanning

involves surveillance of a firm's external environment to predict environmental changes and detect changes already under way -It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends - what catches your eye? -Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. -Predicts environmental changes are happening and what's to come. -Allows firm to be proactive in our actions/strategy -Leading firms in an industry can also be a key indicator of emerging trends

Environmental Forecasting

involves the development of plausible projections about the direction, scope, speed, and intensity of environmental change; purpose is to predict change Asks what would happen if the environment should change dramatically? Addresses the need to consider several scenarios in order to envision possible future outcomes. Plausible projections about -Direction of environmental change? -Scope of environmental change? -Speed of environmental change? -Intensity/magnitude of environmental change? Some forecasting issues are much more specific to a particular firm and the industry which it competes

Technology Development (support activities of value-chain analysis)

is related to a wide range of activities associated with the development of new knowledge that is applied to the firm's overall operations. discrete activities may include component design, feature design, field testing, process engineering, and technology selection Focuses: -Effective (R&D) activities for process/product initiatives -Positive collaborative relationships between R&D and other departments -State-of-the-art facilities and equipment -Excellent professional qualifications of personnel -Use of data analysis The array of tech employed in most firms is very broad, ranging from tech used to prepare documents and transport goods to those embodied in processes/equipment or the product itself

doing a good industry analysis

looks rigorously at the structural underpinnings & root causes of profitability. -Must choose the appropriate time frame. (One of the essential tasks in industry analysis is to distinguish short-term fluctuations from structural changes, Consider the industry business life cycle. --> Average profitability over 3-5 years or longer for a horizon should be an analysis focus -Other industries w/ long lead times (mining), the appropriate horizon may be a decade or more) -Must consider quantitative factors as well as qualitative. (Get numbers to quantify five forces factors.) EX: percentages of total cost or sales accounted for by the industry, actual switching costs Michael Porter cautions that good industry analysis needs to yield an understanding of structural underpinnings/ root causes of profitability within the industry by choosing the appropriate time frame and doing a rigorous quantification of the five forces.

support activities (value-chain analysis)

make sure the primary activities are functioning well; either add value by themselves or through important relationships with both primary activities and other support activities typically don't touch the actual product/service that's provided or interact with customers but provide support with these activities: General administration Human resource management Technology development Procurement

Outbound Logistics (primary activities of value-chain analysis)

managing the activities that manage the outflow away from the firm, packaging and shipping; includes collecting, storing, and distributing the product/service to the buyers These include: -Finished goods/warehousing -Material handling -Delivery vehicle operation -Order processing, scheduling, and distribution Factors to consider include: -Effective shipping processes to provide quick delivery and minimize damages -Minimizing shipping/transportation costs by grouping goods into larger lot sizes

innovation and learning perspective (balanced scorecard analysis)

measures of firm performance that indicate how well firms are changing their product/service offerings to adapt to changes in the internal/external environments Criteria for success is constantly changing as markets, technologies, and global comp. does Managers must make frequent changes to existing products/services as well as introduce entirely new products with extended capabilities. --> more dependent on intangible assets: -Human capital (skills, talent, knowledge) -Information capital (information systems, networks) -Organization capital (culture, leadership)

customer perspective (balanced scorecard analysis)

measures of firm performance that indicate how well firms are satisfying customer's expectations; top priority for management Requires that managers translate their general mission statements on customer service into specific measures that reflect the factors that matter to customers Using the balanced scorecard, managers articulate goals for 4 key categories of customer concerns: -Time vs quality -Performance and service vs cost

internal business perspective (balanced scorecard analysis)

measures of firm performance that indicate how well firms' internal processes, decisions, and actions are contributing to customer satisfaction Customer-based measures must be translated into indicators of what the firm must do internally to meet customers' expectations Managers must focus on those critical intern operations that enable them to satisfy customer needs: -Business processes (Cycle time, quality, employee skills, productivity) -Decisions -Coordinated actions undertaken to achieve these customer needs -Key resources and capabilities --> can use resource-based perspective to do this

financial perspective

measures of firms' financial performance that indicate how well strategy, implementation, and execution are contributing to bottom-line improvement --> how companies generate profit so very important Financial goals include: -Profitability, growth, and shareholder value These should lead to these results to benefit firms: -Improved sales -Increased market share -Reduced operating expenses -Higher asset turnover Key implication is that managers do not need to look at their job as balancing stakeholder demands. The balanced scorecard provides a win-win approach of increasing satisfaction among a wide variety of organizational stakeholders (including all employees, customers, and stockholders)

Porter's Five Forces Model of Industry Competition

most popular analytical tool for examining the industry-level competitive environment, especially the ability of firms in that industry to set prices and minimize costs; illustrates how these forces can be used to explain an industry's profitability Each of these forces affects a firm's ability to compete in a given market. Together they determine the profit potential for a particular industry. Developed in the 80s but been useful up until today as an analytical tool in order to understand what these forces are and how strongly they're able to affect us

Intangible Resources

organizational assets that are difficult for competitors to identify/account for or imitate and are typically embedded in unique routines and practices that evolved and accumulated over time Human resources: trust, experience and capabilities of employees, managerial skills, firm-specific practices and procedures, and anything associated/embedded within our employees (their knowledge, skillsets, experiences) Innovation resources: technical and scientific expertise/ideas and innovation capabilities of our organization Reputation resources: brand names, reputation for fairness with suppliers (non-zero-sum relationships) and reputation for reliability and product quality with customers. A firm's specific practices and procedures, and the firm's culture, may also be resources that provide competitive advantage. EX: Harley-Davidson has entered all of these product/service markets by capitalizing on its strong brand image (a valuable intangible resource), social networking sites

Tangible Resources

organizational assets that are relatively easy to identify Physical assets: modern plant/facilities, favorable manufacturing locations, and state-of-the-art machinery/equipment. Financial assets: firm's cash and cash equivalents (accounts receivable), firm's borrowing capacity, and firm's capacity to raise equity. Technological resources: data analytic algorithms and patents/copyrights/trademarks. Organizational resources: effective strategic planning processes and excellent evaluation/control systems. These include assets that the firm uses to create value for its customers; physical resources such as the plant's proximity to customers and suppliers; financial resources such as accounts receivables; organizational resources such as employee development, evaluation and reward systems; technological resources such as trade secrets and patents.

Marketing & Sales (primary activities of value-chain analysis)

primary activity that attracts clients, revenue generating part; involve purchases of products/services by end users and how to get buyers to make those purchases These include: -Advertising and promotion -Sales force management -Pricing/price quoting -Channel selection -Channel relations Factors to consider include: -Innovative approaches to promotion/advertising -Proper identification of customer segments we want to serve and their needs -Product placement is a marketing strategy that many firms are adopting to reach customers without traditional advertising

primary activities (value-chain analysis)

productive activities of firm; contribute to the direct physical creation of the product/service, the sale and transfer to the buyer, and service after the sale Inbound logistics Operations Outbound logistics Marketing/sales Service

Procurement (support activities of value-chain analysis)

purchasing and negotiating for raw materials; includes how the firm purchases inputs used in its value chain These include: -Procurement of raw material inputs -Purchased inputs include raw materials, supplies, and other consumable items as well as assets such as machinery, lab equipment, office equipment, and buildings Focuses: -Optimizing quality and speed of procurement of raw material inputs -Minimizing associated costs -Development of collaborative win-win relationships with suppliers -Analysis and selection of alternative sources of inputs to minimize dependence on one supplier May include activities like qualifying new suppliers, purchasing different groups of inputs, and monitoring supplier performance EX: Microsoft has improved its procurement process and the quality of suppliers by providing formal reviews of its suppliers, helping clarify its expectations to suppliers

Inbound Logistics (primary activities of value-chain analysis)

set of materials that are taken in to be used as inputs; primarily associated with receiving, storing, and distributing inputs to the product These include: -Material handling -Warehousing -Inventory control -Vehicle scheduling -Returns to the suppliers Factors to consider include: -Location of distribution facilities to minimize shipping times -Warehouse layout/designs (to increase efficiency of operations for incoming materials) -Logistical networks/ connections btween ours and suppliers

Operations (primary activities of value-chain analysis)

take those inputs and use those to make something, designing processes; include all activities associated with transforming inputs into the final product form These include: -Machining -Packaging/assembly -Testing/quality control -Printing -Facility operations -Also, delivering services (accounting, haircut) Factors to consider include: -Efficient plant operations to minimize costs -Efficient plant layout /workflow design -Incorporation of appropriate process technology (generally pretty straight-forward to understand) Creating environmentally-friendly manufacturing is one way to use operations to achieve competitive advantage

Competitive Parity

when 2+firms perform the same level -If the resource is valuable, but not rare, it's easy to imitate and has substitutes -Not earning much profit but we're able to recover the cost of producing product/service (typical for product/commodity markets: where everyone has same resource like oil but it isn't rare)