Strategic Management Midterm
three key principles that underlie strategic positioning
1) strategy is the creation of a unique and valuable position, involving a different set of activities. 2) strategy requires you to make trade-offs in competing- to choose what not to do. 3) strategy involves creating "fit" among a company's activities
five steps of stakeholder impact analysis
1) who are the stakeholders? 2) what are our stakeholders' interests and claims? 3) what opportunities and threats do our stakeholders present? 4) what economic, legal, ethical and philanthropic responsibilities do we have to our stakeholders? 5) what should we do to effectively address the stakeholder concerns?
strategic initiative
any activity a firm pursues to explore and develop new products and precess, new markets, or new ventures. may develop through autonomous actions by lower level employees, serendipity, or resource allocation process (RAP)
emergent strategy
any unplanned strategic initiative undertaken by mid-level employees of their own volition
scenario planning
approach to strategic management. managers envision different what-if scenarios to anticipate plausible futures. takes place at both the corporate and business levels. addresses both optimistic and pessimistic futures. bottom up approach because environment helps to dictate decisions
top-down strategic planning
approach to strategic management. rational, top-down process aiding in programming for future success; typically concentrates strategic intelligence and decision-making responsibilities in office of CEO. Analysis -> Formulation -> Implementation
strategy as planned emergence
approach to strategic management. top-down and bottom-up. managers must synthesize all available input from different internal/external sources into an overall strategic vision. involves a progression from intended strategy to realized and emergent strategy
minimum efficient scale (MES)
output range needed to bring the cost per unit down so firm can take advantage of economies of scale
vertical integration
ownership of its inputs, production, and outputs in the value chain. industry level integration from upstream to downstream when Cost of in house is less than Cost of market
ecological/environmental factors
part of PESTEL framework. broad environmental issues. natural environment, global warming, sustainable economic growth
sociocultural factors
part of PESTEL framework. captures cultures, norms, and values for society. dynamic and differ across groups. demographic trends capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class
technological factors
part of PESTEL framework. captures the application of knowledge to create new processes and product. innovations in process technology. nanotechnology revolution
economic factors
part of PESTEL framework. economy wide phenomena, consisting of the following five macroeconomic factors and affecting firms strategy: growth rates, interest rates, levels of employment, price stability (inflation/deflation), currency exchange rates
legal environment
part of PESTEL framework. laws, mandates, regulations, and court decisions. tax guidelines, safety regulations, employment laws, trade regulations
political environment
part of PESTEL framework. processes/actions of government that can influence the decisions and behavior of firms. political stability, government policies
primary activities
part of value chain analysis. add value directly by transforming inputs into outputs
support activities
part of value chain analysis. add value indirectly, but are necessary to sustain primary activities.
upper-echelons theory
strategic choices and performance levels are reflections of top management values-interpret situations through unique perspective. strong leadership can be learned and is a result of innate abilities
balanced scorecard
strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial strategic goals. how do customers view us? how do we create value? what core competencies do we need? how do shareholders view us?
subscription based model
one type of business model. users pay for access to a product/service during the payment term
freemium
one type of business model. users pay only for premium services
incremental innovation
steady improvement of product or service; existing markets. Gillette now 6 bladed razors. often from incumbent firms
strategic group model
framework that explains performance differences within the same industry by clustering different firms into groups based on key strategic dimensions
limitations of shareholder value creation metrics
stock prices can be highly volatile. macro-economic factors. stock prices frequently reflect the psychological mood of investors
mapping strategic groups
1) identify important strategic dimensions. 2) for the horizontal and vertical axes- select 2 key dimensions which expose pivotal differences among the competitors (dimensions shouldn't be highly correlated). 3) graph the firms in their strategic groups, indicating each firm's market share by the size of the bubble with which it is represented
Porter's Five Forces
1) Barriers to Entry 2) Threat from substitutes 3)Threat from Buyers Bargaining Power 4) Threat from Suppliers Bargaining Power 5) Competitive Rivalry among existing competitors
what strategy is NOT
1) grandiose statements. 2) a failure to face a competitive challenge. 3) operational effectiveness, competitive benchmarking, or other tactical tools
taper integration
an alternative to vertical integration. firm is backwardly integrated but also relies on outside-market firms for some of its supplies, and/or is forwardly integrated but also relies on outside-market firms for some of its distribution
boston consulting group growth-share matrix
A corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) and speed of market growth (vertical axis). SBUs are plotted into four categories (dog, cash cow, star, and question make) each of which warrants a different investment strategy.
strategic outsources
an alternative to vertical integration. moving one or more value chain activities outside the firm's boundaries to other firms in the industry value chain
diversification
an increase in the variety of products and services a firm offers of markets and the geographic regions in which it competes
stakeholder strategy
an integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage
ambidextrous organization
an organization able to balance and harness different activities in trade-off situations
implications of 3 external analysis methods
PESTEL- how the external factors identified affect the firm's industry environment. Porter's five forces- identifies industry profit potential and firm positioning for gaining and sustaining competitive advantage. strategic group map- helps find performance differences within the focal industry
conglomerate
a company that combines two or more strategic business units under one overarching corporation; follows unrelated diversification
complementor
a company that provides a good or service that leads customers to value your firm's offering more when the two are combined
strategic positioning
a company's relative position within its industry. reflects choices a company makes about the kind of value it will create and how that value will be created differently than rivals. differentiation and cost leadership. tradeoffs are required (walmart v. nordstrom)
level-5 leadership pyramid
a conceptual framework of leadership progression with five distinct sequential levels. 1) highly capable individual 2) contributing team member 3) competent manager 4) effective leader 5) executive
market capitalization
a firm performance metric that captures the total dollar market value of all of a company's outstanding shares at any given point in time. market cap = number of outstanding shares X share price
dynamic capabilities
a firm's ability create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage. essential to create a sustained competitive advantage. goal is to achieve a dynamic fit between internal strengths and external opportunities
strategic position
a firm's ability to create value (v) for customers while containing costs (c)
competitive advantage
a firm's ability to outperform other companies competing for the same set of customers. a large value gap (v-c)
innovation ecosystem
a firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic decision making
organizational inertia
a firm's resistance to changes in the status quo
corporate social responsibility
a framework that helps firms recognize and address the economic, legal, social, and philanthropic expectations that society has of the business enterprise at a given point in time
industry
a group of firms that face the same set of suppliers and buyers
AFI Framework
a model that links three interdependent strategic management tasks (analyze, formulate, implement) that together help managers plan and implement a strategy that can improve performance and result in competitive advantage
complement
a product, service, or competency that adds value to the original product offering when the two are used in tandem
strategy
a set of goal directed actions a firm takes to gain and sustain superior performance relative to competitors
thin markets
a situation in which transactions are likely not to take place because there are only a few buyers and sellers who have difficulty finding each other
strategic business units
a standalone division of a larger conglomerate, with its own profit and loss responsibility
three performance dimensions
accounting profitability, shareholder value creation, economic value creation
strategic commitments
actions that are costly, long-term-oriented, and difficult to reverse
principal-agent problem
agent performing activities on behalf of a principal pursues his or her own interests
limitations of accounting profitability
all accounting data are historical data and thus backward-looking. accounting data do not consider off-balance sheet items (only focus on tangible assets)
transaction costs
all internal and external costs associated with an economic exchange. corporate strategy determines whether its cost-effective for their firm to expand its boundaries through vertical integration or diversification.
SWOT analysis
allows managers to evaluate a firm's current situation and future prospects by simultaneously considering internal and external factors. strengths weaknesses opportunities threats
vision
aspiration of the firm that lays the foundation for its mission- "to" is a common word
to measure competitive advantage, we must
assess firm performance and benchmark to the industry average/other competitors
long tail
business model in which companies can obtain a large part of their revenues by selling a small number of units from among almost unlimited choices. selling less of more. online retailing with unlimited virtual shelf space
Porter's 4 part framework
framework for predicting competitive behavior. 1) competitors current strategy, 2) competitors objective, 3) competitors assumptions about the industry, 4) competitors resources and capabilities
The PESTEL Framework
categorizes and analyzes an important set of external forces (political, economic, sociocultural, technological, ecological, and legal) that might impinge upon a firm. these forces are embedded in the global environment and can create both opportunities and threats for the firm
strategic trade-offs
choices between a cost or value position. such choices are necessary because higher value tends to require higher cost
integration
combination of differentiation and cost leadership strategies. can work if investments are in complements rather than substitutes (spill over effects). goal of strategy is larger economic value than that of rivals pursuing differentiation and low cost
triple bottom line
combination of economic, social and ecological concerns that can lead to a sustainable strategy
realized strategy
combination of intended and emergent strategy
advantages of balanced scorecard
communicate and link the strategic vision to responsible parties within the organization, translate the vision into measurable operational goals, design and plan business processes, implement feedback and organizational learning in order to modify and adapt strategic goals when indicated
sustained competitive advantage
companies strategy enables it to maintain above average profitability over a prolonged period of time
first-mover advantages
competitive benefits that accrue to the successful innovator
good strategy
consists of analysis, formulation, and implementation
unrelated diversification strategy
corporate strategy in which a firm derives less than 70 percent of its revenues from a single business activity and there are few, if any, linkages among its businesses
related diversification strategy
corporate strategy in which a firm derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity
geographic diversification strategy
corporate strategy in which a firm is active in several different countries
product diversification strategy
corporate strategy in which a firm is active in several different product markets
product-market diversification strategy
corporate strategy in which a firm is active in several different product markets and several different countries
cost-leadership strategy cost drivers
cost of input factors, economies of scale, learning-curve effects, experience-curve effects
external transaction costs
costs associated with economic exchanges. searching for a firm to contract with. negotiating and enforcing contracts
internal transaction costs
costs pertaining to organizing an exchange within a firm. recruiting and training employees, paying salaries, office space. administrative costs
differentiation
create higher value by delivering products/services with unique features
cost leadership
create similar value by delivering products/services at a lower cost and lower prices than competitors
resource stocks
current level of intangible resources
economies of scale
decreases in cost per unit as output increases
product oriented vision statements
defines a business in terms of good service provided. "to be the safest most progressive North American railroad." less flexible
customer oriented vision statements
defines a business in terms of providing solutions to customer needs. "we are in the business of providing solutions to professional communications needs." allows firms to adapt to changing environments
network effects
describe the positive effects that one user of a product or service has on the value of that product or service for other users. threat of potential entry is reduced when they are present. when present, value of the product or service increases with number of users
firm performance
determined not only by the industry to which the firm belongs, but also by its strategic group membership
limitations of economic value creation
determining the value of a good in the eyes of consumers is not simple. the value of a good in the eyes of consumers changes based on income, preferences, time, etc., to measure firm-level competitive advantage, the economic value created for all products/services offered by the firm must be assessed
economic value created
difference between value (v) and cost (c), or v-c; sometimes also called economic contribution
signaling
differentiation is only effective if it is communicated to consumers. not as important for search goods, which are good whose qualities can be ascertained via inspection. important for experience goods, which are goods whose qualities can only be ascertained after consumption (wine)
value (v)
dollar amount (v) a consumer would attach to a good or service; the consumer's maximum willingness to pay. reservation price
competitive industry structure
elements and features common to all industries, including the number and size of competitors in an industry, whether the firms possess some degree of pricing power, and the type of product or service the industry offers. perfect competition has lowest profit potential -> monopolistic competition -> oligopoly- > monopoly has highest profit potential
dynamic capabilities perspective
emphasizes a firm's ability to modify and leverage its resources based in a way that enables it to gain and sustain competitive advantage in a constantly changing environment
values
ethical standards/norms that govern the behavior of individuals within a firm
strategic leadership
executives' use of power and influence to direct assets in the pursuit of an organization's goals
VRIO framework
explains and predicts firm level competitive advantage. a firm can gain competitive advantage if it has resources that are valuable, rare, and costly to imitate (inimitable). the firm must also organize to capture the value of the resources
transaction cost economies
explains and predicts the boundaries of the firm, which is central to formulating a corporate strategy that is more likely to lead to competitive advantage
firm effects
firm performance attributed to the actions managers take
industry effects
firm performance attributed to the structure of industry in which the firm competes
game theory
helps describe and structure competitive situations. points to five aspects of strategic behavior: cooperation, deterrence, commitment, changing the structure of the game being played, signaling
functional strategy
how to implement a business strategy
isolating mechanisms
how to sustain a competitive advantage. barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy. 1) better expectations of future values. 2) path dependence. 3) casual ambiguity. 4) social complexity
the four I's
idea --> invention --> innovation --> imitation
industry analysis
identifies the industry's profit potential
black swan events
incidents that describe highly improbably but high-impact events. accounting scandal at Enron, 2008 financial crisis. two key points: managers actions can affect the economic wellbeing of countless people, effective stakeholder management is necessary to ensure continued survival and sustainable competitive advantage
diseconomies of scale
increases in cost per unit when output increases
risks of vertical integration
increasing costs due to lack of market competition, reducing quality, reducing flexibility, increasing the potential for legal repercussions (anti-trust)
switching costs
incurred by moving from one supplier to another
generic business strategies
independent of industry- can be used by an organization- manufacturing or service, large or small, for profit or non profit, public or private -in the quest for competitive advantage
shareholders
individuals or organizations who own one or more shares of stock in a public company
closed innovation
internal discovery, development and commercialization. fully capture returns, but costly. dominant during 20th century
industry life cycle
introduction -> growth -> shakeout -> maturity -> decline
resource flows
investments to maintain or build a resource
accounting profitability
one performance dimension. using accounting data (financial data and ratios derived from income statements and balance sheets); Enable us to conduct direct performance comparisons between different companies
razor-razor blade model
one type of business model. initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. developed by Gillette
pay as you go model
one type of business model. only pay for what you consume. power, ZipCar
open innovation
leverages both internal ideas and inventions, and external ones. use licensing agreements, strategic alliances, joint ventures
strategic management process
method put in place by strategic leaders to conceive and implement a strategy, which can lay foundation for a sustainable competitive advantage
forward vertical integration
moving ownership of activities closer to the end consumer
backward vertical integration
moving ownership of activities upstream to the originating inputs of the value chain
process innovations
new ways to produce existing products or deliver existing services. product innovations --> process innovations
radical innovation
novel methods or materials serving new markets. mass production- Ford. X-ray
disruptive innovation
novel technologies serving existing markets from bottom up. digital photos, data storage
analysis
one element of a good strategy. diagnosis of the competitive advnatage
formulation
one element of a good strategy. guiding policy to address the competitive challenge
implementation
one element of a good strategy. set of coherent actions to implement the firm's guiding policy
better expectations of future values
one isolating mechanism. buy resources at a low cost. nike signing future mega-athletes early in their career (MJ). real estate development- highway expansion
causal ambiguity
one isolating mechanism. cause of success or failure is not apparent. why has apply had such a string of successful products?
path dependence
one isolating mechanism. current alternatives are limited by past decisions. QWERTY keyboard- in part, advantage is due to time needed to develop this dependence
social complexity
one isolating mechanism. two or more systems interact creating many possibilities. when combined configurations abound and are too complex to imitate
resource immobility
one major assumption of the resource based view. a firm has resources that tend to be "sticky" and don't move easily from firm to firm
resource heterogeneity
one major assumption of the resource based view. a firm is a bundle of resources and capabilities that differ across firms
where to compete
one of three dimensions of the firm defined by corporate strategy. determines geographic scope
range of products and services
one of three dimensions of the firm defined by corporate strategy. how much should we diversify?
industry value chain
one of three dimensions of the firm defined by corporate strategy. transformation of raw materials into finished goods. what stages to participate? determine vertical integration
economic value creation
one performance dimension. a firm has a competitive advantage when it creates more economic value than rival firms. measure of net profit after tax - cost of capital. the amount of total perceived consumer benefits equals the maximum willingness to pay
competitive parity
performance of two or more firms at the same level
differentiation strategy value drivers
product features, customer service, complements/bundling, differentiation by brand, differentiation by positioning
how to gain competitive advantage
provide either goods or services consumers value more highly than those of its competitors, or offer similar products at a lower price
value and cost drivers of integration strategy
quality, economies of scope, customization, innovation, structure, culture and routines
architectural innovation
reconfigure known components to create new markets. cannon user-friendly copiers. GPS to handheld consumer devices
crossing the chasm
related to the technology adoption lifecycle where five main segments are recognized: technology enthusiasts (2.5%), early adopters (13.5%), early majority (34%), late majority (34%) and laggards (16%). According to Moore, the marketer should focus on one group of customers at a time, using each group as a base for marketing to the next group
productivity frontier
relationship that captures the result of performing best practices at any given time; the function is concave (bulging outward) to capture the trade-off between value creation and production cost
two critical assumptions of resource based view
resource heterogeneity and resource immobility
mobility barriers
restricts movement between groups; industry-specific factors that separate one strategic group from another
total return to shareholders
return on risk capital that includes stock price appreciation plus dividends received over a specific period
pareto principle
roughly 80% of effects come from 20% of causes
focused cost leadership strategy
same as cost leadership except with a narrow focus on a niche market
focused differentiation strategy
same as differentiation except with narrow focus on niche market
direct competitors
same strategic group firms
economies of scope
savings that come from producing two or more outputs at less cost than producing each output individually, despite using the same resources and technology
benefits of vertical integration
securing critical supplies and distribution channels, lowering costs, improving quality, facilitating scheduling and planning, facilitating investments in specialized assets
strategic group
set of firms pursuing a similar strategy within a specific industry. differences identify business level strategies
resource allocation process
shapes what initiatives a firm funds
alternatives on the make or buy continuum
short-term contracts, strategic alliances, parent-subsidiary relationship
information asymmetries
situations in which one party is more informed than another, because of the possession of private information
resource based view
suggests that a company is a bundle of resources. resources as key to superior firm performance. helps to determine what a firm's core competencies are and whether a company's resources are truly valuable enough to serve as a basis for strategy. if resources and capabilities exhibit VRIO attributes, they become building blocks for gaining and sustaining competitive advantage
attractive industry
sustainable competitive advantage easier. high profit potential. weaker five forces
unattractive industry
sustainable competitive advantage harder. low profit potential and strong five forces
competitive intelligence
systematic collection and analysis of information about rivals for informing decision making. forecasts competitors future strategies and decisions, predicts competitors likely reactions to a firms strategic initiatives, determines how competitors behavior can be influenced to make it more favorable
stakeholder impact analysis
takes managers through a five-step process of recognizing stakeholders' claims. a stakeholder has: power over a company when it can get the company to do something it would not otherwise do, a legitimate claim when it is perceived to be legally valid or otherwise appropriate, an urgent claim when it requires a company's immediate attention and response
business strategy
the goal-directed actions managers take in their quest for competitive advantage when competing in a single market. cost leadership, differentiation, or integration. determines a firm's strategic position
efficient-market hypothesis
the idea that all available information about a firm's past, current state, and expected future performance is embedded in the stock price of the firm
strategic management
the integrative management filed that combines analysis, formulation, and implementation in the quest for competitive advantage
value chain analysis
the internal activities a firm engages in when transforming inputs into outputs. there are primary and support activities. each activity adds incremental value and associated costs
risk capital
the money provided by shareholders in exchange for an equity share in the company. cannot be recovered if the firm goes bankrupt
intended strategy
the outcome of a rational and structured top-down strategic plan
entreprenueurship
the process by which people undertake economic risk to innovate- to create new products, processes, and sometimes new organizations
strategic entrepreneurship
the pursuit of innovation using tools and concepts from strategic management
social entrepreneurship
the pursuit of social goals by using entrepreneurship. teach for america, TOMS
innovation
the successful introduction of a new product, process or business model
opportunity costs
the value of the best forgone alternative use of the resources employed
disadvantages of balanced scorecard
tool for strategy implementation, not strategy formulation. limited guidance about which metrics to choose. failure to achieve competitive advantage is not indicative of a poor framework but of strategic failure. managers must accurately translate their strategy into objectives that can be measured
business model
translation of strategy into action. how a firm intends to make money and conduct business. effective business models are formulated and implemented
competitive disadvantage
underperformance relative to other competitors in the same industry or industry average
core competencies
unique strengths, embedded deep within a firm, that allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost. amazon: largest selection of items online combined with great customer service. Netflix: proprietary algorithms to track individual customer preference
mission
what an organization does, including products, services, and which markets- "by" is a common word
corporate strategy
where to compete. industry, markets, and geography