Strategic Management Second 1/2 of Course

By forming and emphasizing fewer capabilities:

A firm can concentrate on those areas in which it can create value Specialty suppliers can perform outsourced capabilities more efficiently

Resources

A firm's assets, including people and the value of its brand name

Differences in distribution channels

A firm's marketing strategies needs to be responsive to differences in distribution channels between countries

Corporate governance is

A relationship among stakeholders used to determine and control the strategic direction and performance organizations Concerned with making strategic decisions more effectively Concerned with making strategic decisions more effectively Used to establish order between a firm's owners and its top-level managers whose interests may be in conflict

To get down the experience curve quickly, firms can use ___

A single plant to serve global markets

International strategy

A strategy through which the firm sells its goods/services outside its domestic market

A resource is valuable and rare but neither difficult to imitate nor without substitutes. This should enable the firm to attain

A temporary competitive advantage

Units coordinate their activities with headquarters and with one another, units adapt to special circumstances only they face, and the entire organization draws upon relevant corporate resources. These are all attributes of which type of strategy?

A transnational strategy

The transnational strategy tries to simultaneously:

Achieve low costs through location economies, economies of scale, and learning effects Differentiate the product offering across geographic markets to account for local differences Foster a multidirectional flow of skills between different subsidiaries in the firm's global network of operations

Accelerate business re-engineering benefits

Achieve re-engineering benefits more quickly by having outsiders - who have already achieved world-class standards - take over processes

The separation between a firm's owners and managers creates an ___ relationship

Agency

To be a source of competitive advantage, a resource or capability must allow the firm to perform:

An activity in a manner that is superior to the way competitors perform it, or A value-creating activity that competitors cannot complete

It is important for managers to recognize that valuable skills that could be applied elsewhere in the firm can arise ___

Anywhere within the firm's global network

Defense tactics may require:

Asset restructuring Changes in the financial structure of the firm Shareholder approval

Outbound logistics

Associated with collecting, storing, and distributing the product or service to buyers; effective shipping processes; efficient finished goods warehousing processes; shipping of goods in large lot sizes; quality material handling equipment

Service

Associated with providing service to enhance or maintain value of the product; effective use of procedures to solicit customer feedback and to act on information; quick response to customer needs and emergencies; ability to furnish replacement parts; effective management of parts and equipment inventory; quality of service personnel and ongoing training; warranty and guarantee policies

Marketing and sales

Associated with purchases of products and services by end users and the inducements used to get them to make purchases; highly motivated and competent sales force; innovative approaches to promotion and advertising; selection of most appropriate distribution channels; proper identification of customer segments and needs; effective pricing strategies

Inbound logistics

Associated with receiving, storing and distributing inputs to the product; location of distribution facilities; material and inventory control systems; systems to reduce time to send "returns" to supplier; warehouse layout and design

Operations

Associated with transforming inputs into the final product form; efficient plant operations; appropriate level of automation in manufacturing; quality production control systems; efficient plant layout and workflow design

Which of the following is a risk (or pitfall) of cost leadership?

Attempts to stay ahead of the competition may lead to unacceptable quality

Two strategy levels

Business-level Corporate-level

Resources represent inputs into a firm's production process, such as:

Capital equipment Skills of employees Brand names Financial resources Talented managers

Financial (tangible resources)

Cash accounts; capacity to raise equity; borrowing capacity

Rare

Common strategies based on similar resources give no one firm an advantage; competitive advantage are gained only from uncommon resources, resources that are rare to other competitors

Corporate-level strategy

Company wide; specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different business competing in several industries and product markets

Organizational capabilities

Competencies and skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end

Few organizations possess the the resources and capabilities required to achieve ___ in all primary and support activities

Competitive superiority

Business-level strategy

Competitive; each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets

Substitutability may take at least two forms:

Competitor may be able to substitute a similar resource that enables it to develop and implement the same strategy Very different firm resources can become strategic substitutes (ex: e-business for physical retail facility)

A domestic corporation considering expanding into international markets for the first time will typically___

Consider implementing a low risk/low control strategy such as exporting

The success of firms that expand internationally depends on the goods/services they sell, and on their ___

Core competencies

Efficient internal capital market allocation

Corporate office distributes capital to business divisions to create value for overall company; corporate office gains access to information about those businesses' actual and prospective performance

Limits to international expansion: management problems of:

Cost of coordination across diverse geographical business units Institutional and cultural barriers Understanding strategic intent of competitors The overall complexity of competition

The transnational strategy makes sense when:

Cost pressures are intense Pressures for local responsiveness are intense

Firms that compete in the global marketplace typically face two types of competitive pressures:

Cost reductions To be locally responsive These place conflicting demands on the firm

Learning effects are ___

Cost savings that come from learning by doing

Economies of scope (related diversification)

Cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses

Outsourcing issues

Create value Evaluating resources and capabilities Environmental threats and ongoing tasks Nonstrategic team of resources Firm's knowledge base

Operational relatedness

Created by sharing either a primary activity such as inventory delivery systems, or a support activity such as purchasing; activity sharing requires sharing strategic control over business units; activity sharing may create risk because business-unit ties create links between outcomes

It is important for managers to have a process for identifying when valuable skills have been ___

Created in a subsidiary

The multidomestic strategy focuses on increasing profitability by ___

Customizing the firm's goods/services so that they provide a good match to tastes and preferences in different national markets

High product differentiation is generally accompanied by

Decreased emphasis on competition based on price

Pressures for local responsiveness arise from:

Differences in consumer tastes and preferences Differences in traditional practices and infrastructure Differences in distribution channels Host government demands

Intangible resources

Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time

Board has the power to:

Direct the affairs of the organization Punish and reward managers Protect owners from managerial opportunism

Direct supervision

Direction and coordination of the work of a group by one person who issues direct orders to the group's members

Financial institutions are legally forbidden from ___

Directly holding board seats

Examples of core competencies

Distinguish a company competitively and reflect its personality Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

Evaluating resources and capabilities

Do not outsource activities in which the firm itself can create and capture value

Firm's knowledge base

Do not outsource activities that stimulate the development of new capabilities and competencies

Nonstrategic team of resources

Do not outsource capabilities critical to the firm's success, even though the capabilities are not actual sources of competitive advantage

Environmental threats and ongoing tasks

Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks

Increase market size

Domestic market may lack the size to support efficient scale manufacturing facilities

The bargaining power of suppliers is enhanced under the following market condition:

Dominance by a few suppliers

The basic value chain

Each activity should be examined relative to competitors' abilities and rated as superior, equivalent, or inferior

Host government demands

Economic and political demands imposed by host country governments may necessitate a degree of local responsiveness

To enhance strategic competitiveness

Economies of scope Market power Financial economies

Organizational (tangible resources)

Effective strategic planning processes; excellent evaluation and control systems

Create value through two types of financial economies

Efficient internal capital allocations Purchasing other corporations and restructuring their assets

Corporate relatedness creates value in two ways

Eliminates resource duplication in the need to allocate resources for a second unit to develop a competence that already exists in another unit. Provides intangible resources (resource intangibility) that are difficult for competitors to understand and imitate.

Valuable

Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness

Norm standardization

Encouragement of attitudes and beliefs that lead to desired behaviors

It is important for managers to establish an incentive system that ___

Encourages local employees to acquire new skills

Output standardization

Establishment of goals or desired end results of task performance

Economies of scale or learning

Expanding size/scope of markets help to achieve economies of scale in manufacturing as well as marketing, R&D, or distribution; can spread costs over a large sales base; can increase profit per unit

Human (intangible resources)

Experience and capabilities of employees; trust; managerial skills; firm-specific practices and procedures

International firms can realize greater cost economies from ___ by serving an expanded global market from a central location, thereby reducing the costs of value creation

Experience effects

Which of the following describes the most typical order of entry into foreign markets?

Exporting, licensing, franchising, joint venture, and wholly owned subsidiary

A firm creates value by buying and selling other firms' assets in the ___

External market

In the virtual structure, several organizations attain the performance capacities of a single, much larger firm while retaining ___

Extreme flexibility and significant efficiency

Mutual adjustment

Face-to-face communication in which coworkers exchange information about work procedures

A multidomestic strategy is the most appropriate strategy for international operations because it drives economies of scale as far as possible and provides a middle of the road product appealing to the largest number of consumers in every market

False

A newly acquired business must always have products that are similar to the existing business' products to benefit from the corporation's core competence

False

As a rule, shareholders prefer more diversification than do managers

False

Executive compensation, ownership concentration, and the matrix organizational structure are all examples of governance mechanisms

False

Portfolio management should be considered as the primary basis for formulating corporate-level strategies

False

Research has consistently shown that there is one best way to structure all organizations, regardless of competitive strategy

False

The functional structure is most appropriate for larger firms implementing a strategy that includes high levels of diversification

False

The finance and R&D functions are emphasized in the differentiation strategy functional structure

False (marketing and R&D are)

Conglomerates have a fairly short life cycle because ___ are more easily duplicated by competitors than are gains from operational and corporate relatedness

Financial economies

Unrelated diversification

Financial economies Efficient internal capital market allocation

Related diversification

Firm creates value by building upon/extending resources, capabilities, and core competencies; economies of scope

Which of the following types of international firms are most likely to benefit from a global strategy as opposed to a multidomestic strategy?

Firms in industries that have much value added in research and design or manufacturing

Recent trends that might lead managers of multinational corporations (MNCs) to adopt a more decentralized strategy for their operations would include all of the following EXCEPT ______.

Flexible manufacturing trends have allowed a decline in the minimum volume required to reach acceptable levels of production efficiency

Resource allocation decisions may become complex, so success often requires:

Focus on mature, low-technology businesses Focus on businesses not reliant on a client orientation

When thinking about organizing, it would make sense for a focus on cost leadership company, like SouthWest Air, to be organized as a:

Functional organizational structure

Support activities

General administration Human resource management Technology development Procurement

Firms that take advantage of location economies in different parts o the world create a ___

Global web of value creation activities

Board of directors

Group of elected individuals that acts in the owners' interests to formally monitor and control the firm's top-level executives

The increasing influence of institutional owners (stock mutual funds and pension funds):

Have the size (proxy voting power) and incentive (demand for returns to funds) to discipline ineffective top-level managers Can affect the firm's choice of strategies

When labor productivity increases, individuals learn the most efficient ways to perform particular tasks, and management learns ___

How to manage the new operation more efficiently

Which statement regarding competitive advantage is true?

If several competitors pursue similar differentiation tactics, they may all be perceived as equals in the mind of the customer

Strategic rationales for outsourcing

Improve business focus Provide access to world-class capabilities Accelerate business re-engineering benefits Sharing risks Free resources for other purposes

Pressures for cost reductions are greatest:

In industries producing commodity type products that fill universal needs where price is the main competitive weapon When major competitors are based in low cost locations Where there is persistent excess capacity Where consumers are powerful and face low switching costs

Primary activities

Inbound logistics Operations Outbound logistics Marketing and sales Service

Other reasons for diversification

Incentives and resources with neutral effects on strategic competitiveness Managerial motives

International strategy benefits

Increase market size Return on investment Economies of scale or learning Competitive advantage through location

Individuals and firms buy or take over undervalued corporations

Ineffective managers are usually replaced in such takeovers

Compensation of the Boards:

Insiders: the firm's CEO and other top-level managers Related outsiders: individuals uninvolved with day-to-day operations, but who have a relationship with the firm Outsiders: individuals who are independent of the firm's day-to-day operations and other relationships

Market for corporate control lacks the precision of ___

Internal governance mechanisms

Reasons for having an international strategy

International markets yield potential new opportunities New market expansion extends product life cycle Needed resources can be secured Greater potential product demand

Firms can increase growth by selling goods/services developed at home ___

Internationally

The downsides or limitations of mergers and acquisitions include all of the following except:

It is a slow means to enter new markets and acquire skills and competencies

Diversification strategies play a major role in the behavior of ___

Large firms

Return on investment

Large investment projects may require global markets to justify the capital outlays; weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

Improve business focus

Lets a company focus on broader business issues by having outside experts handle various operational details

When firms base each value creation activity at that location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity, they realize ___

Location economies

If an industry has high exit barriers and high entrance barriers, returns to the industry should be:

Low and stable

Competitive advantage through location

Low cost markets aid in developing competitive advantage by providing access to raw materials, lower cost labor, key customers, and energy

Incentives and resources with neutral effects on strategic competitiveness

Low performance, uncertain future cash flows, risk reduction for firm, tangible resources, intangible resources

By achieving location economies, firms can:

Lower the costs of value creation and achieve a low cost position Differentiate their product offering

It may be advantageous to vertically integrate when

Lower transaction costs and improved coordination are vital and achievable through vertical integration

Although firm infrastructure is often viewed only as overhead expense, it can become a source of competitive advantage. Examples include all of the following except:

Marketing expertise increasing a firm's revenues and enabling it to enter new markets

Physical (tangible resources)

Modern plant and facilities; favorable manufacturing locations; state-of-the-art machinery and equipment

Enhancing the effectiveness of boards of directors

More diversity in the backgrounds of board members Stronger internal management and accounting control systems More formal processes to evaluate the board's performance Adopting a "lead director" role. Changes in compensation of directors.

Managerial defense tactics increase the cost of ___

Mounting a takeover (eg poison pill)

Basic coordination mechanisms

Mutual adjustment Direct supervision Standardization

Universal needs

Needs that exist when the tastes and preferences of consumers in different nations are similar if not identical

Threat of takeover may lead firms to ___

Operate more efficiently

Sharing activities

Operational relatedness

Value is created from economies of scope through:

Operational relatedness in sharing activities Corporate relatedness in transferring skills/corporate core competencies among units

Create value

Outsource only to firms possessing a core competence in terms of the outsourced activity

Examples of organizational capabilities

Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital

A crash R&D program by one firm cannot replicate a successful technology developed by another firm when research findings cumulate. This is an example of

Path dependency

Executive compensation is a governance mechanism that seeks to align managers' and owners' interests through all of the following except

Penalties for inadequate firm performance

Core competencies enable the firm to reduce the costs of value creation and, or to create ___ in such a way that premium pricing is possible

Perceived value

Under this strategy, different stages of the value chain are dispersed to those locations around the globe where ___

Perceived value is maximized, or where the costs of value creation are minimized

Costly to imitate (examples)

Physical uniqueness Path dependency Causal ambiguity Social complexity

Standardization

Planning and implementation of standards and procedures that regulate work performance

Firm size and executive compensation are:

Positively related

Competitiveness is usually enhanced by good implementation of diversification based on all of the following reasons except:

Potential to overcome uncertainties in the future cash flows of a mature product line with cash flows for a new product to protect value for shareholders

Differences in traditional practices and infrastructure

Pressures for local responsiveness emerge when there are differences in infrastructure and, or traditional practices between countries

Agency relationship problems

Principal and agent have divergent interests and goals. Shareholders lack direct control of large, publicly traded corporations. Agent makes decisions that result in the pursuit of goals that conflict with those of the principal. It is difficult or expensive for the principal to verify that the agent has behaved appropriately. Agent falls prey to managerial opportunism.

Response to managerial opportunism

Principals do not know beforehand which agents will or will not act opportunistically. Thus, principals establish governance and control mechanisms to prevent managerial opportunism.

Examples of the agency problem

Product diversification Increased size, and relationship of size to managerial compensation Reduction of managerial employment risk

Global strategy

Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (hard to manage)

Costly to imitate

Profits generated from inimitable resources are more likely to by sustainable

The strategic goal is to ___

Pursue a low-cost strategy on a global scale

The global strategy focuses on increasing profitability and profit growth by ___

Reaping the cost reductions that come from economies of scale, learning effects, and location economies

Free resources for other purposes

Redirects efforts from non-core activities toward those that serve customers more effectively

By moving down the experience curve, firms ___

Reduce the cost of creating value

Sharing risks

Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

Market power

Related diversification; blocking competitors through multipoint competition; vertical integration

Economies of scope (strategic competitiveness)

Related diversification; sharing activities; transferring core competencies

Technology development

Related to a wide range of activities and those embodied in processes and equipment and the product itself; effective R&D activities for processes and product initiatives; positive collaborative relationships between R&D and other departments; state-of-the-art facilities and equipment; culture to enhance creativity and innovation; excellent professional qualifications of personnel; ability to meet critical deadlines

Tangible resources

Relatively easy to identify, and include physical and financial assets used to create value for customers

___ (intangible resources)

Reputation

Core competencies

Resources and capabilities that serve as a source of a firm's competitive advantage; skills within the firm that competitors cannot easily match/imitate

Forms of compensation

Salaries, bonuses, long-term performance incentives, stock awards, stock options

Transnational strategy

Seeks to achieve both global efficiency and local responsiveness Must pursue organizational learning to achieve competition advantage

The international strategy involves taking products first produced for the domestic market and then ___

Selling them internationally with only minimal local customization

International firms can expand the market for their domestic product offerings by ___

Selling those products in international markets

Shareholder activism:

Shareholders can convene to discuss corporation's direction If a consensus exists, shareholders can vote as a block to elect their candidates to the board Proxy fights There are limits on shareholder activism available to institutional owners in responding to activists' tactics

Basis of the modern corporation

Shareholders purchase stock, becoming residual claimants Professional managers are contracted to provide decision making

Value chain

Shows how a product moves from raw-material stage to the final customer

The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies

Some strategies provide individual country units with the flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units

Behavior standardization

Specification of sequences of task behaviors or work processes

Skill standardization

Specification of the abilities, knowledge, and skills required by a particular task

Sources of economies of scale

Spreading fixed costs over a large volume Utilizing production facilities more intensively Increasing bargaining power with suppliers

Corporate level strategy's value

The degree to which the businesses in the portfolio are worth more under the management of the firm than they would be under other ownership; what businesses should the firm be in?; how should the corporate office manage the group of businesses?

Location economies

The economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be

Capabilities

The firm's capacity to deploy resources that have been purposely integrated to achieve a desired end state; emerge over time through complex interactions among tangible and intangible resources; often are based on developing, carrying, and exchanging information and knowledge through the firm's human capital

Procurement

The function of purchasing inputs used in the firm's value chain, including raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings

Which of the following is not a disadvantage of licensing?

The high costs of establishing manufacturing facilities

Which of the following would be most difficult to assess?

The legitimacy and reputation of a firm

An analysis of the economic segment of the external environment does not include

The move toward a contingent work force

Outsourcing

The purchase of a value-creating activity from an external supplier

Economies of scale

The reductions in unit cost achieved by producing a large volume of a product

Diversification concerns:

The scope of the industries and markets in which the firm competes How managers buy, create and sell different businesses to match skills and strengths with opportunities presented to the firm

Provide access to world-class capabilities

The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications

The experience curve refers to ___

The systematic reductions in production costs that have been observed to occur over the life of a product

Large block shareholders have a strong incentive to monitor management closely:

Their large stakes make it worth their while to spend time, effort, and expense to monitor closely They may also obtain Board seats which enhances their ability to monitor effectively

The international strategy makes sense when:

There are low cost pressures Low pressures for local responsiveness

The global strategy makes sense when:

There are strong pressures for cost reductions Demands for local responsiveness are minimal

The multidomestic strategy makes sense when:

There are substantial differences across nations with regard to consumer tastes and preferences Where cost pressures are not too intense

International firms can realize location economies by dispersing individual value creation activities to locations around the globe where ___

They can be performed most efficiently and effectively

Criticisms of Boards of Directors:

Too readily approve managers' self-serving initiatives Are exploited by managers with personal ties to board members Are not vigilant enough in hiring and monitoring CEO behavior Lack of agreement about the number of and most appropriate role of outside directors.

Technological (tangible resources)

Trade secrets; innovative production processes; patents, copyrights, and trademarks

High pressure for local adaptation combined with high pressure for lower costs would suggest what type of international strategy?

Transnational

A caveat:

Transportation costs, trade barriers, and political risks complicate this picture

Corporate governance involves oversight in areas where owners, managers, and members of boards of directors may have conflicts of interest

True

Corporations with multiple foreign operations that act very independently of one another are following a multidomestic strategy.

True

Establishing a customer service hotline to handle customer complaints would be considered a primary activities in value chain analysis

True

In contrast to managers, shareholders may prefer that free cash flows be returned to them as dividends

True

Internal competition for corporate resources is effective for companies with an unrelated diversification strategy, but dysfunctional for companies with a related-constrained strategy

True

Stock options attempt to align managers' and owners' interests by tying managerial pay and firm performance together

True

The primary role of the board of directors is to monitor and control to b-level executives to protect owners' interests

True

The separation between owners and managers creates the potential for owners and managers to have conflicting interests

True

To properly execute strategic controls in firms using related diversification, the executives must have a deep understanding of each unit's business level strategy

True

General Administration

Typically supports the entire value chain and not individual activities; effective planning systems; ability of top management to anticipate and act on key environmental trends and events; ability to obtain low-cost funds for capital expenditures and working capital; excellent relationships with diverse stakeholder groups; ability to coordinate and integrate activities across the value chain; highly visible to inculcate organizational culture, reputation and values

Limits on the effectiveness of executive compensation:

Unintended consequences of stock options Firm performance not as important as firm size Balance sheet not showing executive wealth Options not expensed at the time they are awarded

Financial economies (strategic competitiveness)

Unrelated diversification; efficient internal capital allocation; business restructuring

Corporate relatedness

Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise

Four criteria of sustainable competitive advantage

Valuable Rare Costly to imitate Non-substitutable

International firms can earn a greater return by leveraging any ___, and transferring them to other entities within the firm's global network of operations

Valuable skills developed in foreign operations

Managerial motives

Value reduction; diversifying managerial employment risk; increasing managerial compensation

Human resource management

activities involved in the recruiting, hiring, training, development and compensation of all types of personnel; effective recruiting, development, and retention mechanisms for employees; quality relations with trade unions; quality work environment to maximize overall employee performance and minimize absenteeism; reward and incentive programs to motivate all employees

Financial economies (unrelated diversification)

cost savings realized through improved allocations of financial resources; based on investments inside or outside the firm

Firms following a global strategy strive to offer ______________ products and services as well as locate manufacturing, R&D, and marketing activities in _____________ locations.

Standardized; few

Excessive focus on reduced risk might occur if an executive has been with the company for a long time and his/her pay package has been dominated by:

Stock options

Factors complicating executive compensation

Strategic decisions by top-level managers are complex, non-routine and affect the firm over an extended period Other variables affecting the firm's performance over time

Multidomestic strategy

Strategy and operating decisions are decentralized to strategic business units (SBU) in each country. Products and services are tailored to local markets. Business units in one country are independent of each other. Assumes markets differ by country or regions. Focus on competition in each market. Prominent strategy among European firms due to broad variety of cultures and markets in Europe.

The transnational strategy is difficult to achieve because of simultaneous requirements:

Strong central control and coordination to achieve efficiency Decentralization to achieve local market responsiveness

Differences in consumer tastes and preferences

Strong pressure emerges when consumer tastes and preferences differ significantly between countries

The three key types of firm factors that are central to the resource-based view of the firm are:

Tangible resources, intangible resources, and organizational capabilities

Innovation and creativity (intangible resources)

Technical and scientific skills; innovation capacities