BMGT495 Final
Value creation vs. Value capturing
-economic value -V>C>P -Profit= (P-C)*Q
What are the appropriate tests for evaluating corporate diversification decisions
1) The better-off test 2) The best-alternative test
reservation price
AKA value or maximum WTP. the absolute maximum price a consumer is willing to pay for a product or service, based on total perceived consumer benefits
information asymmetry
situation in which one party is more informed than another because of the possession of private information
When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in
strategic trade-offs
Product Differentiation is likely to be used when
there is a high willingness to pay in the market
T/F: It is harder for a rival to match an array of interlocked activities than it is merely to imitate a particular sales-force approach, match a process technology, or replicate a set of product features. Positions built on systems of activities are far more sustainable than those built on individual activities (Porter)
true
T/F: One of the reasoning for diversification is for diversifying financial risks.
true
T/F: The word strategy comes from the greek word strategos, which means the art of the general
true
Use the following information to properly label companies A & B: The industry cost is $10/unit and the revenue is $25/unit. Company A: Cost $4/unit and revenue is $25/unit Company B Cost $10/unit and revenue is $40/unit
Company A uses Cost leadership. Company B uses Product differentiation
Which of the following is a feature of the growth stage of the industry life cycle?
Consumer demand and market growth increase
What values do we need to know about a business?
1) Value/WTP: what value has your business created for your target customers? 2) Price: how much do you charge your customers? 3) Cost: what is the cost structure of your product or service? 4) Quantity: volume of sales
Four fundamental questions that a good strategy needs to answer
1) Where do we compete? 2) What unique value do we bring? 3) What resources/capabilities do we utilize? 4) How do we sustain unique value?
What is not strategy?
1) benchmarking 2) operational efficiency 3) error correction 4) goals or vision 5) luck
How can a firm achieve competitive advantage?
1) drop cost and keep revenue constant 2) increase revenue and keep cost constant
How can a firm have lower costs/sources of cost advantage
1) economies of scale: specialization and division of labor. spread fixed costs; bulk discount in procuring raw input 2) lower input prices: moving production to regions with lower labor prices. bargaining power, supplier cooperation, location advantages, ownership of low-cost inputs. 3) product design: Design for automation and to economize materials 4) production techniques: Mechanization and automation. Efficient utilization of materials -3&4: increase production efficiency, which lowers K or L, for a given level of Q 5) economies of learning: Increased dexterity. Improved coordination/ organization. Improvement with learning leading to cost decrease as output increases
Determinants of Sustainable Competitive Advantage w/ dynamics
1) technological, demand/supply shifts, regulation 2) environmental determinants: industry position, institutional factors, barriers to entry 3) firm-specific determinants: capabilities and resources, scale or scope, structures and systems and people
What are the effective barriers for preventing competitor's from imitating a firm's resources
1) unique historical conditions 2) causal ambiguity 3) social complexity
3 components of strategy toolkit relating to resources and capabilities
1. Identification: What is a company's key resources, capability, or "core competency?" "Without this resource or capability, could the company exist?" "Does consumer value revolve around this resource or capability?" 2. Analysis: Can this resource or capability sustain a competitive advantage? VRIO analysis 3. Forecasting: What type of resource should the firm develop?
Isolating mechanisms in order to protect key resources and capabilities
1. legal protections (Patents and copyrights Non-compete laws preventing workers to leave for competitors) 2. Path dependence (unique historical conditions) 3. Causal ambiguity (a system of activities re-enforcing a firm's competitive advantage)
Strategy
A firm's theory about how to compete successfully/meet objectives
Which of these examples from our past cases and class discussions are true about diversification?
A) Target's expansion to Canada is a form of geographical diversification. B) Disney has engaged in channel diversification when acquiring ABC. C) Netflix has remained undiversified throughout its corporate history. D) Atari has diversified into mobile game market. a&b
What is the best generic strategy for a firm at the introduction stage of industry life cycle?
Differentiation strategy
___ is best described as decreases in cost per unit as output increases.
Economies of scale
How is a cost-leader protected from threats from powerful buyers?
It is more able to absorb price increases through accepting lower profit margins.
When Toyota wanted to secure a long-term supply of lithium, it had to create a bond of trust with an Australian company, Orocobre Ltd. Orocobre wanted to establish the bond of trust before making huge investments in specialized equipment required to extract the high-quality lithium. What did Toyota do to instill this trust?
It made a credible commitment by taking an equity stake in Orocobre.
organizational assets
Organizational routines and team-based skills that find their expression in a company's structure, routines, and culture are referred to as
Dick Rumelt definition of strategy
Rather, it is coherent action backed by an argument. And the core of the strategists work is always the same: discover the crucial factors in a situation and design a way to coordinate and focus actions to deal with them."
The diffusion of a technological innovation typically follows a:
S-curve
Which of the following are NOT among the 5 common alternatives of mode of change to fill a resource gap or exploit an opportunity?
SPAC
Michael Porter definition of strategy
Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do. Without trade-offs, there would be no need for choice and thus no need for strategy. Any good ideas could and would be quickly imitated.
Which of the following statements accurately brings out the difference between tangible and intangible resources?
Tangible assets can be bought on the open market, whereas intangible assets cannot be easily purchased.
In developed economies, the electric car industry is in the introduction stage, and the industry for MP3 players is in the shakeout phase. What does this imply?
The industry for electric cars will focus more on product innovation, whereas in the MP3 player industry, the focus will be on process innovation.
In the example of EMI and CT Scanner, EMI's CT Scanner invention failed to pass the VRIO test because:
The invention is easily imitable; and EMI does not have the organizational infrastructure to capture its value.
T/F: A good strategy explains why a business is successful by clearly articulating what a business does and does not do
True
Which framework can be used to evaluate a firm's resources (and capabilities)?
VRIO
economic value
Value - Cost (V-P) + (P-C)
AccuroDisk Inc. manufactures external hard disks for $32 per unit, and the maximum price customers are willing to pay is $47 per unit. TD Storage Inc. is a competitor of AccuroDisk Inc. that produces external hard disks for $37 per unit, and customers are willing to pay a maximum price of $50 per unit. What does this imply?
a) AccuroDisk and TD Storage share differentiation parity. b) TD Storage has a competitive advantage over AccuroDisk in terms of perceived value c) AccuroDisk creates a greater profit margin than TD Storage d) TD Storage is a cost-leader when compared to AccuroDisk c
Which of the following statement(s) is/are true about the advantages and disadvantage of being an (innovator) first-mover firm versus being a (follower) second-mover firm? There can be multiple correct answers to this question.
a) Innovators (first-movers) incur higher costs than follower (second-movers) due to the need for educating customers. b) Innovators (first-movers) have economy of scale advantage over followers (second-movers) c) Innovators face the risks of adopting the wrong industry standard due to technological uncertainties in early phase of an industry. d) Demand uncertainty is higher for (followers) second-movers than for (innovators) first-mover firms. a&c
Which following statement(s) is/are true about network externalities? There may be multiple correct answers to this question.
a) Network externalities were only discovered in Internet-related industries. b) Facebook is an example of how a firm has built strong network externalities from a large user base who are reinforcing the value the Facebook platform. c) Network externalities were part of Porter's Five-Forces Framework d) Network externalities exist when the value of a product to an individual increases with the number of other users of the same product b&d
Which of the following is NOT an example of positive (synergistic) driver of the better-off test that increase value for combined entity?
a) Shared cost economies b) Increased appeal to customers through one-stop shopping c) Bundling of complementary assets d) increase in needs for coordination d
Grace Apparel Inc. has decided to procure fabrics required for its garments from external suppliers instead of maintaining its own dyeing and weaving facilities. How will this decision affect the firm?
a) The firm will still suffer the principal-agent problem. b) The firm's administrative costs will be higher because of added necessary bureaucracy. c) The firm will have more flexibility in purchasing and comparing prices of goods and services. d) The firm will have high-powered incentives, such as hourly wages and salaries. c
What are dynamic capabilities? Multiple answers may be correct to this question.
a) They are a firm's ability to predict where the future is heading. b) They are a firm's ability to lobby government for favorable policy support. c) They are a a firm's ability to continuously improve its cost structure in order to achieve maximum efficiency. d) The are a firm's ability to marshal resources to adapt itself to a predicted future. a&d
_____ is best described as a firm's ownership of its production of needed inputs or of the channels by which it distributes its outputs.
a) Venture capitalism b) Bootlegging c) Vertical integration d) Crowdsourcing c
Both Viten Electronics Inc. and JL Electronics Inc. incur a cost of $400 to manufacture a LED television. However, the economic value created by Viten Electronics is less than that created by JL Electronics. What does this indicate?
a) Viten Electronics has a competitive advantage over JL Electronics. b) Both Viten Electronics and JL Electronics have achieved competitive parity. c) JL Electronics can charge a premium price on its televisions. d) Viten Electronics has created a higher value gap than JL Electronics. c
Divina Pharma Inc. and MF Electronics Inc. have together invested and created a new organization, FirstHealth Inc., to focus on developing diagnostic devices. Through this new firm, both companies are attempting to combine their core competencies to innovate and reduce their risks associated with transaction-specific investments. However, the new organization operates independent of Divina Pharma and MF Electronics. Which of the following alternatives to integration does this scenario best illustrate?
a) a joint venture b) a franchisee c) a licensing contract d) a corporate acquisition
When Internet service providers offer free routers for subscriptions to their wireless Internet packs, the perceived value of the service offering increases. In this case, the value driver would be
a) economies of scale b) learning-curve effects c) experience-curve effects d) availability of components d
Oviyo Inc. has been successful at differentiating itself from competitors by claiming a premium price for its digital cameras based on superior image quality and advanced technology. In this scenario, which of the following is the key value driver?
a) economies of scale b) low-cost input factor c) product features d) premium prices c
When North Autos Inc. wanted to sell its cars in the country of Balvia, it lacked access to distribution channels and marketing expertise in the country. Thus, North Autos had to enter into a strategic alliance with a local automobile company to get access to the foreign partner's well-established distribution channels. Which of the following reasons for entering into a strategic alliance is best illustrated in this scenario?
a) increasing competitive intensity b) accessing critical complementary assets c) procuring additional capital investments d) reducing differentiation of product and service offerings b
Both BioThink Inc. and GD Pharma Inc. have discovered similar vaccines to prevent cancer. While GD Pharma's vaccine sells at $100 per unit, BioThink sells its vaccine at $90 per unit. This price differentiation has mainly been attributed to the companies' capital decisions. While BioThink used its retained earnings to develop the vaccine, GD Pharma borrowed funds from banks to develop the vaccine. Thus, GD Pharma pays a higher interest on its capital, which makes it necessary to price its vaccine higher. Thus, the key driver for BioThink's competitive advantage is
a) low-cost input factors b) superior customer service c) network externalities d) economies of scale a
Which of the following is an example of a firm's resources?
a) routine activities such as invoicing customers that can be contracted from other firms b) assistance available from the government in the form of rules and regulations c) assets such as land and buildings owned by a firm d) liabilities such as bills payables and short-term debts c
PepsiCo operates in many countries and sells a wide variety of aerated drinks, other beverages, different types of chips, and Quaker Oats goods to achieve continuous growth. From this data, we can conclude that PepsiCo has been involved in
a) strategic outsourcing b) lean manufacturing c) product-market diversification d) process diversification c
Lush Roses is a chain of premium hotels around the globe that charges higher prices for its rooms and suites when compared to the average industry standards. Yet, the hotel enjoys the largest market share in the industry. This is mainly due its highly responsive staff that has a strong commitment toward achieving a 100 percent guest satisfaction. In this scenario, which of the following is the key value driver?
a) superior customer service b) low cost of input factors c) availability of complements d) economies of scale a
Gene Craft Inc. is the market leader in the pharmaceutical industry. Though most of its resources are common to those of its competitors, a few resources have helped the company gain and sustain a competitive advantage. Which of the following assets of Gene Craft Inc. is most likely to be considered a rare and costly-to-imitate resource that has contributed to its competitive advantage?
a) the company's land and buildings b) the company's plant and machinery c) the company's raw material supplies d) the company's chemical patents d
Value drivers contribute to a firm's competitive advantage only if
a) the increase in value creation exceeds the increase in costs. b) they can shrink the firm's value gap. c) they can restrict the firm from claiming a premium price for its products d) the decrease in perceived value leads to an increase in costs. a
A primary advantage of organizing economic activity within firms is the
ability to coordinate highly complex tasks to allow for specialized division of labor.
First movers often have several competitive benefits including
better opportunity to build network effects
The managers at AHL Chemicals Inc. decided that their firm needed to diversify because of falling sales and lower performance in one sector. How does diversifying compensate for the lackluster performance in this sector?
by having higher performance in another sector
Economies of scope
consist in a proportionate saving, gained by producing 2 complimentary products. share same distribution and sales channels
In a focused cost-leadership strategy, a firm
delivers low-cost products and services to a specific, narrow part of the market.
T/F A strategy is often misinterpreted as a goal
false
T/F Companies that that try to use all four generic strategies often have the most sustainable success in their industry.
false
T/F: A strategy will focus on a single aspect of the overall picture
false
T/F: DSC has a sustainable competitive advantage by delivering razors to the customers door because no other business can imitate their business model
false
T/F: In this set of class slides on resources, we have used the following companies/products as examples: movie studios, Pringle, and Tesla.
false
According to Barney, _____ are all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc., controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness. Put it differently, _____ are strengths that the firm can use to conceive of and implement their strategies.
firm resources
As the inventor of hypertension medication, OneSure Pharmaceuticals (OSP) Inc. was able to reap the benefits of economies of scale due to a large consumer demand for the drug. Even when competitors later developed similar drugs after the expiry of OSP's patents, regular users did not want to switch because they were concerned about possible side effects. Which of the following benefits does this scenario best illustrate?
first-mover advantages
When a differentiator charges a similar price as its competitors in the same strategic group but offers more perceived value, it
gains market share from other firms.
In a low cost leadership model the owners would want...
high demand, homogeneous market, high fixed cost
A ________ problem is referred to as the possibility that partners can exploit the transaction specific investment made by others in the alliance.
holdup
Whole Foods differentiates itself from competitors by offering top-quality foods obtained through sustainable agriculture. This business strategy implies that Whole Foods focuses on
increasing the perceived value created for customers, which allows it to charge a premium price.
A factor favoring the success of disruptive innovation is that
incumbent firms are slow to change.
Which of the following are examples of firm's resources that are hardest for competitors to replicate?
organizational routines and organizational culture
Which of the following alternatives on the make-or-buy continuum allows for most integration?
parental subsidiary relationships
DFS Electronics has managed to ensure that all its products are highly durable and reliable. These efforts not only add to the products' differential appeal, but also help the company save costs during production and avoid expenses due to after-sales services. Thus, the common value and cost driver responsible for DFS Electronics strategic position as in blue ocean is the
quality
Investments in specialized assets tend to incur high opportunity costs because the
threat of one of the partners pursuing his or her self-interest is high.
T/F The virtuous cycles of resources involve: (1) identification of valuable resources, (2) leverage them in firm capabilities to achieve strong performance, and (3) reinvest, hone and upgrade existing resources.
true
T/F: Although disaggregation is the key to identifying competitively superior resources, sometimes the valuable resource is a combination of skills, none of which is superior by itself but which, when combined, make a better package. (Collis and Montgomery)
true
T/F: Companies sometimes buying distribution channels in vertical integration diversification.
true
T/F: Pooling businesses together to achieve economy of scale and thus reducing costs through sharing of facilities is a common source of synergy driving diversifications.
true
T/F: The better-off test for corporate diversification holds that the combined value of two businesses should be higher than the sum of values of the two businesses when they are not yet combined.
true
T/F: United Technologies is a highly diversified firm that engages in many unrelated diversifications.
true
strategic alliances
voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage.