Capstone: Test 2
innovation
both novel and useful; the systematic practice of developing and marketing breakthrough products and services for adoption by customers
Types of Corporate Diversification
1.Single business ◦Low level of diversification 2.Dominant business ◦Additional business activity pursued 3.Related diversification A.Constrained: all businesses share competencies B.Linked: some businesses share competencies 4.Unrelated diversification (conglomerate) ◦No businesses share competencies
True
A cost leader is the firm most likely to survive a price war.
False
A manager's only responsibility is to monitor and assess the performance of his or her firm.
False
A sustainable strategy is one that produces a competitive advantage that can be maintained over time.
Accounting Profitability
Accurately assesses firm performance Compares firm performance to competitors / industry average
Entrepreneurs
Agents who introduce change Undertake economic risk to innovate ◦Create new products, processes, & organizations
a consumer electronics company popular among price-conscious customers
Airbase is a consumer electronics company known for its affordable mobile devices that follows a cost-leadership strategy. In this scenario, Airbase should ideally compare its strategic position with
product diversification (from quiz)
Amazon.com has decided to enter the college bookstore market. The goal of "Amazon Campus" is to offer co-branded university-specific web sites that offer textbooks and paraphernalia, such as logo sweaters and baseball hats. This development shows Amazon's relentless pursuit of
what range of products the firm should offer
Anita has been named CEO of a popular sports apparel company. As CEO, she is tasked with setting the firm's corporate strategy. Which of the following decisions is Anita most likely to make?
a conglomerate
Argus Inc. is a large multinational company owned by two partners, is active in the petroleum, capital market, chemicals, steel, beverages, hospitality, airlines, education, automobiles, and consumer electronics industries. The company has multiple brands and a large product portfolio under its banner. Which of the following terms would best describe this company?
Isolating Mechanisms
Barriers to imitation Prevents rivals from competing away firm advantage
Strategic Trade Offs
Choices between a cost or value position.
Introduction Stage
Core competency: R&D Strategic objective: market acceptance & future growth Capital-intensive ◦Designing a unique product ◦Trying new ideas to attract customers ◦Producing small quantities
False
Corporate strategy is focused solely on determining the geographic locations in which the firm should compete.
Economies of Scale
Decreases in cost per unit; achieved as output increases
Decline Stage
Demand falls rapidly. ◦Innovation efforts cease ◦Strong pressure on prices
Growth Stage
Demand increases rapidly others have tested Product has been improved and/or process to make has
false
Differentiation and cost leadership strategies are only effective in manufacturing industries.
Blue Ocean Strategy
Differentiation and cost-leadership activities Uses value innovation to reconcile trade-offs ◦Untapped market space ◦Creation of additional demand ◦Opportunities for highly profitable growth
consumer surplus plus firm profit.
Economic value creation is best expressed as
return on risk capital
From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the
business level strategy
Goal-directed actions: ◦To achieve competitive advantage ◦In a single product market "How should we compete?"
vertically integrate
Gold Leaf Computers sources the components for its laptops from various suppliers on the market. The firm pays $100 for processors, $35 for disk drives, $50 for screens, $10 for memory, and $40 for graphics and wireless internet cards. Gold Leaf has determined that it would cost $200 per unit to produce all of the necessary components in its in-house manufacturing facility. In this scenario, Gold Leaf should
The Strategy Canvas
Graphical depiction of a company's performance ◦Relative to its competitors ◦Shows focus or divergence
Shakeout Stage
Growth has slowed Intense competition - forces out weak firms - consolidation
Complements add value to a product when they are consumed in tandem with it
How does availability of complements act as a value driver?
radical innovation will disturb the existing power distribution within the firms
Incumbent firms favor incremental innovation over radical innovation because
increased competition from imitators
Lillypad Toys is a manufacturer of educational toys for children. Six months ago, the company's research and development division came up with an idea for a unique touchscreen device that can be used to introduce children to a number of foreign languages. Three months ago, the company produced a working prototype, and last month the company successfully launched its new device on the commercial market. What should Lillypad's managers prepare for next?
False
Managers have exactly two choices when determining the boundaries of the firm: produce goods and services in-house ("make") or purchase them externally ("buy").
an agency
Mega Media sells books by having salespeople set up appointments with potential customers and give them a sales pitch for the product. When a salesperson sells a book, he or she gets a predetermined percentage commission. This type of business model is called
franchising
Mondo Tacos, a fast food restaurant, operates through a business model in which individuals can buy the rights to set up Mondo Taco stores and sell the company's food in return for a lump sum fee at the beginning of the contract and a percentage of revenues every month. The owners of the stores have to offer a menu approved by the company's headquarters and also maintain consistent customer service as expected in its flagship store. Which of the following alternatives to integration does this best illustrate?
Risk Capital
Money provided for an equity share
Focused Business Strategies
Narrower competitive scope
Maturity stage
Peak industry - Only a few large firms remain - market reached max size
False
Pipeline businesses are typically better than platform businesses at incorporating user feedback and taking advantage of network effects.
The Principal-Agent Problem
Principal - the owner of the firm ◦Goal: create shareholder value Agent - manager or employee ◦Should act on behalf of the principal Problem: ◦Agents pursue their own interests ◦Corporate jets, golf outings, expensive hotels One Solution: ◦Stock options to make agents owners
Strategic Position
Profile based on value creation and cost ◦In a specific product market A valuable and unique position, which: ◦Meets customer needs ◦At the highest possible product value ◦For the lowest possible product cost
Value Innovation
Pursuing both differentiation and cost leadership at the same time
low-cost input factors
Quick Clean Chemicals outsources its production to contract manufacturers located in underdeveloped nations where unskilled labor is available in plenty for very low wages. This has helped the company become a price leader in the chemicals industry. Which of the following is the key driver behind Quick Clean's strategic position?
Restructuring
Reorganizing and divesting business units and activities Helps refocus a company Helps leverage core competencies more fully
Corporate Strategy
The decisions that leaders make Goal directed actions Boundaries of the firm ◦Vertical integration ◦Diversification ◦Geographic scope
growth stage
The leading producer of cell phone backup batteries, Jumpstart, has achieved great success because they produce high-quality battery backups that are not too expensive. Even so, another company that produces lower-quality batteries at the same price has also achieved some success, but not as much as Jumpstart. Also, in general, the price of backup batteries has declined because of economies of scale and learning. In addition, Jumpstart has added complementary assets, such as a carrying case. Considering all of these factors, the backup battery industry is most likely in the
triple-bottom-line approach.
The management team for Volcanic Batteries came up with the following vision statement: "Volcanic Batteries will conscientiously track its financial performance to ensure profits for its investors, enhance its community through employment and supporting charities, and dispose of waste in a manner that will not harm the environment." This vision statement is most likely based on the
by having higher performance in another sector
The managers at Camphor Plastics decided that their firm needed to diversify because of overall falling sales and lower performance in one sector. How does diversifying compensate for the lackluster performance in this sector?
False
The pace of innovation has slowed in the 21st century.
Network Effects in the Introduction Stage
The positive effect that one user has on the value of a product for other users
business model
The translation of strategy into action primarily takes place in a firm's
Narrow the scope of competition and focus on unique features such as the use of organic materials.
Thomas is the owner of a landscaping company that caters to a very wealthy clientele. His company has struggled to differentiate itself from the other high-end landscapers in the area, but because he has hired several expensive but highly-qualified team members, Thomas is unable to shift to a cost leadership strategy. Which strategy is most likely to achieve a competitive advantage?
Why firms need to grow
To increase profits and shareholder returns To lower costs and achieve economies of scale To increase market power To reduce risk through diversification To motivate management
VRIO Framework
Value, Rarity, Imitability, Organization
Three Dimensions of Corporate Strategy
Vertical integration, diversification, and geographic scope
Three Standard Performance Dimensions
What is the firm's accounting profitability? How much shareholder value does the firm create? How much economic value does the firm generate?
patent.
When ReGen Pharmaceuticals released a new drug to treat insomnia, its chemical composition was disclosed at the back of the drug's cover. However, any attempts by competitors to copy the chemical composition would result in infringement of ReGen Pharmaceuticals intellectual property rights. Thus, the drug is protected by a
strategic trade-offs.
When a firm makes choices between a cost or value position to achieve competitive advantage, it is primarily involved in
continues to support marketing efforts even if the demand for the product is declining
When a firm pursues a maintain strategy, it
availability of complements
When wireless service providers offer free or discounted mobile phones for subscriptions to their wireless voice and data service, the perceived value of the service offering increases. In this case, the value driver would be
It requires the reconciliation of fundamentally different strategic positions—differentiation and low cost.
Which of the following best explains why a blue ocean strategy is difficult to implement?
It is the product of the number of outstanding shares and the share price.
Which of the following expressions accurately describes market cap?
Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term.
Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization?
The framework does not explain everything about changes in industries.
Which of the following is a drawback of using the industry life cycle as a framework to guide strategic choice?
the cost of searching for a contract manufacturer
Which of the following is an example of an external transaction cost?
introduction, growth, shakeout, maturity, and decline
Which of the following lists the stages of the industry life cycle in the correct order?
Rachel implemented a new and more efficient way to produce pottery
Which of the following scenarios would be characteristic of an entrepreneur?
Opportunity costs
are best described as the value of the best forgone alternative use of the resources employed.
Cost of input factors
◦Raw materials, capital, labor, and IT services
The innovation process
idea, invention, innovation, and imitation
geographic diversification
increase in variety of markets/geographic regions
product diversification
increase in variety of products/services
Information asymmetry
is best described as a situation in which one party is more informed than another, because of the possession of private information.
minimum efficient scale (MES)
is best described as the output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.
Economies of Scope
producing two outputs at less cost; shares resources or technology; doing more less less
product - market diversification
product and geographic diversification
Internal transaction costs
◦Recruiting and retaining employees ◦Setting up a shop floor
Resource Immobility
resources don't move easily from firm to firm, difficult to replicate, and can last for a long time
Resource Heterogeneity
unique bundle of resources and capabilities
Taper Integration
◦Backward or forward integrated ◦Plus reliance on outside firms
Incremental Innovation:
◦Builds on established knowledge ◦Results from steady improvement ◦Targets existing markets and technology
Dimensions of Corporate Strategy
◦Core Competencies ◦Economies of Scale ◦Economies of Scope ◦Transaction Costs ◦Cost effectiveness of vertical integration vs. diversification
Platform Business
◦Enables interaction between producers and consumers ◦Enable matches among users ◦Provides infrastructure and governance
Architectural Innovation:
◦Existing technology leveraged into a new market ◦Known components, used in a novel way
Diseconomies of Scale
◦Firms too big ◦Complexities of too much coordination ◦Inflexible and slow
Experience-curve effects
◦Improvements to technology and production processes
Learning-curve effects
◦Less time to produce output with experience
Disruptive Innovation:
◦Leverages new technologies in existing markets ◦New product / process meets existing customer needs
Pipeline Business
◦Linear transformation through the value chain ◦R&D, then design, then manufacture, then sell
Strategic Outsourcing
◦Moving internal value chain activities
Radical Innovation:
◦Novel methods & materials ◦Entirely new knowledge base ◦Or, recombination of existing knowledge ◦Targets new markets and technology
Forward Vertical Integration
◦Owning activities closer to the customer
Backward Vertical Integration
◦Owning inputs of the value chain
Strategic Entrepreneurship
◦Pursuit of innovation using strategic tools ◦Combining entrepreneurial actions ◦Creating new opportunities ◦Exploiting existing opportunities
Cost Leadership Strategy
◦Reduce cost below competitors ◦Offer adequate value ◦Reduce prices for customers ◦Optimize the value chain for low cost Sell as many as you can at a small profit margin
External transaction costs
◦Searching for contractors ◦Negotiating, monitoring, and enforcing contracts
Differentiation
◦Seeks to create higher value vs. competitors ◦Offers unique features ◦Charges higher prices Unique perception
Cost Leadership
◦Seeks to create similar value vs. competitors ◦Charges lower prices
Social Entrepreneurship
◦The pursuit of social goals AND a profitable business
Organizational Inertia:
◦They have formalized processes and structures
Economic Incentives
◦They must defend their position
Innovation Ecosystem:
◦They rely on certain suppliers, buyers, complementors
