Week 6 Strategy

internal strategic factors

strengths and weaknesses

organizational structures

structural forms, 3 structures: simple, functional, divisional (strategic business units and conglomerate under divisional structure)

transferability

the ability of competitors to gather the resources and capabilities necessary to support a competitive challenge.

capital budgeting

the analyzing and ranking of possible investments in fixed assets such as land, buildings, and equipment in terms of the additional outlays and additional receipts that will result from each investment. A good finance department will be able to prepare such capital budgets and to rank them on the basis of some accepted criteria or hurdle rate (for example, years to pay back investment, desired rate of return, or time to break-even point) for the purpose of strategic decision making. Most firms have more than one hurdle rate and vary it as a function of the type of project being considered. Projects with high strategic significance, such as entering new markets or defending market share, will often have lower hurdle rates.

Ratio analysis

the calculation of ratios from data in these statements. It is done to identify possible financial issues.

cultural intensity

the degree to which members of a unit accept the norms, values, or other cultural content associated with the unit. This shows the culture's depth. Organizations with strong norms promoting a particular value, such as quality at BMW, have intensive cultures, whereas new firms (or those in transition) have weaker, less intensive cultures. Employees in an intensive culture tend to exhibit consistent behavior—that is, they tend to act similarly over time.

technological discontinuity

the displacement of one technology by another (technological discontinuity) is a frequent and strategically important phenomenon. Such a discontinuity occurs when a new technology cannot simply be used to enhance the current technology, but actually substitutes for that technology to yield better performance. According to Foster, for each technology within a given field or industry, the plotting of product performance against research effort/expenditures on a graph results in an S-shaped curve. Information technology is still on the steep upward slope of its S-curve in which relatively small increments in R&D effort result in significant improvement in performance.

cultural integration

the extent to which units throughout an organization share a common culture. This is the culture's breadth. Organizations with a pervasive dominant culture may be hierarchically controlled and power-oriented, such as a military unit, and have highly integrated cultures. All employees tend to hold the same cultural values and norms. In contrast, a company that is structured into diverse units by functions or divisions usually exhibits some strong subcultures (for example, R&D versus manufacturing) and a less integrated corporate culture.

Supply chain management

the forming of networks for sourcing raw materials, manufacturing products or creating services, storing and distributing the goods, and delivering them to customers and consumers.82 Research indicates that supplier network resources have a significant impact on firm performance.83 A survey of global executives revealed that their interest in supply chains was first to reduce costs, and then to improve customer service and get new products to market faster.

company's center of gravity

the part of the chain where the company's greatest expertise and capabilities lie—its core competencies. According to Galbraith, a company's center of gravity is usually the point at which the company started. After a firm successfully establishes itself at this point by obtaining a competitive advantage, one of its first strategic moves is to move forward or backward along the value chain in order to reduce costs, guarantee access to key raw materials, or to guarantee distribution.

imitability

the rate at which a firm's underlying resources, capabilities, or core competencies can be duplicated by others. To the extent that a firm's distinctive competency gives it competitive advantage in the marketplace, competitors will do what they can to learn and imitate that set of skills and capabilities.

prime interest rate

the rate of interest banks charge on their lowest-risk loans. For better assessments of strategic decisions, it can be useful to note the level of the prime interest rate at the time of the case.

transparency

the speed with which other firms can understand the relationship of resources and capabilities supporting a successful firm's strategy.

A core competency can be easily imitated to the extent that it is ____.

transparent, transferable, and replicable.

The value chains of most industries can be split into two segments, ____.

upstream and downstream.

gross domestic product (GDP)

used worldwide and measures the total output of goods and services within a country's borders. The amount of change from one year to the next indicates how much that country's economy is growing.

index of sustainable growth

useful to learn whether a company embarking on a growth strategy will need to take on debt to fund this growth. The index indicates how much of the growth rate of sales can be sustained by internally generated funds. The formula is: g* = [P(1 - D)(1 + L)] / [T - P(1 - D)(1 + L)] where: P = (Net profit before tax/Net sales) * 100 D = Target dividends/Profit after tax L = Total liabilities/Net worth T = (Total assets/Net sales) * 100

Management commonly uses the experience curve in estimating the production costs of _____.

(1) a product never before made with the present techniques and processes or (2) current products produced by newly introduced techniques or processes.

An SBU may be of any size or level, but it must have ____.

(1) a unique mission, (2) identifiable competitors, (3) an external market focus, and (4) control of its business functions.

4 important financial ratios

(1) liquidity ratios, (2) profitability ratios, (3) activity ratios, and (4) leverage ratios.

intermittent systems

(job shops), the item is normally processed sequentially, but the work and sequence of the process vary. An example is an auto body repair shop. At each location, the tasks determine the details of processing and the time required for them. These job shops can be very labor-intensive. For example, a job shop usually has little automated machinery and thus a small amount of fixed costs. It has a fairly low breakeven point, but its variable cost line (composed of wages and the costs of special parts) has a relatively steep slope. Because most of the costs associated with the product are variable (many employees earn piece-rate wages), a job shop's variable costs are higher than those of automated firms. Its advantage over other firms is that it can operate at low levels and still be profitable. After a job shop's sales reach break-even, however, the huge variable costs as a percentage of total costs keep the profit per unit at a relatively low level. In terms of strategy, this firm should look for a niche in the marketplace for which it can produce and sell a reasonably small quantity of custom-made goods.

financial leverage

(the ratio of total debt to total assets) is helpful in describing how debt is used to increase the earnings available to common shareholders. When the company finances its activities by sales of bonds or notes instead of through stock, the earnings per share are boosted: the interest paid on the debt reduces taxable income, but fewer shareholders share the profits than if the company had sold more stock to finance its activities. The debt, however, does raise the firm's break-even point above what it would have been if the firm had financed from internally generated funds only. High leverage may, therefore, be perceived as a corporate strength in times of prosperity and increasing sales, or as a weakness in times of a recession and falling sales. This is because leverage acts to magnify the effect on earnings per share of an increase or decrease in actual sales. Research indicates that greater leverage has a positive impact on performance for firms in stable environments, but a negative impact for firms in dynamic environments.

reverse engineering

(which involves taking apart a competitor's product in order to find out how it works), to hiring employees from the competitor, to outright patent infringement.

Supporting Activities of a corporation's value chain

-Firm infrastructure: general management, accounting, finance, strategic planning -Human Resource management: recruiting, training, development -Technology Development: R&D, product and process improvement -Procurement: purchasing of raw materials, machines, supplies

Primary activities of a corporation's value chain

-Inbound logistics: raw materials handling and warehousing -Operations: machining, assembling, testing -Outbound logistics: warehousing and distribution of finished product -Marketing and Sales: advertising, promotion, pricing, channel relations -Service: installation, repair, parts

A company's annual report and SEC 10-K form from the year of the case can be very helpful. According to the Yankelovich Partners survey firm, 8 out of 10 portfolio managers and 75% of security analysts use annual reports when making decisions.1 They contain not only the usual income statements and balance sheets, but also cash flow statements and notes to the financial statements indicating why certain actions were taken. On 10-K forms you will find detailed information not usually available in an annual report. SEC 10-Q forms include quarterly financial reports. SEC 14-A forms include detailed information on members of a company's board of directors and proxy statements for annual meetings. Some resources available for research into the economy and a corporation's industry are suggested in Appendix 13.A. A caveat: Before obtaining additional information about the company profiled in a particular case, ask your instructor if doing so is appropriate for your class assignment. Your strategy instructor may want you to stay within the confines of the case information provided in the book. In this case, it is usually acceptable to at least learn more about the societal environment at the time of the case.

-extra info

Human resource departments have found that to reduce employee dissatisfaction and unionization efforts (or, conversely, to improve employee satisfaction and existing union relations), they must consider the _______ in the design of jobs. Partially a reaction to the traditionally heavy emphasis on technical and economic factors in job design, quality of work life emphasizes improving the human dimension of work. The knowledgeable human resource manager, therefore, should be able to improve the corporation's quality of work life by _____.

-quality of work life -(1) introducing participative problem solving, (2) restructuring work, (3) introducing innovative reward systems, and (4) improving the work environment.

Corporate culture fulfills several important functions in an organization:

1. Conveys a sense of identity for employees 2. Helps generate employee commitment to something greater than themselves 3. Adds to the stability of the organization as a social system 4. Serves as a frame of reference for employees to use to make sense of organizational activities and to use as a guide for appropriate behavior.

3 steps of corporate value chain analysis

1. Examine each product line's value chain in terms of the various activities involved in producing that product or service: Which activities passed the VRIO test and are therefore true strengths (core competencies) or areas where the organization is substantially behind and therefore weaknesses (core deficiencies)? 2. Examine the "linkages" within each product line's value chain: Linkages are the connections between the way one value activity (for example, marketing) is performed and the cost of performance of another activity (for example, quality control). In seeking ways for a corporation to gain competitive advantage in the marketplace, the same function can be performed in different ways with different results. For example, quality inspection of 100% of output by the workers themselves instead of the usual 10% by quality control inspectors might increase production costs, but that increase could be offset by the savings obtained from reducing the number of repair people needed to fix defective products and increasing the amount of salespeople's time devoted to selling instead of exchanging already-sold but defective products. It could also be used by the overall company as a differentiator when compared to competitors and allow the company to charge more. 3. Examine the potential synergies among the value chains of different product lines or business units: Each value element, such as advertising or manufacturing, has an inherent economy of scale in which activities are conducted at their lowest possible cost per unit of output. If a particular product is not being produced at a high enough level to reach economies of scale in distribution, another product could be used to share the same distribution channel. This is an example of economies of scope, which result when the value chains of two separate products or services share activities, such as the same marketing channels or manufacturing facilities. The cost of joint production of multiple products can be lower than the cost of separate production.

5 steps in basic financial analysis

1. Examine historical income statements and balance sheets: These two basic statements provide most of the data needed for analysis. Statements of cash flow may also be useful. 2. Compare historical statements over time if a series of statements is available. 3. Calculate changes that occur in individual categories from year to year, as well as the cumulative total change. 4. Determine the change as a percentage as well as an absolute amount. 5. Adjust for inflation if that was a significant factor.

The use of virtual teams to replace traditional face-to-face work groups is being driven by five trends:

1. Flatter organizational structures with increasing cross-functional coordination needs 2. Turbulent environments requiring more interorganizational cooperation 3. Increasing employee autonomy and participation in decision making 4. Higher knowledge requirements derived from a greater emphasis on service 5. Increasing globalization of trade and corporate activity.

Marketing Mix variables

1. Product: quality, features, options, style, brand name, packaging, sizes, services, warranties, returns 2.Place: channels, coverage, locations, inventory, transport 3.promotion: advertising, personal selling, sales promotion, publicity 4.Price: list price, discounts, allowances, payment periods, credit items

2 distinct attributes of corporate culture

1. cultural intensity 2.cultural integration

technology transfer

A company should also be proficient in technology transfer, the process of taking a new technology from the laboratory to the marketplace. Aerospace parts maker Rockwell Collins, for example, is a master of developing new technology, such as the "heads-up display" (transparent screens in an airplane cockpit that tell pilots speed, altitude, and direction), for the military and then using it in products built for the civilian market.

R & D intensity

A company's R&D intensity (its spending on R&D as a percentage of sales revenue) is a principal means of gaining market share in global competition. The amount spent on R&D varies dramatically.

technological competence

A company's R&D unit should be evaluated for technological competence in both the development and use of innovative technology. Not only should the corporation make a consistent research effort (as measured by reasonably constant corporate expenditures that result in usable innovations), it should also be proficient in managing research personnel and integrating their innovations into its day-to-day operations.

experience curve

A conceptual framework that many large corporations have used successfully is the experience curve (originally called the learning curve). The experience curve suggests that unit production costs decline by some fixed percentage (commonly 20%-30%) each time the total accumulated volume of production in units doubles. The actual percentage varies by industry and is based on many variables: the amount of time it takes a person to learn a new task, scale economies, product and process improvements, and lower raw materials costs, among others. For example, in an industry with an 85% experience curve, a corporation might expect a 15% reduction in unit costs for every doubling of volume. The total costs per unit can be expected to drop from US$100 when the total production is 10 units, to US$85 (US$100 × 85%) when production increases to 20 units, and to US$72.25 (US$85 × 85%) when it reaches 40 units. Achieving these results often means investing in R&D and fixed assets; higher fixed costs and less flexibility thus result. Nevertheless, the manufacturing strategy is one of building capacity ahead of demand in order to achieve the lower unit costs that develop from the experience curve. On the basis of some future point on the experience curve, the corporation should price the product or service very low to preempt competition and increase market demand. The resulting high number of units sold and high market share should result in high profits, based on the low unit costs.

IV. Internal Environment: Strengths and Weaknesses (SWOT) ; emphasizes strengths and weaknesses

A. Corporate Structure 1. How is the corporation structured at present? a. Is the decision-making authority centralized around one group or decentralized to many units? b. Is the corporation organized on the basis of functions, projects, geography, or some combination of these? 2. Is the structure clearly understood by everyone in the corporation? 3. Is the present structure consistent with current corporate objectives, strategies, policies, and programs, as well as with the firm's international operations? 4. In what ways does this structure compare with those of similar corporations? B. Corporate Culture 1. Is there a well-defined or emerging culture composed of shared beliefs, expectations, and values? 2. Is the culture consistent with the current objectives, strategies, policies, and programs? 3. What is the culture's position on environmental sustainability? 4. What is the culture's position on other important issues facing the corporation (that is, on productivity, quality of performance, adaptability to changing conditions, and internationalization)? 5. Is the culture compatible with the employees' diversity of backgrounds? 6. Does the company take into consideration the values of the culture of each nation in which the firm operates? C. Corporate Resources 1. Marketing a. What are the corporation's current marketing objectives, strategies, policies, and programs? i. Are they clearly stated or merely implied from performance and/or budgets? ii. Are they consistent with the corporation's mission, objectives, strategies, and policies, and with internal and external environments? b. How well is the corporation performing in terms of analysis of market position and marketing mix (that is, product, price, place, and promotion) in both domestic and international markets? How dependent is the corporation on a few customers? How big is its market? Where is it gaining or losing market share? What percentage of sales comes from developed versus developing regions? Where are current products in the product life cycle? i. What trends emerge from this analysis? ii. What impact have these trends had on past performance and how might these trends affect future performance? iii. Does this analysis support the corporation's past and pending strategic decisions? iv. Does marketing provide the company with a competitive advantage? c. How well does the corporation's marketing performance compare with that of similar corporations? d. Are marketing managers using accepted marketing concepts and techniques to evaluate and improve product performance? (Consider product life cycle, market segmentation, market research, and product portfolios.) e. Does marketing adjust to the conditions in each country in which it operates? f. Does marketing consider environmental sustainability when making decisions? g. What is the role of the marketing manager in the strategic management process? 2. Finance a. What are the corporation's current financial objectives, strategies, policies, and programs? i. Are they clearly stated or merely implied from performance and/or budgets? ii. Are they consistent with the corporation's mission, objectives, strategies, and policies, and with internal and external environments? b. How well is the corporation performing in terms of financial analysis? (Consider ratio analysis, common size statements, and capitalization structure.) How balanced, in terms of cash flow, is the company's portfolio of products and businesses? What are investor expectations in terms of share price? i. What trends emerge from this analysis? ii. Are there any significant differences when statements are calculated in constant versus reported dollars? iii. What impact have these trends had on past performance and how might these trends affect future performance? iv. Does this analysis support the corporation's past and pending strategic decisions? v. Does finance provide the company with a competitive advantage? c. How well does the corporation's financial performance compare with that of similar corporations? d. Are financial managers using accepted financial concepts and techniques to evaluate and improve current corporate and divisional performance? (Consider financial leverage, capital budgeting, ratio analysis, and managing foreign currencies.) e. How does finance adjust to the conditions in each country in which the company operates? f. How does finance cope with global financial issues? g. What is the role of the financial manager in the strategic management process? 3. Research and Development (R&D) a. What are the corporation's current R&D objectives, strategies, policies, and programs? i. Are they clearly stated or merely implied from performance or budgets? ii. Are they consistent with the corporation's mission, objectives, strategies, and policies, and with internal and external environments? iii. What is the role of technology in corporate performance? iv. Is the mix of basic, applied, and engineering research appropriate given the corporate mission and strategies? v. Does R&D provide the company with a competitive advantage? b. What return is the corporation receiving from its investment in R&D? c. Is the corporation competent in technology transfer? Does it use concurrent engineering and cross-functional work teams in product and process design? d. What role does technological discontinuity play in the company's products? e. How well does the corporation's investment in R&D compare with the investments of similar corporations? How much R&D is being outsourced? Is the corporation using value-chain alliances appropriately for innovation and competitive advantage? f. Does R&D adjust to the conditions in each country in which the company operates? g. Does R&D consider environmental sustainability in product development and packaging? h. What is the role of the R&D manager in the strategic management process? 4. Operations and Logistics a. What are the corporation's current manufacturing/service objectives, strategies, policies, and programs? i. Are they clearly stated or merely implied from performance or budgets? ii. Are they consistent with the corporation's mission, objectives, strategies, and policies, and with internal and external environments? b. What are the type and extent of operations capabilities of the corporation? How much is done domestically versus internationally? Is the amount of outsourcing appropriate to be competitive? Is purchasing being handled appropriately? Are suppliers and distributors operating in an environmentally sustainable manner? Which products have the highest and lowest profit margins? i. If the corporation is product-oriented, consider plant facilities, type of manufacturing system (continuous mass production, intermittent job shop, or flexible manufacturing), age and type of equipment, degree and role of automation and/or robots, plant capacities and utilization, productivity ratings, and availability and type of transportation. ii. If the corporation is service-oriented, consider service facilities (hospital, theater, or school buildings), type of operations systems (continuous service over time to the same clientele or intermittent service over time to varied clientele), age and type of supporting equipment, degree and role of automation and use of mass communication devices (diagnostic machinery, video machines), facility capacities and utilization rates, efficiency ratings of professional and service personnel, and availability and type of transportation to bring service staff and clientele together. c. Are manufacturing or service facilities vulnerable to natural disasters, local or national strikes, reduction or limitation of resources from suppliers, substantial cost increases of materials, or nationalization by governments? d. Is there an appropriate mix of people and machines (in manufacturing firms) or of support staff to professionals (in service firms)? e. How well does the corporation perform relative to the competition? Is it balancing inventory costs (warehousing) with logistical costs (just-in-time)? Consider costs per unit of labor, material, and overhead; downtime; inventory control management and scheduling of service staff; production ratings; facility utilization percentages; and number of clients successfully treated by category (if service firm) or percentage of orders shipped on time (if product firm). i. What trends emerge from this analysis? ii. What impact have these trends had on past performance and how might these trends affect future performance? iii. Does this analysis support the corporation's past and pending strategic decisions? iv. Do operations provide the company with a competitive advantage? f. Are operations managers using appropriate concepts and techniques to evaluate and improve current performance? Consider cost systems, quality control and reliability systems, inventory control management, personnel scheduling, Total Quality Management (TQM), learning curves, safety programs, and engineering programs that can improve efficiency of manufacturing or of service. g. Do operations adjust to the conditions in each country in which it has facilities? h. Do operations consider environmental sustainability when making decisions? i. What is the role of the operations manager in the strategic management process? 5. Human Resources Management (HRM) a. What are the corporation's current HRM objectives, strategies, policies, and programs? i. Are they clearly stated or merely implied from performance and/or budgets? ii. Are they consistent with the corporation's mission, objectives, strategies, and policies and with internal and external environments? b. How well is the corporation's HRM performing in terms of improving the fit between the individual employee and the job? Consider turnover, grievances, strikes, layoffs, employee training, and quality of work life. i. What trends emerge from this analysis? ii. What impact have these trends had on past performance and how might these trends affect future performance? iii. Does this analysis support the corporation's past and pending strategic decisions? iv. Does HRM provide the company with a competitive advantage? c. How does this corporation's HRM performance compare with that of similar corporations? d. Are HRM managers using appropriate concepts and techniques to evaluate and improve corporate performance? Consider the job analysis program, performance appraisal system, up-to-date job descriptions, training and development programs, attitude surveys, job design programs, quality of relationships with unions, and use of autonomous work teams. e. How well is the company managing the diversity of its workforce? What is the company's record on human rights? Does the company monitor the human rights record of key suppliers and distributors? f. Does HRM adjust to the conditions in each country in which the company operates? Does the company have a code of conduct for HRM for itself and key suppliers in developing nations? Are employees receiving international assignments to prepare them for managerial positions? g. What is the role of outsourcing in HRM planning? h. What is the role of the HRM manager in the strategic management process? 6. Information Technology (IT) a. What are the corporation's current IT objectives, strategies, policies, and programs? i. Are they clearly stated or merely implied from performance and/or budgets? ii. Are they consistent with the corporation's mission, objectives, strategies, and policies, and with internal and external environments? b. How well is the corporation's IT performing in terms of providing a useful database, automating routine clerical operations, assisting managers in making routine decisions, and providing information necessary for strategic decisions? i. What trends emerge from this analysis? ii. What impact have these trends had on past performance and how might these trends affect future performance? iii. Does this analysis support the corporation's past and pending strategic decisions? iv. Does IT provide the company with a competitive advantage? c. How does this corporation's IT performance and stage of development compare with that of similar corporations? Is it appropriately using the Internet, intranet, and extranets? d. Are IT managers using appropriate concepts and techniques to evaluate and improve corporate performance? Do they know how to build and manage a complex database, establish Web sites with firewalls and virus protection, conduct system analyses, and implement interactive decision-support systems? e. Does the company have a global IT and Internet presence? Does it have difficulty with getting data across national boundaries? f. What is the role of the IT manager in the strategic management process? D. Summary of Internal Factors (List in the IFAS Table 5-2, p. 154) Which of these factors are core competencies? Which, if any, are distinctive competencies? Which of these factors are the most important to the corporation and to the industries in which it competes at the present time? Which might be important in the future? Which functions or activities are candidates for outsourcing?

vertical integration

After a firm successfully establishes itself at this point by obtaining a competitive advantage, one of its first strategic moves is to move forward or backward along the value chain in order to reduce costs, guarantee access to key raw materials, or to guarantee distribution.24 This process, called vertical integration,

operating leverage

Consequently, this firm has a high amount of fixed costs. It also has a relatively high break-even point, but its variable cost line rises slowly. This is an example of operating leverage, the impact of a specific change in sales volume on net operating income. The advantage of high operating leverage is that once the firm reaches break-even, its profits rise faster than do those of less automated firms having lower operating leverage. Continuous systems reap benefits from economies of scale. In terms of strategy, this firm needs to find a high-demand niche in the marketplace for which it can produce and sell a large quantity of goods. However, a firm with high operating leverage is likely to suffer huge losses during a recession. During an economic downturn, the firm with less automation and thus less leverage is more likely to survive comfortably because a drop in sales primarily affects variable costs. It is often easier to lay off labor than to sell off specialized plants and machines.

Information systems/technology offers four main contributions to corporate performance:

First, (beginning in the 1970s with mainframe computers) it is used to automate existing back-office processes, such as payroll, human resource records, accounts payable and receivable, and to establish huge databases. Second, (beginning in the 1980s) it is used to automate individual tasks, such as keeping track of clients and expenses, through the use of personal computers with word processing and spreadsheet software. Corporate databases are accessed to provide sufficient data to analyze and to create what-if scenarios. These first two contributions tend to focus on reducing costs. Third, (beginning in the 1990s) it is used to enhance key business functions, such as marketing and operations. This third contribution focuses on productivity improvements. The system provides customer support and help in distribution and logistics. For example, in an early effort on the Internet, FedEx found that by allowing customers to directly access its package-tracking database via the Web instead of having to ask a human operator, the company saved up to US$2 million annually.79 Business processes are analyzed to increase efficiency and productivity via reengineering. Enterprise resource planning (ERP) application software, such as SAP, PeopleSoft, Oracle, Baan, and J.D. Edwards (discussed further in Chapter 10), is used to integrate worldwide business activities so that employees need to enter information only once and that information is available to all corporate systems (including accounting) around the world. Fourth, (beginning in 2000) it is used to develop competitive advantage. For example, American Hospital Supply (AHS), a leading manufacturer and distributor of a broad line of products for doctors, laboratories, and hospitals, developed an order entry distribution system that directly linked the majority of its customers to AHS computers. The system was successful because it simplified ordering processes for customers, reduced costs for both AHS and the customer, and allowed AHS to provide pricing incentives to the customer. As a result, customer loyalty was high and AHS's share of the market became large.

______ permits the low-volume output of custom-tailored products at relatively low unit costs through economies of scope. It is thus possible to have the cost advantages of continuous systems with the customer-oriented advantages of intermittent systems.

Flexible manufacturing

Profit Pyramid Model

General Motors offers a full line of automobiles in order to close out any niches where a competitor might find a position. The key is to get customers to buy in at the low-priced, low-margin entry point (Chevrolet Spark— manufacturer's suggested retail price US $13,485)20 and move them up to highpriced, high-margin products (Cadillac and Buick) where the company makes its money.

Multicomponent system/ installed base model

Gillette invented this classic model to sell razors at break-even pricing in order to make money on higher-margin razor blades. HP does the same with printers and printer cartridges. The product is thus a system, not just one product, with one component providing most of the profits.

customer solutions model

IBM uses this model to make money not by selling IBM products, but by selling its expertise to improve its customers' operations. This is a consulting model.

economies of scope

If a particular product is not being produced at a high enough level to reach economies of scale in distribution, another product could be used to share the same distribution channel. This is an example of economies of scope, which result when the value chains of two separate products or services share activities, such as the same marketing channels or manufacturing facilities. The cost of joint production of multiple products can be lower than the cost of separate production.

corporate culture

In most organizations, the "company way" is derived from the corporation's culture. Corporate culture is the collection of beliefs, expectations, and values learned and shared by a corporation's members and transmitted from one generation of employees to another. The corporate culture generally reflects the values of the founder(s) and the mission of the firm.28 It gives a company a sense of identity: "This is who we are. This is what we do. This is what we stand for." The culture includes the dominant orientation of the company, such as R&D at 3M, shared responsibility at Nucor, customer service at Nordstrom, innovation at Google, or product quality at BMW. It often includes a number of informal work rules (forming the "company way") that employees follow without question. These work practices over time become part of a company's unquestioned tradition. The culture, therefore, reflects the company's values.

Blockbuster model

In some industries, such as pharmaceuticals and motion picture studios, profitability is driven by a few key products. The focus is on high investment in a few products with high potential payoffs—especially if they can be protected by patents.

De facto industry standard model

In this model, a company offers products free or at a very low price in order to saturate the market and become the industry standard. Once users are locked in, the company offers higher-margin products using this standard. LinkedIn has used this approach very successfully while TurboTax makes its most basic program free.

Entrepreneurial Model

In this model, a company offers specialized products/ services to market niches that are too small to be worthwhile to large competitors but have the potential to grow quickly. Small, local brew pubs have been very successful in a mature industry dominated by AB InBev and MillerCoors. This model has often been used by small high-tech firms that develop innovative prototypes in order to sell off the companies (without ever selling a product) to bigger players.

Efficiency model

In this model, a company waits until a product becomes standardized and then enters the market with a low-priced, low-margin approach that appeals to the mass market. This model is used by Spirit Airlines, KIA Motors, and Vanguard.

Switchboard model

In this model, a firm acts as an intermediary to connect multiple sellers to multiple buyers. Financial planners juggle a wide range of products for sale to multiple customers with different needs. This model has been successfully used by eBay and Amazon.com.

Moore's Law

Information technology is still on the steep upward slope of its S-curve in which relatively small increments in R&D effort result in significant improvement in performance. This is an example of Moore's Law (which is really a rule of thumb and not a scientific law), which states that the number of transistors that can fit on a computer chip (microprocessors) will double (in other words, computing power will double) every 18 months.49 The presence of a technological discontinuity in the world's steel industry during the 1960s explains why the large capital expenditures by U.S. steel companies failed to keep them competitive with the Japanese firms that adopted the new technologies. As Foster points out, "History has shown that as one technology nears the end of its S-curve, competitive leadership in a market generally changes hands."50

cross-functional work teams

Instead of developing products/services in a series of steps, companies are tearing down the traditional walls separating the departments so that people from each discipline can get involved in projects early on.

IFAS

Internal Factor Analysis Summary -Use the VRIO framework (Value, Rareness, Imitability, and Organization) to assess the importance of each of the factors that might be considered strengths. Except for its internal orientation, this IFAS Table is built the same way as the EFAS Table described in Chapter 4 (in Table 4-5). To use the IFAS Table, complete the following steps: 1. In Column 1 (Internal Factors), list the 8 to 10 most important strengths and weaknesses facing the company. 2. In Column 2 (Weight), assign a weight to each factor from 1.0 (Most Important) to 0.0 (Not Important) based on that factor's probable impact on a particular company's current strategic position. The higher the weight, the more important is this factor to the current and future success of the company. All weights must sum to 1.0 regardless of the number of factors. 3. In Column 3 (Rating), assign a rating to each factor from 5.0 (Outstanding) to 1.0 (Poor) based on management's specific response to that particular factor. Each rating is a judgment regarding how well the company's management is currently dealing with each specific internal factor. 4. In Column 4 (Weighted Score), multiply the weight in Column 2 for each factor times its rating in Column 3 to obtain that factor's weighted score. 5. In Column 5 (Comments), note why a particular factor was selected and/or how its weight and rating were estimated. 6. Finally, add the weighted scores for all the internal factors in Column 4 to determine the total weighted score for that particular company. The total weighted score indicates how well a particular company is responding to current and expected factors in its internal environment. The score can be used to compare that firm to other firms in its industry. Check to ensure that the total weighted score truly reflects the company's current performance in terms of profitability and market share. The total weighted score for an average firm in an industry is always 3.0.

4 ways a corporation can gain access to a distinctive competency

It may be an asset endowment, such as a key patent, coming from the founding of the company. Such was the case with Xerox, which grew on the basis of its original copying patent. ■■ It may be acquired from someone else. Disney bought Pixar in order to reestablish itself in the animated movie market. ■■ It may be shared with another business unit or alliance partner. LG has taken its electronics and production expertise into appliances with astonishing success in the market. ■■ It may be carefully built and accumulated over time within the company. For example, Honda carefully extended its expertise in small motor manufacturing from motorcycles to autos, boat engines, generators, and lawnmowers.

R & D Mix

Most corporations will have a mix of basic, product, and process R&D, which varies by industry, company, and product line. The balance of these types of research is known as the R&D mix and should be appropriate to the strategy being considered and to each product's life cycle. For example, it is generally accepted that product R&D normally dominates the early stages of a product's life cycle (when the product's optimal form and features are still being debated), whereas process R&D becomes especially important in the later stages (when the product's design is solidified and the emphasis is on reducing costs and improving quality).

primary activities

Porter proposes that a manufacturing firm's primary activities usually begin with inbound logistics (raw materials handling and warehousing), go through an operations process in which a product is manufactured, and continue on to outbound logistics (warehousing and distribution), to marketing and sales, and finally to service (installation, repair, and sale of parts).

Time model

Product R&D and speed are the keys to success in the time model. Being the first to market with a new innovation allows a pioneer such as Google to earn extraordinary returns. By the time the rest of the industry catches up, Google has moved on to a newer, more innovative approach to keep people coming back.

The ____ is responsible for suggesting and implementing a company's technological strategy in light of its corporate objectives and policies. The manager's job, therefore, involves (1) choosing among alternative new technologies to use within the corporation, (2) developing methods of embodying the new technology in new products and processes, and (3) deploying resources so that the new technology can be successfully implemented.

R&D manager

Typical value chain for a manufactured product

Raw Materials-->Primary Manufacturing-->Fabrication-->Distributor-->Retailer

support activities

Several support activities, such as procurement (purchasing), technology development (R&D), human resource management, and firm infrastructure (accounting, finance, strategic planning), ensure that the primary value-chain activities operate effectively and efficiently.

Advertising model

Similar to the multicomponent system/installed base model, this model offers its basic product free in order to make money on advertising. Originating in the newspaper industry, this model is used heavily in commercial radio and television. Many web-based firms offer freemium versions to users in order to expose them to the basics and then hope to sell premium features to a smaller set of customers.

Profit multiplier model

The idea of this model is to develop a concept that may or may not make money on its own but, through synergy, can spin off many profitable products. Walt Disney invented this concept by using cartoon characters to develop high-margin theme parks, merchandise, and licensing opportunities.

market segmentation

Through market research, corporations are able to practice market segmentation with various products or services so that managers can discover what niches to seek, which new types of products to develop, and how to ensure that a company's many products do not directly compete with one another.

dynamic capabilities

When these capabilities are constantly being changed and reconfigured to make them more adaptive to an uncertain environment

distinctive competencies

When unique resources and/or core competencies are superior to those of the competition,

Altman's Z-Value Bankruptcy Formula

Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5 where: x1 = Working capital/Total assets (%) x2 = Retained earnings/Total assets (%) x3 = Earnings before interest and taxes/Total assets (%) x4 = Market value of equity/Total liabilities (%) x5 = Sales/Total assets (number of times)

A culture emphasizing constant renewal may help a company adapt to ___.

a changing, hypercompetitive environment.

business model and 5 elements

a company's method for making money in the current business environment. It includes the key structural and operational characteristics of a firm—how it earns revenue and makes a profit. A business model is usually composed of five elements: ■■ Who it serves ■■ What it provides ■■ How it makes money ■■ How it differentiates and sustains competitive advantage ■■ How it provides its product/service.

autonomous (self-managing) work teams

a group of people work together without a supervisor to plan, coordinate, and evaluate their own work.

value chain

a linked set of value-creating activities that begin with basic raw materials coming from suppliers, moving on to a series of value-added activities involved in producing and marketing a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer. Value-chain analysis works for every type of business regardless of whether they provide a service or manufacture a product. Very few corporations have a product's entire value chain in-house.

core rigidity or deficiency

a strength that over time matures and becomes a weakness.4 Although it is typically not an asset in the accounting sense, a core competency is a very valuable capability—it does not "wear out" with use. In general, the more core competencies are used, the more refined they get, and the more valuable they become.

corporate brand

a type of brand in which the company's name serves as the brand. Of the top 10 world brands listed previously, all are company names. The value of a corporate brand is that it typically stands for consumers' impressions of a company and can thus be extended onto products not currently offered—regardless of the company's actual expertise. For example, Caterpillar, a manufacturer of heavy earth-moving equipment, used consumer associations with the Caterpillar brand (rugged, masculine, construction-related) to market work boots.

corporate reputation

a widely held perception of a company by the general public. It consists of two attributes: (1) stakeholders' perceptions of a corporation's ability to produce quality goods and (2) a corporation's prominence in the minds of stakeholders.38 A good corporate reputation can be a strategic resource. It can serve in marketing as both a signal and an entry barrier. It contributes to its goods having a price premium.39 Reputation is especially important when the quality of a company's product or service is not directly observable and can be learned only through experience.

intranet

an information network within an organization that also has access to the external worldwide Internet. Intranets typically begin as ways to provide employees with company information such as lists of product prices, fringe benefits, and company policies. They are then converted into extranets for supply chain management.

extranet

an information network within an organization that is available to key suppliers and customers. The key issue in building an extranet is the creation of "fire walls" to block extranet users from accessing the firm's or other users' confidential data. Once this is accomplished, companies can allow employees, customers, and suppliers to access information and conduct business on the Internet in a completely automated manner. By connecting these groups, companies hope to obtain a competitive advantage by reducing the time needed to design and bring new products to market, slashing inventories, customizing manufacturing, and entering new markets.

resources

an organization's assets and are thus the basic building blocks of the organization. They include tangible assets (such as its plant, equipment, finances, and location), human assets (the number of employees, their skills, and motivation), and intangible assets (such as its technology [patents and copyrights], culture, and reputation).

Divisional structure

appropriate for a large corporation with many product lines in several related industries. Employees tend to be functional specialists organized according to product/market distinctions. The Clorox Company is made up of five big divisions: (1) Cleaning (e.g., Clorox, 409, and Tilex); (2) Household (e.g., Glad, Kingsford, and Fresh Step); (3) Lifestyle (e.g., Brita and Burt's Bees); (4) Professional (Commercial Solutions); and (5) International (e.g., Chux and Poett).26 Management attempts to find some synergy among divisional activities through the use of committees and horizontal linkages. In terms of stages of development (to be discussed in Chapter 9), this is a Stage III company.

Conglomerate structure

appropriate for a large corporation with many product lines in several unrelated industries. A variant of the divisional structure, the conglomerate structure (sometimes called a holding company) is typically an assemblage of legally independent firms (subsidiaries) operating under one corporate umbrella but controlled through the subsidiaries' boards of directors. The unrelated nature of the subsidiaries prevents any attempt at gaining synergy among them. In terms of stages of development (discussed in Chapter 9), this is also a Stage III company.

Functional structure

appropriate for a medium-sized firm with several product lines in one industry. Employees tend to be specialists in the business functions that are important to that industry, such as manufacturing, marketing, finance, and human resources. In terms of stages of development (discussed in Chapter 9), this is a Stage II company. -top management, manufacturing, sales, finance, and personnel

Strategic Business Units (SBUs)

are a modification of the divisional structure. Strategic business units are divisions or groups of divisions composed of independent product-market segments that are given primary responsibility and authority for the management of their own functional areas. An SBU may be of any size or level, but it must have (1) a unique mission, (2) identifiable competitors, (3) an external market focus, and (4) control of its business functions.27 The idea is to decentralize on the basis of strategic elements rather than on the basis of size, product characteristics, or span of control and to create horizontal linkages among units previously kept separate. For example, rather than organize products on the basis of packaging technology like frozen foods, canned foods, and bagged foods, General Foods organized its products into SBUs on the basis of consumer-oriented menu segments: breakfast food, beverage, main meal, dessert, and pet foods. In terms of stages of development (to be discussed in Chapter 9), this is also a Stage III company.

constant dollars

are dollars adjusted for inflation to make them comparable over various years. One way to adjust for inflation in the United States is to use the consumer price index (CPI), as given in Table 13-2. Dividing sales and net income by the CPI factor for that year will change the figures to 1982-1984 U.S. constant dollars (when the CPI was 1.0).

common-size statements

are income statements and balance sheets in which the dollar figures have been converted into percentages. These statements are used to identify trends in each of the categories, such as cost of goods sold as a percentage of sales (sales is the denominator). For the income statement, net sales represent 100%: calculate the percentage for each category so that the categories sum to the net sales percentage (100%). For the balance sheet, give the total assets a value of 100% and calculate other asset and liability categories as percentages of the total assets with total assets as the denominator. (Individual asset and liability items, such as accounts receivable and accounts payable, can also be calculated as a percentage of net sales.)

continuous systems

are those laid out as lines on which products can be continuously assembled or processed. An example is an automobile assembly line. A firm using continuous systems invests heavily in fixed investments such as automated processes and highly sophisticated machinery. Its labor force, relatively small but highly skilled, earns salaries rather than piece-rate wages. Consequently, this firm has a high amount of fixed costs. It also has a relatively high break-even point, but its variable cost line rises slowly.

The simplest way to begin an analysis of a corporation's value chain is by ____.

carefully examining its traditional functional areas for potential strengths and weaknesses.

clusters

clusters—geographic concentrations of interconnected companies and industries.

Product R & D

concentrates on marketing and is concerned with product or product-packaging improvements. The best measurements of ability in this area are the number of successful new products introduced and the percentage of total sales and profits coming from products introduced within the past five years.

Engineering (or process) R & D

concerned with engineering, concentrating on quality control, and the development of design specifications and improved production equipment. A company's capability in this area can be measured by consistent reductions in unit manufacturing costs and by the number of product defects.

In a process called _____, the once-isolated specialists now work side-by-side and compare notes constantly in an effort to design cost-effective products with features customers want.

concurrent engineering

Basic R & D

conducted by scientists in well-equipped laboratories where the focus is on theoretical problem areas. The best indicators of a company's capability in this area are its patents and research publications.

Radio-frequency identification (RFID) tags

containing product information are used to track goods through inventory and distribution channels.

capabilities

corporation's ability to exploit its resources. They consist of business processes and routines that manage the interaction among resources to turn inputs into outputs.

competency

cross-functional integration and coordination of capabilities

market position

deals with the question, "Who are our customers?" It refers to the selection of specific areas for marketing concentration and can be expressed in terms of market, product, and geographic locations.

Strategic Business Units and the Conglomerate structure are variants of the _____ structure.

divisional

Economies of scope (in which common parts of the manufacturing activities of various products are combined to gain economies even though small numbers of each product are made) replace ______ (in which unit costs are reduced by making large numbers of the same product) in flexible manufacturing.

economies of scale

All ratios found in "Week 2 Strategy w Ratios" quizlet.

extra info

A ____ must ascertain the best sources of funds, uses of funds, and the control of funds. All strategic issues have financial implications. Cash must be raised from internal or external (local and global) sources and allocated for different uses. The flow of funds in the operations of an organization must be monitored. To the extent that a corporation is involved in international activities, currency fluctuations must be dealt with to ensure that profits aren't wiped out by the rise or fall of the dollar versus the yen, euro, or other currencies. Benefits in the form of returns, repayments, or products and services must be given to the sources of outside financing. All these tasks must be handled in a way that complements and supports overall corporate strategy. A firm's capital structure (amounts of debt and equity) can influence its strategic choices. Corporations with increased debt tend to be more risk-averse and less willing to invest in R&D.

financial manager

Product life cycle

graph showing time plotted against the sales of a product as it moves from introduction through growth and maturity to decline. This concept is used by marketing managers to discuss the marketing mix of a particular product or group of products in terms of where it might exist in the life cycle. From a strategic management perspective, this concept is of little value because the real position of any product and the actual curve of that product can only be ascertained in hindsight. Strategy is about making decisions in real-time for the future of the business. -Sales on the vertical/y axis -introduction, growth, maturity, and decline on the horizontal/x axis

Virtual teams

groups of geographically and/or organizationally dispersed co-workers that are assembled using a combination of telecommunications and information technologies to accomplish an organizational task.

Simple structure

has no functional or product categories and is appropriate for a small, entrepreneur-dominated company with one or two product lines that operates in a reasonably small, easily identifiable market niche. Employees tend to be generalists and jacks-of-all-trades. In terms of stages of development (to be discussed in Chapter 9), this is a Stage I company. -owner-manager and workers

In very general terms, manufacturing can be _____.

intermittent or continuous.

organizational analysis

internal scanning for strategic factors (strengths and weaknesses); concerned with identifying, developing, and taking advantage of an organization's resources and competencies.

core competency

is a collection of competencies that crosses divisional boundaries, is widespread within the corporation, and is something that the corporation can do exceedingly well. Thus, new product development is a core competency if it goes beyond one division.

replicability

is the ability of competitors to use duplicated resources and capabilities to imitate the other firm's success.

explicit knowledge

knowledge that can be easily articulated and communicated. This is the type of knowledge that competitive intelligence activities can quickly identify and communicate.

tacit knowledge

knowledge that is not easily communicated because it is deeply rooted in employee experience or in a corporation's culture.9 Tacit knowledge is more valuable and more likely to lead to a sustainable competitive advantage than is explicit knowledge because it is much harder for competitors to imitate.10 The knowledge may be complex and combined with other types of knowledge in an unclear fashion in such a way that even management cannot clearly explain the competency.11 Tacit knowledge is thus subject to a paradox. For a corporation to be successful and grow, its tacit knowledge must be clearly identified and codified if the knowledge is to be spread throughout the firm. Once tacit knowledge is identified and written down, however, it is easily imitable by competitors.12 This forces companies to establish complex security systems to safeguard their key knowledge.

The primary task of the ______ is to improve the match between individuals and jobs. Research indicates that companies with good HRM practices have higher profits and a better survival rate than do firms without these practices.56 A good HRM department should know how to use attitude surveys and other feedback devices to assess employees' satisfaction with their jobs and with the corporation as a whole. HRM managers should also use job analysis to obtain job description information about what each job needs to accomplish in terms of quality and quantity. Up-to-date job descriptions are essential not only for proper employee selection, appraisal, training, and development for wage and salary administration, and for labor negotiations, but also for summarizing the corporate-wide human resources in terms of employee-skill categories.

manager of human resources

The primary task of the _______is to design and manage the flow of information in an organization in ways that improve productivity and decision making. Information must be collected, stored, and synthesized in such a manner that it will answer important operating and strategic questions. A corporation's information system can be a strength or a weakness in multiple areas of strategic management. Not only can it aid in environmental scanning and in controlling a company's many activities, it can also be used as a strategic weapon in gaining competitive advantage.

manager of information systems/technology

The ____ is a company's primary link to the customer and the competition. The manager, therefore, must be especially concerned with the market position and marketing mix of the firm as well as with the overall reputation of the company and its brands.

marketing manager

The use of Computer-Assisted Design and Computer-Assisted Manufacturing (CAD/CAM) and robot technology means that learning times are shorter and products can be economically manufactured in small, customized batches in a process called _____—the low-cost production of individually customized goods and services.

mass customization

brand

name given to a company's product which embodies all of the characteristics of that item in the mind of the consumer. Over time and with effective advertising and execution, a brand connotes various characteristics in the consumers' minds.

VRIO framework

proposing four questions to evaluate a firm's competencies: 1. Valuable: Does it provide customer value and competitive advantage? 2. Rareness: Does only one other competitor or preferably do no competitors possess it at relatively the same level? 3. Imitability: Do the competitors have the financial ability (viewed in the widest sense) to imitate? 4. Organization: Is the firm organized to exploit the resource?

Human diversity

refers to the mix in the workplace of people from different races, cultures, and backgrounds. Realizing that the demographics are changing toward an increasing percentage of minorities and women in the U.S. workforce, companies are now concerned with hiring and promoting people without regard to ethnic background. Research does indicate that an increase in racial diversity leads to an increase in firm performance.

marketing mix

refers to the particular combination of key variables under a corporation's control that can be used to affect demand and to gain competitive advantage.