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125 Cards in this Set
- Front
- Back
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What is Strategy?
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A firm’s theory about how to gain competitive advantage.
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Strategy is often the difference between:
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Success and failure; mediocrity and excellence
A great manager and average managers Stumbling through life and moving ahead with purpose |
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Strategic Management Process-
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sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy
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Mission statement-
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defines what a firm aspires to be in the long run and what it wants to avoid in the meantime
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Visionary firms-
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firms whose mission is central to all they do (Johnson & Johnson)
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Objectives-
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specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.
o Easy to measure, track over time. |
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External Analysis
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-firm indentifies the critical threats and opportunities in its competitive environment
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• Internal Analysis-
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helps a firm indentify its organizational strengths and weaknesses
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Business-level strategies-
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taken in a single market or industry
Two most common: cost leadership & product differential |
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Corporate-level strategies- multiple markets or industries simultaneously
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occurs when a firm adopts organizational policies and practices that are consistent with its strategy
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Economic value-
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the difference between the perceived benefits gained by a a customer and that purchases a firm’s products or services and the full economic cost of these products or services
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Competitive Advantage
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- When you have more economic value (above) than the other firms
o Temporary- very short period of time o Sustained- much longer |
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Parity
Disadvantage |
- firms that create the same economic value as their rivals
- Less economic value |
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Accounting performance
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- It can be difficult to compare because of different accounting practices
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Economic measures of competitive advantage-
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compares a firms level of return to its cost of capital instead of to the average level of return in the industry
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Strategies (list and definition)
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Intended- a strategy a firm thought it was going to pursue
Deliberate- an intended strategy a firm actually implements Realized- the strategy a firm is actually pursuing Unrealized- an intended strategy a firm does not actually implement Emergent- emerged over time or has been reshaped once implemented |
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A mission statement should communicate…
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The purpose of the business
What the business does What values guide firm behavior They must be relevant |
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The Strategic Management Process (list steps)
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1) Mission
2) Objectives 3) External/Internal Analysis 4) Strategic Choice 5) Strategic Implementation 6) Equals Competitive Advantage |
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The mission is supposed to align what...
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The Strategic Management Process
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Objectives should be...
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Specific, measurable targets
The things a firm needs to “do” to achieve its mission Should influence other elements in the strategic manageme |
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Strategy Implementation (list properties, etc)
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How strategies are carried out
Who will do what Organizational structure and control Who reports to whom How does the firm hire, promote, pay, etc. Every strategic choice has strategy implementation implications Strategy implementation is just as important as strategy formulation. Example: Gen. Lee at Gettysburg |
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Firms could achieve competitive parity and survive but have these characteristics...
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They would face a flat demand curve
Their cost structure would be the industry average They would need to adapt their strategy over time just to survive They would fail if they didn’t adapt their strategy |
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External Analysis allows firms to:
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Discover threats and opportunities
See if above normal profits are possible in an industry Better understand the nature of competition in an industry Make more informed strategic choices |
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The Structure – Conduct – Performance Model Core Thesis:
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Core thesis: Industry structure determines the range of strategies a firm can pursue, which in turn determine firm profitability
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Why S-C-P Matters...
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If you know the structure of the industry, you can determine the likelihood of earning poor, average, or above-average profits
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The Structure-Conduct-Performance Model (3 steps with explanation)
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Industry Structure- # of competing firms, homogeneity of products, cost of entry and exits
Firm Conduct- Strategies firms use to gain competitive advantage Performance- Firm Level: Competitive Advantage, Competitive parity, temporary/sustained, etc |
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Porter’s Five Forces Model is in the _____ not the _____
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Industry, Firm
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Analysis is heavily dependent on how you define the ______
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Industry
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Porter’s Five Forces Model (just list)
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Threat of Entry
Threat of Rivalry Threat of Powerful Suppliers Threat of Powerful Buyers Threat of Subsitutes |
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Threat of Entry
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If firms can easily enter the industry, any above normal profits will be bid away quickly
Barriers to entry lower the threat of entry Barriers to entry make an industry more attractive This is true whether the focal firm is already in the industry or thinking about entering |
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Barriers to Entry (list and explain)
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Economies of scale – firm that can’t produce the minimum efficient scale will be at a disadvantage
Product differentiation – entrants are forced to overcome customer loyalties to existing products Cost advantage independent of scale – incumbents may have learning advantages, etc. Government policies – government may impose trade restrictions and/or grant monopolies Proprietary Technology- when existing firms have techonology that reduces costs and new firms must develop subsitute techonologies, thus a barrier. Managerial know-how- when exihisiting firms have really gotten used to skills and knowledge that takes years to develop Favorable access to raw materials- costs a lot to have access to critical raw-materials that exhisisting firms have for cheap Learning-Curve Cost Advantages- when you produce a lot and gain cost advantages |
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Threat of Rivalry
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High rivalry means firms vigorously compete away above average profits
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Industry conditions that facilitate rivalry...
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Large number of competitors
Slow or declining growth High fixed costs and/or high storage costs Low product differentiation Industry capacity added in large increments |
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Threat of substitutes
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Substitutes fill the same need but in a different way
Coke and Pepsi are rivals; milk is a substitute for both Substitutes create a price ceiling because consumers switch to substitutes if prices rise Substitutes come from outside the industry – be aware of non-industry developments |
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Threat of Powerful Suppliers
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Powerful suppliers can “squeeze” (lower profits)
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Industry conditions that facilitate supplier power
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Small number of firms in supplier’s industry
Highly differentiated product Lack of close substitutes for suppliers Supplier could integrate forward Suppliers threaten forward vertical integration (FVI) |
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Forward Vertical Integration
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when suppliers have ability to become rivals
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Threat of Powerful Buyers
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Powerful buyers can “squeeze” (lower profits) the focal firm by demanding lower prices and/or higher levels of quality and service
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Industry conditions that facilitate buyer power:
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Small number of buyers for focal firm’s output
Lack of differentiated product The product is not significant to the buyer Buyers threaten backward vertical integration (when they can start sellin it) |
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If all threats in industry are high then...
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its a perfectly competitive industry
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Complementors as Another Force
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Complementors increase the value of the focal firm’s product
Customers perceive more value in the focal firm’s product when it is combined with the complementor’s product Complementors are found outside the focal firm’s industry Example: Goodyear Tires on Corvette |
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Competitor:
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When customers value your product less when they have the other firm’s product than if they just had yours
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Complementor-
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when customers value your product more when they have the other firm’s product than when they just had yours
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Responding to Environmental Threats
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Neutralizing Threats
Most firms cannot unilaterally change the threats in an industry By altering relationships in an industry, firms may reduce threats and/or create opportunities, thereby increasing profits Examples: Regional Healthcare system, Building Contractor, and the Bakery |
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Exploiting Industry Opportunities
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Generic Industry Structures
At any point in time, the structure of most industries fits into one of four generic categories Each industry structure presents opportunities that may be exploited Firms can choose to exploit an industry structure, continue business as usual, or exit the industry |
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Fragmented Industry Structure Characteristics
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large number of small firms
no dominate firms no dominate technology commodity type products low barriers to entry few, if any, economies of scale |
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Fragmented Industry Structure Opportunities
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Consolidation: implementation of strategies that begin to consolidate the industry into a smaller number of firms.
-buy competitors -build market power -exploit economies of scale |
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Emerging Industry Structure Characteristics
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new industry based on break through technology or product
no product standard has been reached no dominant firm has emerged new customers come from non-consumption not from competitors |
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Emerging Industry Structure Opportunities
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First mover advantages
Technology Locking-up-assets Create Switching Costs |
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Declining Industry Structure Characteristics
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industry sales have sustained pattern of decline
some well-established firms have exited firms have stopped investing in maintenance |
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Declining Industry Structure Opportunities
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market leadership
niche harvest divest |
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Strategically valuable assets-
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resources required to successfully compete in an industry
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What Does Internal Analysis Tell Us?
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Internal analysis provides a comparative look at a firm’s capabilities
What are the firm’s strengths? What are the firm’s weaknesses? How do these strengths & weaknesses compare to competitors’? |
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Internal analysis helps a firm:
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Determine if its resources and capabilities are likely sources of competitive advantage
Establish strategies that will exploit any sources of competitive advantage |
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What question does the The Resource-Based View answer?
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Why do some firms achieve better economic performance than others?
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What assumption does the rbv make?
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Assumes that a firm’s resources and capabilities are the primary drivers of competitive advantage and economic performance
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What are the two types of resources and what are they used for?
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Tangible: factories, products
Intangible: reputation Used to conceive of and implement strategies |
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Capabilities
What is the definition of a resource, and give examples? |
A subset of resources that enable a firm to take full advantage of other resources
Marketing skill, cooperative relationships |
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What are the four categories of resources?
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Financial (cash, retained earnings)
Physical (plant & equipment, geographic location) Human (skills & abilities of individuals) Organizational (reporting structures, relationships) |
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Two Critical Assumptions of RBV (list and explain)
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Resource heterogeneity- Different firms may have different resources
Resource immobility -It may be costly for firms without certain resources to acquire or develop them Some resources may not spread from firm to firm easily |
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Heterogeneity of resources typically occurs as the result of ______ the resources and capabilities of a firm
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bundling
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VRIO (just list acronyms)
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Value
Rarity Imitability Organization |
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If a firm has all the the VRIO components the firm enjoys..
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sustained competitive advantage
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The Question of Value (just the question)
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“Do resources and capabilities enable a firm to exploit external opportunity or neutralize an external threat?”
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One way to identify potentially valuable resources is to evaluate their _______
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Value Chain
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Value Chain-
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the set of business activities in which it engages to develop, produce, and market its products or services
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The question of Rarity (just the question)
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- “How many competing firms already possess particular valuable resources and capabilities?”
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What occurs If a resource is not rare?
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then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits)
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If a firms resources are:
Not valuable: Valuable, but not rare: Valuable and rare: |
Competitive disadvantage
Competitive parity Competitive advantage |
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The Question of Imitability (just the question)
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- “Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?”
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The temporary competitive advantage of valuable and rare resources can be sustained only if competitors face ________
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a cost disadvantage in imitating the resouce
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____ Resources are more costly to imitate than _______ resources
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Intangible, Tangible
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If there are high costs of imitation, then the firm may enjoy a period of _______ only until a ___________ or __________ emerges
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sustained competitive advantage
duplicate or substitute emerges |
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Direct duplication-
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NBC sponsoring an alternative extreme games completion
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Substitution
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- Extreme sports shows and an extreme sports cable channel are potential substitutes for X-Games, but they do not require the same resources as an X-Games strategy requires
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Sources of costly Imitation (list and give properties)
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Uniquely Historical Conditions- first mover advantages, path dependence
Casual Ambiguity- When competitors can’t tell for sure what enables a firm to gain an advantage. Bundles of resources fog these causal links Social Complexity (WordPerfect) The social relationships entailed in resources may be so complex that managers cannot really manage them or replicate them. Patents Patents may be a two-edged sword Offer a period of protection if the firm is able to defend its patent rights Required disclosure may actually increase the cost of imitation, and the timing |
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If a firm’s resources are:
Valuable, Rare, but not Costly to imitate |
Temporary Competitive Advantage
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If a firm’s resources are:
Valuable, Rare, and Costly to imitate |
Sustained Competitive Advantage
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The Question of Organization
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“Is a firm organized to exploit the full competitive potential of its resources and capabilities?”
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A firm’s structure and control mechanisms must be ______ so as to give people ability and incentive to exploit the firm’s resources
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aligned
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Compensation policies
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- are the ways that firms pay employees. Create incentives for employees to behave in certain ways.
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Competitive Dynamics:
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The strategic decisions and actions of firms in response to the strategic decisions and actions of other firms
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No Action:
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The other firm is serving a different market
A response may hurt its own competitive advantage It does not have the resources and capabilities to mount an effective response It wants to reduce or manage rivalry in the market through tacit collusion |
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Imitation will seldom lead to competitive advantage so firms should...
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Firms should use resources and capabilities to fill unique competitive space
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Similar strategies _____ lead to competitive advantage
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may
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Leapfrog” tactic
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- developing an entirely new set of tactics.
• P&G- introduced its laundry detergent, tide, in a new, concentrated formula, which required new manufacturing and packaging equipment, different than what everyone else did with the lemon scents. |
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Managers’ Job when it comes to resources and capabilities
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Bundle resources and capabilities to achieve competitive advantage
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Management control systems-
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include a range of formal and informal mechanisms to ensure that managers are behaving in ways consistent with a firm’s strategies.
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Formal management controls-
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include a firm’s budgeting and reporting activities that keep people higher up in a firm’s organizational chart informed about the actions taken by people lower down in a firm’s organizational chart
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Informal management controls
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- might include a firm’s culture and the willingness of employees to monitor each others’ behavior.
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Complementary resources and capabilities-
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these components have limited ability to generate competitive advantage in isolation
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Tacit Cooperation-
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any actions a firm takes that require firms in an industry to directly communicate or negotiate with each other
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Tacit Collusion-
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when tacit cooperation has the effect of reducing supply and increasing prices.
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Environment for Tacit Cooperation
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Small number of competing firms
Homogenous products and costs Market-share leader High Barriers to entry |
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Changing Strategies in Response to Another Firm’s Competitive Advantage
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Typically happens when another firm’s strategies usurp a firm’s competitive advantage.
Most frequent change is a change in technology. It is much better for a firm to change its strategy before that strategy is no longer viable. |
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Two Generic Business Level Strategies:
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Cost Leadership
Product Differentiation |
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Cost Leadership
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Generate economic value by having lower costs than competitors
Example: Wal-Mart |
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Product Differentiation
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Generate economic value by offering a product that customers prefer over competitors’ product
Example: Harley Davidson |
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Managers need to understand _____ has the cost advantage in their market
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who
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If its the _____ firm you should...
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Develop a strategy to exploit the advantage
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It could be a ______
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Develop a strategy to either capture the advantage or compete on some other basis
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Economies of Scale
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Average cost per unit falls as quantity increases – until the minimum efficient scale is reached
Are a cost advantage because competitors may not be able to match the scale because of capital requirements (barrier to entry) International expansion may allow a firm to have enough sales to justify investing in additional capacity to capture economies of scale |
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Diseconomies of scale
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Are an advantage for those who do not have diseconomies of scale
Occur when firms become too large and bureaucratic Example: Nucor Steel Are a risk of international expansion |
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Sources of Cost Advantage (just list)
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Economies/Diseconomies of Scale
Learning Curve Economies Differential Low-Cost Access to Productive Inputs Technology Independent of Scale Policy Choices |
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Learning Curve Economies
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A firm gets more efficient at a process with experience
The more complicated / technical the process, the greater the experience advantage International expansion may propel a firm down the experience curve because of higher volumes |
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Differential Low-Cost Access to Productive Inputs....may result from:
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May result from:
History – being in the right place at the right time Being first into a market – esp. foreign markets Natural endowment – owning a mineral deposit Locking up a source – buying all of its output |
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Technology Independent of Scale
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May allow small firms to become cost competitive
Advantage typically accrues to the “owner” of the technology – may or may not be the ones who actually use the technology Size of the advantage depends both on how valuable and protectable technology is Example: Vegetable Inspection |
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Policy Choices
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Firms get to choose how they will serve the market
We’ll offer a level of quality that is inexpensive to produce Firms can make policy choices that give people incentives to reduce cost at every opportunity Example: Southwest Airlines |
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Value of a Cost Advantage from the Five Forces Perspective (explain each one)
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Rivalry- competitors rationally avoid price competition
Entry- Increases capital requirements for entrants Substitutes- limits attractiveness Buyers- lowers incentives for buyers to vertically integrate Suppliers- increases importance of the focal firm to the supplier |
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Rareness of a Cost Advantage (Emerging Market)
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Economies of Scale- NOT RARE
Diseconomies of Scale- RARE Policy Choices- RARE Differential Input Access- RARE |
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Rareness of a Cost Advantage (Mature Market)
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Economies of Scale- RARE
Diseconomies of Scale- RARE Policy Choices- RARE Differential Input Access- RARE Technology Independent of Scale- NOT RARE Learning Curve Economies- NOT RARE |
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Imitability of Sources of Cost Advantage
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Conditions largely determine if a source of cost advantage will be costly to imitate
Low cost conditions: Unbalanced industry capacity and demand Non-proprietary technology Highly observable technology Transactional exchange (A cost advantage can be easily imitated) High cost conditions: Balanced industry capacity and demand Path dependence (historical uniqueness) Protected technology Highly unobservable technology (causal ambiguity) Relational exchange (social complexity) (A cost advantage cannot be easily imitated) |
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Strategy is implemented through organizational structure and controls:
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Structure:
1) The division of management responsibilities 2)The establishment of reporting relationships Controls: Policies intended to influence behavior – align the interests of the individual with the interests of the organization |
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Three organizational structures
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Simple
Functional Multi-divisional |
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Simple Structure
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Owner / Manager:
Makes all major decisions directly and monitors all activities Difficult to maintain this structure as the firm grows in size and complexity |
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U Form Structure
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CEO above everyone
CEO is responsible for strategy & coordination of functions |
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Multi-Divisional Structure (M-Form)
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Functions are replicated in each division as appropriate
This structure makes sense when the firm is involved in more than one business or has grown large enough to justify geographic divisions CEO has strategic responsibility with the help of vice presidents, etc. – information is filtered through layers CEO balances coordination & competition among divisions |
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Product Diff- 3 catagory of bases
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product
Firm Firm Link |
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Product Attributes
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features
complexity timing location |
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firm-customer
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custimization
marketing reputation |
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linkages
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within firm
with other firms product mix dist channel service and support |
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Exploting Fragmented
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turn prod into brand
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Expliting Emerging
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first mover
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mature exploiting
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refine
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decline expl
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niche
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