1: Foundations of Strategy Flashcards
Strategy:
goal
+ how it was
+ then
+ now
- > for managers to position their firms relative to competitors
- Strategy often revealed after the fact – based on (un)successful firms’ strategic moves
- practitioners, consultants, academics have sought to find “rules” to predict success
- Strategy research is based on statistical analysis of many firms + single cases of successful and less successful firms
Strategy research answers 3 key Qs:
- Why do some firms financially outperform for some time?
- How to deal with opportunities n threats in environment?
- How to manage own strengths n weaknesses?
Historical dev. of strategy 50’s to 00’s
17=2+3+3+3+3+3
-
1950’s Financial planning
- Functional control
-
1960’s Long range planning
- Planning for growth
- Resource allocation
-
1970’s Strategic planning
- Response to markets
- Alternative strategies
-
1980’s Strategic Mgmt
- Strategic processes
- Competitive positioning
-
1990’s Quest for Strategic Advantage
- Capabilities
- Resources
-
2000’s New Economy
- Business Models
- Disruptive technologies
current 10=3+3+3+1 forces pushing to radical rethinking of strategic mgmt
- Structural change
- Scarcity of expertise
- Mergers transforming industries
- Environmental concerns
- New industry substitutes
- Rapidly changing customer expectation
- Rate of innovations
- Increased entrepreneurial activity
- Global competition
- Deregulation
Basic 8=2+2+4 radical devs. in strategy
- Knowledge and technology
- Processes and routines
- History and path-dependence
- Cooperation and networks
- Resource-based theory
- Knowledge-based view
- Capabilities-based view
- Entrepreneurial view
Today’s 4 trends
- Corporate social responsibility (CSR) and business ethics
- Global strategies Sustainability / green strategies
- Competing for standards
Competitive Strategy
def
goal
key author
Competitive strategy is concerned with ”Creating and maintaining a competitive advantage in each and every area of business“
–> outperform competitors
by Porter
Porter’s 2 fundamental competitive strategies
- Cost leadership = company prices around the market average, and enjoys superior profits because its costs are lower than those of its rivals
- Differentiation = company adds value in areas of significance for the customer, who then accepts a premium price for distinctiveness of products and services
Backup 3 levels of firm’s economic performance
Below-normal, Normal, Above-normal = with its resources and knowledge, a firm generates economic value below/equal to/above what owners of that resource and knowledge expect
Backup 6=(2+1)+(2+1) Profitability ratios in strategy
each w name, formula, meaning
- Return on total assets (ROA)
- profit after tax
- / total assets*
- =Return on total investment in a firm
- Return on equity (ROE)
- profit after tax
- / total stockholder equity*
- =Return on total equity investment in a firm
- Gross profit margin
- (sales - cost of goods sold)
- /sales*
- =Sales available to cover operating expenses and still generate profit
- Earnings per share (EPS)
- (profits after tax - preferred stock dividends)
- /number of shares of common stock outstanding*
- =Profit available to owners of a common stock
- Cash flow per share
- (after-tax profits + depreciation)
- /no. of common shares outstanding*
- =Funds available to fund activities above current levels of costs
- Price-earning ratio
- current market price per share
- /after-tax earnings per share*
- =Anticipated firm performance
Backup - 5=2+1+2 Liquidity and leverage ratios in strategy name, formula, meaning
- Quick ratio
- (current assets - inventory)
- / current liabilities*
- =Ability to meet short- term obligations without selling current inventory
- Current ratio
- current assets
- / current liabilities*
- =Ability to cover short-term liabilities with short-term assets
- Times interest earned
- profit before interest and tax
- / total interest charged*
- =How much a firm‘s profit can decline and still meet its obligations
- Debt to asset
- total debt
- / total assets*
- =The extent to which debt has been used to finance a firm‘s business
- Debt to equity
- total debt
- / total equity*
- =The use of debt versus equity to finance business activities
Backup - 3=1+2 Activity ratios
- Inventory turnover
- sales
- / inventory*
- =Speed with which a firm‘s inventory is turning over
- Accounts receivable turnover
- annual credit sales
- / accounts receivable*
- =Average time it takes to collect on credit sales
- Average collection period
- accounts receivable
- /average daily sales*
- =Time it takes to receive payment after sale has been made
Competitive advantage:
measurable how,
4 possible situations
from P/E ratio of firm relative to avg. competitor
- disadvantage
- parity
- temporary advantage
- sustainable advantage
Relative Revenue Growth rates segmented by geographic market
Cos based in emerging markets VS dev.ed economies have a 10%+ growth rate advantage, regardless of
home/foreign X dev./em. markets!
Competitive strategy
def
+ 2x2 matrix
“Creating and maintaining a competitive advantage in each and every area of business”
Strategic advantage (perceived uniqueness /Low-cost )
x
Strategic target (industry wide / particular segment only)
=
Product differentiation (+focus) / Cost leadership (+focus)
Cost leadership’s 5 sources of cost advantage with explanation and key underlying concept
- Size differences and economies of scale = economies of scale in manufacturing, marketing, sales, or administration for larger firms up to a certain point (there is an optimal volume)
- Experience differences learning- economies = unit costs go down on value ~20-30% every time total production experience (=cumul.prod.) doubles for whole industry or individual producer, till physical lower bound (there is accumulated learning) –> Relationship between competitors stabilizes at constant market shares but different profit margins
- Differential low-cost access to factors of production = cheaper raw materials, land, labor, capital, maybe through bargaining power thanks to high volume
- Technological advantage independent of scale = more R&D inv. or better exploitation of (purchased) tech
- Policy choices = no variation, everyone focuses on cutting costs of standardized products
Differentiation strategy def + econ. conseq.
The firm attempts to gain competitive advantage by enhancing the perceived value of its own products and services, in various ways, relative to that of the firm‘s competitors (including substitutes)
-> no more pure competition, but monopolistic competition w buyers n sellers pairing based on prefs.
Differentiation’s 7=1+2+3+1 sources
- Product features = Quality, Design, Color, Style, Trademarks, Patents (matching pref. of certain customers)
- Timing = 1st mover: aggressive R&D, prod.dev., marketing -> +use (up) slack resources, + capture loyal customers - uncertainty; 2nd mover responds/imitates, late mover much time later
- Location and presence = close to Suppliers/Distributors and retailers/Customers
- Linkages between functions and complexity = more complex features or delivery, often through links of sales X (distrib./financing/prod.dev./service) or fin. X prod.dev.
- Product mix = when sets of products are linked and/or bought together by some customers
- Links with other firms = like inter-function links, but w other firms’ functions
- Reputation (KEY SOURCE) = consistent behavior -> brand name n perception of quality/dur-n reliability w suppliers n customers
- => optimal reputation cheating: dangerous*
Integrators’ strategy explained
maximize Value - Cost even though neither is optimized overall
Value-based model of firm strategy:
(3 factors) n 3 elements of _biz-level strategy_ for Value Creation and Appropriation
- Competitors =
- direct,
- entrants,
- substitutes
- Resources =
- internal/
- external=
- acquired,
- shared,
- complementors
- Customers =
- intermediaries,
- industrial,
- final
- Co-Cu: market positioning: to whom, how differentiate?
- Co-Re: competititve dynamics: barriers, interaction
- Re-Co: resource mgmt process: which, how config.
The 3 basic ways to create value for customers
w (value nature) <= key cost to firm
- product (features) < production
- professional services (solution) < HR
- network (connectivity to others) < network capacity n use
