Business Strategy Week 2 Flashcards
external market (from out to in)
general environment-political economic socio cultural demographic technological ecological and legal/ethical
industry-markets and strategic groups
market - customer competitors business partners and community
firm
pestel analysis components
political
economic
socio-cultural (and demographic)
technological
ecological
legal and ethical
michael porter general idea
strategy should be formulated on the basis of analysis
Henry Mintzberg general idea
strategy as planned emergence
external environment
refers to the factors, forces, situations, and events outside the organization that affects its performance
strategic group
direct competitors w/ similar business models and strategies
pestel - political
-can potentially be influenced through lobbying ( one of few areas a firm can actually influence)
examples of impacts of political
-tax policy
-subsidies or grants
-tariffs
-political action to drive legislation
pestel - economic
-influence spending and types of purchases for businesses and consumers
-economic business cycle
-cost of capital
pestel - socio-cultural (demographic)
-impact market sizes and types of products customers want to buy
-demographics like hispanic people buying power or age related buying can have an impact
-socio cultural - values and beliefs
-going green
-health concious
pestel - technological
new technology can change the other factors
pestel - ecological
can impact a frims reptutation and attractiveness to customers
pestel - legal/ethical
- employment and labor laws and regulations;
- consumer and privacy laws;
- health and safety in the work place;
- packaging and labeling; and
- interstate and international trade regulation.
what is pestel analysis? what are the steps?
external analysis tool to identify key macro-econmoic forces
-identify external factors that most directly impact the firm
-research and analyze how relevant forces are trending so you can make predictions about the future
-from predicted futures identify opportunities and threats
pestel analysis- prioritization approach
you want to prioritize high impact things that have a high probability of occurence and deprioritize low impact things with a low probability of occurance. closer to high you build strategy, somewhere in the middle you monitor
the structure conduct performance model key assumption (SCP)
assumes industry structure determines firm conduct which in turn determines firm performance
structure conduct performance model components (SCP)
-structure - # of competitors and product diversity, extent of vertical integration and value chain, economics of supply and demand, cost of entry/ exit
-conduct - specific firm actions like branding, differentiation, and price setting, capacity, innovation, operating efficiencies, collusion
-performance - performance of individual firms and the industry as a whole.
profits, value creation, technological progress, returns for shareholders,performance in industry
Perfect competition
- many small firms
-firms are price takers - a company has little or no control over the price of its products or services
-commodity product
-low entry barriers
-most fragmented ( low profitability)
monopolistic competition
-many firms
-some pricing power
-differentiated
-medium entry barriers
oligopoly
-few large firms
-some pricing power
-differentiated
-high entry barriers
-either homogeneous or heterogeneous products
monopoly
-one firm
-considerable pricing power
-unique product
-very high entry barriers
-most consolidated (high profitability)
when is A firm is a price taker
when it responds to changes in industry supply and demand by adjusting prices, rather than attempting to influence the level of supply or demand
porter five force model reason for existing
The closer that competitive conditions of an Industry approximate perfect competition the more unattractive the industry becomes
therefore
The Porter Five Forces Model is focused on Industry structure and how factors that drive structure impacts firm profitability
porter five forces model
competitve rivalry ( main driver) among existing competitors and the other drivers:
-threat of new entrants
-bargaining power of buyers
-bargaining power of supplies
-threat of substitute product or services
-provide the industry structure in which the various firms compete.
concentration ratio (industry concentration)
ratio of combined markets shares of a given number of top firms to whole market size
-An economic metric that can measure fragmentation
-used to asses the extent to which a market is oligopolistic
-most common is top 4
impacts:
competitive rivalry
buyer bargaining power
supplier bargaining power
switching costs
costs incurred as a result of changing brands suppliers or products
-costs can be monetary but also psychological, effort and time based
impacts - all five forces
forward integration
a form of vertical integration moves down the supply chain to expand business activities to control direct distribution or supply of companies products. when a firm purchases or builds it’s own retail or distribution centers
impacts
-buying bargaining power
backward integration
up the supply chain by controlling supply before the company. a firm purchases or becomes it’s own supplier
-supplier bargaining power
porter five forces - power of suppliers: when is bargaining power of suppliers high?
-concentrated or limited supplier industry
-suppliers not dependent on industry for majority of revenue
-industry competitors firms face supplier switching costs
-suppliers hold scarce resources
-suppliers offer differentiated products
-no or few suppliers substitutes
-suppliers can forward integrate into the industry
porter five forces -bargaining power of buyers: when is bargaining power of buyers high?
-few buyers and each buyer purchase large quantities
-industries products are standardized or undifferentiated commodities
-buyer has many substitutes
-buyers have low or no switching costs
-buyers are price sensitive
-buyers can backwardly integrate into the industry
porter five forces -threat of substitutes: when is the threat of substitutes high?
-substitute has attractive price-performance tradeoff
-buyers switching cost to substitute is low
-buyer are not loyal to any of the industry competitors
what is the primary impact of substitutes (porter 5 forces)
the limit placed on the pricing flexibility of the industry competitors
porter five forces -threat of new entrants: when is the threat of new entrants high? What barriers to entry are there?
-when there are now or low barriers of entry and the industry avg profitability is high
barriers to entry
-economies of scale
-network effects
-customer switching costs
-capital requirements
-advantages independent of size
-government policy
-credible threat of retailation
porter five forces -competitive rivalry
the amount of competition for market share and profitability
-other 4 forces put pressure on rivalry
-the stronger the forces the stronger the intensity
when do firms have less rivalry ( porters 5 forces)
-high buyer switching costs
-low exit barriers
-economies of scale
-more industry concentration
-more product differentiation (the herogenous or dissimilar products are the more attractive the industry)
are industries static or dynamic (porter)
industryies are dynamic. porters 5 forces analysis is a snapshot as of a point in time and needs to be revisited periodically
how are industries dynamic?
-barriers to entry can be made more or less difficult (patents, buyer loyalty, technology)
-supplier power can change ( vertical integration)
-technology ( new products or leapfrog product lines, capacity)
-competitor rivalry intensifies as industries mature
-sociocultural, demographic, technological, etc changes impact buyer preferences
what is a complement? benefits?
a product, service, or competency that adds value to the original product offering when the two are used in tandem.
tends to result in higher margins and profits for industry competitors. they stimulate demand
How can companies eliminate obstacles to firm profitability?
-increase product differentiation
-diversify product lines
-introduce or increase switching costs
-innvoate to increase product value
-alter bargaining relationships between industry competitors buyers and suppliers
-build barriers to entry to keep new competition out
-develop complement or build strategic partnerships w/ complement providers
internal analysis
analyze and assess the internal capabilities and resources of the organization and to evaluate the firm’s ability to leverage its strengths or mitigate its weaknesses when pursuing external opportunities or protecting the firm against external threats.
Sources of Competitive Advantage
-core competencies
-resources
-capabilites
-activites
Sources of Competitive Advantage - core competencies
–unique strengths that drive competitive advantage
Sources of Competitive Advantage - resources
–tangible and intangible assets of the firm
Sources of Competitive Advantage - capabilities
organizational and managerial skills, what a firm can do
Sources of Competitive Advantage - activities
transform inputs into outputs (goods or services). business processes
resource-based view
relies on resources
tangible and intangibles
that must be
heterogenous and immobile
and have vrio attributes to become
vrio resources
that provide
competitive advantage
Resource-Based View - tangible
-easiest to identify
-physical assets (land,buildings, equipment
-financial resources
-need to understand their potential for creating competitive advantage
-dont provide as much advantage because other companies can just buy them
Resource-Based View - intangible
-more likely than tangible to create a sustainable competitive advanatage
-difficult to measure (especially on balance sheets)
-large market to book disparities
important ex: brands technology / intellectual property
-other companies can’t buy this
- more likely to create a competitive advantage than tangible resources
Resource-Based View - tangible / intangible: human capital
-have characteristics that are both intangible and tangible
-skills, knowledge, knowhow
-most important resource for many firms is human capital
-differ from intangible resources because firms don’t own humans
Resource-Based View - heterogenous
-skills, capabilities, and other resources that organizations’ possess differ from one firm to another
Resource-Based View - immobile
they cannot be easily transferred to a different organization
vrio acronym
for a resource to provide competitive advantage it must be vrio resource
valuable
rare
costly to Imitate
organize to capture value
VRIO Analysis steps
if a resource is
not valuable then eliminator or outsource ( be cost effective)
-competitive disadvantage
if a resource is
valuable but not rare then keep it but focus on being cost effective
-competitive parity
if a resources is
valuable, rare, but not costly to imitate then find ways to protect it or innovate to stay ahead of competition
-temporary competitive advantage
if a resource is rare, costly to imitate, but not organized to capture value then it’s probably not contributing to competitive advantage or parity. license if possible or modify org. to exploit it
-temporary competitive advantage
if a resource is
valuable, rare, costly to immitate, AND the firm is organized to capture it’s value
then sustained competitive advantage
according to vrio, when can a firm get a sustained competitive advantage
a firm can only gain a sustained competitive advantage if it has the resources and capabilities that satisfy VRIO requirements
why would a resource be costly to imitate?
-historical condition- resources developed over a long period of time (brand reputation)
-causal ambiguity- competitiors don’t know what is giving you an advantage
-social complexity - resources and capabilities are interwoven in the fabric of a frim’s culture and interpersonal relationships. two or more things combine to create a resource
competitive conformity ( vrio)
the firm is not worse than its competitors, but it’s not better either
happens when a resource is valuable but not rare
value chain analysis (value chain framework)
supporting activities and primary activities create margin
supporting activities
r + d
information systems
hr
firm infrastructure
accounting finance and planning
primary activities
inbound logisitics
manufacturing and assembly
distribution
marketing and sales
post-sales support
inbound logistics (value chain framework)
supply chain management or transportation. anything involved in order planning, placement, receiving storing, or distributing raw material.
commonly outsourced ( not a competitive advantage)
manufacturing and assembly (value chain framework)
the stage where raw materials and other inputs are turned into product
manufacturing for industrial companies and for service related companies a process that supports value creation (claims processing)
distribution (value chain framework)
distribution of final product to customers
the value created is place value
marketing and sales (value chain framework)
advertising, promotion, sales force organization, selecting distribution channels, pricing and managing customer relationships and post sales support
post-sales support (value chain framework)
-activities such as installation, training, maintenance, repair, warranty, and other after sales services.
what does (value chain analysis do?
helps you understand how the firm create value for it’s customers
what is a value chain?
the full range of activities a firm performs to bring a product from conception to delivery. the full range of activities a firm performs to bring a product from conception to delivery.
r&d (support) (value chain framework)
researching the firms market and customer needs and developing new and improved products and services to fit these needs
information systems (support) (value chain framework)
technology can be used to develop a prodcut
hr (support) (value chain framework)
activities involving hiring and retaining employees and ensuring employees are placed in the right jobs
firm infrastructure (support) (value chain framework)
refers mainly to the management of the firms physical infrastructure including the assets of the firm
accounting, finance, and planning (support) (value chain framework)
adminstrative functions that support many of the planning and control functions of the organization
(Ratio Analysis and Benchmarking)
what is the primary objective of porters 5 forces? add to assessment page
asset specificity add to assessment page
what 3 (+ one extra) financial documents are used for developing ratios?
-bs
-is
-statement of cash flows
-+ operational metrics and cost accounting data
what are the 4 basic types of ratios?
-activity and asset quality
-liquidity
-capital adequacy
-earnings and profitability
(internal analysis) Activity and Asset Quality Ratios - days sales outstanding
how well a business can issue credit to customers and be paid back on a timely basis
can be an indicator of product quality issues or taking on bad credit risks
(internal analysis) Activity and Asset Quality Ratios - inventory turnover
the time it takes to sell inventory
low -> too much inventory and risk of it becoming obsolete
high-> could be due to poor planning
(internal analysis) Activity and Asset Quality Ratios - asset turnover
the value of sales or revenues relative to the value of it’s assets
indicator of the efficiency that the company is using it’s assets to generate revenue. higher is more efficient
(internal analysis) Liquidity Ratios - Current Ratio
compares current assets to current liabilities
does the business have enough immediate assets to pay back immediate liabilites? ratio less than 2 is liquidity risk
(internal analysis) Liquidity Ratios - Quick Ratio
measures level o the most liquid current assets availabel to cover current liabilities. excludes inventory and pre-paid expenses which are more difficult to turn into cash
a higher quick ratio means a more liquid position. quick ratios less than 1 are liquidity risk
(internal analysis) Capital Adequacy Ratios - debt to equity ratio
compares the proportion of debt to equity to see if a business has taken on too much debt. the higher the number the more leverage (and risk)
(internal analysis) Earnings and Profitability Ratios - gross margin
proportion of earning generated by the sale of goods or services before admin and other non-product expenses
a decline in this could signalpricing pressure, cost control issues or and increasing cost of inputs
(internal analysis) Earnings and Profitability Ratios - net profit margin
proportion of net profits to sales.
low proportion can indicate a bloated cost structure or pricing pressure
(internal analysis) Earnings and Profitability Ratios - return on assets
ability of management to efficiently use assets to generate profits
low return indicates a bloated asset base or poor sales
(internal analysis) Earnings and Profitability Ratios - return on equity
measure of financial performance
-return on net assets (assets - debt = equity)
(internal analysis) process benchmarking - types
- Internal (across organizational units)
- Competitive (often sponsored by Industry Associations or consulting firms)
- Non-Competitive (functional or capability)
(internal analysis) process benchmarking - objectives
- Identify strengths and weaknesses
- Identify and adopt best practices
(internal analysis) common forms of benchmarking
process
product
function
financial
performance
(internal analysis) common forms of benchmarking - process
identify best practices and reduce costs
(internal analysis) common forms of benchmarking - product
competitive (external analysis)
(internal analysis) common forms of benchmarking functionional
entire business function (hr for example). decide whether to outsource
(internal analysis) common forms of benchmarking - financial
financial analysis to assess overall competitiveness
(internal analysis) common forms of benchmarking performance
assessment of competitive positions ( external analysis)
what is the purpose of internal analysis
identify firm strengths and weaknesses relative to the opportunities and threats identified in external analysis
SWOT framework
internal positive - strengths
internal negative - weakness
external positive - opportunities
external negative - threats
SWOT strengths
positive attributes, tangible and intangible, internal to the firm
core competencies and vrio resources
ex
* brand reputation,
* intellectual property,
* customer relationships,
* and exclusive business partnerships.
SWOT weaknesses
factors that are within the control of management that detract from the firm’s ability to obtain or maintain a competitive advantage
- lack of expertise,
- limited resources,
- lack of access to skills or technology,
- inferior service offerings,
- poor location,
- poor geographic coverage,
- poor reputation,
- negative publicity,
- the lack of access to distribution channels,
- inadequate cash flow and other financial weaknesses
SWOT opportunities
external positives from which the firm hopes to benefit. These opportunities reflect the potential the firm can realize through formulating and implementing strategy
ex
* lifestyle changes,
* resolutions of problems associated with current situations,
* positive market perceptions about the business,
* competitor missteps,
* improving economic conditions,
* or the ability to offer greater value that will create additional demand.
SWOT threats
factors beyond management’s control that can place the firm’s business strategy or the business itself at risk. A threat is a challenge created by an unfavorable trend or development that may lead to deteriorating revenues or profits. Competition, existing and potential, is always a threat.
