Cards from notes Flashcards
Porter’s Three Essential Tests are
attractiveness test
cost-of-entry test
the better-off test (most important)
Porter’s Three Essential tests are used for…
to evaluate whether diversification into a new business or market will create value. Can also be used for vertical integration
Four factors for success
Goals that are consistent and long term
Understanding of the competitive environment
Objective appraisal of resources
Effective implementation
Framework of strategy analysis have two components:
- Internal environment
- External environment (mostly industry analysis)
The mission statement describes…
organizational purpose: it addresses “why we exist”
The vision statement desribes…
“What we want to be”
Corporate strategy is…
Industry Attractiveness: Where to compete
the scope of the firm in terms of the industries and markets in which it competes.
choices over:
- geographical
- diversification,
- vertical integration,
- new ventures
- allocation of resources between the different businesses of the firm
Business strategy is…
Competitive advantage: How to compete
how the firm competes within a particular industry or market. If the firm is to succeed within an industry, it must establish a competitive advantage over its rivals. Hence, this area of strategy is also referred to as competitive strategy
Firm strategy can be described in two ways:
Strategy as Positioning / Competing for the present
- Where are we competing?
- How are we competing?
Strategy as Direction / Preparing for the future:
- What do we want to become?
- How will we get there?
The four parts of applying strategy analysis is…
- Setting the strategic agenda (Current strategy and performance)
- Analyzing the situation (Diagnose the performance, why is the performance good/bad?)
- Formulating strategy
- Implementing strategy
Stakeholder value is…
Total value creation
Shareholder value is…
Profit for market efficiency
PESTLE stands for…
Political
Economic
Social
Technological
Legal
Environmental
For industry analysis, this framework can be used to find environmental hinders
PESTLE
The core of the firm’s business environment is formed by its relationships with three sets of players:
- Customers
- Suppliers
- Competitors
Analyzing industry attractiveness can be measured using…
Porter’s Five Forces
Porter’s Five Forces are
- competition from substitutes,
- threat of entry
- competition from established rivals
- the bargaining power of suppliers
- the bargaining power of buyers
Resources are…
Productive assets owned by the firm
- Tangible (Physical assets)
- Intangible (Disney’s brand)
- Human resources
Capabilities are…
What the firm can do by combining resources effectively (e.g., organizational culture, operational expertise).
Competitive advantage is sustained by…
Isolating mechanisms
The isolating mechanisms are:
Preemption: Firms occupy strategic opportunities to limit rivals, such as launching many products, overinvesting in capacity, or building large patent portfolios.
Obscuring superior performance: One way to throw competitors off balance is to mask high performance so rivals fail to see your success until it’s too late.
Deterrence: Firms discourage competitors by signaling credible threats of aggressive responses, making imitation unprofitable
Causal Ambiguity: Rivals struggle to identify the exact reasons behind a firm’s success when it stems from a complex mix of resources and capabilities (e.g., Netflix’s blend of analytics, content design, and global-local integration)
Acquiring Resources and Capabilities: To imitate a competitor’s advantage, a firm must acquire the necessary resources and capabilities, either by buying or building them. Barriers include the transferability and replicability of these resources, which can vary across market contexts.
Cost advantage is achieved by…
Producing at lower cost while maintaining quality.
Drivers of cost advantage include:
Economies of Scale
Economies of Experience:
Process Technology
Input Costs (Advantages from location, supply ownership, or bargaining power.)
Differentiation advantage is…
offering unique value to customers compared to competitors
Vertical integration is…
a firm’s ownership and control of the stages in the value chain of an industry
The benefits of vertical integration are…
Technical Economies from the Physical Integration of Processes
Avoiding Transaction Costs in Vertical Exchanges
Coordination Benefits
The costs of vertical integration are…
Differences in Optimal Scale between Different Stages of Production
The Need to Develop Distinctive Capabilities
Problems of Managing Strategically Different Businesses
Competitive Effects
Flexibility
Investing in an Unattractive Business
Compounding Risk
Strategy is the link…
between the firm and its environment
Why do firms need strategy?
decision support: improves the quality of decision making
coordination and communication: Creates consistency and unity
target: Improves performance by setting high asperations
Value creation for shareholder is to…
operate in the interests of their owners (who
wish to earn profit)
Value creation for stakeholder is to…
maximize total value creation for customers, employees and society in whole
VRIO stands for…
Value: Does the resource add value by helping the company exploit opportunities or mitigate threats?
Rarity: Is the resource rare or unique compared to competitors?
Imitability: Is it costly or difficult for competitors to imitate the resource?
Organization: Is the company organized to effectively utilize and capitalize on the resource?
To appraise resources and capabilities, you can use…
VRIO
The 6th force in Porter’s Five Forces is…
Complements
A complement is…
Something that adds value while substitute reduces value.
Example: Ink to a printer
ROI means…
Return on Investments
measures the profitability or efficiency of an investment relative to its cost.
It is used to evaluate the financial returns of strategic decisions, helping managers assess whether initiatives, projects, or strategies contribute value to the organization
Margins are…
the proportion of revenue remaining after certain costs are deducted
Forward-Looking Performance Measures:
Stock market value
indicators of a firm’s effectiveness in generating profits:
ROCE (Return on capital employed)
ROA (Return on Assets)
ROE (Return on Equity)
For a resource or capability to be a source of competitive advantage, two conditions must be present:
Relevance
Scarcity
What is the most successful way of coping with a key weakness
outsource, because making own investment can be expensive, time-consuming, and demanding resources better used elsewhere
There are three types of profit:
Gross profit
Operating profit
Net profit
What is gross profit
sales revenue less - material cost
What is operating profit
gross profit less operating expences, before tax/interest
What is operating cash flow
Pengar som genereras av företagets dagliga verksamhet.
What is free cash flow
Visar hur mycket pengar företaget faktiskt kan använda för tillväxt, utdelningar eller att minska skulder
what factors affect industry rivalry
Concentration: The number and size distribution of firms competing within a market.
Diversity of Competitors: The ability of rival firms to avoid price competition by coordinating their prices depends on how similar they are in their origins, objectives, costs, and strategies.
Product Differentiation: The more similar the offerings among rival firms, the more willing are customers to switch between them.
Excess Capacity and Exit Barriers: Unused capacity encourages firms to offer price cuts to attract new business.
Cost Conditions: The ratio of fixed to variable costs affects the level of price competition.
What is an industry
firms within a broad sector
What is a market
the buyers and sellers of a specific product
What is key success factors
the general sources of competitive advantage in an industry
those factors within an industry that
influence a firm’s ability to outperform rivals.
Key success factors are found by looking at…
What do customers want and who are they?
How does the firm survive competition?
What is a business ecosystem?
a community of organizations, institutions, and individuals that impact the enterprise.
What is The Role of Resources and Capabilities in Strategy Formulation
Resources and capabilities are the internal foundations for a firm’s competitive advantage.
A firm’s strategy should exploit its resource and capability strengths while defending against its weaknesses.
What are some external sources of competitive advantage
Changing customer demand: Shifts in consumer preferences or needs
Changing prices of inputs: Changes in the cost of raw materials or labor
Technological change: Advances in technology that create new opportunities or challenges
What are the types of vertical integration?
Backward / upstream integration: a firm integrates into its suppliers’ activities
Forward / downstream integration: a firm integrates into its customers’ activities
What are the steps in the Framework for Analyzing Resources and Capabilities
- Identify the firms resources and capabilities
- Appraise the firms resources and capabilities in term of:
- Strategic importance
- Relative strength - Develop strategy implications for:
- Strengths
- Weaknesses
