Ch 6: strategic direction (final exam)

Question 1

What is the first step in formulating a company’s technological innovation strategy?

Answer 1

To assess the current position and define the strategic direction for the future.

Question 2

What are two common tools for assessing the external environment of a firm?

Answer 2

• Porter’s five forces

- Stakeholder analysis

Question 3

What does the Porter’s five forces model essentially show?

Answer 3

That the attractiveness of an industry, and a firm’s opportunities and threats, are determined by five forces. For firms, this can be useful in finding the strategic direction

Question 4

What are the five forces (Porter)?

Answer 4

1. Degree of existing rivalry (competitors)
2. Threat of potential entrants
3. Bargaining power of suppliers
4. Bargaining power of buyers
5. Threat of substitutes

Question 5

What is a sixth force (Porter) that has been acknowledged in later years?

Answer 5

The role of complements (products that enhance the usefulness/desirability of a good), influenced by price, quality and availability.

• How important are complements?
• Are complements differentially available for various rivals?
• Who captures the value offered by the complements?

Question 6

What shapes the degree of existing rivalry?

Answer 6

• The number and relative size of competitors. More competing firms of comparable size = more competitive industry (exception: oligopolistic industries).
• Differentiation degree (high=less direct rivalry=appealing different segments)
• Demand conditions (increasing demand=more revenues=less competitive pressure)
• Exit barriers in declining industries

Question 7

What are oligopolistic industries?

Answer 7

Highly consolidated industries with a few large competitors.

Question 8

What are exit barriers?

Answer 8

Costs or other commitments that make it difficult for firms to abandon an
industry (large fixed-asset investments, emotional commitment, etc).

Question 9

What influences the threat of potential entrants?

Answer 9

• Degree of attractiveness (profitable, growing or otherwise alluring industry)
• Height of entry barriers.
  (partnership can sometimes lower start-up costs)

Question 10

What are entry barriers?

Answer 10

Conditions that make it difficult or expensive for new firms to enter an industry (government regulation, large start-up costs, brand loyalty, proprietary technologies).

Question 11

What influences the bargaining power of suppliers?

Answer 11

• Reliance on one/few suppliers. (few or highly differentiated = little choice in buying decisions = little leverage in negotiations)
• How dependent the supplier is on us as a buyer
• Switching costs (we have SC = higher supplier bargaining power)
• Vertical backward/forward integration

Question 12

What are switching costs?

Answer 12

Factors that make it difficult or expensive to change suppliers or buyers, such as investments in specialized assets to work with a particular supplier or buyer.

Question 13

What is vertical integration?

Answer 13

Getting into the business of one’s suppliers (backward) or one’s buyers (forward).

Question 14

What influences the bargaining power of buyers?

Answer 14

• Degree to which they are reliant on each other.
• Highly differentiated product = less bargaining power of buyers.
• Buyers facing switching costs = less bargaining power of buyers.
• Backward integration threat = higher bargaining power of buyers. Firm forward integrate = less bargaining power of buyers.

Question 15

What are substitutes and what influences the threat of them?

Answer 15

Products or services that are not considered competitors, but fulfil a strategically equivalent role for the customer.

• More potential substitutes, and the closer they are in function to the firm’s product/service, the greater the threat of substitution.
• relative price.

Question 16

What are the two purposes that stakeholder models are often used for?

Answer 16

1. Strategic stakeholder analysis; emphasis on the stakeholder management issues that are likely to impact financial performance.
2. Normative stakeholder analysis; emphasis on the stakeholder management issues the firm ought to attend to due to their ethical or moral implications.

Question 17

What are the steps of stakeholder analysis?

Answer 17

1. Identify all the parties that will be affected by the firm’s behavior; the stakeholders.
2. Identify what each stakeholder’s interests are, what resources they contribute with, what claims they are likely to make, and which are the most important stakeholders.

Question 18

What is Porter’s model of a value chain?

Answer 18

A tool for internal analysis. Activities are divided into primary activities and support activities. Each activity is considered as how it contributes to the overall value produced by the firm. Once strengths and weaknesses are identified, the firm can see which activities to leverage in the future strategic intent (to get sustainable competitive advantage).

Question 19

What are primary activities in Porter’s model of a value chain?

Answer 19

1. Inbound logistics; activities required to receive, store, and disseminate inputs.
2. Operations; activities involved in transforming inputs to outputs.
3. Outbound logistics; activities required to collect, store, and distribute outputs.
4. Marketing and sales; informing buyers of products to induce their purchase.
5. Service; after-sales activities required to keep the product working effectively.

Question 20

What are support activities in Porter’s model of a value chain?

Answer 20

1. Procurement; acquisition of inputs, but not their physical transfer.
2. Human resource management; recruiting, hiring, training, compensating personnel.
3. Technology development; developing and managing equipment, hardware, software, procedures, and knowledge needed for inputs→outputs).
4. Infrastructure; functions such as accounting, legal counsel, finance, planning, public affairs, government relations, quality assurance and general management for smooth functioning.

Question 21

To be a potential source of SUSTAINABLE competitive advantage, resources must be:

Answer 21

• rare
• valuable
• durable
• inimitable (tacit, socially complex, causally ambiguous, first-mover advantage)

Question 22

What are tacit resources?

Answer 22

Resources of an intangible nature (such as knowledge) that cannot be readily codified.

Question 23

What are socially complex resources?

Answer 23

Resources or activities that emerge through the interaction of multiple individuals.

Question 24

What is causal ambiguity?

Answer 24

The relationship between a resource and the outcome it produces is poorly understood (the causal mechanism is ambiguous).

Question 25

What are a company’s core competencies?

Answer 25

Competencies that differentiate the company strategically. Combines multiple primary abilities.

• Difficult to imitate.
• Depend on building high-quality relationships across different functions and business units.

Core competencies can be viewed as roots, that core products grow from, and then give rise to business units, whose fruits are the end products. Can be redeployed across units in the organization.

Question 26

What are three tests suggested by Prahalad and Hamel for identifying core competencies?

Answer 26

1. Is it a significant source of competitive differentiation? Unique signature? Significant contribution to the value a customer perceives in the end product?
2. Does it transcend a single business? Does it cover a range of businesses, both current and new?
3. Is it hard for competitors to imitate? In general, competencies that arise from the complex harmonization of multiple technologies will be difficult to imitate.

Question 27

What does viewing business as a portfolio of core competencies enable?

Answer 27

Managers can focus on value creation and NPD instead of cost cutting and opportunistic expansion.

Question 28

What is the risk of core rigidities?

Answer 28

The things that a firm excels in can sometimes enslave it, making the firm rigid and overly committed to inappropriate skills and resources.

• Incentive systems favouring activities that reinforce the core competencies; inhibit/discourage development of new core competencies (exploratory).
• Limited flexibility; difficulties assimilating and utilizing things outside path.

Question 29

What are dynamic capabilities and when can they be important?

Answer 29

A set of abilities that make a firm more agile and responsive to change.

Extremely useful in fast-changing markets. Be able to quickly adapt to emerging markets and major technological discontinuities.

Question 30

What is a firm’s purpose and how is it accomplished?

Answer 30

To create value; performance for customers, well-being for employees, returns for shareholders.

Accomplished through developing new businesses and markets, and leveraging resources, guided by the strategic intent.

Question 31

What is a firm’s strategic intent?

Answer 31

A long-term goal that is ambitious, builds upon and stretches the firm’s existing core competencies, and draws from all levels of the organization.

• Looks 10-20 years ahead
• Clear milestones for employees to target.

Forward-looking -> not too focused on markets they have already served in the past.
-> developing products that will meet future market requirements.

–> Identify resources and capabilities required to close the gap between the strategic intent and the current position.

Question 32

What is the balanced scorecard?

Answer 32

How a firm measures performance influences whether and how they pursue their strategic objectives.
- Should be a coherent and integral part of the management process.

The balanced scorecard emphasizes four perspectives that the firm should take in when formulating goals that target critical success factors and in defining measures:

1. Financial perspective.
2. Customer perspective.
3. Internal perspective.
4. Innovation and learning perspective.