Ch.1 Flashcards
Memorize
firm’s strategy
actions that managers take to attain the goals of the firm.
profitability definition
rate of return the firm makes on its invested capital
profit growth
percentage increase in net profits over time
enterprise valuation
profitability, profit growth
profitability (table)
reduce costs, add value and raise prices
profit growth (table)
sell more in existing markets, enter new markets
Competitive advantage theories
your value defined by clients+suppliers
Firm selects value
Value is A moving target It’s not static
To increase profitability…
value must be created for the consumer
The more value customers place on the firm’s products
the higher the price the firm can charge..
The value created by a firm is measured by
- the difference between
V - (the price that the firm can charge for that product given
competitive pressures)
C -(the costs of producing that product)
Perceived Utility, Price, Total Cost
Buyer’s Value & Seller’s Value
Firms can increase their profits..how?
• by adding value to a product
- so that customers are willing to pay more for it
• by lowering the costs
two basic strategies for improving a firm’s profitability:
a differentiation strategy
• a low cost strategy
Strategic Fit
•to attain superior performance and earn a high return on capital,
- its strategy must make sense given market
conditions.
The operations of the firm
must support the firm’s strategy
The organizational architecture of the firm
must match the firm’s operations and strategy
• If market conditions shift
– so must the firm’s strategy, operations, and
organization
Firms that operate internationally are able to:
Expand the market for their domestic product offerings
Realize location economies
Earn a greater return
Realize greater cost economies from experience effects
Core competencies enable the firm to
• reduce the costs of value creation
• to create perceived value in such a way that premium
pricing is possible
Location Economies
• Firms can realize location economies – (the economies that arise from performing a
value creation activity in the optimal location for that activity, wherever in the world that might be)
Location Economies
•Multinationals
-take advantage of location economies -create a global web of value creation activities
Two effects of location economies
• It can lower the costs of value creation
-help the firm to achieve a low cost position
• It can enable a firm to differentiate its product offering from the offerings of competitors
Some Caveats
- Introducing transportation costs and trade barriers complicates this picture
- Political risks must be assessed when making location decisions
•The experience curve
- the systematic reductions in production costs that have
been observed to occur over the life of a product
Learning Effects
•cost savings that come from learning by doing
• So, when labor productivity increases,
- individuals learn the most efficient ways to perform
particular tasks, management learns how to manage the new operation more efficiently
Economies of Scale
- the reductions in unit cost achieved by
producing a large volume of a product.
Sources of economies of scale :
– the ability to spread fixed costs over a large
volume – the ability of large firms to employ
increasingly specialized equipment or personnel
Strategic Significance
Porter’s 5 Forces
Supplier Power Degree of Rivalry Entry Barriers Threat of Substitutes Buyer Power
