Chapter 5 and Week 4: Business Strategy Flashcards
Define strategic management
consists of analysis, decisions, implementations and evaluations a firm undertakes in order to create and sustain its competitive advantages
- The process is critical to firm performance and survival… can enhance survival chance
Define strategy
plans or actions taken in an effort to help an organization achieve its intended purposes
What is the purpose of the Five Forces Model?
Functions to determine the attractiveness of the industry environment, which helps us make strategic decisions about achieving goals or finding a position in the industry where we can best defend ourselves against competition
What are the Five Forces Model and who founded it?
Micheal Porter
- Threats of new entrants / new competitors
- Bargaining power of suppliers
- Bargaining power of customers
- Threats of substitute products or services
- Rivalry among existing firms
What are the 4 barriers and 1 threat in Threats of New Entrants?
Threats of New Entrants (person/group that enters)
* Take two forms: new start-ups and diversification of existing firms in another industry
5 barriers from new Entrants:
- Economies of Scale (likely a barrier)
○ New entrants point of view, have to compete with the cost advantages that the incumbents already have - Capital Requirements (likely a barrier)
○ Spending money on assets to start up an industry can be expensive
§ Such as air planes and parts for automobiles - Switching Costs (likely a threat)
○ The costs (monetary or psychological) to the buyer associated with changing from one store to another - Access to Distribution Channels (likely a barrier)
○ Incumbents control most of the distribution channels - Cost Disadvantages Independent of Scale (likely a barrier)
○ Independent economic factors that incumbents have over new entrants
§ They have for an ex. Governmental polices and legal protection (e.g. patents and trademarks)
What are the two major factors that contribute to Bargining power of Suppliers?
- Suppliers can exert power over incumbents by demanding better prices or threatening to reduce the quality of purchased goods/services
Two major factors that contribute to the Supplier’s Power
1. The Resources/Raw materials - can demand higher prices from incumbents
2. The number of suppliers relative to the number of incumbents in an industry
- When the number of suppliers is low, incumbents compete for them
What are the 2 factors and 2 power dimish factors that contribute to the Bargaining Power of Buyers?
- Buyers can affect industry performance by demanding lower prices or better quality of services, and playing incumbents against each other
- Switching Costs
○ Buyers can easily switch incumbents with no cost, while it does cost incumbents - Undifferentiated Products
○ Incumbents offer buyers similar products - gives the power to buyers to find alternatives from other incumbents - Importance of Incumbents’ Products to Buyers (Power diminished)
○ When products/services incumbents offer are important/critical to buyers - Number of Incumbents relative to the Number of Buyers (power diminished)
○ When there are few incumbents offering products/services that buyers need
What are the 3 factors that contribute to the Rivarly amongst firms?
- Lack of Differentiation or Switching Costs
○ When products are undifferentiated or the switching costs are minimal, customers’ choices are based on price and service - Numerous or Equally Balanced Competitors
○ When there are many incumbents in an industry, the likelihood of mavericks is great. Some firms believe they can initiate strategic action without being noticed - High Exit barriers
○ Economic, strategic, emotional factors that keep firms competing even though they may be earning low return on investments
Ex. government and social pressures
What are the 3 limitations of the Five Forces Model?
- Does not take the roles of technological change and government regulations into considerations
- Focuses primarily on the power relationships between each force at a given time
- Assumes that all incumbents experience the same power relationship with each force
What is the purpose of the VRIO Model?
Help managers examine the resources and capabilities in a systemic way
What does the VRIO Model mean by resources and capabilities? Give an example
Resources and capabilities include:
* Financial - debt, equity, retained earning
* Physical - machines, product facilities, plants and buildings
* Human - experiences, knowledge, risk-taking, judgment
* Organization - history, relationships, trust, culture
What 4 steps to the VRIO Model (explain each one) and who founded it?
Jay Barney
The Question of Value (V)
* Managers need to ask if their firm’s resources and capabilities add any value that will increase their ability to capture market share or enhance profitability
The Question of Rareness (R)
* Resources should be controlled by only a small number of firms in order for those firms to obtain competitive advantage
* The rareness (not a lot of people have it) of resources
The Question of Imitability (I)
* How long the rareness lasts - how quickly other companies can imitate it
The Question of Organization (O)
* Managers have to consider is whether their firms can be organized in efficient ways to exploit their valuable, rare, resources and capabilities to maximize their potentials
This is SWOT internal!
What Model does Strengths and Weaknesses (internal) correlate to and what model does Opportunities and Threats (external) correlate to?
SWOT Analysis
Strengths
Weaknesses
(VRIO Model)
Opportunities
Threats
(Five Forces Model)*
What are the two levels of strategies?
Business and Corporate
Define a Business strategy and what are the 3 factors within it?
A firm chooses to compete in a given market (One product)
- Cost Leadership ex. Walmart
* Reducing the economic costs of their competitors
a. Economies of scale
b. Learning curve economies: firms can reduce marginal costs by improving efficiency and decreasing the number of defects in production
c. Low-cost access to factors of production: access to low cost raw materials, labour, location,…
Product Differentiation
* Firms attempting to gain completive advantages by increasing the perceived value of their products
* Managers need to create a the value that is rare and difficult to be imitated or substituted
Focus
* Means targeting a particular buyer group, segment of the product line, or a geographic market
