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MGMT 290: Industry Analysis > Chapter 7 / Week 7: Leadership, Profitability, and Generic Strategies > Flashcards

Chapter 7 / Week 7: Leadership, Profitability, and Generic Strategies Flashcards

1
Q

eBook – Read page 52-53 Is the industry outlook conducive to good profitability.

A

eBook – Read page 52-53 Is the industry outlook conducive to good profitability.

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2
Q

PESTEL, five forces analysis, driving forces, strategy groups, competitor analysis, and key success factors—provides a useful perspective on an industry’s outlook for

A

future profitability.

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3
Q

The important factors on which to base a conclusion include (conclusion as in after you conduct the analyses provided in card 2)

A
  • How the company is being impacted by the state of the macro-environment. • Whether strong competitive forces are squeezing industry profitability to subpar levels.
  • Whether the presence of complementors and the possibility of cooperative actions improve the company’s prospects.
  • Whether industry profitability will be favorably or unfavorably affected by the pre-vailing driving forces.
  • Whether the company occupies a stronger market position than rivals. • Whether this is likely to change in the course of competitive interactions.
  • How well the company’s strategy delivers on the industry key success fact
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4
Q

As a general proposition, the anticipated industry environment is fundamentally attractive if it presents a company with:

A

Good opportunity for above-average profitability;

the industry outlook is fundamentally unattractive if a company’s profit prospects are unappealingly low.

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5
Q

When a company decides an industry is fundamentally attractive and presents
good opportunities,

A

a strong case can be made that it should invest aggressively to capture the opportunities it sees and to improve its long-term competitive position in the business.

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6
Q

When a strong competitor concludes an industry is becoming less attractive,

A

it may elect to simply protect its present position, investing cautiously—if at all—and looking for opportunities in other industries.

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7
Q

A competitively weak company in an unattractive industry may see its best option as

A

finding a buyer, perhaps a rival, to acquire its business

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8
Q

Grant, R. ((2013). Contemporary strategy analysis (8th ed.) West Sussex: Wiley Read pages 62-63

BEYOND

A

Grant, R. ((2013). Contemporary strategy analysis (8th ed.) West Sussex: Wiley Read pages 62-63

BEYOND

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9
Q

The level of industry profitability is neither random nor the result of entirely industry specific- influences:

A

it is determined by the systematic influences of the industry’s structure

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10
Q

Profits earned by the firms in an industry are determined by three factors:

A

1) The value of product to customers
2) The intensity of competition
3) The bargaining power of industry members relative to their suppliers and buyers

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11
Q

eBook – 139-148, 158-161 How to compete for advantage. Differentiation Strategy. Cost-leadership strategy.

BEYOND

A

eBook – 139-148, 158-161 How to compete for advantage. Differentiation Strategy. Cost-leadership strategy.

BEYOND

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12
Q

Business-level strategy

A

The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market

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13
Q

To formulate an appropriate business-level strategy, managers must answer the who, what, why, and how questions of competition:

A

■Who are the customer segments we will serve?
■What customer needs, wishes, and desires will we satisfy?
■ Why do we want to satisfy them?
■How will we satisfy them?

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14
Q

Competitive advantage is determined jointly by _____ and ______ effects

A

Industry

Firm

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15
Q

At the firm level, performance is determined by _____ and _________ relative to competitors

A

Value

Cost positions

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16
Q

Competitive advantage is based on

A

the difference between the perceived value a firm is able to create for consumers (V), captured by how much consumers are willing to pay for a product or service, and the total cost (C) the firm incurs to create that value.

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17
Q

The greater the economic value created = (V−C),

A

the greater is a firm’s potential for competitive advantage.

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18
Q

To answer the business-level strategy question of how to compete, managers have two primary competitive levers at their disposal:

A

value (V) and cost (C)

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19
Q

Strategic trade-offs

A

Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost.

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20
Q

A business strategy is more likely to lead to a competitive advantage if a firm has a clear strategic profile,

A

either as differentiator or a low-cost leader

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21
Q

blue ocean strategy

A

is only successful, in contrast, if the firm can implement some type of value innovation that reconciles the inherent trade-off between value creation and underlying costs.

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22
Q

There are two fundamentally different generic business strategies

A

1) differentiation

2) cost leadership.

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23
Q

A differentiation strategy (generic strategy)

A

Generic business strategy that seeks to create higher value for customers by delivering products or services with unique features, than the value that competitors create, while containing costs.

Incorporate features that appeal to buyers and create sustainably distinctive product

Use higher prices to recoup differentiations costs

Can be tangible or intangible

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24
Q

A cost-leadership strategy (generic strategy)

A

Generic business strategy that seeks to create the same or similar value for customers at a lower cost.

Leads to lower cost for consumers to buy at

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25
Q

These two business strategies are called generic strategies because

A

they can be used by any organization—manufacturing or service, large or small, for-profit or nonprofit, public or private, domestic or foreign—in the quest for competitive advantage, independent of industry context.

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26
Q

Because value creation and cost tend to be positively correlated

A

however, important trade-offs exist between value creation and low cost.

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27
Q

A business strategy, therefore, is more likely to lead to a competitive advantage if it allows a firm to either ______________ or __________ than its rivals that result in creating more value or offering similar products / services at lower costs

A

perform similar activities differently

perform different activities

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28
Q

Scope of competition

A

The size—narrow or broad—of the market in which a firm chooses to compete

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29
Q

Focused cost-leader-ship strategy

A

Same as the cost-leadership strategy except with a narrow focus on a niche market.

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30
Q

Focused differentiation strategy

A

Same as the differentiation strategy except with a narrow focus on a niche market.

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31
Q

The goal of a differentiation strategy is to

A

add unique features that will increase the perceived value of goods and services in the minds of consumers so they are willing to pay a higher price.

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32
Q

Economies of scale

A

denote decreases in cost per unit as output increases

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33
Q

Economies of scope

A

Savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology.

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34
Q

Here, we will study the most salient value drivers that strategic leaders have at their disposal, they are:

A

1) Product features
2) Customer service
3) Complements

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35
Q

The condition of ∆V > ∆C must be fulfilled if a

A

Differentiation strategy is to strengthen a firm’s strategic position and thus enhance its competitive advantage.

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36
Q

1) PRODUCT FEATURE

A

Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price

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37
Q

2) CUSTOMER SERVICE

A

Exceptional customer service such as not using a script when talking to customers, having free shipping on returns,

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38
Q

3) COMPLEMENTS

A

Complements add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for strategic leaders in their quest to enhance the value of their offerings.

Example: Smartphones and cellular services (one without the other is useless)

39
Q

The goal of a cost-leadership strategy is to

A

reduce the firm’s cost below that of its competitors while offering adequate value.

40
Q

Cost leader

A

as the name implies, focuses its attention and resources on reducing the cost to manufacture a product or on lowering the operating cost to deliver a service in order to offer lower prices to its customers.

41
Q

A cost leader can achieve a competitive advantage as long as

A

its economic value created

(V − C) is greater than that of its competitors

42
Q

The most important cost drivers that strategic leaders can manipulate to keep their costs
low are

A

1) Cost of input factors.
2) Economies of scale.
3) Learning-curve effects.
4) Experience-curve effects

43
Q

1) COST OF INPUT FACTOR

A

One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.

44
Q

2) ECONOMIES OF SCALE

A

Decreases in cost per unit as output increases.

Think of a bowl and the area that doesn’t go up (the middle) is the economies of scale

45
Q

What causes per-unit cost to drop as output increases (up to point Q1)? Economies of
scale allow firms to:

A

1) Spread their fixed costs over a larger output.
2) Employ specialized systems and equipment.
3) Take advantage of certain physical properties

46
Q

Minimum efficient scale (MES)

A

Output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.

47
Q

Diseconomies of scale

A

Increases in cost per unit when output increases.

48
Q

A differentiation strategy is defined by

A

establishing a strategic position that creates higher perceived value while controlling costs.

49
Q

A successful differentiation strategy is likely to be based on

A

unique or specialized features
of the product, on an effective marketing campaign, or on intangible resources such as a reputation for innovation, quality, and customer service

50
Q

The threat of entry is reduced:

A

Competitors will find such intangible advantages time-consuming and costly, and maybe impossible, to imitate.

51
Q

If the differentiator is able to create a significant difference between perceived
value and current market prices,

A

the differentiator will not be so threatened by increases in input prices due to powerful suppliers.

52
Q

Exhibit 6.8 (textbook green 159, ebook 157)

A

Good diagram comparing porters five forces and differentiation and cost leadership

53
Q

A cost-leadership strategy is defined by

A

obtaining the lowest-cost position in the industry while offering acceptable value.

54
Q

The success of cost leadership, differentiation, and focused variations thereof depends on context and relies on two factors:

A

How well the strategy leverages the firm’s internal strengths while mitigating its weak-nesses.

How well it helps the firm exploit external opportunities while avoiding external threats

55
Q

Pearce, Robinson (2015). Strategic management ((14th ed.). New York McGrawHill.

A

Pearce, Robinson (2015). Strategic management ((14th ed.). New York McGrawHill.

56
Q

To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas

A

1) Profitability
2) Productivity
3) Competitive position
4) Employee Development
5) Employee Relations
6) Technological leadership
7) Public Responsibility

57
Q

1) Profitability

A

Obviously need these, best measured in earnings per share or return on equity

58
Q

2) Productivity

A

Commonly used items for this: Number of items produced, number of services rendered per unit of input

Can be based on cost decreases, such as reducing defective items, customer complaints leading to litigation, or overtime

59
Q

3) Competitive position

A

Commonly used terms: Total sales or Market share

60
Q

4) Employee Development

A

Employee value education and training

61
Q

5) Employee Relations

A

Believe that productivity is linked to employee loyalty and to appreciation from managers

62
Q

6) Technological leadership

A

Firms must decide whether to lead or follow in the marketplace

Good technology helps the company

63
Q

7) Public Responsibility

A

Examples may be charitable donations, educational contributions, minority training, public or political activity, community welfare, or urban revitalization

64
Q

5 Qualities of long-term objectives

A

1) Flexible
2) Measurable
3) Motivating
4) Suitable
5) Understandable

65
Q

1) Flexible

A

Objectives should be adaptable to unforeseen or extraordinary changes in the firm’s competitive or environmental forecasts

66
Q

2) Measurable

A

Objectives must clearly and concretely state what will be achieved and when it will be achieved, thus measurable over time

67
Q

3) Motivating

A

Challenges evoke motivation when they are difficult, but not so hard they can not be completed

68
Q

4) Suitable

A

Objectives must be suited to the broad aims of the firm, which are expressed in its mission statement

69
Q

5) Understandable

A

Must understand what is to be achieved and the major criteria in which their performance will be evaluated

70
Q

Balance scorecard

A

Set of four measures directly linked to a company’s strategy: financial performance, customer knowledge, internal business processes, and learning and growth

71
Q

Generic strategy

A

A core idea about how a firm can best complete in the marketplace

72
Q

Shareholder value

A

Share price
Total return to shareholders
Market capitalization

Negatives: Stock prices are volatile, effects overall macro-economic forces, irrationality of stock price evaluations

These are not always the best measure of industry/firm attractiveness because:

73
Q

Return on invested capital (ROIC)

A

Best measure of performance and attractiveness in an industry

74
Q

Incumbent’s advantage

A

Deeper insights into needs of customers you serve + understand profitability of serving and retaining them = Knowledge of needs and profits are less susceptible to imitation than features of

75
Q

Multi-dimensional Approach to Assessing Attractiveness of an Industry

A

1) Quantitative approach

2) Qualitative approach

76
Q

1) Quantitative approach

A

Economic value
Shareholder value
Accounting/financial measures

77
Q

2) Qualitative approach

A

Leadership
Range of strategic options to gain Competitive advantage
Complements

78
Q

Firm’s Cost

A

= C

79
Q

Firm’s profit

A

= P-C

80
Q

Limitations of Accounting Data

A

Past performance
-Historical records look backward

Do not consider off-balance sheet items
-Assets owned or leased

Focus on tangible assets
-Difficulty with measuring intangible assets such as patents/trademarks, brand reputation, innovation, customer experience, quality

Differing financial structures/practices of firms make it difficult for direct comparison

Book value vs market value

81
Q

Growth Ratios

A

Measure change year over year

  • Sales
  • Various expense categories
  • Income
  • Earnings per share
  • Dividends per share
  • Price-earnings ratio

Indicate trends
-Ability to rationalize trends

82
Q

General Growth Ratio % =

A

(Current - past) / Past

83
Q

Profitability Ratios

A

See slides 20 + 21 for all the equations from Accounting 201

84
Q

Leverage Ratios

A

Indicate the source of the firm’s capital

  • Owners
  • Creditors

Leverage refers to using capital with a fixed interest charge to “amplify” profits in relation to equity shares

Most common ratio measures the % of total funds provided by debt

85
Q

Leverage / Solvency Ratios

A

See slide 23

86
Q

Liquidity/Activity Ratios

A

Indicators of a firm’s ability to meet short term obligations including:

  • Current liabilities
  • Currently maturing long term debt

Normal cash cycle (B2B)
Sales > Accounts Receivables > Cash

Indicate how effectively a firm is using its resources
-Compare revenues earned to the resources used in generating them

87
Q

Liquidity / Activity ratios

A

See slide 25

88
Q

Levels of competitive advantage

A 
From top to Bottom:
Distinct competence,
Core competences
Core Skills
Capabilities
89
Q

Costs can be categorized by:

A

Direct/Indirect
Variable/Fixed
COGS/Operations
Administration & Overhead

90
Q

Differentiation Advantages

A

Command premium prices for the firm’s products
Increased unit sales due to attractive differentiation
Brand loyalty that bonds buyers to the firm’s products

91
Q

Differentiation Risks

A

Adding too much so that product exceeds the needs and use patterns of most buyers
Overspending on efforts to differentiate the firm’s product offering
Competitors achieve new, more valued point of differentiation

92
Q

Uniqueness can be created through:

A

Product features and product performance
Complementary services
Brand image and intensity of marketing activities Technology embodied in design and manufacture
Quality of purchased inputs
Procedures impacting customer experience
Skill and experience of employees
Location

93
Q

Effective Low-Cost Approaches:

A

Pursue cost-savings that are difficult imitate.
Perform value chain activities more cost-effectively than rivals.
Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities.
Work to quickly achieve economies of scale and learning curve advantages

MGMT 290: Industry Analysis (11 decks)

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