Corporate Strategy Key Terms Flashcards
What is competitive advantage?
The ability to outperform competitors or the capacity to increase added value.
What is the value chain?
A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product (good and/or service) to end customer.
It is a representation of the firm’s set of activities and can be used to separate and analyse the different activities of the firm.
What are the primary activities in the value chain?
Inbound logistics, operations, outbound logistics, marketing and sales and service.
What are the support activities in the value chain?
Firm infrastructure, Human Resources, technology development, procurement.
What is organizational structure?
Organisational structure is how activities in an organization are divided, for reporting structure, etc. It can be by:
Function (i.e. task: HR, marketing)
Division (i.e. product, geographical)
Matrix (mix of the two)
How is profit measured?
Profit is measured in two ways:
Size dependent; Earnings before interest and taxes captures the operating income. Net income can give an idea of the general wealth of the company.
Size Independent; Return on total assets or return on total sales.
What are economies of scale? When do we get them?
Reduction in unit costs deriving from increased output of a product. They can arise b/c of:
- inverse relationship between the quantity produced and per-unit fixed costs, or (use of machine per item made, machinery is a fixed cost)
- for decrease in variable costs associated to increased production levels (ex: bargaining power)
What is economies of scope?
Producing two goods together is cheaper than separately. (Ex: both cakes and cupcakes in same oven).
Reductions in unit costs deriving from the fact that the total cost of producing two different goods together in one firm is lower than the cost of producing them separately in two firms.
What is economies of learning?
Cost reduction b/c you get better at production – less waste, more know-how.
Reductions in unit costs due to accumulation of experience and know-how over time. They do not depend on producing more quantity or a wider portfolio, but from becoming a true specialist.
What is switching cost?
Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers or products. Mostly monetary, but also can be psychological, effort-based, or time-based.
What is economic rent?
Economic rent is the positive difference between the actual payment made for a factor of production (such as land, labor or capital) to its owner and the payment level expected by the owner, due to its exclusivity or scarcity.
Market inefficiencies or information asymmetries are usually responsible for economic rent.
Examples: shortage of workers, or a buyer will pay more for an item/value it at a higher price than it is sold for. When one party in transaction has more information, ex: buying a used car from owner.
What are some examples of economic rent?
Shortage of workers.
When a buyer will pay more for an item/value it at a higher price than it is sold for.
When one party in transaction has more information, ex: buying a used car from owner.
What is monopoly rent?
Monopoly rent refers to economic rents derived from monopolies, which can result from 1- denial of access to an asset or 2- the unique qualities of an asset.
A situation in which a monopoly producer lacks competition and can sell its good and services at a price far above what the otherwise competitive market price would be, at the expense of buyers.
What is competition and what does it mean?
Competition is a scenario where different economic firms are in contention to obtain goods that are limited.
Causes commercial firms to develop new products, services and technologies, which give consumers greater selection and better products.
Greater the competition, the lower the prices.
What is industry?
A branch of the economy that produces a closely related set of raw materials, goods or services.
A classification valuable for economic analysis, as it leads to largely distinct categories with simple relationships.
What is market share?
The percentage of total sales in an industry generated by a particular company.
A key indicator of a company’s competitiveness. When a company increases market share, this can improve its profitability.
What is value creation?
The process in which new value (economic worth for an increase in utility) is generated.
Value creation = total customer value - real costs of production
Willingness to pay = value creation.
What is value appropriation?
Value appropriation is the process through which the value that is created for the market place is extracted.
What is competitive advantage?
A firm possesses a competitive advantage over direct competitors when it earns (or has the potential to earn) a persistently higher rate of profit.
Why are some companies so much more successful than others?
Companies are successful if they create customer value with resources that are rare and hard to imitate.
Willingness to pay = value creation
What are some examples of organisational capabilities/resources?
Resources include all assets, capabilities and organisational processes, firm attributes, products, information knowledge, etc.
What is creating customer value?
Creating customer value is a way to create firm value (and therefore profits).
The questions are:
1. Does a resource create value? What is the willingness to pay vs what the customer actually pays?
- How do customers/firms appropriate some share of the value created and how?
If the net customer value is negative, it is then more expensive to create this than the customer benefits from (ex: a service/feature that a customer does not care about).
What are the four requirements for a resource to be valuable?
VRIO:
V - Valuable: Resource creates customer value
R - Rare: Resource is rare, not all firms have it
I - Imitable: Difficult to imitate or acquire
O - Organization: Firm can appropriate some of the customer value it creates
Why are some companies more attractive than others?
Because they have resources other companies do not have: look at VRIO/value creation analysis
Why are some industries more attractive than others?
Because the forces that depress profits are weak: look at Porter’s 5 Forces analysis
What is the strategic fit?
The strategic fit refers to the consistency of a firm’s strategy, first with the firm’s external environment and, second, with its internal environment, especially with its goals, values, resources and capabilities.
What is the difference between corporate strategy vs business strategy?
Corporate Strategy: Looks at industry attractiveness and asks, where to compete? Diversification, vertical integration, acquisitions, and resource allocation.
Business Strategy: Question is, how to compete? competitive strategy, how the firm competes in a particular industry.
What is total customer value?
Total customer value = the customer’s willingness to pay; the difference between W2P and the actual price is called the customer surplus and the difference between the minimum selling price and the actual price of the good on the market is the producer surplus.
What is the business environment consist of?
The business environment consists of all the external influences that impact its decisions and its performance. The core of the firm’s business environment is formed by its relationships with its customers, suppliers and competitors.
What does Porter’s Five Forces do?
Porter’s Five Forces of Competition Framework is the most widely used tool for analysing competition within industries. It looks at the profitability of an industry as determined by five sources of competitive pressure.
What is included in Porter’s 5 Forces?
Included are 3 sources of “horizontal” competition: from substitutes, from entrants and from estimated rivals.
There are also 2 “vertical” sources of competition: the power of suppliers and the power of buyers.
The stronger the 5 forces, the lower the profits and the less attractive the industry.
How do we appraise resources and capabilities’ potential for value creation?
We look at both the strategic importance of the resources and capabilities and their strength relative to competitor’s.
What is added value?
Added value is consumer’s willingness to pay - firm opportunity costs.
The price tells us how the value that is created is split between the customer and the firm.
In capturing value, what is a dual strategy?
A dual strategy for capturing value is increasing the consumer’s WTP and at the same time decreasing the firm opportunity costs.
What does industry evolution look like and why does industry change?
Industry changes with demand growth and creation and diffusion of knowledge.
How does a company choose which way they’d like to grow?
Decisive factors in deciding how to grow come to a decision about whether a company would like to acquire or form an alliance (as an external strategy) or build something internally.
