FINAL Flashcards
The Strategic Management Process
A sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy; that is, a strategy that generates competitive advantages.
What is strategy?
A firm’s theory about how to gain competitive advantages.
Business Level Strategies
Actions firms take to gain competitive advantages in a single market or industry
Corporate Level Strategies
Actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously
Competitive Disadvantage
Achieved when you generate less economic value than your rivals
Competitive Parity
When a firm creates the same economic value as its rivals.
Temporary Competitive Advantage
Competitive advantages that last a short time
Sustained Competitive Advantage
Competitive advantages that last a long time
Economies of Scale
When a firm’s costs fall as a function of its volume of production
Diseconomies of Scale
When a firm’s costs rise as a function of its volume of production
Economies of Scope
The value of a firm’s products or services increases as a function of the number of different businesses in which that firm operates
U-Form Organizational Structure
Where different functional heads report directly to CEO; used to implement business-level strategies
M-Form Organizational Structure
Organizational structure for implementing a corporate diversification strategy whereby each business a firm engages in is managed through a separate profit-and-loss division
Corporate Diversification Strategy
When a firm operates in multiple industries or markets simultaneously
Product Diversification
When a firm operates in multiple industries simultaneously
Geographic Market Diversification Strategy
When a firm operates in multiple geographic markets simultaneously
Product-Market Diversification Strategy
Operating in multiple industries and in multiple geographic markets simultaneously
What are motivations for diversification?
- When valuable economies of scope are present
- Less costly for the firm to realize economies of scope than outside equity holders
Economies of Scope
Activities where the average cost of producing two different products from a range of businesses is less
Economies of Scale
The per-unit cost of production falls as the volume of production increases
Different Types of Economies of Scope
- Operational Economies of Scope
- Financial Economies of Scope
- Anticompetitive Economies of Scope
- Employee and Stakeholder Incentives for Diversification
Division
Each business that the firm engages in; aka a strategic business unit (SBU)
Board of Directors
Group of 10-15 individuals drawn from a firm’s top management and from people outside the firm who make decisions inline with the firm’s stakeholders
Senior Executive
President, CEO of a firm
Chairman of the Board
Person who presides over the board of directors; may or may not be the same person as a firm’s senior executive
Agency Problem
Separation of ownership (stockholders = principals) and management (agent) (corporation vs. division)
Transfer Pricing System
Manages the transfer of intermediate products or services among divisions
Nonequity Alliance
Cooperation between firms is managed directly through contracts, without cross-equity holdings or an independent firm being created (contracts)
Joint Venture
Cooperating firms form an independent firm in which they invest. Profits from this independent firm compensate partners for this investment (joint equity holdings)
Equity Alliance
Cooperative contracts are supplemented by equity investments by one partner in the other partner. Sometimes these investments are reciprocated. (cross equity holdings)
Adverse Selection
An alliance partner promises to bring to an alliance certain resources that it either does not control or cannot acquire
Moral Hazard
Partners in an exchange possess high-quality resources and capabilities of significant value to the exchange but fail to make them available to the other partners
Holdup
One firm makes transaction-specific investments in an exchange than partner firms make and the firm that has not made these investments tries to exploit the firm that has made the investments
What are the 3 Hazards of Strategic Alliances?
- Adverse Selection
- Moral Hazard
- Holdup
Acquisition
when a firm purchases a second firm
Merger
when the assets of two similar-sized firms are combined
Technical Economies
scale economies achieved when the physical processes inside a firm allow the same inputs to produce a higher quantity of outputs (e.g. marketing, production, experience, scheduling, banking, and compensation).
Pecuniary Economies
economies achieved by the ability of firms to dictate prices by exerting market power.
Diversification Economies
economies achieved by improving a firm’s performance relative to its risk attributes or lowering its risk attributes relative to its performance (e.g. portfolio management, risk reduction).
International Strategies
theory about how to gain a competitive advantage by operating in multiple countries simultaneously
Why do firms pursue International Strategies?
- To gain access to new customers for products or services
- To gain access to low cost factors of production
- To develop new core competencies
- To leverage current core competencies in new ways
- To manage risk
