MGMT 478 Exam #2 Flashcards
A firm that achieves superior performance relative to other competitors in the
same industry or the industry average
Always relative, not absolute
competitive advantage
- accounting profitability
- shareholder value creation
- economic value creation
ways to assess firm performance
- Helps managers achieve their strategic objectives more effectively
- Uses internal and external performance metrics
- Balances both financial and strategic goals
balanced scorecard
Three dimensions fundamental to sustainable strategy:
Profits: The economic dimension
The business must be profitable to survive
People: The social dimension
Emphasizes the people aspect
Planet: The ecological dimension
Emphasizes the relationship between business and the natural
environment
triple bottom line
Goal-directed actions managers take
To achieve competitive advantage
In a single product market
“How should we compete?”
Who: which customer segments will we serve?
What: customer needs will we satisfy?
Why: do we want to satisfy them?
How: will we satisfy our customers’ needs?
business level strategy
Unique features that increase value, so that consumers are willing to
pay a higher price.
The focus of competition:
Unique product features
Customer service
New product launches
Marketing & promotion
Competitive advantage achieved when:
(Value – Cost) > competitors’
differentiation
obtaining the lowest-cost position in the industry while
offering acceptable value
cost leadership
Successfully combining differentiation and cost-leadership activities
blue ocean strategy
Benefits:
Strengths when a price war ensues
Economies of scale (larger market share) allows to further lower prices
Risks:
High risk of replacement if a potent substitute emerges due to innovation
Potential to lose competitive advantage when the focus shifts from price to
non-price attributes
benefits/risks of cost leadership
Benefits:
Can contribute to low threat of entry & low threat of substitutes
Customer loyalty
Risks:
When differentiated products are commoditized, lose competitive advantage
Needs to be careful not to overshoot its differentiated appeal
Can increase costs, not perceived value
benefits/risks of differentiation
Graphical depiction of a company’s performance
Relative to its competitors
Shows focus or divergence
strategy canvas
The decisions and goal-directed actions
taken to gain & sustain competitive
advantage in several industries and
markets simultaneously
corporate level strategy
The process in which several steps in the production and/or distribution of a product or service are controlled by
a single company or entity
To increase that company’s power in the
marketplace
vertical integration
acquiring a business operating earlier in the supply chain
e.g., manufacturer integrates with raw materials
backward integration
Acquiring a business further up the supply chain
(activities closer to the customer)
e.g., a distributor buys a retailer
forward integration
Lowers costs
Improves quality
Facilitates scheduling and planning
Facilitates investments in specialized assets
Co-located assets, unique equipment, human capital
Secures critical supplies and distribution channels
benefits of vertical integration
Why do firms exist?”
Transaction cost:
All internal and external costs
associated with an economic exchange
TCE uses transactions (contracts) as
the basic unit of analysis
Firms are viewed as a bundle of contract
transaction cost economics
if in house costs are less than cost market, the firm should vertically integrate.
own production of inputs or own output distribution channels
how TCE applies to vertical integration
strategic alliances,
short term contracts
long-term contracts
licensing
franchising
equity alliances
joint ventures
parent-subsidiary relationship
alternatives to make-or-buy continuum
Firms send out request for proposal (RFP)
Competitive bidding for contracts
(less than a year in duration)
Benefits:
Allows longer planning period than market transactions
Lower prices due to competitive bidding
Drawbacks:
Firms responding to RFP have no incentive to make
transaction-specific investments
(e.g., new machinery)
Example:
General Motor’s car components
short-term contracts
Longer than a year in duration
Help facilitate transaction-specific investment
Enables firms to commercialize intellectual property
Example: Humulin (human insulin)
Developed by Genentech based on licensing agreement
Commercialized by Eli Lilly
licensing
Franchisor grants a franchisee right to use:
Trademark
Business processes
Franchisee provides to franchisor:
Up-front buy-in
Percentage of revenues
franchising
Partnership in which one firm takes partial ownership in the other
(i.e., buy stock or assets)
Why equity alliance?
Example: Coca-Cola & Monster $2B for a 16.7% stake in the company
Why not an acquisition?
Several wrongful death lawsuits
They can benefit from explosive growth
They can protect their wholesome image & brand
equity alliance
Two or more partners create and jointly own new firm
Long-term commitment facilitates transaction-specific investments
joint venture
