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
Corporate parent owns subsidiary
Directs it via command and control
parent subsidiary relationship
mix of vertical integration and market exchange. Upstream, a producer might manufacture some of the input itself and buy the remaining portion from independent firms
tapering integration
a long-term, result-oriented business relationship between the Customer and the Service Provider
strategic outsourcing
An increase in the variety of products/services
a firm offers or
the markets and geographic regions
in which it competes
diversification
Derive more than 95% of revenue from one business
Birkenstock, Coca-Cola, Facebook
single business
Between 70% and 95% of revenue from one business
Harley Davidson, Nestlé (Switzerland), UPS
dominant business
Derive less than 70% of revenue from one business
Remainder of revenue comes from business linked (related) to main line of business
related (constrained or linked) diversification
single business, dominant business, related diversification, unrelated diversification
types of diversification
High and low levels of diversification = lower performance
Moderate levels of diversification = higher firm performance
(bell curve graph)
relationship between diversification and firm performance
No businesses share competencies
Example: Berkshire Hathaway, Yamaha (Japan)
Samsung and LG (S. Korea), Tata Group (India)
“Chaebol”: a large family-owned business
conglomerate
unrelated diversification
Increase in costs
In-house suppliers not exposed to market competition
Reduction in quality
Know there is always a buyer
Reduction in flexibility
Potential for legal repercussions
Monopoly concerns
risks of vertical integration
Voluntary arrangements between firms that involve sharing of knowledge, resources, and
capabilities with the intent of developing processes, products, or services
strategic alliance
- strengthen competitive position
- enter new markets
- hedge against uncertainty
- access critical complementary assets
- learn new capabilities
why firms enter strategic alliances
- partner selection and alliance formation
- alliance design and governance
- post-formation alliance management
phases of alliance management
More frequent transactions allow firms to demonstrate their reliability and good faith more quickly, thus potentially building trust sooner.
importance of interfirm trust
Alliance experience may increase
performance
Dedicated alliance function
increases performance
Example: Eli Lilly
* Office of Alliance Management
* Each alliance managed by
a three-person team
– “Alliance Champion”
– “Alliance Leader”
– “Alliance Manager
relationship between alliances and firm performance
The joining of two independent companies
Often companies of similar size
Forms a combined entity
Tends to be friendly
merger
Purchase of one company by another
Buying company is typically larger
Can be friendly or unfriendly
Considered hostile when the target firm does not wish to be acquired
accquisition
The target company does not
wish to be acquired
hostile takeover
Benefits of mergers & acquisitions are often hard to achieve.
Anticipated synergies don’t materialize.
Most mergers & acquisitions don’t positively impact firm performance
Stock prices usually go down when acquisition is announced
Investors think acquisitions are generally risky
Often result in destroyed shareholder value
Ex) Verizon’s acquisition of AOL & Yahoo for $9B,
but had to sell them for $4B
relationship between firm performance and mergers and acquisition
how firms achieve growth
build, borrow or buy framework
Process of closer integration and
exchange between different
countries and peoples worldwide
Made possible by:
Falling trade and investment barriers
Advances in telecommunications
Reductions in transportation costs
globalization
Country-level Impact: Increase in Living Standards
Multinational
Enterprises (MNEs
Foreign Direct Investment (FDI)
Global Strategy:
To gain and sustain a competitive
advantage when competing against other
foreign and domestic companies around
the world
Global brands
impact of globalization
Deploys resources and capabilities
in at least two countries
Need an effective global strategy
multinational enterprise
access to larger market,
low cost input factors,
develop new competencies
advantages of going global
liability of foreignness,
potential for loss reputation
potential for loss of intellectual property
disadvantages of going global
cultural
administrative & political
geographic
economic
Decide on what countries to enter
CAGE Distance framework
global standardization
transnational
international
multidomestic
types of global strategies
High-cost reductions & Low-local responsiveness
Economies of scale & location economies
Achieved through global division of labor where capabilities have lowest cost
Benefits: reduced labor costs, economies of scale, location economies
Risks: no local responsiveness, little or no product differentiation, risk of wage changes
global-standardization
High-cost reductions / High-local responsiveness
Used by MNEs that pursue a blue ocean strategy
“Think globally, act locally”
Benefits: reduced labor costs, economies of scale, benefits from global learning
Risks: difficult to implement, high failure rate
transnational
Sells the same products/services in both domestic & foreign markets
Low pressures for both local responsiveness & cost reductions
Used by MNEs with large domestic markets and with strong reputations and
brand names
international
Used to maximize local responsiveness (low on cost reductions)
Local consumers ideally perceive products as local
Duplication of key business functions across countries
multidomestic
Benefits:
- highest possible local responsiveness
- reduced exchange rate exposure
Risks:
- duplication of units is expensive
- little economies of scale
- little or no learning across regions
benefits/risks of multidomestic
Benefits:
- leverage home-based core competencies
- utilize economies of scale
- low-cost implementation through exporting, liscensing & franchising
Risks:
- no or limited local responsiveness
- affected by exchange rate
- IP embedded in products/service can be expropriated
benefits/risks international strategy
the company must meet that exchange’s minimum financial and non-financial requirements or lsting standards
how a public stock company is set-up
high visibility
adhere to highest ethical standards
unethical behavior can destroy reputation
benefits & issues with public companies
Principal: hires, monitors, and compensates
Agent: performs work, provides time and talent
Both: information asymmetry
Core assumptions:
Managers (agents) are opportunistic and self-interested
Risk aversion of agents
Information asymmetry between principals and agents
principal-agent problem
When one party is incentivized to take undue risks or shirk responsibilities, the
costs are incurred to the other party
Ex) when the agent is able to do the work but may decide not to do so
moral hazard
A system of mechanisms to direct and
control an enterprise to ensure it pursues
its strategic goals successfully & legally
corporate governance
- board of directors
- executive compensation
- market for corporate control
- auditors
- government regulators
- industry analysts
- business ethics
corporate governance mechanism
Agreed-upon code of conduct in business, based on societal norms
business ethics
Strategists should ask:
Is the action within the acceptable norms of professional behavior?
As outlined in the organization’s
code of conduct
As defined by the profession at large
Would you feel comfortable explaining and
defending the decision in public?
How would the media react?
How would the company’s stakeholders
feel about it?
things to consider when facing an ethical dilemma
Translates strategy into action by detailing the firm’s competitive tactics and
initiatives
critical to achieving a competitive advantage
business model
- razor-razorblades
- subscription
- pay as you go
- freemium
- wholesale
- agency
- bundling
popular business models
an increased likelihood of selecting inferior alternatives
Ex: when agents misrepresent their ability to do the job
adverse selection
costs incurred to prevent agency problem
- monitoring cost
- company structuring (board of directors)
agency cost
