Midterm Flashcards
Definition of Strategy (Michael Porter)
Strategy is about making trade-offs in competing.
The essence of strategy is choosing what not to do.
It involves doing different things or doing things differently.
Operational effectiveness (doing things better) is NOT strategy.
Successful strategy requires deepening a strategic position rather than compromising it.
What is competitive advantage?
superior performance relative to competitors or the industry average
What are the two ways to gain competitive advantage?
Offer higher-value goods/services than competitors.
Provide similar goods/services at a lower price.
Define economics for strategic managers
the science of decision making under scarcity
Describe the ways to create or capture value
Create value
- Increase consumers’ Willingness to Pay (WTP) without increasing costs.
- Decrease product costs without lowering WTP.
Capture value
- Creating value in ways difficult for competitors to replicate.
What are some factors effecting WTP?
preference, income, substitutes/compliments, expectations
What is price elasticity of demand?
a measurement of the change in the demand for a product as a result of a change in its price
If a price change creates a large change in demand, that is known as elastic demand
If a price change creates a small change in demand, that is an inelastic demand
What should be done to prices when demand is elastic?
Lowering prices increases revenue when demand is elastic.
What should be done to prices when demand is inelastic?
Raising prices increases revenue when demand is inelastic.
What are sources of competitive advantage for Arauco?
- For Arauco, cost of production is much lower
- Location is a primary reason for lower production costs
- Project would allow Arauco to increase economies of scale and scope
What is a powerful way to shape strategic interactions?
make commitments and threats
must be credible
What is seen as an industry in industry analysis?
a group of firms producing products or services that are perceived by customers as meeting the same needs
What are Porter’s Five Forces?
competition, the threat of new entrants to the industry, supplier bargaining power, customer bargaining power, and the ability of customers to find substitutes for the sector’s products
What is the PESTEL Framework?
a tool that helps businesses analyze external factors that impact their operations
Political: Government policies, leadership, and change
Economic: Economic growth, inflation, interest rates, unemployment, and consumer spending
Social: Demographics, consumer attitudes, and population growth
Technological: Technological advancements
Environmental: Environmental factors that impact the business
Legal: Legal standards and regulations
What is the main thing that Coke and Pepsi do not compete on?
Price
What is a strategic group?
Cluster of industry rivals that follow similar competitive strategies and market positions or have comparable business models
Group of firm’s closest rivals
Existence of multiple strategic groups implies that the forces of competitive rivalry are not faced equally by all firms in the industry
What are mobility barriers?
barriers to shifting strategic position from one strategic group to another within the industry
one reason why some firms in an industry are persistently more profitable than others
Describe Cost Leadership/Advantage
Similar products acceptable to customers at lower costs
Performing activities differently (cheaper process)
Can be achieved via economics of scale/scope, operating at efficient scale, learning, lower input costs via bargaining/cooperation
Risk product quality becomes too low to be acceptable
Describe differentiation advantage
Price premium (that is acceptable) from a unique product
Performing different (valuable) activities
Can be achieved via technology, prestige/brand, quality, customer service,
complementary products, social responsibility
Risk too much differentiation ceases to provide value which customers are willing to pay
What are the two main reasons for Disney’s success?
Owns the rights to animated characters
Basis of competitive advantage across many businesses/industries
What is a Resource-Based View of companies?
Resources & capabilities are key to superior performance
Two assumptions of RBV
- A firm is a unique bundle of resources and capabilities
- Resources don’t move easily from firm to firm, difficult to replicate
What is the VRIN(DA) acronym?
Valuable? Rare? Inimitable? Non-substitutable?
(DA) – Durable, Appropriable
What is the VRIO acronym?
Valuable, Rare, Costly to Imitate, Organized to capture the value of the resource
What is a core rigidity?
Former core competency or resource turned into a liability
Result of lack of fit with a changed external environment
Dynamic Capabilities – some firms are able to reconfigure/modify resources into new markets or new businesses so they don’t become core rigidity
Describe the bathtub metaphor
Firms need to refresh their resource stock as some resources will depreciate or be forgotten
Can purchase on strategic factor markets, only source of advantage there is better foresight, expectations, or luck
Some resources can’t be bought and sold
What are the system of activities for a company?
Elements easy to observe, difficult to imitate the whole system fully
Source of sustainable competitive advantage
Difficult to change if system doesn’t fit with external environment
What is a network effect?
Effect that one user of a good or service has on value of that product for other people
Direct effect – product or service becomes more valuable as more people use it
Indirect effects – increased usage leads to increased value of complementary product which adds to the value of the original product/service
Success is influenced by number of users and complementary products
True or False: Industries with strong network effects are often winner takes all leading to standard wars
True
