MIDTERMS 1 & 2- ADMN 4606 Flashcards
Strategy
Integrated and coordinated set of commitments and actions designated to exploit core competencies and gain a competitive advantage and above average returns.
Strategic competitiveness
Achieved when a firm successfully formulates and implements a value-creating strategy.
Core competency
A capability of a firm that is rare, valuable, costly to imitate and non-substitutable. Creates a competitive advantage.
Competitive advantage
Implemented strategy that creates superior value for customers that competitors are unable to duplicate or find too costly to imitate. No competitive advantage is permanent.
Above average returns
Returns in excess of what investor expects in comparison to other investments with similar risk.
Reasons for hyper-competition
Globalization and technology
Hyper-competition
Extremely intense rivalry among competing firms characterized by escalating & increasingly aggressive competitive moves.
I/O based model
Explains dominant influence of the external environment on a firm’s strategic actions and performance. AAR are earned when firms implement the strategy dictated by environment.
Four assumptions of I/O based model
- External environment imposes pressures and constraints that determine strategies leading to AAR
- Most firms competing in an industry control similar strategically resources and pursue similar strategies
- Resources used to implement strategies are highly mobile across firms
- Organizational decision makers are assumed to be rational and committed to acting in firm’s best interest
Implementation of I/O based model
-Study external environment (especially industry)
-locate an industry with high potential for AAR
-Identify strategy called for by attractive industry
-develop or acquire assets and skills needed
-use firm’s strengths to implement strategy
Resource based model
Suggests a firm has a superior performance because of unique resources and capabilities and the combination makes them different and better than competition.
Four assumptions of resource based model
- firms acquire different resources and develop unique capabilities based on how they combine and use them.
- Resources used to implement strategies are not mobile across firms.
- differences in firms’ performance are due primarily to their unique resources and capabilities rather than structural characteristics of the industry.
- Differences in resources and capabilities is the source of competitive advantage.
Implementation of resource based model
-identify firm’s resources. Study its strengths and weaknesses compared to competitors
-determine firm’s capabilities
-determine potential of firm’s resources and capabilities in terms of competitive advantage
-locate attractive industry
-select strategy that allows firm to utilize its resources and capabilities relative to opportunities in external env.
Inputs into a firm’s production process (resources)
Money, machines, methods, material, men and information (5m’s and I)
Capability
capacity for a set of resources to perform a task or activity in an integrative manner
Vision
Big picture (dream) of what the firm wants to be. Tends to be short term and concise. Ex. A computer on every desk running Microsoft software
Mission
Specific business(es) in which the firm intends to compete and the customers it intends to serve. The firm’s reason for existence. Ex. McDonalds wants to be the best employer and give best customer service.
Stakeholders
Can affect and are affected by strategic outcomes/performance of a firm.
3 Stakeholder groups
-Capital market (shareholders, suppliers of capital)
-Product market (customers, suppliers, unions, host communities)
-organizational (employees, managers, non-managers)
8 Performance measures
-firm survival
-accounting measures
-multiple stakeholder approach
-present value
-market value added and economic value added
-balanced scorecard
-CSR
-sustainability and triple bottom line
Multiple stakeholder approach
Views firm’s performance relative to the preference of stakeholders. Problem is different stakeholders have different interests.
Present value and NPV
Grounded in finance theory. Avoids short term bias by measuring cash flows over time. Values all resources by using discount rate concept. NPV < 0, below average. >0, above average, =0, average.
Balanced scorecard
Translates firm’s vision and strategy into operational terms by asking four interrelated questions: customer, financial, internal business process, learning and growth.
Corporate social responsibility
Firm voluntarily taking steps to improve quality of life for employees and families as well as local community and society.
Four areas of CSR
Brand differentiation, human resources, risk management, licence to operate.
Triple bottom line
People first, planet second, and profit last. Stakeholders expect firms to be environmentally, socially and financially responsible.
3 sub-environments of external environment
- general environment
- industry environment
- competitor environment
7 elements of general environment
- economic
- demographic
- socio-cultural
- political/legal
- global
- technological
- physical
5 forces model (industry analysis)
- threat of new entrants
- threat of substitutes
- power of buyers
- power of suppliers
- competitors
Opportunity
General environment condition that when exploited can yield strategic competitiveness
Threat
General environment condition that may hinder strategic competitiveness
4 activities for external environment analysis
scanning- identifying early signs of environmental changes
monitoring-see if important trends are emerging
forecasting- developing feasible projections of outcomes
assessing- determining the timing and importance of environmental changes and trends
Industry
Group of firms producing products that are close substitutes
Barriers to entry
-economies of scale
-product differentiation
-capital requirements
-switching costs
-access to distribution channels
-cost disadvantages independent of scale
-government policy
Economies of scale
As quantity of production increases, cost of production declines
Tangible resources
Those that can be seen, touched and quantified.
Four types of tangible assets
Financial, organizational, physical, technological
Intangible assets
Assets rooted deeply in the firm’s history and accumulated over time. Can’t be seen or touched which makes them most valuable to firms as they are not easily replicable.
Three types of intangible resources
innovation, human resources, reputational resources
Value chain analysis
Allows a firm to understand the parts of its operations that create value and those that do not
primary activities
Involved with a product’s physical creation, sales & distribution to buyers and service after sale
Support activities
Provide assistance necessary for the primary activities to take place (firm infrastructure, HRM, technological development, procurement)
Inbound logistics
Activities such as materials handling, warehousing, and inventory control. Used to receive, store, and disseminate inputs into a product
Outbound logistics
Activities involved with collecting, storing, and physically distributing the final product to customers
Procurement
Activities involving purchase of inputs needed to produce products
Technological development
Activities to improve a firm’s product and the processes used to manufacture it
Firm infrastructure
Activities such as general management, planning, finance, accounting, legal support and government relations that support the value chain
Outsourcing
Purchase of value-creating activity from an external supplier. Solution to primary and secondary activities that are not a source of competitive advantage.
Business level strategy
Integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
Three questions of business level strategies
Who will be served?
What needs of target customers will be satisfied?
How?
Corporate level strategy
Determining which business to enter
Types of competitive advantage
Cost advantage, uniqueness
Types of competitive scope
Broad and narrow (niche)
5 generic business level strategies
Cost leadership
differentiation
focused cost leadership
focused differentiation
integrated cost leadership/differentiation
Competitors
Firms operating in the same market, offering similar products and targeting similar customers
Competitive rivalry
Ongoing set of competitive actions and responses occurring between competitors as the content with each other for an advantageous market position
Competitive dynamics
Total set of actions and responses of all firms competing in a market
New ways of competing
-bringing new goods/services more quickly
-use of new technologies
-diversification
-shifting product emphasis
-consolidation
-combining online selling with physical stores
Drivers of competitive actions and responses
Market commonality and resource similarity influence three drivers of competitive behaviour:
awareness, motivation, ability.
Competitor analysis
firms are direct competitors based on:
-market commonality
-resource similarity
Awareness
refers to the extent competitors recognize degree of mutual interdependence that results from market commonality and resource similarity. Greatest when firms have similar resources.
Motivation
Firm’s incentive to take action or respond to competitor’s attack as it relates to perceived gains and losses.
Ability
Firm’s resources that allow competitive action and flexibility responsiveness
Resource dissimilarity
The greater the resource imbalance between acting firm and competitors or potential responders, greater delay in response.
Strategic actions/responses
Market-based moves that signify a significant commitment of organizational resources to pursue a specific strategy
Tactical action (response)
Market-based move the firm makes in order to fine-tune a strategy
Likelihood of attack
depends on 3 factors:
1. first mover incentives
2. organizational site
3. quality
Slow-cycle market
Markets in which the firm’s competitive advantages are shielded from imitation for long periods of time. Monopoly situation.
Fast-cycle markets
Competitive advantages are not shielded from imitation. Focus is to innovate to stay ahead.
Merger
Two firms agree to integrate their operations on a relatively co-equal basis.
Acquisition
One firm buys a controlling 100% interest in another firm with the intent of making the acquired firm a subsidiary within its portfolio.
Takeover
Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm’s bid. Hostile takeovers are unexpected and undesired.
Reasons for acquisitions
- increase market power
- overcome entry barriers
- cost of new product development & increased speed to market
- lower risk
- increased diversification
- reshaping firm’s competitive landscape
- learning/developing new capabilities
Determinants of success in acquisitions
-well-conceived strategy for selecting target
-not paying a high premium
-effective integration process
Problems in achieving success in acquisitions
-integration difficulties
-inadequate evaluation of target
-large debt
-inability to achieve synergy
-too much diversification
-overly focused on acquisitions
-too large
Synergy
Value created by units exceeds value of units working independently
Private synergy
Occurs when the combination and integration of acquiring and acquired firms’ assets yields capabilities and core competencies that could not be developed by combining and integrating the assets with any other company.
Restructuring
A strategy through which a firm changes its set of businesses or financial structure
Downsizing
Reduction in number of firms’ employees and possibly operating units that may or may not change composition of businesses in the company’s portfolio
Down scoping
Eliminating businesses unrelated to firms’ core businesses through divesture, spin-off etc.
Leveraged buyouts
One party buys all of a firm’s assets in order to take the firm privateP
Private equity firm
Firm that engages in taking a public firm private
Three types of LBOs
management buyouts
employee buyouts
whole-firm buyout
Corporate-level strategy
Actions a firm takes to gain competitive advantage by selecting and managing a group of different businesses competing in different product markets. An effective strategy creates synergy and AAR.
Low levels of diversification
-single business: 95% or more revenue comes from single business
-dominant business: 70-75% revenue comes from single business
Moderate to high levels of diversification
Related constrained and related linked
Related constrained
Less than 70% revenue comes from the dominant business, all businesses share product, tech, and distribution linkages.
Related linked
Less than 70% of revenue comes from dominant business and there are limited links between businesses
Very high levels of diversification
Unrelated: less than 70% of revenue comes from dominant business and there are no common links between businesses.
3 reasons to diversify
- value creating diversification
- value neutral
- value reducing
Value creating diversification
increase the firm value by increasing performance. Created through related and unrelated diversification.
Economies of scope
Cost savings firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate level core competencies to another of its businesses.
Operational relatedness (related constrained)
Created by sharing primary or support activities
Corporate relatedness (related linked)
Core competency transfer. creates value by reducing resource allocation for second business and creates competitive advantage.
Corporate level core competencies
Complex sets of resources and capabilities linking different businesses through managerial and technological knowledge, experience and expertise.
Market power
Exists when a firm can sell its products above the existing competitive level, to reduce costs of primary & support activities or both. Gained through related diversification and/or multipoint competition or vertical integration.
Multipoint competition
Exists when 2 or more diversified firms simultaneously compete in same product/geographic market
Vertical integration
Exists when a firm produces its own inputs (backward integration) or owns its source of distribution of outputs (forward integration)
Three reasons for value creating diversification
-economies of scope (related)
-market power (related)
-financial economies (unrelated)
Value created by unrelated diversification
Financial economies:
-efficient internal capital allocations reduce risk by developing portfolio with different risk levels
-purchasing other corps. and restructuring assets
Financial economies
Cost savings realized through improved allocations of financial resources based on investments in/outside the firm.
Reasons for value-neutral diversification
-antitrust laws
-tax laws
-low performance
-uncertain cash flows
-synergy
-risk reduction
-resources and diversification
Value-reducing diversification
Diversifying managerial employment risk and increasing managerial compensation (in managers interest only)
International strategy
A strategy through which the firm sells its goods or services outside its domestic market
Traditional incentives to using international strategy
-extend product life cycle
-secure key resources
-provide access to low-cost labour and production
Emerging incentives to use international strategy
-Integration of operations on a global scale
-global communication media facilitate people in different countries to model different lifestyles
-universal product demand
3 basic benefits of international strategy
- increased market size
- greater economies of scale and learning
- location advantages
Porter’s diamond model
factors of production
demand conditions
related and supporting industries
firm strategy, structure and rivalry
Factors of production
inputs necessary to compete in any industry:
Basic- natural and labour resources
advanced- digital communication systems and educated workforce
Demand conditions
Characterized by nature and size of buyers’ needs in the home market for goods and services
Related and supporting industries
Related industries provide critical networks of suppliers, buyers and services
Firm strategy, structure and rivalry
Patterns of strategy, structure and rivalry among firms differ from nation to nation and foster the growth of certain industries
Multidomestic strategy
International strategy in which strategic and operating decisions are decentralized to the strategic business units in individual countries allowing each unit to tailor to local market
Global Strategy
Firm’s home office determines strategies that business units are to use in each country/region. Seek to develop economies of scale. Assumes customers have similar needs.
Transnational strategy
The firm seeks to achieve both global efficiency and local responsiveness.
