Prelim 1 Flashcards
Operational Effectiveness
Performing similar activities better than competitors, encompassing efficiency and management techniques like Total Quality Management (TQM), benchmarking, and reengineering
characteristics of operational effectiveness
-Improves inputs’ utilization by reducing defects, speeding up production, or improving customer service.
-Driven by continuous improvement initiatives, flexibility, and adoption of new technologies.
strategy
Creating a unique and sustainable position by performing different activities or performing the same activities differently
productivity frontier
Represents the maximum value a company can deliver at a given cost with the best current technologies and management practices.
what are the three sources of strategic positioning
variety-based, needs-based, and access-based
variety-based positioning
Specializing in producing a subset of an industry’s products or services
needs-based positioning
Meeting the distinct needs of a specific group of customers
access-based positioning
Serving customers who are accessible in specific ways due to geography, scale, or other factors.
trade-offs
foundation of a sustainable strategic position, as they prevent rivals from imitating activities without compromising their own strategy
three causes of trade offs
incompatibility of image or reputation, conflicting activities, and limits on coordination
fit
emphasizes how activities interconnect and reinforce one another, creating a cohesive and sustainable system
first-order fit
Consistency between each activity and the overall strategy
second-order fit
Activities that reinforce each other
third-order fit
Optimization of effort to eliminate redundancies and maximize synergies.
4 challenges to sustaining strategy
growth imperative, best practices mentality, organizational realities, and failure to make trade offs
why do some firms outperform others
understanding the decisions that drive differences in performance
what is performance
financial (ROIC - return on investment capital) and survival (how long the firm survives)
efficiency
how well a firm uses its resources
why is operational effectiveness necessary but not sufficient
people can easily replicate
strategic positioning
deliberately choosing different activities or preforming similar activities differently than competitors
in order to improve operational effectiveness, what should happen on the productivity frontier
to improve OE, must move closer to the line
how does Fit prevent imitation
when activities fit, there is little benefit from imitating just one activity, but there is complexity in replicating the entire system
porter’s 5 forces
- threat of new entrants
- bargaining power of suppliers
- bargaining power of buyers
- threat of substitute products or services
- rivalry amongst existing competitors
what do porter’s five forces enable strategists to do
identify root causes of profitability, anticipate shifts in competition, and craft strategies to defend against and influence competitive forces
threat of new entrants
new competitors increase market competition, reduce prices, and intensify the need for investment to remain competitive
economies of scale
Incumbents achieve lower costs through higher production volumes. New entrants face significant cost disadvantages unless they scale quickly.
demand-side benefits of scale (network effects)
A larger customer base enhances the perceived value of a product.
effects of high threat of new entrants
Existing firms may lower prices or increase investment in differentiation and innovation to deter new entrants
bargaining power of suppliers
suppliers can capture more value by raising prices, reducing quality, or limiting availability
concentration of suppliers
If suppliers are more consolidated than buyers, they wield greater power.
dependency on industry
Suppliers less reliant on a specific industry (e.g., diversified suppliers) can demand higher prices
switching costs
Firms with significant investment in supplier-specific systems or technologies face higher costs to switch
supplier differentiation
Unique or patented products give suppliers greater leverage.
bargaining power of buyers
buyers can demand lower prices, higher quality, or additional services, shifting value away from the firm
threat of substitutes
substitute products or services cap industry profitability by providing alternative solutions for customers
effects of high substitution threat
Industry profits suffer as substitutes place a ceiling on prices and limit growth potential.
rivalry amongst existing competitors
rivalry occurs through price wars, product innovations, marketing battles, or improved services
what are the two types of rivalry
price based and non-price based (branding, services, etc)
what happens when the five forces are weak
When the five forces are weak, industries tend to be more profitable (attractive)
what happens when the five forces are strong
When five forces are strong, industries tend to be less profitable (unattractive)
steps to analyze industry profitability
- define the industry
- identify the relevant participants
- assess the 5 forces
step 1 - define the industry
where does the competition take place?
3 scopes to define the industry (horizontal, vertical, geographic scope)
horizontal scope (product)
the products or services included in the competition
vertical scope
the stage of the industry value chain where the competition occurs
Industry value chain - a sequence of activities to create a product or service
geographic scope
the location of the competition (local, national, global)
step 2 - identify the relevant participants (there is always 5 participant groups)
- Potential entrants
- Industry competitors
- Substitutes
- Buyer
- Supplier
if higher threat of new entrants
then lower industry profitability
if lower threat of new entrants
then higher industry profitability
if there is a high industry rivalry
then less profitable industry
if a low industry rivalry
then more profitable industry
when is industry rivalry high
when the industry is closer to perfect competition
industry rivalry is high when
Many competitors with equal power
Stagnant or shrinking market
Price-based competition
High exit costs
industry rivalry is low when
Few competitors with unequal power
Growing market
Non-price-based competition
Low exit costs
substitutes
products or services outside the industry that serve similar functions
if there is a high threat of substitutes
then there is a less profitable industry
if there is a low threat of substitutes
then there is a more profitable industry
threat of substitutes is high when
Readily available
Affordably priced
High quality
Low switching costs
threat of substitutes is low when substitutes are
Not readily available
Not affordably priced
Low quality
High switching costs
if there is more powerful buyers
then there is less profitable industry
if there is less powerful buyers
then there is more profitability in the industry
buyers have more power when
There are many, unconcentrated buyers
Products are unique
They face switching costs when changing suppliers
Buyers are not price-sensitive
buyers have less power when
There are many, unconcentrated buyers
Products are unique
They face switching costs when changing suppliers
Buyers are not price-sensitive
if there is more powerful suppliers
then there is a less profitable industry
if there is a less powerful supplier
then the industry is more profitable
suppliers have power when
There are a few, concentrated suppliers
Suppliers depend heavily on the buyers for revenue
Buyers have no substitutes for the supplier’s product
Buyers face huge switching costs in changing suppliers
what are the two types of positionings
differentiation and cost-leadership
primary activities that help with cost-leadership strategy
directly related to the creation of a product or service (ex. manufacturing)
secondary activities that help with cost-leadership strategy
support primary activities to become more efficient (ex. human resources)
competitive advantage
firm’s ability to sustain superior profitability compared to competitors (done through positioning)
how does a cost-leadership strategy create a competitive advantage
value stick - heuristic
consumer surplus
= WTP - Price
value captured (profit)
= price - cost
total value created
= WTP - Cost
stuck in the middle
a firm fails to develop a clear competitive advantage (not on the productivity frontier because you are not leading in cost or efficiency)
productivity frontier
represents the state of best practice where a firm operates at optimal efficiency
PEST analysis
political, economic, social, technological
political
regulations and laws, government policies, ex. minimum wage policy
economic
inflation, interest rates, exchange rates
social
cultural trends and demographic shifts, Ex. health concerns
technological
technological change (e.g. automation), Ex. third-party delivery platforms
creativity
the ability to form novel and useful concepts using existing knowledge
innovation
realization of creative ideas in the form of products and services
cognitive fixation
our creativity is often structured by past experience
what prevents us from being creative
conformity in groups (asch experiment) – conforming pressures
