SM_L1 Flashcards
What is strategy?
Strategy is about:
- Uniqueness in offering
- Making trade-offs
- Creating fit across activities
What are two common competitive strategies?
Cost leadership:
- Lower costs than competitors
- Standardised products
Product differentiation:
- Unique product features
- Higher perceived customer value
What drives cost leadership?
- Economies of scale
- Learning curve (costs drop as production doubles)
- Low-cost access to factors of production
- Efficient policy choices
Explain learning curve effects
Learning curve:
- Costs decline by ~20–30% whenever cumulative production doubles
- Efficiency improves with experience
What is product differentiation?
A strategy where a firm provides unique attributes:
- Product features
- Timing (first-mover)
- Location
- Strong reputation
Give an example of reputation as a differentiator
Reputation can:
- Encourage brand loyalty
- Justify premium prices
- Deter short-term ‘quality reduction’ (reputation cheating)
What is competitive advantage?
Achieved when a firm:
- Implements a value-creating strategy
- Which rivals cannot easily duplicate
- Results in above-normal performance
Name two key profitability ratios
- ROA (Return on Assets): profitafter tax ÷ total assets
- ROE (Return on Equity): profitafter tax ÷ shareholders’ equity
What is the price-earnings ratio (P/E)?
P/E = current market price per share ÷ after-tax earnings per share
- Reflects investors’ expectations
Why is value creation and capture important?
It shows how firms:
- Create value for customers
- Capture enough value for profitability
- Manage resources, customers, and competition
What is meant by ‘business model innovation’?
Business model innovation:
- Shifts from selling just products to selling solutions
- Changes value proposition, profit formula, and key processes
Why do managers need strategy?
Managers use strategy to:
- Position the firm vs. competitors
- Exploit opportunities and counter threats
- Leverage strengths and address weaknesses
