Strategic Decisions Flashcards
Combines within a firm production, distribution, selling, or other separate economic processes needed to deliver a product or service to a customer.
Vertical integration
The extent of integration depends on
The balance of economic and administrative benefits and costs
Generic strategic benefits of vertical integration include:
1) Gaining economies of vertical integration,
2) Providing assurance of supply or demand, and
3) Off-setting the bargaining power of strong suppliers and customers
Occurs when throughput is great enough to achieve economies of scale.
Economies of vertical integration
Economies of vertical integration result from
1) Economies of combined operations,
2) Control and coordination, and
3) Information
Generic strategic costs of vertical integration include:
1) Increased requirements in capital investment and
2) Increased exit barriers
Vertical integration includes
1) Upstream integration and
2) Downstream integration
Is acquisition of a capability that otherwise would be performed by external parties that are suppliers of the firm. It allows the firm to protect proprietary knowledge from suppliers.
Upstream (backward) integration
Is acquisition of a capability performed by customers. It may secure access to distribution channel, improve access to market information, and permit higher price realization.
Downstream (forward) integration
Porter’s model of the decision process for capacity expansion has five steps. The firm must
1) Identify the options in relation to their size, type, degree of vertical integration, and possible response by competitors.
2) Forecast demand, input costs, and technology developments.
3) Analyze competitors to determine when each will expand.
4) Predict total industry capacity and the firm’s market shares.
5) Test for inconsistencies.
Capacity expansion: Various factors may lead to overbuilding:
1) Technological factors
2) Structural factors
3) Competitive factors
4) Information flow factors
5) Managerial factors
6) Governmental factors
Requires investments in plant facilities and the ability to accept short-term unfavorable results.
A preemptive strategy
An organization can enter into a new business through:
1) Internal development or by
2) Acquisiton
Ordinarily involves creation of a new business entity. The internal entrant should undertake structural analysis to identify target industries.
Entry by Internal development
Prices are set in the market. The market usually eliminates above-average profits for a buyer, but in certain circumstances (e.g. an imperfect acquisition market) buyers may earn above-average profits.
Entry by Acquisition
Forecasting methods include:
1) Qualitative method
2) Quantitative method
Rely on experience and human intuition. An example is the Delphi method.
Qualitative (judgement) methods
Use mathematical models and graphs and include causal relationship forecasting and time series analysis
Quantitative methods
Types of time series analysis are:
1) Trend analysis (projection),
2) Moving average,
3) Exponential smoothing, and
4) Learning curves
Fits a trend line to the data and extrapolates it.
Trend analysis
Is appropriate when the demand for a product is relatively stable and not subject to seasonal variations.
A moving average
Places greater weight on the most recent data, with the weight assigned to older data falling off exponentially. It is useful when large amounts of data cannot be retained.
Exponential smoothing
Reflects the increased rate at which people perform tasks as they gain experience.
A learning curve
Types of probabilistic models are:
1) Simulation,
2) Monte Carlo simulation,
3) Sensitivity analysis,
4) Markov process,
5) Game theory, and
6) Expected value
Experiments with logical and mathematical models using a computer.
Simulation
Uses a random number generator to produce individual values for a random variable.
Monte Carlo simulation
Examines how the model’s outcomes change as the parameters change. Examples include cost-volume-profit analysis.
Sensitivity analysis
Quantifies the likelihood of a future event based on the current state of the process.
Markov process
Is a mathematical approach to decision making when confronted with an enemy or competitor.
Game theory
Is a rational means of making the best decision when risk is quantifiable.
Expected value
Is the process of deriving the linear equation that describes the relationship between two variables.
Regression analysis
Is used when exactly one independent variable is involved. The equation is the algebraic formula for a straight line ( y = a + bx)
Simple regression
Is used when there is more than one independent variable.
Multiple regression
Is used to generate a regression line by basing the equation on only the highest and lowest of a series of observations.
The high-low method
Is the strength of the linear relationship between two variables, expressed mathematically in terms of the coefficient of correlation, r.
Correlation
Improves every phase of an entity’s operations. Most measures are nonfinancial. They do not directly measure revenues or cost but rather productivity.
Quality management
Is the effectiveness and efficiency of the entity’s internal operations.
Process quality
Is the conformance of the entity’s output with customer expectations.
Product quality
Is the comparison of some aspect of an organization’s performance with best-in-class performance.
Benchmarking
Is the Japanese term for the continuous pursuit of improvement in every aspect of organizational operations.
Kaizen
Is a quality improvement methodology devised by Motorola. Is meant to reduce the number of defects per million opportunities in a mass-production process to 3.4, a level of good output of 99.99966%.
Six sigma
Cost of quality include:
1) Prevention costs
2) Appraisal costs
3) Internal failure costs
4) External failure costs
Incurred to prevent defects
Prevention costs
Incurred to detect defective output during and after production
Appraisal costs
Associated with defective output discovered before shipping.
Internal failure costs
Associated with defective output discovered after it has reached the customer.
External failure costs
= (Total costs of quality divided by Total direct labor costs) x 100
Quality cost index
Are graphic aids for monitoring the variability of any process subject to random variations.
Statistical control charts
Is a bar chart that assists mangers in what is commonly called 80:20 analysis.
A Pareto diagram
A Pareto diagram is:
1) The 80:20 rule states that 80% of all effects are the result of only 20% of all causes.
2) In the context of quality control, managers optimize their time by focusing their effort on the sources of most problems.
Displays a continuous frequency distribution of the independent variable.
A histogram
Is a total quality management process improvement technique.
A fishbone diagram (also called a cause-and-effect diagram or an Ishikawa diagram)
Is the continuous pursuit of quality in every aspect of organizational activities
Total Quality Management (TQM)
Connects critical success factors (CSFs) with measures of performance.
The Balanced Scorecard
The Balanced Scorecard has four categories of measures, which are:
1) Financial;
2) Customer;
3) Internal business processes; and
4) Learning, growth, and innovation.
