Test One Flashcards
Strategy
A firm’s theory about how to gain competitive advantages
Define Mission
Long-term purpose of a firm
Define Strategic Management Process
Sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy that generates competitive advantages
Visionary Firm
Firms whose central mission is central to all they do and they earn higher returns
Objectives
Specific measurable targets a firm uses to evaluate the extent to which it is realizing its mission
External Analysis
The firm identifies the critical threats and opportunities in its environment
Internal Analysis
Helps a firm identify its organizational strengths and weaknesses and helps the firm identify which of its resources and capabilities are likely to be sources of competitive advantage.
Business-Level Strategies
Actions taken by the firm to gain competitive advantage in a single market or industry.
Corporate-Level Strategies
Actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously.
Competitive Advantage
Creation of more economic value than rival firms
Economic Value
The difference between the perceived benefits gain by a customer that purchases a firm’s products or services and the full economic cost of these products or services.
Competitive Parity
Firms that create the same economic value as their rivals
Competitive Disadvantage
Firms that generate less economic value than their rivals
Accounting Performance
Measure of competitive advantage calculated by using information from a firm’s published profit and loss and balance sheet statements.
Accounting Ratios
Numbers taken from a firm’s financial statements that are manipulated in ways that describe various aspects of a firm’s performance.
Profitability Ratios
Measure of profit in the numerator and some measure of firm size or assets in the denominator
Liquidity Ratios
Focus on the ability of a firm to meet its short-term financial obligations
Leverage Ratios
Focus on the level of a firm’s financial flexibility
Activity Ratios
Focus on the level of activity in a firm’s business
Cost of Capital
Rate of return that a firm promises to pay its suppliers of capital to induce them to invest in the firm
Economic Measurements of Competitive Advantage
Compare a firm’s level of return to its cost of capital instead of to the average level of return in the industry.
Cost of Debt
Interest firm must pay its debt holders
Cost of Equity
Rate of return a firm promises its equity holders in order to induce these individuals and institutions to invest in the firm.
Weighted Average Cost of Capital
% of the firm’s total capital
Mission statements must create what for the company
value
High quality objectives are tied to what?
mission statement
The size of the competitive advantage is equal to what?
the difference in economic value between the two firms
define privately held firm
has stock that is not traded on public stock market or it is a division of a larger company
When would a firm have above average accounting performance but below normal economic performance?
when a firm is not earning its cost of capital but has above industry average accounting performance
When would a firm have below average accounting performance but high economic performance
happens when a firm has a very low cost of capital and is earning at a rate in excess of this cost but is still below the industry average
define emergent strategies
theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshaped once they are initially implemented
Define the General Environment
broad trends in the context within which a firm operates that can have an impact on a firm’s strategy choices
What are the six elements of the General Environment?
Technological Change Demographic Trends Cultural Trends Economic Climate Legal and Political Conditions Specific International Events
Define technological change
exploring the use of technology to create new products and services
define demographics
distribution of individuals in a society in terms of age, sex, marital status, income, ethnicity, etc.
define culture
values, beliefs, and norms that guide behavior in society
define economic climate
overall health of the economic systems within which a firm operates
what is the legal and political environment
laws and legal systems’ impact on business together with the general nature of the relationship between government and business
what are specific international events?
civil wars, political coups, terrorism, wars, famines, etc.
What is the structure-conduct-performance model?
measures relationship among a firm’s environment, behavior, and performance
What is industry structure in the SCP model?
# of competing firms homogeneity of products cost of entry and exit
What is firm conduct in the SCP model?
strategies firms pursue to gain competitive advantage
What is performance in the SCP model?
firm level: competitive disadvantage, parity, temporary or sustained CA
Society: productive and allocative efficiency, level of employment, progress
what is the five forces framework?
identifies the five most common threats faced by firms in their local competitive environments and the conditions under which these threats are more or less likely present
what are the five threats in the FF framework?
entry, suppliers, rivalry, substitutes, buyers
define environmental threat
any individual or group outside a firm that seeks to reduce the level of that firm’s performance
define threat of entry
firms that have started operating in an industry or that threaten to begin operations in an industry soon
barriers to entry
attributes of an industry’s structure that increase the cost of entry
what are the 4 barriers to entry identified by the SCP model?
economies of scale
product differentiation
Cost advantages independent of scale
government regulation of entry
define economies of scale
a firm’s costs rise as a function of its volume of production
define diseconomies of scale
firm’s costs rise as a result of its volume of production
define product differentiation
incumbent firms possess brand identification and customer loyalty that potential entrants do no.
define proprietary technology
secret technology gives incumbent firms important cost advantages over potential entrants
define managerial know-how
knowledge and information that are needed to compete in an industry on a day-to-day basis
define rivalry threat
intensity of competition among a firm’s direct competitors
what is a sign of rivalries in an industry?
frequent price cutting
what attributes increase the threat of rivalry
large number of firms
slow industry growth
lack of product differentiation
capacity added in large increments
what is the threat of substitutes?
rival products that meet approximately the same customer needs but do so in different ways
what is the effect of substitutes?
puts price ceiling on the prices firms can charge
what is the threat of suppliers?
suppliers can increase the price of supplies or reduce quality
true or false, suppliers are not a threat to firms when firms are not an important part of a supplier’s business
false
what is the threat of powerful buyers?
powerful buyers act to decrease a firm’s revenues
if the products or services that are being sold to buyers are standard and not differentiated, then the threat of buyers is what?
greater
buyers are more likely to be more of a threat when the —-they purchase are a significant portion of the costs of their final products.
supplies
true or false, buyers more likely to be a threat when they are not earning significant economic profit
true
what is backward vertical integration?
A form of vertical integration that involves the purchase of suppliers.
what is an example of backward vertical integration?
An example of backward integration would be if a bakery business bought a wheat processor and a wheat farm.
when is another firm considered a competitor?
if your customers value your product less when they have another firm’s product
when is another firm considered a complementor?
if your customers value your product more than the other firm’s
define fragmented industries
industries in which a large number of small or medium-sized firms operate and no small set of firms has dominant market share
define emerging industries
newly created or newly re-created industries formed by technological innovations, changes in demand, the emergence of a new customer, etc.
define consolidation strategy
strategies that begin to consolidate the industry into a smaller number of firms
define first-mover advantage
advantages that come to firms that make important strategic and technological decisions early
define technological leadership strategy
making early investments in particular technologies in an industry
define strategically valuable assets
resources required to successfully compete in an industry.
define cross-switching costs
customers make investments in order to use a firm’s particular products or services
define processes
activities that a firm engages in to design, produce, and sell products and services
define process innovation
firm’s effort to refine and improve its current processes.
define market leader
firm with the largest share in that industry
define niche strategy
reduce scope to narrow segments of the declining industry
define harvest strategy
a firm tries to stay in a dying industry as long as possible
define divestment
extracting a firm from a declining industry
what is the resource based view?
focuses on the resources and capabilities controlled by a firm as sources of competitive advantage
define resources according to RBV
tangible and intangible assets that a firm controls that it can use to conceive and implement its strategies.
define capabilities
tangible and intangible resources that that enable a firm to take full advantage of the other resources it controls
define financial resources
all money from whatever source
define retained earnings
profit that a firm made earlier in its history
define physical resources
all physical technology used in a firm
define human resources
training, experience, judgement, intelligence, relationships, and insight of individual managers and workers in a firm.
define organizational resources
firms formal reporting structure, formal and informal planning, culture, reputation, etc
define resource heterogeneity
some firms may be more skilled in accomplishing a certain activity than other firms
define resource immobility
unable to overcome resource heterogeneity
define VRIO framework
Value
Rarity
Imitability
Organization
define question of value
does a resource enable a firm to exploit an environmental opportunity and or neutralize an environmental threat?
What defines a good strategy?
that which generates competitive advantages
what are the two most common business-level strategies?
cost leadership and product differentiation
what are common corporate-level strategies?
vertical integration diversification strategic alliances merger and acquisition global strategies
which ratio shows how profitable a company’s assets are?
ROA
true or false, firms that have normal economic performance are able to gain access to the capital they need to survive although they are not prospering
true
true or false. In general, firms with competitive parity usually do not have normal economic performance
false
What accounting and economic performances are associated with competitive advantage?
Above average on both
What accounting and economic performance are associated with competitive parity?
average accounting performance
normal economic performance
What accounting and economic performance are associated with competitive disadvantage?
below average accounting
below normal economic performance
Define competitive disadvantage
A factor which places a business at risk for losing customers to a competitor.
if a restaurant has its liquor license suspended and its competition still has the license, what is this an example of?
competitive disadvantage
define intended strategy
a strategy a firm thought it was going to pursue
define unrealized strategy
an intended strategy a firm does not actually implement
define deliberate strategy
an intended strategy a firm actually implements
“The premise that genius is not in crafting a particular strategy, but instead noticing what’s actually working and investing in that.” this quote is related to what?
emergent strategies
NyQuil. In testing, they realized this regular cold medicine kept putting people to sleep. The solution? Reposition the product as a nighttime cold remedy, which it’s been for over 25 years. what is this an example of?
emergent strategy
Viagra. Originally intended as high-blood pressure medication, patients in the clinical trials consistently reported an interesting side effect, so they repositioned the drug around the side effect and created a multi-billion dollar category in the process. this is an example of what?
emergent strategy
what is a major general environment concern in regards to marketing in other countries?
culture
an ice cream company that buys a dairy farm. The company requires milk to make ice cream and either can buy milk from a dairy farm or other milk supplier or could own the dairy farm itself. This ensures that it will have a steady supply of milk at its disposal and that it will pay a reasonable price. This can protect the ice cream maker in the event that there are several other buyers vying for the same milk supply. this is an example of what?
backward vertical integration
- Low barriers to entry.
- Highly specialized market for goods and services requires extreme specialization by firms.
- High transportation costs.
- Lack of standardization, or lack of need for it.
- High need for trust and local firms often inspire more trust in their customers.
these are examples of what?
fragmented industry
A unique product or specialized service is characteristic of what type of market?
fragmented
true or false, barriers to entry are high in an emerging industry
false
What are four sources of cost advantage that act as barriers to entry?
Proprietary Technology
Managerial know-how
Favorable access to raw materials
Learning-curve cost advantages
What are the indicators of threat of suppliers in an industry?
many small firms differentiated products not threatened by subs suppliers forward integrate firms are not important customers for suppliers
True or false, when a firm has the option of purchasing from a large number of suppliers, suppliers have more power to threaten a firm’s profits
false, it will have less power to threaten a firm’s profits
true or false, suppliers are a greater threat when what they supply is unique and highly differentiated
true
what are the indicators of the threat of buyers in an industry
small number of buyers
undifferentiated product
products sold to buyers are a significant % costs
buyers are not earning good ec. profits
buyers threaten backward vertical integration
in the five forces model, if all of the threats are low, what will expected performance of firm be?
high
in the five forces model, if all of the threats are high, what will expected performance of firm be?
low
in the five forces model, if half of the threats are high and half are low, what will firm performance be?
mixed
true or false, the five forces model can be used to anticipate exact level of firm performance in industry
false, it anticipates the average performance
true or false, a firm does not want to introduce complementors into its market
false, complementors increase market share
what is an environmental opportunity for a fragmented industry?
consolidation
what is an environmental opportunity for an emerging industry?
first-mover advantage
what is an environmental opportunity for a mature industry?
product refinement
improve service quality
process innovation
what is an environmental opportunity for a declining industry?
leadership
niche
harvest
divest
