Question: Strategic Management

Answer: Analysis, formulation and implementation in the quest for competitive advantage.

Question: Strategy

Answer: The set of goal directed actions a firm takes to gain and sustain competitive advantage.

Question: What three things does a good strategy consist of?

Answer: (1) A diagnosis of the competitive challenge.(2) A guiding policy to address the competitive challenge.(3) A set of actions to implement the firms guiding policy.

Question: Competitive advantage is always __________, not ____________.

Answer: Relative, absolute.

Question: To assess competitive advantage, what do we compare firm performance to?

Answer: A benchmark = Performance of other firms in the same industry, or an industry average.

Question: Competitive Parity

Answer: 2 or more firms perform at the same level.

Question: T/F: Making money/ satisfying shareholders should be consequences, not goals.

Answer: TRUE

Question: T/F: Operational effectiveness, competitive benchmarking or other tactical tools are not strategy.

Answer: True, these elements may be necessary to support its competitive strategy, but they are not sufficient to achieve competitive advantage.

Question: What is the first step to gain and sustain competitive advantage?

Answer: Define the organization's vision, mission and values.

Question: Do vision statements help firms gain and sustain competitive advantage?

Answer: It depends on if the vision statement is customer-oriented or product-oriented. Customer-oriented strategy tend to be better.

Question: What is a product-oriented vision statement?

Answer: Defines the business in terms of a good/service provided, not how they can benefit the customer. Not the best option.

Question: What is a customer-oriented vision statement?

Answer: Defines a business in terms of providing solutions to customer needs. These companies can adapt to changing environments easier.

Question: What is the AFI strategy framework?

Answer: "Analyze, formulate, Implement" A model that links these 3 things and helps managers plan and implement a strategy that can improve performance and result in competitive advantage.

Question: What is Strategic Leadership?

Answer: When executives use power and influence to direct the activities of others when pursuing an organization's goals. They spend most of their time participating in face-to-face interactions.

Question: What is upper-echelon's theory?

Answer: States that organizational outcomes, strategic choices and performance levels are reflections of the values of the top management team.

Question: The strategy process consists of what two parts?

Answer: (1) Strategy formulation = Concerns the choice of strategy in terms of where and how to compete.(2) Strategy implementation = concerns the organization of how work gets done, or strategy execution.

Question: What are strategic business units (SBUs)?

Answer: Standalone divisions of a larger conglomerate, each with their own profit and loss responsibility (ex. PepsiCo has many different product categories under one roof)

Question: general vs. functional manager

Answer: In SBU's, General managers must decide how to compete to achieve superior performance, and they take orders from corporate headquarters. Functional managers are responsible for decisions/actions within a single functional area (ex. accounting, marketing, finance, etc.)

Question: When setting the strategy process, strategic leaders rely on what 3 approaches?

Answer: (1) Top-down strategic planning = Top management attempts to program future success by learning from the past. In this strategy, formulation of the strategy is separate from doing it since information only flows from top to bottom. (2) Scenario Planning = Top management envisions different what-if scenarios to anticipate plausible futures in order to create strategic responses. Allows more flexibility.(3) Strategy as planned emergence: Top-down & bottom-up = consider all available input from internal and external sources to form a strategic vision rather than relying on data.

Question: What is a strategic initiative?

Answer: Any activity a firm pursues to explore and develop new products and processes, new markets and ventures.

Question: Strategic initiative can bubble up from deep within an organization through what 3 things?

Answer: (1) Autonomous actions = Strategic initiatives undertaken by lower-level employees on their own volition and often a response to unexpected situations. (2) Serendipity = Any random events, pleasant surprises or accidents that can have a huge impact on a firm's strategic initiatives.(3) Resource-allocation process = The way a firm allocates its resources based on predetermined policies, which can be critical in shaping its realized strategy.

Question: What is the PESTEL model?

Answer: "Political, Economic, sociocultural, technological, ecological, legal" The model categorizes and analyzes an important set of external factors that might have a negative or positive effect on the firm.

Question: Industry vs. firm effects

Answer: Industry effects = Firm performance attributed to the structure of the industry in which the firm competes.Firm effects = Firm performance attributed to the actions managers take.

Question: What is the equation for economic value?

Answer: value creation - cost (v-c)

Question: What is Michael Porter's five forces model?

Answer: Identifies 5 forces that determine the profit potential of an industry and shape a firm's competitive strategy. 1. Threat of entry2. Power of suppliers3. Power of buyers4. Threat of substitutes5. Rivalry among existing competitors

Question: What are the 7 entry barriers? (ENCCAGC)

Answer: (1) Economies of scale - gives larger firms an advantage over smaller firms.(2) Network effects - The value of a product or service for an individual user increases with the number of total users. (ex. Facebook has a strong network effect)(3) Customer switching costs - incurred by moving from one supplier to another (ex. retrain employees) (4) Capital requirements - Price of an entry ticket into a new market (ex. startup costs)(5) Advantages independent of size - Advantages of incumbent firms based on things like brand loyalty, access to raw materials, favorable location, etc.(6) Government policy - Restrictive government policy can keep firms from entering the industry(7) Credible threat of retaliation - Incumbent firms can react to new entrants with retaliation by starting things like price wars, since they can afford it more than new new entrants.

Question: When is bargaining power of suppliers high?

Answer: - Supplier's industry more concentrated than buyer's industry.- Suppliers don't depend heavily on the industry for their revenues- Incumbent firms face large switching costs when changing suppliers- Suppliers offer products that are differentiated- No available substitutes for products that suppliers offer- Suppliers can threaten to forward integrate into industry

Question: When is the power of buyers high?

Answer: - When there are few buyers, and each buyer purchases large quantities - The industries products are standardized and undifferentiated- Buyers face low or no switching costs- Buyers can backwardly integrate into an industry

Question: When is the threat of substitutes high?

Answer: - When Substitutes outside of the industry offer attractive price performance trade-off- When buyers cost of switching to substitute outside of industry is low

Question: What is rivalry among existing competitors determined by?

Answer: Competitive industry structures = Elements/forces common to all industries

Question: What are the 4 main competitive industry structures?

Answer: (1) Perfect competition = Many small firms, commodity product, low entry barriers and there is little to no ability for firms to raise prices.(2) Monopolistic competition = Many firms, differentiated product, some obstacles to entry and the ability to raise prices. Similar products, but each has its own unique features (ex. computer hardware industry, Apple, Microsoft, Lenovo etc.)(3) Oligopoly = Few large firms, differentiated products, high entry barriers, and some degree of pricing power dependent on differentiation. The action of one firm influences the behavior of the others since there aren't that many. (4) Monopoly = Only one firm, high pricing power, unique product, high entry barriers.

Question: What is a complementor?

Answer: a company that provides a good or service that leads customers to value your firm's offering more when the two are combined (ex. Google complements Samsung)

Question: What is coopetition?

Answer: Cooperation by competitors to achieve a strategic objective (ex. Samsung and google cooperate as complementors to compete against apple, while also competing against each other)

Question: What is industry convergence?

Answer: Process whereby formerly unrelated industries begin to satisfy the same customer need. (ex. media industries)

Question: What is a strategic group?

Answer: Set of companies that pursue a similar strategy within a specific industry (ex. Low cost airlines have the same business strategy, and so do high cost airlines) - Intra group rivalry exceeds inter group rivalry - The external environment effects different strategic groups differently - Some strategic groups are more profitable than others

Question: What are core competencies?

Answer: Unique strengthsEmbedded deep within a firmAllow a firm to differentiate its products and services from those of its rivals

Question: What is a resource-based view?

Answer: Model that sees certain types of resources as key to superior performance.Competitive advantage more likely to spring from intangible rather than tangible resources.

Question: What two assumptions are critical in the resource-based model?

Answer: 1. Resource heterogeneity = assumption that a firm is a bundle of resources/capabilities that differ across firms.2. Resource immobility = assumption that a firm has resources that tend to be sticky and that do not move easily from one firm to another. (they're hard to replicate)

Question: What is the VRIO framework?

Answer: ValuableRare, and costly to...Imitate. and finally, the firm itself must be...Organized to capture the value of the resourceA firm can gain/sustain competitive advantage only when it has resources that satisfy all the VRIO criteria.

Question: What are isolating mechanisms?

Answer: barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy.

Question: What are the 5 isolating mechanisms?

Answer: (1) Better expectations of future resource value = When firms acquire a resource at a low cost, that they anticipate will increase in value in the future.(2) Path Dependence = Situation in which the options one currently faces are limited by decisions made in the past.(3) Casual ambiguity = A situation in which the cause and effect of a phenomenon are not readily apparent, so other firms can't easily replicate it.(4) Social complexity = Situation in which different social and business systems interact with one another, and are hard to replicate.(5) Intellectual property protection = Intangible resources such as patents, copyrights, trademarks, etc.

Question: What is competitive rigidity?

Answer: A former core competency that turned into a liability because the firm failed to hone, refine and upgrade the competency as the environment changed over time.* Must make your capabilities dynamic to sustain the competitive advantage you gain from them.

Question: What are resource stocks and flows?

Answer: Resource stocks = The firm's current level of intangibles.Resource flows = The firm's level of investments to maintain or build a resource.

Question: What are secondary and primary activities in the value chain?

Answer: Primary activities = activities that add value directly by transforming inputs into outputs as the firm moves a product/service through the value chain.Secondary activities = Firm activities that add value indirectly by transforming inputs into outputs as the firm moves a product or service through the value chain. (ex. R&D)

Question: What is a SWOT analysis?

Answer: strengths, weaknesses, opportunities, threats Allows a company to analyze its internal and external factors through a thorough analysis.

Question: What are the three traditional frameworks to measure and assess firm performance?

Answer: (1) Accounting profitability(2)Shareholder value creation(3) Economic value creation

Question: What is accounting profitability, and what are its limitations?

Answer: Accounting Profitability = performance analyzation tool where a company compares its income statements/balance sheets to conduct direct performance comparisons.Limitations:- Accounting data is backwards looking- Accounting data doesn't consider off balance sheet items.- Accounting data mainly focuses on tangible assets which are not the most important.

Question: What is Shareholder value creation, and what are its limitations?

Answer: Shareholder value creation = From the shareholder's perspective, the measure of competitive advantage that matters most is the return on investment capital.Limitations:- Stock prices can be unpredictable, making it difficult to asses performance in the long term- Effects on stock prices are not limited to just the firm's strategy- Stock prices can reflect the "mood" of investors which is often times irrational.

Question: What is market capitalization and what is its formula?

Answer: Firm performance metric that captures the total dollar market value of a company's total outstanding shares at any time.MC = (# of outstanding shares x Share price)

Question: What is economic value creation, and what are its limitations?

Answer: Economic value creation = A firm has competitive advantage when it creates more economic value than rival firms. Limitations: - Determining the value of a good to consumers isn't easy- Value of a good to consumers depends on many different factors- It's hard to measure economic value created for every product when dealing with a firm with a diversified set of products.

Question: What is a reservation price?

Answer: the maximum price a consumer is willing to pay for a product or service based on the total perceived consumer benefits.

Question: What is producer surplus? What is consumer surplus?

Answer: Producer surplus: Difference between price charged (P) and the cost to produce (c), [p-c].Consumer surplus: Difference between value to a customer (v), and what they paid for it (p), [v-p]

Question: What is the formula for Economic value created?

Answer: Difference between value (v) and cost (c) [v-c]. [(v-c) = (v-p) + (p-c)]Difference between a buyer's willingness to pay for a product or service, and the firms total cost to produce it.

Question: What is a balanced scorecard?

Answer: strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals.It includes the individual approaches of accounting profitability, shareholder value creation and economic value creation.

Question: What are the advantages of a balanced scorecard? What are the disadvantages?

Answer: Advantages:- link strategic vision within the organization- Translate vision into goals- Design/plan business processes- modify/adapt strategic goals through feedback/learning- can accommodate short-term & long-term performance metricsDisadvantages: - It is a tool for strategy implementation, NOT strategy formulation- First a strategy must be developed; Second, strategy must be translated into objectives that can be measured/managed in a balanced scorecard approach.

Question: What is the tripple bottom line?

Answer: Combination of social, economic and ecological concerns that can lead to a sustainable strategy (can also be called profits, people and planet)Using a T.B.L approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders as they track its financial performance.

Question: What are some popular business approaches?

Answer: (1) Razor-razor blades - initial product given away/sold at a loss, and complementary product charged at a high price (ex. razors and their replacement blades)(2) Subscription - users pay for service whether they us it or not(3) Pay-as-you-go - Users only pay fro services they consume (ex. Utilities) (4) Freemium - Basic services are free of charge, but charges for premium services.(5) Wholesale - Whole-seller price is lower than retail price(6) Agency - The producer relies on a third party to sell the product at a commission (ex. Music industry)(7) Bundling - Sells less demanded products in a bundle with more desirable products to increase profits.