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Business Policy - Exam 1
Terms in this set (113)
What is Strategy?
A firm's theory about how to gain competitive advantages
What is Competitive Advantage
Ability to create more economic value than rival forms
What is the process we use to create a competitive advantage?
Strategic Management Process
3. Internal/External Analysis
5. Implement Choice
Finally you reach competivie advantage
Defining the firm's long term purpose
Missions may or may not influence performance
Specific measurable targets that indicate whether firm is reaching mission
Explain: Internal/External Analysis
External analysis: identification of external threats & opportunities; PEST analyses, Porter's Five Forces
Internal analysis: Identify's strengths and weaknesses; assessment of the firm's resources/capabilities
Explain: Strategic Choice (2 types)
1.Business-level strategies focus on a single market/industry
2.Corporate-level strategies focus on multiple markets
Explain: Implement Choice
Adoption of policies & practices that are consistent with strategy (e.g., org structure, mgmt controls, comp.)
Why are objectives important?
Objectives reflect the "specific measurable targets a firm can use to evaluate the extent to which it is reaching its mission"
what are the components of high-quality
~Specific - what exactly needs to be done
~Measurable (high-quality objectives are easy to measure and track over time)
~Appropriate (aligned with mission or vision)
Accounting Performance Measures
a measure of its competitive advantage calculated by using information from firms published profit and loss and balance sheet statements
How are Accounting Performance Measures grouped
1) Profitability ratios
2) Liquidity ratios
3) Leverage ratios
4) Average ratios
Economic Performance Measures
Compare a firms level of return to its cost of capital instead of to the average level of return in the industry.
How are Economic Performance Measures grouped
1) Dept (capital from banks and bondholders)
2) Equity (capital from individuals and institutions that purchase a firms stock)
What is Economic Value Added? (EVA)
Difference between consumer's perceived benefit and the cost of production
How is Economic Value added (EVA) calculated?
Perceived Value - Cost = EVA
Corporate vs. business strategies
Competing in single market/industry
(Examples: Local florist, JetBlue)
Competing in multiple markets/industries
(Examples: Wal-Mart, Apple, GE)
Emergent vs. intended strategies
~Intended Strategy: A strategy the firm hopes it is going to pursue
~Emergent strategy: is a strategy that emerges over time or is an intended strategy that has been radically reshaped once its implemented
Why is the external environment important?Why do managers conduct this analysis?
Takes time and effort
Includes assessments of general and local environments
Should include international and domestic markets
Provides assessment of likelihood of profitability in an industry (e.g., deciding business vs. corporate-level strategy)
Can be applied at individual level to professional and personal environmentsA)
** If a firm understands the threats and opportunities in its competitive environment, it is one step closer to being able to choose and implement a strategy that leads to competitive advantage.
B) It is part of the strategic management process.
Differences between general environment and local (industry) environment
General Environment has all local environments within it's realm.
General Environment: dimensions in a broader society that influence an industry and the firms within it.
Industry Environment: factors that directly influence a firm and its competitive actions
Consist of broad trends in the context within which a firm operates that can have an impact on a firm's strategic choice
What are the tools used to assess general environment / local environment
Structure- Conduct - Performance Model
and "More detailed PEST analysis" PESTLE:
~Developed to spot anti-competitive conditions for anti-trust purposes
~Emerged as a way to assess a firm or industry's potential for above normal profits
~Basis for Porter's Five Forces Model
Structure- Conduct- Performance Model
Industry Structure: Number of competing firms ; homogeneity of products ; Cost of Entry of Exit
Firm Conduct: Strategies firms persure to gain competitive advantage
Performance: Firm Level: competitive disadvantage, parity, temporary or sustained competitive advantage
Society: productive and allocative efficiency, level of employment, progress
6 different segments to use as tools to asses general environments:
Legal & Political Conditions, Economic Climate, Technological Change, Cultural Trends, Demographic Trends, International Events
creates both opportunity, as firms begin to explore how to use technology to create new products and services, and threats, as technological change forces firms to rethink their technological strategies
is the distribution od individuals in a society in terms of age, sex, marital status, income, ethnicity, and other personal attributes that may determine buying patterns. Understanding this basic info. About a population will help a firm determine whether its products or services will appeal to customers and how many potential customers for these products or services it might have Ex: baby boomers
the values, beliefs, and norms that guide behavior in society. These values, beliefs, and norms define what is "right and wring" in a society, what is acceptable and unacceptable, what is fashionable and unfashionable. Failure to understand changes in cultures, or differences between cultures, can have a very large impact on the ability of the firm to gain competitive advantage
the overall health of the economic systems within which a firm operates. Varies over time in a distinct pattern; periods of relative prosperity, when demand for goods and services is high ad employment low, are all followed by relatively low properity when demand for goods and services is low and unemployment is high. Activity in economy low = recession. Severe recession = depression. Whole cycle = business cycle.
Legal & Political Conditions
the laws and the legal system's impact on business, together with the general nature of the relationship between gov. and business.
events such as cival wars, political coups, terrorism, wars between countries, famines, and country or regional economic recessions.
Value is added when a firm's product is combined with another firm's product or service (even when it comes from outside the industry) Example: State Game > Dippin Dots > Dreamland BBQ
In what industry structures are certain opportunities available
Fragmented industry- Consolidation
Emerging Industry- First-mover advantages
Mature Industry - Product refinement
- Investment in service quality
- Process Innovation
Declining Industry- Leadership
~large # of firms (no dominant firms)
~low entry barriers
~few economies of scale
~No product standard has been reached (nor dominant firm)
~Often triggered with technological development
~Slowing demand & capacity growth
~Fewer profits & new innovations
~Shrinking demand & capacity growth
~Firms exiting & no new investments
Fragmented Industry Opportunities
~Consolidation (acquisitions, franchising)
~Discovery of economies of scale
Emerging Industry Opportunities
First mover advantages (technological leadership; locking up assets; creating switching costs)
Maturing Industry Opportunities
~Refine current products & services
~Introduce process innovations
Declining Industry Opportunities
Why is an assessment of the internal resources and capabilities of a firm important? Why do managers conduct this analysis?
~Compare strengths and weaknesses to competitors
~Determine if firm resources and capabilities are sources of competitive advantage
~Develop strategies that exploit sources of competitive advantage
What are a firm's resources?
tangible & intangible assets that a firm controls that it can use to conceive & implement its strategies
What are a firm's capabilities?
tangible & intangible assets that enable a firm to take full advantage of the other resources it controls
How are firm resources classified?
Different firms have different resources
It may be costly for firms without certain resources to acquire or develop other resources
Some resources may not spread from firm-to-firm easily
average accounting performance
when its performance is equal to the industry average.
Question of Value
Do resources and capabilities enable a firm to exploit an external opportunity or neutralize an external threat?
Question of Imitability
Do firms without a resource or capability face a cost disadvantage in obtaining or developing it compared to firms that already possess it?
Question of Rarity
Is the resource controlled by a small number of firms?
Question of Organization
Is the firm organized to exploit the full competitive potential of its resources and capabilities?
Threat of Suppliers
the extent to which firms that make critical resources available & have leverage over the industry
Threat of Suppliers (Examples)
1. Suppliers' industry is dominated by small number of firms
2. Suppliers sell unique or highly differentiated products
3. Suppliers are not threatened by substitutes
4. Suppliers threaten forward vertical integration
5. Firms are not important customers for suppliers
Threat of Entrants
The extent to which the new firms can easily enter the industry and threaten to compete
Threat of Entrants (Examples)
1. Economies of scale
2. Product differentiation
3. Cost advantages independent of scale
4. Government regulation of entry
Threat of Rivals
The level of intensity of competition among direct competitors
Threat of Rivals (Examples)
1. Large number of competing firms that are roughly the same size
2. Slow industry growth
3. Lack of product differentiation
4. Capacity added in large increments
Threat of Buyers
The extent to which a buyer (company/individual) has power over the firm in the industry
Threat of Buyers (Examples)
1. Number of buyers is small
2. Products sold to buyers are undifferentiated and standard
3. Products sold to buyers are a significant percentage of a buyer's final costs
4. Buyers are not earning significant economic profits
5. Buyers threaten backward vertical integration
Threat of Substitutes
Strategic Management Process
Sequential set of analyses an choices that can increase the likelihood that a firm will choose a good strategy; that is, a strategy that generates competitive advantages.
Missions may or may not influence performance.
SMART - Specific
What exactly needs to be done
SMART - Measurable
High quality objectives that are easy to measure and track over time
SMART - Appropriate
Aligned with vision or mission
SMART - Realistic
SMART - Timely
1. Demographic - Trends
2. Economic Climate
3. Political & Legal Conditions
4. International Events
5. Cultural Trends
6. Technological Change
Structure Conduct Performance Model
Industry Structure, measured by factors such as the number of competitors in an industry, the heterogeneity of products in an industry, cost of entry, etc.
Strategies that firms in an industry implement to gain a competitive advantage
1. Performance of individual firms
2. Performance of the economy as a whole
Large number of firms
Large number of firms
Small number of firms
Costly entry and exit
Economies of Scale
exist in an industry when a firm's cost fall as a function of its volume production.
Diseconomies of Scale
Exist when a firm's costs rise as a function of its volume.
1. Product Refinement
2. Investment in Service Quality
3. Process Innovation
1. Market Leadership
2. Niche Market
Fragmented Industries are _________
industries in which a large number of small or medium-sized firms operate and no small set of firms has dominated market share or creates dominant technologies.
Difference between a market and an industry.
Industry - Firms that produce a product or service
Resource Based View (RBV)
Assumptions of the RBV
1. Resource Heterogeneity
2. Resource Immobility
Set of business activities in which it engages to develop, produce, and market its products or services.
1. Unique Historical Conditions
2. Casual Ambiguity
3. Social Complexity
Unique Historical Conditions
When a firm gains low-cost access to resources because of its place in time and space. Both first-mover advantages and path dependence can create unique historical conditions.
Path of Dependence
When competitors cannot tell, what enables a firm to gain an advantage, the advantage may be costly to imitate.
When the resources and capabilities a firm uses to gain competitive advantage involve interpersonal relationships, trust, culture, and other social resources that are costly to imitate in the short-term.
Only a source of sustained competitive advantage in few industries, including pharmaceuticals and specialty chemicals.
Formal Reporting Structure
Description of whom in the organization reports to whom; it is often embodied in a firm's organizational chart.
Management Control Systems
Formal mechanisms to ensure that managers are behaving in ways consistent with a firm's strategies.
Formal Management Controls
Firm's budgeting & reporting activities
Any actions a firm takes that have the effect of reducing the level of rivalry in an industry and that also do not require firms in an industry to directly communicate/negotiate with each other
When tacit cooperation has the effect of reducing supply and increasing prices.
3. Gross Profit Margin
4. Earnings Per Share (EPS)
5. Price Earnings Ratio (p/e)
6. Cash Flow per Share
1. Current Ratio
2. Quick Ratio
1. Debt to Assets
2. Debt to Equity
3. Times Interest Earned
1. Inventory Turnover
2. Accounts Receivable Turnover
3. Average Collection Period
Measure of its competitive advantage calculated by using information from a firm's published profit/losses and balance sheet statements
incumbent firms possess brand identification and customer loyalty that potential new competitors do not
Barriers to Entry (Cost Advantages)
1. Proprietary Technology
2. Managerial Know-how
3. Favorable Access to raw materials
4. Learning-curve cost advantage
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