Strategic Management Ch. 1-5 Mid-Term Exam

Front 1

Define the Strategic Management Process & Identify the Stages

Back 1

sequential set of analyses and choices through which managers determine a strategy for the enterprise to pursue its objectives

Front 2

Competitive Advantage

Back 2

-More economic value than competitors
Customers demonstrate a preference for the firm’s offerings
Firm has a cost advantage over other firms

Front 3

Competitive Parity

Back 3

Similar economic value as competitors
-Firm’s offerings are “average”
-Customers demonstrate no preference for the firm’s offerings
-The firm does not have a cost advantage over others

Front 4

Competitive Disadvantage

Back 4

Less economic value than competitors
- Customers demonstrate an aversion to the firm’s offerings e.g. negative reputation

-Firm may have a cost disadvantage e.g. outdated equipment or technology

Front 5

sustained competitive advantage

Back 5

Strategic Management – Imperfect Competition
-External and internal factors that limit competition/imitation
- How can firms protect and/or build sustained competitive advantage

Front 6

temporary competitive advantage

Back 6

Traditional Economic Theory – Perfect Competition

-Competitive advantage typically results in high profits Profits attract competition

-Competition usually limits the duration of the competitive advantage

Front 7

Competitive Advantage - Measurement

Back 7

(1) Accounting Measures and/or (2) Economic Measures

Front 8

Profitability Ratios

Back 8

ROA, ROE, Gross Profit, EPS

Front 9

Liquidity Ratios

Back 9

Current Ratio, Quick Ratio

Front 10

Leverage Ratios

Back 10

Debt/Assets, Debt/Equity

Front 11

Activity Ratios

Back 11

Sales/Inventory, Accounts Receivable Turnover

Front 12

Competitive Advantage is determined by----

Back 12

comparing the ratio in question to an industry average

Front 13

DuPont Analysis

Back 13

(Profit Margin) x (Asset Turnover) x (Equity Multiplier)

Net Income/ Sales x Sales/Assets x Assets/Equity

Front 14

Firms pursuing product differentiation frequently demonstrate______________

Back 14

High Profit Margin

Front 15

Firms pursuing cost leadership frequently demonstrate________________

Back 15

high asset turnover

Front 16

DuPont analysis provides____________

Back 16

rough estimate into the strategies a firm may be pursuing

Front 17

Intended Strategies

Back 17

Strategy as a result of formal, structured processes (e.g. strategic management process)

-Top Management Team

- CEO Often top - down

Front 18

Emergent Strategies

Back 18

Strategy as an evolving process, responsive to changing conditions and new information

- Lower level and/or middle managers

-Often bottom - up

Front 19

Economic Measures

Back 19

Earning a return in excess of the cost of capital

Front 20

Cost of Capital

Back 20

The rate of return that a firm promises to pay its suppliers of capital (debt & equity) to induce them to invest in the firm.


Cost of debt given by market rating

-Cost of equity calculated with Capital Asset Pricing Model (CAPM)

-Weighted Average Cost of Capital (WACC) (debt x cost of debt) + (equity x cost of equity)

Front 21

Accounting Measures and Economic Measures are____________

Back 21

often highly correlated

Front 22

Porter’s Five Forces Model

Back 22

Substitutes

Buyers

Rivalry

Suppliers

Entry

Front 23

All Threats High

Back 23

Equals Lower Average Profits

Front 24

All Threats Low

Back 24

Equals Higher Average Profits

Front 25

What are the 4 indicators of barriers to entry?

Back 25

(1) Economies of scale
(2) Product differentiation
3) Cost advantages independent of scale
(4) Government policy

Front 26

When are Suppliers powerful?

Back 26

can increase the firm’s cost of developing its products or services - specifically by either charging a higher price or providing a lower quality

Front 27

High threat of suppliers- 5

Back 27

-Few suppliers

- Suppliers sell unique or highly differentiated product

-Few substitutes

-Threat of forward vertical integration

-Firms are not important customers for supplier

Front 28

When are Buyers powerful?

Back 28

can decrease the price a firm is able to charge for its product or service

seek to reduce the price they must pay for the good or service

Front 29

High threat of buyers- 5 threats:

Back 29

1.Small number of buyers
2.Products are standard or low switching costs exist
3.Product represents a significant fraction of buyers’ cost of purchases
4. Buyers do not earn significant economic profits
5.Buyers can vertically integrate backwards

Front 30

When is the threat of Substitutes high?

Back 30

Meet approximately the same needs but do so in a different manner – place a ceiling on the price a firm can charge for its products or services


Customers simply switch if the price is too high

Front 31

Examples of substitutes

Back 31

-Digital books vs. printed books
-Computers vs. television
-Eggs & bacon vs. cereal
-Pepsi / Coke vs. Milk

Front 32

Rivalry

Back 32

The intensity of competition among the firm’s competitors – often results in a reduction of price a firm can charge for its product or service

Front 33

4 Industry attributes of high rivalry

Back 33

1.Large number of firms of similar size

2.Slow industry growth (i.e. demand)

3.Lack of product differentiation (homogenous products or service)

4-Capacity added in large increments (Economies of scale)

Front 34

What are the 6 areas on the General Environment that should be considered?

Back 34

Front 35

What are Economies of Scale?

Back 35

Firm’s costs fall as a function of production (downward slope)

Firm could enter but its products would be more expensive to produce or increase supply above market demand

Front 36

What are dis economies of scale?

Back 36

Firm’s costs rise (upward slope)

Front 37

What are the 4 generic industry structure?

Back 37

Front 38

RBV

Back 38

Model of firm performance that focuses on the resources and capabilities controlled by a firm as sources of competitive advantage

Front 39

Firm profitability is driven by the structure of assets within the firm – two assumptions of RBV:

Back 39

-Resource heterogeneity
-Resource immobility

Front 40

What are the 4 types of resources?

Back 40

Financial

Physical

Human

Organizational

Front 41

Resources

Back 41

Tangible and intangible assets that a firm controls to implement strategy

Front 42

Financial

Back 42

Money

Front 43

Physical

Back 43

Plant, Equipment, Natural Resources, IT, etc

Front 44

Human

Back 44

Training, intelligence, insight of individuals

Front 45

Organizational

Back 45

Reporting structure, culture, planning & controlling mechanisms, etc.

Front 46

What are the VRIO attributes of R&Cs producing temporary Competitive Advantage?

Back 46

Front 47

Imperfectly Imitable

Back 47

Resources & Capabilities that other firms cannot easily obtain or develop
– Costly to imitate (time, money, difficulty, etc)

Front 48

Unique Historical Differences

Back 48

Emerge over time

Front 49

Causal Ambiguity

Back 49

unable to clearly identify

Front 50

Social Complexity

Back 50

trust, culture

Front 51

R&Cs are imitable if_________

Back 51

Direct Duplication and/or Substitution is possible

Front 52

Value Chain

Back 52

– set of business activities in which a firm engages to develop, produce, and market its products or services

Front 53

McKinsey Generic Value Chain

Back 53

Front 54

What are 3 strategic responses a firm can make to their competitors?

Back 54

1-No Response
-Serving a different market / different sources of CA (e.g. Rolex vs. Casio)
-Lack of R&Cs Tacit Cooperation
- Tacit Collusion

2- Change Tactics – specific actions a firm takes to implement a strategy – valuable and rare but often not a source of sustained CA

- Changes in tactics are often quickly imitated

3-Change Strategy – changing the theory of how the firm does businessThese changes can be difficult!

-Mimetic Changes in strategy may only lead to competitive parity, but rarely lead to competitive advantage

Front 55

Strategic Management Process

Back 55

Front 56

Business Level Strategy

Back 56

How to position a business
Domain Navigation

Front 57

Corporate Level Strategy

Back 57

Which business to enter
Domain Selection

Front 58

Business Level Strategies

Back 58

actions firms take to gain competitive advantages in a single market or industry

Front 59

Business Level Strategies are intended to create differences between______

Back 59

the firm’s position and those of its rivals

Front 60

Generic Strategies (Porter)

Back 60

Front 61

What are the 6 sources of cost advantage?

Back 61

1-Economies of Scale (EoS)
2-Diseconomies of Scale
3-Learning Curve Economies
4- Differential Low Access to Productive Inputs 5-Technological Advances Independent of Scale 6-Policy Choices

Front 62

Cost Leadership & 5 Forces

Back 62

Front 63

Imitability – Cost of Duplication

Back 63

Low Cost
-Non-Proprietary or Highly Observable
-Technology Observable Value Chain Improvements

High Cost

-Historical Uniqueness
-Protected or unobserved technology
-Unobserved value chain improvements -Unique bundle of resources

Front 64

Three Organizational Structures

Back 64

1-Simple
2-Functional (i.e. U-form)
3- Multi-Divisional (i.e. M-Form)

Front 65

Management Controls

Back 65

-Tight cost control systems
-Quantitative cost goods
-Close supervision of labor, raw material, inventory, etc
-Cost leadership philosophy (organizational culture)

Front 66

Compensation Policies

Back 66

-Rewards for cost reduction (employee incentives)

Front 67

When does Cost Leadership Work?

Back 67

-Price competition is vigorous
- Large market size
- Volume Product is standardized or readily available
-Limited differentiation
-Buyers incur limited switching costs
- Buyers are large and have significant power

Front 68

Cost Leadership

Back 68

Generate economic value by having lower costs than rivals

Front 69

Product Differentiation

Back 69

-Generate economic value by offering a good or service that provides greater perceived benefits than those of rivals

-Important – perceived benefits

Front 70

Bases of Differentiation

Back 70

-Almost anything can be a base of differentiation -A wide range of customers needs can be filled by a wide range of bases of differentiation
-Tangible & Intangible
-Limited only by managerial creativity

Front 71

Differentiation: Imitability

Back 71

Front 72

When is differentiation likely to work?

Back 72

-Many methods for differentiating the product or service
-Buyers needs and uses are diverse
-Few rivals are following a similar differentiation approach
-Rapid technological change and product innovation (i.e. industry activity)

Front 73

Differentiation & 5 Forces

Back 73

Threat of Entry - Lower New products must surpass current products differentiation Switching Costs

Threat of Rivalry - Lower Features of differentiated products offset price competition

Threat of Substitutes - Lower Features of differentiated product reduce “substitute” exploration

Threat of Suppliers – Lower Firms are more able to pass the cost increase along to customer

Threat of Buyers – Lower Differentiated products reduce customer sensitivity

Front 74

Business Level Strategy – Changing Times

Back 74

-Cost leadership and differentiation can co-exist in the same firm, however mangers must set priorities

-Some sources of cost leadership can be effectively utilized to address differentiation

-Low-cost and differentiated products are often both produced in countries with low labor costs

-Product differentiation can lead to high-market share (e.g. Toyota)

-Beware of being “stuck in the middle.”

Front 75

Industries in which a large number of small or medium-sized firms operate and no small set offirms has dominant market share or creates dominant technologies are called ________ industries.

Back 75

fragmented

Front 76

The threat of direct competition tends to be high when

Back 76

firms are unable to differentiate their products.

Front 77

In general, first-mover advantages can arise from any of these sources except

Back 77

using an imitative strategy to introduce improved versions of competitors' new products.

Front 78

All other things being equal, which of the following would lead to lower barriers to entry in anindustry?

Back 78

Raw materials are widely and readily available at a competitive price.

Front 79

Civil wars, political coups, terrorism, wars between countries, famines, and country or regionaleconomic recessions are all examples of which element of the general environment?

Back 79

specific international events

Front 80

In the S-C-P model, ________ refers to the strategies that firms in an industry implement.

Back 80

conduct

Front 81

All of the following are elements of the general environment except

Back 81

industrial trends.

Front 82

Which of the following attributes makes suppliers a stronger threat?

Back 82

The supplier's industry is dominated by a small number of firms.

Front 83

Computer hardware and software technology, robots used in manufacturing and automatedwarehouses are examples of which type of resources?

Back 83

Physical Resources

Front 84

The training, experience, judgment, intelligence, relationships and insight of individual managersand workers in a firm are examples of

Back 84

Human Resources

Front 85

The VRIO assumption that some of the resource and capability differences among firms may belong lasting because it may be very costly for firms without certain resources and capabilities todevelop or acquire them is known as

Back 85

resource immobility

Front 86

Resources and capabilities, such as interpersonal relations among managers and a firm's culture,that may be costly to imitate because they are beyond the ability of firms to systematically manageand influence are referred to as

Back 86

socially complex

Front 87

To the extent that a firm's resources and capabilities enhance a firm's competitive position byenabling a firm to exploit its opportunities or neutralize its threats, these resources and capabilitiesare valuable and are known as

Back 87

strengths

Front 88

Resources that generate a temporary competitive advantage are

Back 88

valuable and rare but not costly to imitate.

Front 89

________ in the RBV are defined as the tangible and intangible assets that a firm controls that it canuse to conceive and implement its strategies.

Back 89

Resources

Front 90

A firm's marketing skills and teamwork as well as its cooperation among managers are examples of

Back 90

capabilities

Front 91

Actions that firms take to gain competitive advantage in a single market or industry are known as

Back 91

business-level strategies

Front 92

________ are said to exist when the increase in firm size (measured in terms of volume ofproduction) are associated with lower costs (measured in terms of average costs per unit ofproduction).

Back 92

Economies of scale

Front 93

The best example of a firm following a cost-leadership business strategy is

Back 93

Ryanair

Front 94

Learning-curve-cost advantages are

Back 94

not restricted to manufacturing

Front 95

Which of the following is not a potential source of diseconomies of scale?

Back 95

learning-curve economies

Front 96

Cost-leadership and product-differentiation strategies are so widely recognized that they are oftencalled

Back 96

generic business strategies

Front 97

When managers committed to an incorrect course of action increase their commitment to this actioneven as its limitations become manifest, this is known as

Back 97

escalation of commitment

Front 98

Cost-leadership firms are typically characterized by very ________ cost-control systems

Back 98

tight

Front 99

The ability of companies that produce complex software packages to tailor these packages to thespecific needs of their customers is an example of product differentiation through

Back 99

product customization

Front 100

Through which bases of competitive advantage do firms attempt to alter the perceptions of currentand potential customers, whether or not specific attributes of a firm's products or services arealtered?

Back 100

consumer marketing

Front 101

Which of the following bases of product differentiation attempts to create the perception that afirm's products or services are unusually valuable by focusing on links within and between firms?

Back 101

product mix

Front 102

A firm's ________ is really no more than a socially complex relationship between a firm and itscustomers and can serve as a basis for product differentiation.

Back 102

reputation

Front 103

While cost leadership requires rewards for cost reduction, product differentiation requires rewardsfor ________.

Back 103

creative flair

Front 104

Which of the following bases of product differentiation is almost always easy to duplicate?

Back 104

product features

Front 105

Which of the following bases of product differentiation is usually costly to duplicate?

Back 105

reputation

Front 106

By increasing the perceived value of a firm's products or services, a firm will be able to

Back 106

charge a higher price than it would otherwise be able to do.