Strategic Management Exam #2 Saxton

Business-level strategy

A plan for how a firm competes in a specific market to achieve competitive advantage

Strategic approach

The method a firm uses to compete (cost leadership or differentiation)

Scope

The breadth of the market served (broad or narrow)

Cost leadership

A strategy focused on achieving the lowest cost in the industry while maintaining acceptable quality

Differentiation

A strategy focused on increasing customer willingness to pay by offering unique or superior value

Cost leadership vs. differentiation

Cost leadership lowers costs while differentiation increases willingness to pay

Cost leadership competitive advantage

Achieved by producing at lower costs than competitors, allowing lower prices or higher margins

Differentiation competitive advantage

Achieved by offering unique value that customers will pay more for

Drivers of cost leadership

Economies of scale, capacity utilization, experience curve, efficient design, process innovation, internal coordination

Economies of scale

Lowering cost per unit by producing in large volumes

Capacity utilization

Maximizing use of production capacity to spread costs

Experience curve

Cost reductions gained from learning and efficiency over time

Process innovation

Improving how activities are performed to reduce costs or increase efficiency

Internal value chain coordination

Efficient alignment of activities within the firm to reduce costs

Cost leadership in practice

Streamlined operations, tight cost control, standardized products, efficient supply chain

Drivers of differentiation

Product features, quality inputs, branding, customer responsiveness, reputation, process innovation

Product/service features

Unique characteristics that meet customer needs

Quality inputs

Using high-quality materials or components

Branding and marketing

Creating strong brand perception and awareness

Customer responsiveness

Meeting customer needs quickly and effectively

Corporate reputation

Overall perception of the company by customers

Differentiation in practice

Unique design, strong branding, premium experience, innovation focus

Price is not a strategy

Price is a short-term tactic, while strategy requires long-term investment and positioning

Parity

Meeting basic customer expectations on factors other than your main strategy

Cost leadership risks

Imitation by competitors, declining customer value of low cost, losing cost advantage

Differentiation risks

Imitation, declining customer value of uniqueness, confusion between product and value chain differentiation

Focus strategy

Targeting a narrow market segment or specific group of customers

Integrated strategy

Combining cost leadership and differentiation

Stuck in the middle

Failing to achieve either low cost or differentiation effectively

Outsourcing

Contracting external parties to perform certain business activities

When outsourcing makes sense

When activities are not strategically important, cost less externally, and do not reduce control significantly

Reasons for outsourcing

Reduce costs, focus on core competencies, improve efficiency

Outsourcing risks

Loss of control, disrupted coordination, hollowing out the firm, competitors gaining insight

Business strategy

Focuses on how a firm competes within a single industry using value chain, resources, and cost vs. differentiation approaches

Corporate strategy

Focuses on decisions across multiple industries including which industries to enter or exit and how to structure the company

Corporate vs. business strategy

Business strategy is about competing in one industry, while corporate strategy is about managing across multiple industries

Corporate strategy decisions

Choosing industries, structuring the company, allocating resources, and managing strategic business units

Strategic Business Units (SBUs)

Divisions of a company grouped for strategic planning and resource allocation

Diversification

Expanding a company into new industries or businesses

How companies diversify

By starting a new business ("make") or through mergers and acquisitions ("buy")

Value creation in diversification

A new business must be worth more as part of the corporation than on its own

Historical diversification trend

Diversification among large firms has increased significantly over time

Mergers and acquisitions activity

Large and consistent portion of economic activity with high dollar values

Motivations for diversification

Growth, market power, market entry, and risk spreading

Growth (diversification)

Expanding the company's size and revenue through new businesses

Market power

Increasing influence over competitors, suppliers, or customers

Market entry

Entering new industries more easily through diversification

Risk spreading

Reducing risk by operating in multiple industries

Related diversification

Entering businesses with similarities that allow for synergies

Synergies

Value created by combining businesses that is greater than their separate value

Market fit

Similarity in customers or markets between businesses

Operational fit

Similarity in operations or value chain activities

Management fit

Similarity in management practices or capabilities

Economizing

Reducing costs through shared activities or efficiencies

Resource leverage

Using existing resources across multiple businesses

Unrelated diversification

Entering businesses with no expected synergies

Financial advantage (unrelated diversification)

Creating value by acquiring undervalued firms or exploiting market inefficiencies

Diversification performance

Has a wide range of outcomes with a slightly positive average

Favorable diversification performance

Selecting attractive industries, strong rationale, good due diligence, capturing synergies, effective integration

Unfavorable diversification performance

Overpaying premiums, poor due diligence, failure to capture synergies, loss of focus, difficult integration

Acquisition premiums

Paying too much for a target firm, often reducing value

Due diligence

Careful evaluation of a target firm before acquisition

Post-acquisition integration

The process of combining operations after an acquisition

Synergy capture risk

Difficulty in actually realizing expected benefits from combining firms

Loss of focus

When diversification distracts from core business performance

Downscoping

Reducing the scope of the firm by shedding businesses

Divestiture

Selling off parts of the company when they are more valuable separately

Reason for divestiture

Unattractive industry, no strategic fit, or inability to capture synergies

International strategy

A firm's plan for competing and growing in markets outside its home country

International expansion

A strategic choice among alternatives like domestic growth, new products, or acquisitions

Motivation for international expansion

New geographic revenue opportunities, leveraging value chain, spreading risk, overcoming trade barriers, and location-based advantages

Location-based advantage

Value creation is enhanced by operating in a specific geographic location

Leveraging value chain internationally

Using existing resources and activities across multiple countries to create value

Emerging motivations for international expansion

Pressure for global integration, technology enabling scale and remote management, and competitive responses

Global integration

Pressure to standardize operations across countries to achieve efficiency

Market opportunities

Expanding into new geographic markets to increase revenue

Four international strategies

Global, transnational, multidomestic, and centralized (single country)

Global strategy

Focuses on efficiency with value added in upstream activities and minimal differences across countries

Transnational strategy

Balances efficiency and local responsiveness with value added both upstream and downstream

Multidomestic strategy

Focuses on local responsiveness with value added near customers and significant country differences

Centralized strategy

Focuses on upstream value creation with no pressure for efficiency, often in protected or controlled markets

Upstream activities

Early stages of the value chain like production and manufacturing

Downstream activities

Later stages of the value chain like marketing and customer service

Efficiency (scale and scope)

Cost advantages from producing large quantities or sharing activities across markets

Local responsiveness

Adapting products or services to meet specific country needs

Country variation

Differences across countries that affect strategy and operations

Fit with country

Evaluating how well a company's strategy aligns with a specific country

CAGE distance

Framework measuring distance between countries: cultural, administrative/political, geographic, and economic

Cultural distance

Differences in language, values, and norms between countries

Administrative/political distance

Differences in laws, policies, and political systems

Geographic distance

Physical distance and transportation challenges

Economic distance

Differences in income levels, costs, and economic development

Impact of distance

Greater distance makes it harder to operate effectively in a foreign country

Modes of entry

Different ways a firm enters a foreign market with varying levels of investment and risk

Exporting

Selling products in a foreign country through local agents

Licensing

Allowing another firm to use intellectual property under specific conditions

Franchising

Granting rights to operate a business using a firm's model and brand

Strategic alliance

Partnership between firms with shared goals and mutual commitments

Joint venture

A jointly owned business created by two or more firms

Wholly-owned subsidiary

A fully owned operation in a foreign country