Strategic Management Exam 1

Business strategy

A plan to create value and capture value in the marketplace.

Four interrelated strategic choices

1) Which markets/industries to compete in; 2) what unique value to offer; 3) what resources and capabilities are needed to deliver that value better than competitors; 4) how to sustain the advantage by preventing imitation.

Industry

A group of firms offering similar products or using similar capabilities; organized around supply — who produces.

Market

A group of buyers/customers with similar needs, preferences, or use cases; organized around demand — who buys.

Competitive advantage

When a firm generates consistently higher profits than its competitors.

Unique value

The reason a firm wins with customers; its value proposition, such as a cost advantage, differentiation advantage, or both.

Value creation formula

Value created = V − C, where V is the value customers place on the offering and C is the firm's cost.

Profit per unit

P − C, where P is price and C is cost.

Consumer surplus

V − P: the difference between the value a customer places on a product and the price paid.

Three ways to increase willingness to pay

Improve product features/quality; offer complementary goods; benefit from network effects.

Strategic management process

Mission → external analysis + internal analysis → strategy formulation → strategy implementation.

Mission

A company's primary purpose, often specifying the business(es) it competes in or the customers it intends to serve.

External analysis

Examines forces that influence industry attractiveness, especially opportunities and threats.

Internal analysis

Examines a firm's resources and capabilities, strengths and weaknesses, to assess its ability to deliver unique value.

SWOT

A strategic planning method used to evaluate strengths, weaknesses, opportunities, and threats.

Corporate strategy

Decisions about WHERE to compete — which industries or markets — made at the corporate level.

Business-unit strategy

Decisions about HOW to gain and sustain competitive advantage within a specific business unit.

Functional strategy

Decisions about how areas such as R&D, operations, finance, HR, and marketing implement the business-unit strategy.

Strategy vehicles

Activities and choices such as make-or-buy decisions, acquisitions, and strategic alliances that help a firm enter markets, deliver unique value, or build barriers to imitation.

Strategy implementation

Translating a chosen strategy into organizational action; functions, structure, systems, staff, skills, style, and shared values must support execution.

Deliberate strategy

A plan or pattern of action formulated through a deliberate planning process and then carried out to achieve the firm's goals.

Emergent strategy

A plan or pattern of action that develops over time, often through unplanned opportunities.

Four stakeholder groups

Capital market stakeholders; product market stakeholders; organizational stakeholders; community stakeholders.

Sustaining advantage

Protecting created value from imitation through mechanisms such as patents, strong brands, scarce resources, network effects, or first-mover advantages.

Competitive landscape

Defined by the industry or industries a firm competes in plus the product and geographic markets it targets.

NAICS

North American Industry Classification System; classifies industries from broad 2-digit sectors to narrow 6-digit U.S. industries.

Best NAICS starting point for direct competitors

The 6-digit NAICS level, but analysts must still verify products/services, customers, geography, needs/use cases, and price/quality position.

Five Forces

Rivalry among incumbents, buyer power, supplier power, threat of new entrants, and threat of substitutes.

Three steps in Five Forces analysis

Identify factors relevant to each force → assess the strength of each force → estimate the combined forces and overall industry attractiveness.

Rivalry among incumbents

The intensity with which existing firms compete for customers; stronger rivalry tends to pressure industry profit margins.

Factors that increase rivalry

More/more equal competitors, standardized products, low switching costs, slow demand growth, excess capacity, high fixed costs/perishable products, and high exit barriers.

Fragmented industry

An industry with many competitors; often associated with more difficulty tracking rivals and potentially stronger rivalry.

Switching costs

Costs a customer faces when changing brands or products; lower switching costs generally increase rivalry.

HHI formula

HHI = Σsᵢ², where each firm's market share sᵢ is expressed as a decimal.

HHI range

0 to 1. Values near 0 indicate fragmentation; 1 represents a pure monopoly.

HHI interpretation

Higher HHI = greater concentration and potentially lower rivalry; lower HHI = more fragmentation and potentially higher rivalry. Concentration does NOT determine rivalry by itself.

Class HHI example

0.40² + 0.35² + 0.15² + 0.10² = 0.3150.

Buyer power

Buyers' ability to pressure sellers for lower prices or better terms, based on bargaining power and price sensitivity.

Backward integration

A buyer threatens to make the supplier's product itself instead of purchasing it; this can increase buyer power.

Buyer price sensitivity increases when…

Buyers are financially pressured, the product is a large share of their costs, they buy in large volume, the product has little effect on performance, or it does not save them money.

Supplier power

Suppliers' ability to raise prices or demand better terms, especially when suppliers are concentrated or can credibly forward integrate.

Forward integration

A supplier threatens to enter the business of its buyers.

Threat of new entrants

The risk that new firms enter, take market share, add capacity, and pressure prices and profits.

Major barriers to entry

Economies of scale/experience/learning; patents or proprietary technology; better locations; economies of scope; preferred access to resources; high capital requirements; network effects; government restrictions.

Substitute

A fundamentally different product that performs the same basic job as another product.

What raises the threat of substitutes?

High awareness/availability, low switching costs, lower substitute prices, and similar or better performance.

Attractive industry

Generally has weak buyer/supplier power, strong entry barriers, few substitutes, and limited rivalry.

PESTEL / general environment

Macro forces outside the Five Forces that can affect firm and industry profitability.

Political/legal/regulatory forces

Government laws, regulations, and institutional actions that affect costs, competition, or strategic options.

Economic forces

Economic growth, interest rates, and inflation; these affect demand, price sensitivity, rivalry, and cost of capital.

Social/cultural forces

Society's values, norms, and attitudes that affect preferences, laws, and business practices.

Technological change

New products, processes, or materials that can reshape industries; early adopters may gain share and higher margins.

Ecological/natural forces

Changes in the physical environment and public perceptions of business's environmental impact.

Demographic forces

Changes in population size, age, gender, ethnicity, or income distribution.

Global forces

Changes such as trade barriers, international economic growth, transportation, communication, and living standards.

Complementary products/services

Products or services used together that become more valuable in combination, such as smartphones and apps.

Industry life cycle

Introduction → growth → shakeout → maturity → decline.

Industry life-cycle examples from class

Quantum computing = introduction; electric vehicles = growth; food delivery apps = shakeout; smartphones = maturity; print newspapers = decline.

Value chain

A visual description of the steps and functions required to turn raw materials into finished products and/or services.

Primary value-chain activities

Inbound logistics, operations, outbound logistics, marketing & sales, and service.

Support value-chain activities

Firm infrastructure, human resource management, technology development, and procurement.

Value chain vs. RBV

Value chain asks what a firm is good at; the Resource-Based View asks what the firm is better at than relevant competitors.

Resource-Based View (RBV)

Analyzes the resources and capabilities that can help a firm create and sustain competitive advantage.

Resources

Assets, capabilities, processes, attributes, information, and knowledge controlled by a firm — the 'what' of competitive advantage.

Four categories of resources

Physical, financial, human, and intangible resources.

Tangible resource

A resource with physical presence, such as land, factories, equipment, or cash.

Intangible resource

An economically valuable resource without physical presence, such as brands, patents, licenses, knowledge, or reputation.

Capabilities

Procedures, processes, and routines used to coordinate activities — the 'how' of competitive advantage.

Operating capabilities

Procedures, processes, or routines used to deliver value day to day.

Dynamic capabilities

Processes that continuously expand resources or improve, update, or change operating capabilities.

Priorities

A firm's rankings of what matters most; they guide resource allocation and help sustain commitments over time.

Assets

Tangible or intangible resources/factors of production that create economic value when employed by the firm.

VRIO

Tests whether a resource/capability is Valuable, Rare, costly to Imitate, and whether the firm is Organized to exploit it.

VRIO: Valuable?

Does the resource help the firm produce something of worth to customers?

VRIO: Rare?

Is the resource scarce relative to competitors?

VRIO: Inimitable?

Is the resource difficult or costly for competitors to replicate?

VRIO: Organized?

Can the firm actually capture the value created by its valuable, rare, and inimitable resource/capability?

VRIO outcome: not valuable

Competitive disadvantage / competitive failure.

VRIO outcome: valuable but not rare

Competitive parity.

VRIO outcome: valuable + rare but imitable

Temporary competitive advantage (study-guide wording).

VRIO outcome: valuable + rare + inimitable but not organized

Unused competitive advantage (study-guide wording).

VRIO outcome: valuable + rare + inimitable + organized

Sustained competitive advantage.

Path dependence

An advantage built through a unique sequence of past decisions and learning; competitors cannot simply recreate the same history.

Tacit knowledge

Know-how that is difficult to write down, explain, or transfer.

Causal ambiguity

Competitors cannot clearly identify exactly what causes a firm's success, so they do not know what to copy.

Complexity

An advantage depends on many interrelated activities working together.

Time compression diseconomies

Some advantages require time to build and cannot be created faster simply by spending more money.

Network effects / first-mover advantages

Value grows as more users join, creating a reinforcing cycle that makes catching up difficult.

Competitive Advantage Pyramid

Priorities & values → resources & capabilities → activities/strengths & weaknesses → competitive advantage.

Three sources of data for competitive analysis

Archival data, interviews, and direct observation.

Walmart value-chain example

Procurement, inbound logistics, and operations/distribution are central because purchasing power, inventory management, and efficient logistics support low prices.

Apple value-chain example

Technology/product design plus marketing & sales create value through hardware/software integration, ecosystem development, branding, and customer experience.

Disney value-chain example

Content/IP development, marketing, and operations/customer experience allow Disney to monetize characters and stories repeatedly across many businesses.

Cost advantage strategy

An advantage in producing a product or service at lower cost than competitors.

Two choices with a cost advantage

Charge lower prices to gain market share OR match competitors' prices and keep the cost difference as higher profit.

Five sources of cost advantage

Economies of scale/scope; learning and experience; proprietary knowledge; lower input costs; a different business model.

Economies of scale

A reduction in cost per unit as production volume increases.

Four sources of economies of scale

Spread fixed production costs; spread nonproduction costs; specialize machines/equipment; specialize tasks/people.

Scale curve

A graph of cost per unit versus production volume over a given period.

Minimum efficient scale (MES)

The smallest output level at which long-run average unit costs stop falling; the point where the scale curve flattens.