Strategic Management Midterm Exam

MTBF

Mean time before failure

Contribution margin

Sales - Variable costs

Stockout

Running out of units to sell during the year

Retiring Stock

Buying back shares of common stock from the public

• this reduces the number of sharess outstanding

• this is best reserved for when you have excess cash

Retiring Long-term debt

Paying back bonds early prior ro their 10-yr due dates

• This helps reduce interest payments

• typically best used in later rounds

Issuing Dividends

Giving money to shareholders per each share each year

• this slightly helps to increase your stock price when you have excess cash

Strategic mgt

the integrative discipline associated with managing an organization to achieve competitive advantage

strategic mgt involves

• viewing the firm in its entirety - ALL FUNCTIONS

• Thinking like a general manager, owner, or CEO

• Positioning the organization vis-a-vis (face-to-face, or in relation to) its competitors

• Allocating precious materials

Strategy

A firm’s plan for how it is going to achieve sustained competitive

advantage

Strategy elements

• goal: what we are trying to accomplish

• Policy: The approach, formula, or discrimination we are going to leverage

• Actions: Specific action we will take to implement the policy

• Competitive advantage: Superior performance relative to competit

Three parts of a good strategy

1. Diagnosis of the competitive challenge

2. Guiding Policy to address the challenge

3. Set of coherent actions to implement te guiding poilcy

Everyone has a what?! They should leverage it!

A SECRET SAUCE!!

Strategy ask…

What am I going to do different from my competitors to win?

Competitive advantage

A firm that achieves superior performance relative to competitors in the same industry

Sustained competitive advantage

A firm that is able to maintain its competitive advantage over a prolonged period of time

Competitive disadvantage

underperforming the competition

Competitive parity

Performing at the same leve;

The V-P-C Model

Competitive advantage is achieved by creating greater economic value than competitors

Economic value (EV)

The difference between the perceived value gained by the consumer and economic cost to the producer (V-C)

• EV is apportioned between the consumer and producer based on price

Consumer surplus

customer satisfaction

producer surplus

profit

V

Perceived value

C

Cost

What strategy is not

• Grandiose statements

• Failure to face the competitive challenge

• Focused on operational effectiveness

• Tactical and not strategic

Mimicking the strategies of successful competitors rarely works. At best you will achieve __________

Competitive parity

The red queen effect

Every firm runs faster but their relative strategic positions remain the same

Five generic strategies

1. Broad low-cost

2. Broad differentiation

3. Focused low-cost

4. Focused differentiation

5. Best-cost (or best-value)

Broad low-cost

Achieving a cost-based advantage over competitors

Broad differentiation

Differentiating your product or service from your competitors

Focused low-cost

Achieving a cost-based advantage within a narrow market segment (niche)

Focused differentiation

Differentiating your product or service from your competitors in a narrow market segment (niche)

Best-cost (or best-value)

Hybrid strategy providing somewhat differentiated products at a somewhat lower cost (bang for your buck)

Stakeholder strategy

An integrative approach to managing a diverse set of stakeholders effectively in order to attain competitive advantage

CSR Strategy

Recognizes that firms today have not just economic but legal, ethical, and philanthropic goals which need to be part of the strategy

Levels of CSR

Economic, legal, ethical, philanthropic

Strategic Leadership

The executive’s use of power and influence to direct the activities of others when pursuing an organization’s goals

Upper-echelon theory

Suggest that organizational outcomes are reflection of the top management team

Level 5 leadership pyramid

1. Highly capable individual

2. Contributing team member

3. Competent manager

4. Effective leader

5. Executive

AFI Strategy Framework

• Analysis

• Formulation

• Implementation

Analysis

• Mission, vision, values

• External and internal analysis

Formualtion

• Corporate strat

• Bus strat

• Functional strat

Implementation

• Structure, culture, and control

• Corporate governance and business ethics

5-stage strat process

1. Mission,vision

2. external analysis

3. internal analysis

4. formulation

5. implementation

Strategic Planning Cycle

• Monthly/quarterly strat review

• Quarterly/mid year strat update

• Annual strategic plan

Mission

Description of what an organization actually does

Vision

An organization’s aspiration for what it ultimately wants to accomplish in the future

Values

Principles, ethical standards, and norms or behavior for individuals and the organization

• keeps values clean, crisp, and easy to remember

Strategic intent

An ambitious and compelling stretch goal that provides emotional and intellectual energy for the organization

Big hairy audacious goal (BHAG ~ Built to last)

Current capabilities and resources are manifestly insufficient to the task. Continuous learning is required

Strategic intent provides:

• a sense of direction

• a sense of discovery

• a sense of destiny

Setting strategic objectives

convert the mission, vision, and value into specific performance targets which the strategy is intended to achieve.

SMART objectives

Specific, measurable, aspirational, or achievable, relevant, and timely

Levels of strategy

• corporate

• business

• functional

Corporate strategy

where to compete (industry, markets, geography, etc.)

Business strategy

Focuses on goal-directed actions taken by managers to achieve competitive advantage in a single product market

• How to compete (cost, differentiation, etc)

Functional strategy

How to implement the strategy (engineering, r&d, mkt, hr, etc.)

Three general strategy approaches

1. top-down strategic planning

2. Scenario planning

3. Strategy as planned emergence

Top-down strategic planning

• traditional strategic plan

• sequential, logical process, analysis driven

• Assumes future can be predicted from the past

Scenario planning

• Assumes future is uncertain, black swan events

• Ask what-if questions

  • Antitipates multiple possible futures

Strategy as planned emergence

• blend or bottom-up and top-down

• recognizes serendipity and autonomy

• More practical, more inclusive

Devil’s advocacy

Team one develops a strat, team two challenges the strat and its underlying assumptions, team one revises tha strat, and the process continues until an acceptable strat is found

Dialectic inquiry

Team one develops a strat, another team created to develop an alternative strat, both teams present and debate their strats in front of the executive leadership team which selects or integrates the strats together

Illusion of control

overestimating ability to control things

Escalation of commintment

digging in when faced with negative feedback

Confirmation bias

seeking support for existing beliefs

Reason by analogy

Using analogies which are to simple for complex challenges

Representativeness

Basing conclusions on small sample or anecdotes

Group think

Following the leader without critical thinking

PESTEL

Used to identify trends in the external environment

• Political

• Environmental

• Social/ socioculture

• Technology

• Economic

• Legal

Five force analysis

Used to analyze industry structure through the forces which influence its profitability

• threat of new entrants

• bargaining power of suppliers

• Rivalry among existing competitors

• Bargaining power of buyers

• Threat of substitutes

Threat of new entrants

The risk that new competitors will enter an industry and take market share

• this force lowers industry profit potential in two ways:

  • incumbents must keep their prices low

  • incumbents must spend more to keep existing customers satisfied

Entry barriers

obstacles which make it hard to enter the industry

• economies of scale

• network effect

• switching cost

• capital requirements

• brand loyalty

Network effects

increase in value of a product or service as more people use it

economies of scale

cost advantage due to spreading fixed cost over a large number of outputs units (lower cost per unit)

Proprietary technology

exclusive access to valuable resources or capabilities

Government policy

govn’t regulations which restrict new entracts (ex: no foreign ownership, regulated monoploy)

Sources of strength for new entrants

• minimum efficient scale to compete is low

• no network effect

• customer switching cost is low

• capital requirements are low

• restrictive government regulations do not exist

Bargaining power of suppliers

The ability of industry suppliers to negotiate higher prices, thereby capturing more economic value

• this forces lower industry profit potential by moving profit from the industry incumbents to their suppliers

• Is strong when:

  • few suppliers relative to the number of industry incumbents

  • suppliers do not depend heavily on one industry

  • incumbent firms have switching cost

  • supplier products are differentiated

  • no readily available sub

  • suppliers threaten to forward integrate into industry

Bargaining power of buyers

The ability of industry consumers to negotiate lower prices, thereby capturing more economic value

• this forces lower industry profit to potential by reducing the prices buyers are willing to pay

• strong when:

  • fewer buyers relative to the number of industry incumbents

  • Industry products are standardized or commoditized

  • buyers face low switching cost

  • Buyers threaten to backwards integrate into industry

  • High price sensitivity due to low margins or potentially going out of business

Threat of substitutes

the risk that buyers will meet their needs in a different way from outside the focal industry

• this force lowers industry profit potential in the same way as new entrants:

  • incumbents must keep prices low

  • incumbents must spend more to satisfy the existing customers

• strong when:

  • sub offer and attractive prices to performance trade-off

  • buyer switching cost are low

Rivalry among direct competitors

Rivalry is the intensity with which incumbents within the industry compete for market share or profitability

• strong when:

  • many competitors

  • low industry growth rate

  • incumbents have made strategic commitments

  • exit barriers are high

  • products and services are direct substitutes for one another

  • fixed costs are high and marginal costs are low

Competitive industry structure

Fragmented to consolidated

• perfect competition

• monopolistic competition

• oligopoly

• monopoly

strategic commintment

firm actions that are costly, long-term oriented, usually made public, and difficult to reverse.

• economical and political

Exit barriers

Obstacles for leaving the industry

industry positioning theory

The source of competitive advantage is the firms ability to stake-out a unique position in the industry structure

Complementors

A producer of complementary products which enhance the value of the focsl firm’s products when used together.

Co-opetition

Cooperation with competitors to achieve strategic objectives

Strategic group

a subset of companies within an industry that pursue a similar strategy

strategic group model

a two-dimensional map which clusters firms into different groups based on selected strategic dimensions

strategic group mapping process

1. pick two dimensions that are strategically important in the industry

2. plot each firm as a circle at their approximate x, y position on the map

3. Size each circle to represent the relative $ revenue or the firm

   1. use a reference buble to provide a scale

4. Identify clusters representing strategic groups and give them a meaningful name

5. consider where firms in each group may move and how to get there

mobility barriers

industry specific factors that restrict the movement of companies between strategic groups

Core Competencies

• Unique strengths embedded deeply within the firm

• activities which you are good at and which drive competitive advantage

competencies

activities which your are good at

resources

any asset such as cash, buildings, machinery, intellectual property, ppl, etc that a firm can draw on to craft and execute strategy

capabilities

organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically

resource-based theory/ resource-based view (RBV)

the strategic mgt theory suggesting a firm’s underlying resources are the true source of its competitive advantage (think of a tree (products and services) and its roots (resources and capabilities)

The source of ______ is the firms ability to establish and leverage valuable, rare, inimitable, and organizationally supported resources

competitive advantage

Tangible resources

Visible and physical attributes

• labor

• capital

• land

• buildings

• plant

• equipment

• supplies

Intangible resources

invisible and nonphysical attributes

• culture

• knowledge

• brand equity

• reputation

• intellectual property

  • patens, designs, copy rights, trade marks, trade secrets

VRIO (VRIN) Framework

Analytical framework used to assess the degree to which different resources may contribute to superior performance (competitive advantage)

• firm level analysis

• for a resource to be the basis of comparative advantage it must be:

  • valuable, rare, inimitable, and organizationally