mgmt 498 - midterm

competitive advantage

when a firm generates consistently higher profits compared to its competitors

market

the industry, customer segment, or geographic area that a company competes in

unique value

the reason a firm wins with customers or the value proposition it offers to customers, such as low cost advantage or differentiation advantage or both

above-average profits

returns in excess of what an investor expects from other investments with a similar amount of risk

strategic management process or business strategy

the process by which organizations formulate a plan and allocate resources to achieve competitive advantage that involves making four strategic choices:

1. markets to compete in

2. unique value the firm will offer in those markets

3. the resources and capabilities required to offer that unique value better than competitors

4. ways to sustain the advantage by preventing imitation

external analysis

examining the forces that influence industry attractiveness, including opportunities and threats that exist in the environment

internal analysis

the analysis of a firm’s resources and capabilities (its strengths and weaknesses) to assess how effectively the firm is able to deliver the unique value (value proposition) that it hopes to provide to customers

cost advantage

an advantage that a firm has over its competitors in the activities associated with producing a product or service, thereby allowing it to produce the same product at lower cost

differentiation strategy

an advantage a firm has over its competitors by making a product more attractive by offering unique qualities in the form of features, reliability, and convenience that distinguish it from competing products

resources

all assets, brands, land, information, knowledge, and so on, controlled by a firm that enables it to conceive of and implement strategies that improve its efficiency and effectiveness

capabilities

the procedures, processes, and routines firms employ in their activities

strategy implementation plan

a company developing a set of processes 9capabilities) with each function (e.g., R&D, operations, sales, service, HR, etc.) that align with the unique value the company hopes to offer

mission

a company’s primary purpose that often specifies the business or businesses in which the firm intends to compete - or the customers it intends to serve

mission statement

a formal declaration of a company’s core values, business objectives, and ethical aspirations

vision statement

a short and inspiring declaration of what a business wants to achieve in the future

SWOT analysis

strategic planning method used to evaluate the strengths, weaknesses, opportunities, and the threats involved in a business

price sensitivity

the degree to which the price of a product or service affects consumers’ willingness to purchase the product or service

segmentation analysis

dividing up customers into groups or segments based on similar needs or wants

resource-based view

determining the strategic resources available to a company

corporate strategy

decisions about what markets to compete in, made by executives at the corporate level of an organization

business unit strategy

decisions about how to gain nad sustain advantage, made at the manager level for each standalone business unit within a company

functional strategy

decisions about how to effectively implement the business unit strategy within functional areas like finance, product development, operations, information technology, sales and marketing, and customer service

strategy vehicles

activities and strategic choices - such as make versus buy, acquisitions, and strategic alliances - that influence firm’s ability to enter particular markets, deliver unique value to customers, or create barriers to imitating its product

diversifying

adding to its products or opening a new line of business

acqusition

a strategy vehicle used for growth and diversification or to acquire key resources

strategic alliance

an exclusive relationship with another firm

vertical integration

the combination in one company of two or more stages of production normally operated by separate companies

international expansion

a growth strategy that involves taking business operations, products, and services from a home market into target markets abroad

strategy implementation

the translation of a chosen strategy into organizational action so as to effectively implement the activities required to achieve strategic goals and objectives

strategic leadership

organizational leaders charged with formulating and implementing a strategy with the objective of ensuring the survival and success of an organization

deliberating strategy

a plan or pattern of action that is formulated through a deliberate planning process that is then carried out to achieve the mission or goals of an organization

emergent strategy

a plan or pattern of action that develops and emerges over time in an organization despite a mission or goals

stakeholders

those who have a share or an interest in the activities and performance of an organization

four primary stakeholder groups

1. capital market stakeholders (shareholders, banks)

2. product market stakeholders (customers, suppliers)

3. organizational stakeholders (employees)

4. community stakeholders (communities, government bodies, community activists)

shareholders

owners of the company

corporate governance

the processes and structures that provide the ultimate decision-making authority for the firm

corporation

a legal structure for organizing where the organization is a distinct and separate entity from its owners, also known as shareholders

individual proprietorship

a legal structure for organizing where the same person owns and runs the business

partnerships

• a legal structure for organizing where the owners of a business share ownership

• the partnership is not separate from its owners

shareholder primacy model

the belief that a corporation should be run, primarily or exclusively, for the benefit of its shareholders

stakeholder model

the belief that a corporation should be run for the benefit of its entire stakeholder set, with no group enjoying primacy in decision making

nexus of contracts

a model of the corporation suggesting that the firm is the sum of its contracts with different stakeholders

property rights

the rights of owners to:

1. claim the residual earnings of the corporation, or the profits after all other stakeholders have been paid

2. monitor the management team to make sure that the team works in their best interests

three reasons for the shareholder primacy model

1. shareholders are the legal owners of the corporation’s assets

2. financial capital is the most important input into making a business successful

3. other societies and business arrangements in which business firms try to maximize the welfare of some other stakeholder group - such as employees or local community

three criticisms of the shareholder primacy model

1. shareholders don’t really own the corporation, since shareholders own stock that they can easily trade

2. shareholders have different objectives for investing in a firm

3. failures including Enron, Long-Term Capital Management, BP and the Deepwater Horizon oil spill, the collapse of Lehman Brothers, the behavior of firms during the financial crisis of 2008, and the recent activities of Wells Fargo are evidence that managing for shareholder value creates negative consequences for firms, investors, and society at large

primary stakeholders

• shareholders

• customers

• suppliers

• employees

• local communities

secondary stakeholders

• competitors

• national or global communities

• special-interest groups

reasons to advocate for stakeholder models

• executives and managers spend most of their time interacting with and managing the demands and needs of different stakeholder groups

• people believe that stakeholder groups have the right to be considered in decisions that will have an impact on the (intrinsic stakeholder model)

agency problem

• a consequence of the separation of ownership (shareholders/principals( and control (managers/agents) in the corporation

• agency problems occur when the goals of principals differ from those of agents

principals

• the owners of a resource or piece of property

• shareholders are considered principals

agents

• individuals or groups to administer the property or resources of principals

• the managers of a corporation are considered to be agents of the shareholders

tender offer

an offer by those hoping to control the corporation to purchase shares of dissatisfied investors

proxy fight

an attempt by dissatisfied investors or stakeholders to gain seats on the board of directors, or to influence corporate policy

board of directors

a group of individuals who monitor the executive team of the corporation and ensure that those executives are acting in the best interests of the shareholders

fiduciary duty

• the legal obligation of an agent to act in the best interests of the principal, or owner

• fiduciary duties include the duty of loyalty, to work for the optimal good of the owner, and the duty of care, to not take undue risk that would jeopardize the principal

inside directors

executives or managers working inside the company who also hold seats on the board of directors

outside directors

members of the board of directors not employed by the corporation in any other role

other constituency laws

laws that allow the board of directors to freely consider the needs of stakeholders other than shareholders when making critical strategic decisions for the firm

pay for performance

variable or contingent compensation that focuses managers on key variables, designed to align their interests with the shareholders

bonuses

additional compensation paid to executives, managers, and employees when they meet certain performance objectives

stock-based compensation

payment to organizational members in the form of shares in the corporation

stock option

the right to buy a certain number of the corporation’s shares at a specified future date for a specified price

stock grants

a gift, or grant, a stock given to organizational members, primarily executives

ethical values

values that define for an individual, group, or society things are morally right or wrong

four debates for ethical behavior

1. a good society creates the greatest good for the greatest number of people

2. the good society ensures a basic set of rights for its citizens

3. the good society creates the most freedom for people to act as they please

4. in a good society, individuals care for each other, exhibit empathy with others, and focus on meaningful relationships

culture

a pattern of behaviors and beliefs that are considered appropriate and correct for organizational members

porter’s five forces

1. rivalry

2. buyer power

3. supplier power

4. threat of new entrants

5. threat of substitute products

rivalry

• competition among firms within an industry

• involves firms putting pressure on each other and limiting each other’s profit potential by attempting to gain profits and/or market share

substitute

a product that is fundamentally different yet serves the same function or purpose as another product

threats

conditions in the competitive environment that endanger the profitability of a firm

opportunities

ways of taking advantage of conditions in the environment to become more profitable

three steps involved in porter’s five forces

1. identify the specific factors relevant to each of the five major forces

2. analyze the strength of each force

3. estimate the overall strength of the combined five forces to determine the general attractiveness of the industry, the profit potential for an average firm in the industry

seven factors to determine the intensity of rivalry

1. the number and size of competitors

2. standardization of products

3. costs to buyers of switching to another product

4. growth on demand for products

5. levels of unused production capacity

6. high fixed costs and highly perishable products

7. the difficulty for firms of leaving the industry

switching costs

barriers that help keep buyers using the same supplier by imposing extra costs for switching suppliers

buyer power

if customers, or buyers, can easily switch firms, then buyers have increased power

supplier power

if firms can’t switch suppliers easily, then suppliers have increased power

new entrants

if buyers can easily switch to new companies attempting to enter the industry, there is a greater threat of new entrants

substitutes

if buyers can switch to substitute products without much difficulty, firms face an increased threat from those substitutes

supplier

a firm that provides products that are inputs to another firm’s production process

four key factors that influence buyers power of suppliers

• switching costs

• demand

• number, or concentration, and size of buyers

• credible threat of backward integration

backward integration

a firm purchases one or more of its suppliers in order to make a product itself rather than buying it from another firm

increases in buyer price sensitivity

• buyers are struggling financially

• product is significant proportion of buyer’s costs

• buyers purchase in large volumes

• product doesn’t affect buyers’ performance very much

• product doesn’t save buyers money

forward integration

a firm goes into the business of its former buyers, rather than continuing to sell to them

barriers to entry

the way organizations make it more difficult for potential entrants to get a foothold in the industry

network effects

growth in demand for a firm’s product that results from a growth in the number of existing customers

trends in opportunities and threats in the general environement

• complementary products or services

• technological change

• general economic conditions

• population demographics

• ecological/natural environment

• global competitive forces

• political, legal, and regulatory forces

• social/cultural forces

complementary products or services

products or services that can be used in tandem with those from another industry

PEST analysis

• political

• economic

• sociological

• technological

value chain

• a visual description of the steps required to turn raw materials into finished products and/or services

• describes key functions of the company linked to each stage and functions that span its productive activities

priorities

a firm’s values and rankings of what is most important

assets

tangible or intangible resources or factors of production that create economic value for the firm when employed

resources to competitive advantage

1. physical (plant, equipment)

2. financial (free cash flow)

3. human (employee know-how, management skill, talents)

4. intangible (brands, patents)

operating capabilities

procedures, processes, or routine for delivering value to customers, employees, suppliers, or investors

dynamic capabilities

procedures, processes, and routines that continuously expand existing resources or improving operating capabilities

VRIO analysis

• value

• rarity

• inimitability

• organization to exploit profits

value

worth or utility

rarity

to be uncommon, or not available to other competitors

inimitability

an attribute of a resource that describes the degree of difficulty a competitor would face in copying, imitating or mimicking the value of that resource

positive network externalities

when the value of a product increases with the number of users

virtuous circle

when more sellers attract more buyers, who, in turn, attract more sellers