Strategy Final

Global strategy

a standardized approach where the firm offers essentially the same product and tries to capture economies of scale across countries

Multidomestic strategy

a localized approach where the firm adapts its product, marketing, and operations to fit each country or region

Transnational strategy

an approach that tries to balance global efficiency with local responsiveness at the same time

liability of foreignness

the extra costs and disadvantages a firm faces when operating in an unfamiliar foreign market

Cultural distance

the differences in language, norms, and business practices that make cross-border coordination and communication harder

Exporting

producing goods in the home country and selling them in foreign markets

Exporting benefits

low risk, low capital investment, fast entry, easy exit, and the ability to use existing production capacity

Exporting drawbacks

limited control over marketing and distribution, exposure to tariffs and shipping costs, currency risk, and weaker local market knowledge

Licensing / Franchising

allowing a foreign company to use a brand, product, or technology in exchange for fees or royalties

Licensing benefits

rapid entry with little capital, no need to run foreign operations directly, royalty income, and a local partner handling local complexity

Licensing drawbacks

weak control over quality and brand image, poor protection of proprietary know-how, and limited profit capture

Joint Venture

a foreign entry mode where a firm shares ownership, control, and profits with a local partner

Joint venture benefits

shared risk and investment plus access to the local partner’s knowledge, relationships, and regulatory expertise

Joint venture drawbacks

shared control slows decisions, disagreements can arise, knowledge can leak to the partner, and exit can be difficult

Wholly Owned Subsidiary

a foreign operation that is 100% owned by the parent firm

Wholly owned subsidiary benefits

maximum control, full profit capture, strong protection of technology, and tight alignment with corporate strategy

Wholly owned subsidiary drawbacks

highest capital commitment, greatest exposure to political and currency risk, slower entry, and a need for strong international experience

Switching-cost moat

a competitive advantage created when customers face meaningful cost, time, or inconvenience in changing to another product or provider

Network effects moat

a competitive advantage where the product or platform becomes more valuable as more users join

Efficient scale moat

a moat that exists when a market is only big enough for one or a few firms to profitably serve it

Intangible assets moat

a moat based on hard-to-copy assets such as patents, trademarks, licenses, or strong brand reputation

Clayton Christensen’s theory of disruptive innovation

incumbents usually do not fail because they are incompetent, but because their structure pushes them to keep serving profitable existing customers

Innovator’s dilemma

the conflict between protecting current profits and investing in disruptive opportunities that may not pay off immediately

Separate entity solution

create a separate unit that can pursue disruptive innovation without being trapped by the priorities of the core business

Low-end disruption

entering by serving over-served customers who accept lower performance for a much lower price, then improving over time

New-market disruption

entering by serving people who previously were not customers at all because the product was too expensive, too complicated, or inaccessible

Sustaining innovation

improvements aimed at existing mainstream customers that make the current product better on the attributes those customers already value

High-end/Premium disruption

entering at the top of the market by offering a superior product to demanding customers at a premium price

Porter’s Five Forces

a framework for judging how attractive an industry is; stronger forces usually mean lower profitability

Rivalry among existing competitors

the pressure created by direct competition, especially when firms are numerous, similar in size, and offer undifferentiated products

Threat of new entrants

the risk that new firms will enter the market and drive down profits, especially when entry barriers are low

Threat of substitutes

the pressure from alternative products that satisfy the same customer need well enough to draw demand away

Bargaining power of buyers

the ability of customers to force prices down or demand more value because they are concentrated, informed, or easy to switch

Bargaining power of suppliers

the ability of suppliers to raise prices or reduce quality because they are few, unique, or costly to replace

“Stuck in the middle” problem

when a firm lacks a clear strategic position and ends up being too costly to be the lowest-cost option and too ordinary to be differentiated

Dominant strategy

a strategy that gives a player the best payoff no matter what the other player chooses

Dominant strategy test

compare payoffs across all the other player’s choices; if one strategy wins in every case, it is dominant

Nash equilibrium

an outcome where no player wants to change strategy alone because doing so would make them worse off

Prisoner’s Dilemma

a situation where individually rational choices lead to a worse outcome for everyone than cooperation would

One-shot game

a game played only once, where the future does not punish defection

Infinitely repeated game

a game played over and over, where future retaliation can support cooperation

Shadow of future punishment

the idea that expected retaliation in later rounds makes cooperation more likely now

Changing the payoff structure

altering incentives so that the desirable action becomes more attractive even without repeated interaction

Own-price elasticity of demand

a measure of how strongly quantity demanded changes when the product’s own price changes

Own-price elasticity formula

% change in Qd ÷ % change in Price

Elastic demand

demand where quantity responds more than proportionally to a price change, so |E| > 1

Inelastic demand

demand where quantity responds less than proportionally to a price change, so |E| < 1

Unit elastic

demand where the percentage change in quantity equals the percentage change in price, so |E| = 1

Pricing power

the ability to raise price without losing too much volume, which usually exists when demand is inelastic

Cross-price elasticity of demand

a measure of how demand for one product changes when the price of another product changes

Positive cross-price elasticity

the two products are substitutes, so when one becomes more expensive, demand for the other rises

Negative cross-price elasticity

the two products are complements, so when one becomes more expensive, demand for the other falls

Near zero cross-price elasticity

the two products are unrelated, so one price change has little effect on the other product’s demand

VRIO Framework

a test for whether a firm’s resources and capabilities can create a sustained competitive advantage

Valuable

a resource that helps the firm exploit opportunities or neutralize threats

Rare

a resource that is not widely possessed by competitors

Inimitable

a resource that is difficult or costly for rivals to copy

Non-substitutable

a resource that cannot be matched by a different resource or capability

Organized

the firm has the structure, processes, and ability to use the resource effectively

Sustained competitive advantage

when a resource passes the VRIO test and supports long-term above-normal performance

Resource-Based View

the idea that competitive advantage comes from inside the firm, from the resources and capabilities it controls

Tangible resources

physical assets such as cash, factories, or trucks that can usually be seen, counted, and valued more easily

Intangible resources

non-physical assets such as patents, trademarks, and brand reputation that are harder to copy

Organizational capabilities

the firm’s embedded skills, routines, and processes that let it do things competitors struggle to replicate

Causal ambiguity

when outsiders can see that a firm performs well but cannot tell exactly which routines or capabilities produce that performance

Experience curve

the pattern where unit costs fall as cumulative output rises and the firm learns through repetition

Learning effects

cost reductions that happen because people become better at the work through repetition, fewer mistakes, and faster execution

Labor efficiency

lower cost per unit that comes from workers performing tasks faster and with less waste as experience builds

Process innovation

cost reductions caused by improving the workflow, methods, tools, or technology used to make the product

Economies of scale

cost reductions that happen because fixed costs are spread over more units and larger operations can be run more efficiently

Learning curve slope

the percentage of prior cost a firm reaches each time cumulative volume doubles, such as costs falling to 75% of the previous level

Lower learning-curve percentage

a steeper learning curve, which means costs fall faster with each doubling of volume

Experience-curve strategic implication

the firm with the greatest cumulative volume usually ends up with the lowest unit cost

Aggressive pricing by the leader

when the low-cost firm prices below rivals’ unit costs to gain more volume and strengthen its advantage

Why investors fund unprofitable entrants

they are betting that the entrant can grow enough volume to move down the experience curve and eventually become low-cost

Uniform industry-wide cost shocks

changes such as tariffs that raise all firms’ costs by the same amount without changing their relative positions

X-axis of the experience curve chart

cumulative GW produced on a log scale

Y-axis of the experience curve chart

unit cost in $/kW on a log scale

Dotted line in the experience curve chart

the market price line

Below the dotted line

profitable at current cost and price

Above the dotted line

losing money per unit at the current volume

Uniform cost shock example

a tariff raises all cost curves, but the low-cost leader still keeps its relative advantage

Vertical integration

a firm expanding into activities upstream from suppliers or downstream toward distributors

When to pursue vertical integration

when supplier power is high, when market transactions are costly or unreliable, or when the input is critical to quality or differentiation

When to avoid vertical integration

when many suppliers exist, when the firm lacks expertise in the activity, or when flexibility matters more than control

First-mover advantage

the durable benefit from entering a market early and building an advantage before rivals catch up

Switching costs as first-mover source

early customers get locked in and become harder for later rivals to steal

Scale economies as first-mover source

early volume helps the pioneer spread costs and lower unit cost faster than followers

Brand loyalty as first-mover source

the first well-known brand can become the default choice in the category

Network effects as first-mover source

early users attract more users, making the pioneer more valuable and harder to displace

Fast follower caveat

being first is not always enough, because later entrants can win if the pioneer’s model is flawed

ROIC

the return the firm generates on the capital invested in its business

WACC

the minimum return investors require on capital they supply

Economic Value Created

ROIC - WACC

ROIC > WACC

the firm is creating economic value and has a real competitive advantage if the spread lasts

ROIC = WACC

the firm is earning no economic profit

ROIC < WACC

the firm is destroying value because returns do not cover the cost of capital

Commoditization

the process where products become so similar that customers mainly choose based on price

Signals of commoditization

falling margins, price-based competition, weaker brand loyalty, higher price transparency, and less meaningful product differentiation

Strategic responses to commoditization

differentiate, become the lowest-cost producer, or exit and redeploy capital elsewhere