Strategic Management and Economies of Scale

A comprehensive set of flashcards covering key concepts from the lecture on strategic management, economies of scale, financial analysis, market dynamics, and competitive strategies.

What are the three types of value in strategic management?

Economic, Social, and Emotional.

What does strategic management primarily focus on?

Value creation for both the customer and the firm.

How is value created for customers?

By solving a problem that customers have and providing greater total value than competitors.

What is the primary purpose of an income statement?

To show a company's revenues, expenses, and resulting profit or loss over time.

What do fixed costs refer to?

Costs that do not fluctuate with the quantity of products manufactured.

What are variable costs?

Costs that change based on the production volume.

What is considered Costs of Goods Sold (COGS)?

The direct costs of producing the goods or services a company sells.

What are some examples of fixed costs?

Land, buildings, and equipment.

What does depreciation apply to?

Tangible fixed assets.

What does amortization apply to?

Intangible assets.

What must be done with advertising costs according to the lecture?

All annual advertising costs must be expensed at once.

What do selling, general, and administrative costs represent?

Operating expenses not directly tied to goods or services.

What are appropriations in the context of business expenses?

Expenses incurred outside of normal day-to-day operations.

What do economies of scale refer to?

Declining average production costs as the number of units produced increases.

What is an example of a cost-intensive industry?

Industries that have a significant percentage of total costs as fixed costs.

What are the advantages of economies of scale?

Lowering average costs increases profit.

What does the average cost function describe?

The firm's per-unit costs.

What are special sources of economies of scale?

Economies of density, purchasing power, and advertising & branding.

What is the learning curve?

Advantages that flow from accumulating experience and know-how.

What does scaling refer to in business?

Growing a company’s operations while lowering the average cost per unit.

What are diseconomies of scale?

Challenges that arise as firms grow larger and more complex.

What key analysis must firms perform before investing in fixed assets?

Break-even analysis.

What is the Fixed Asset Turnover Ratio?

Combines Fixed Assets from the Balance Sheet with Revenue from the Income Statement.

Define economies of scope.

When a company can produce multiple types of products at a lower cost than producing them separately.

What are economies of scope facilitated by?

Product diversification and the introduction of new products.

What does vertical integration mean?

When a company expands its operations into different stages of production within the same industry.

What is the make-or-buy decision?

Choosing between producing a component internally or purchasing it from an external firm.

What is a merger?

When two companies agree to join together on equal terms.

Define acquisition.

One company purchases another company.

What are alliances in business?

Arrangements between two independent companies to fulfill complex transactions.

How do firms enter new markets?

Through internal development, mergers & acquisitions, or strategic alliances.

What do barriers to entry refer to?

Factors that decrease the likelihood of new firms entering a market.

Define the Herfindahl Index.

A measure used to assess the level of competition in a market.

What is perfect competition characterized by?

Many producers selling easily substitutable products.

What is monopolistic competition?

A market with many sellers and differentiated products.

What defines an oligopoly?

A market with only a few sellers, where firms are highly aware of each other’s actions.

What is the Cournot model?

A model simulating a duopoly selling homogenous products.

What does the Bertrand Model illustrate?

Competition based on price among firms selling perfectly substitutable products.

What is disruptive innovation?

Innovating new products to reduce production costs.

What is the significance of strategic positioning?

How a firm differentiates itself within a market.

What are primary activities in a value chain?

Activities that directly contribute to the production, sale, and support of a product.

What does cost leadership strategy aim for?

To produce products at a lower cost per unit than competitors.

Define the benefit leadership strategy.

A strategy where a company’s products offer more benefits to customers than its rivals.

What does the concept of competitive advantage entail?

Earning a higher rate of economic profit than the average in the market.

What is consumer surplus?

The amount of value a consumer receives from a product priced below their willingness to pay.

What is the value creation formula mentioned?

Value Created = Consumer Surplus + Producer Surplus.

What are relationship-specific assets?

Fixed assets that support a specific transaction between two companies.

What is rent in the context of manufacturer-supplier contracts?

The expected profit from a contract if executed as planned.

Define quasi-rent.

The difference in profit between selling to the contracted customer and the second-best option.

What is the holdup problem?

Occurs when one party with more power renegotiates contract terms in their favor.

What determines the competitive dynamics of a market?

The number of firms, distribution of firms, and product differentiation.

What is a tapered integration strategy?

A mixture of vertical integration and market exchange.

What are the benefits of vertical integration?

Greater control over production quality and supply chain efficiency.

What effect does market entry have on competition?

Increases the level of competition, leading to lower profits.

Define strategic groups.

Firms that pursue the same strategy within a market.

What does the phrase 'stuck in the middle' mean in strategic management?

Firms attempting both low-cost and benefit-leadership strategies risk doing neither well.

What is an example of strategic bundling?

Bundling products to deter competition.

What is demand shock risk?

The risk faced by firms during sudden changes in consumer demand.

What are the stages of the industry life cycle?

Startup, Growth, Maturity, and Decline stages.

What are the key variable aspects of break-even analysis?

Fixed costs, variable costs per unit, revenue per unit, and quantity sold.

What does product market segmentation involve?

Dividing specific needs into geographic, demographic, and psychographic factors.

What is direct competition?

When firms operate within the same industry and offer similar products.

What does indirect competition involve?

Different products that fulfill a similar need, competing for consumer attention.

What is the impact of government regulation on new firms?

Regulations can impose barriers to entry for new firms.

What strategy should firms pursue to lower risks with economies of scale?

Regulate their fixed costs carefully.

What is a long-term contract in business relationships?

A formal agreement maintained over an extended period between a buyer and a supplier.

Define non-equity alliances.

Collaborative agreements without shared ownership between firm partners.

What is a joint venture?

A jointly owned company created by two or more firms for a specific objective.

What is the decision-making challenge regarding vertical integration?

Evaluating whether it is better to produce internally or outsource.

What are essential resources in market entry?

Resources that new firms must control to compete effectively.

Define the strategic relevance of economies of scope.

Cost savings achieved by producing multiple products together.

What is vertical chain in production?

All sequential stages a product passes through from concept to sale.

What is the competitive significance of cruising the value chain?

Identifying strengths and weaknesses to optimize product offerings.

What does maximizing output mean in scaling?

Increasing production to effectively reach new customers.

How do firms maintain focus on core competencies?

By not diluting resources when diversifying product lines.

What is the relationship between market demand and economies of scale?

Scalability is limited by the existing market demand.

What is strategic management's ultimate goal?

To maximize firm value and customer satisfaction.

How does performance analysis relate to competitive advantage?

It helps businesses identify opportunities for improvement.

What role does technology play in economies of scale?

Facilitates the increase of production efficiency.

What are sunk costs?

Costs that cannot be recovered once incurred.

What does operational elasticity reflect?

The relationship between variable costs and fixed costs at the break-even point.

What factors determine market structure?

The number of firms, distribution of market share, and product differentiation.

What is an example of a significant competitive threat in a market?

The entry of a disruptive innovator.

Define market position.

The strategic place a firm occupies in a market relative to competitors.

What is the impact of pricing strategy on competition?

Pricing decisions significantly influence consumer behavior and market competition.

What do firms analyze when considering mergers?

Potential for economies of scale and scope.

How does product innovation influence market structure?

Innovation can redefine competitive dynamics and market entry barriers.

What is the primary purpose of operational efficiency?

To minimize costs and optimize resource allocation.

What risk do firms face when they optimize production too rigidly?

The risk of failing to adapt to changing market demands.

What strategies can firms employ to avoid competitive disadvantages?

Diversification and strategic alliances.

What characterizes market penetration strategies?

Firms aim to increase sales volume within existing markets.

What is a potential drawback of aggressive market entry?

Overextending resources and compromising existing business sustainability.

Describe the term 'market entry barriers.'

Challenges a new firm may face when attempting to enter an established market.

What does market segmentation focus on?

Identifying specific buyer characteristics and needs.

What is the relevance of customer loyalty in competitive markets?

It can significantly affect pricing strategies and market share.