Strategic Management Test #1

1) Why is it important for you to understand business strategy?

When starting a company or being president or general manager within one, developing strategy is a primary job. As a junior officer in a company, developing and implementing ideas that are consistent with corporate strategy could lead to early promotions. You can also evaluate the potential success of companies that you may work for by understanding their strategy.

1) How would you describe/define strategy?

A plan to achieve competitive advantage

What are the four choices that are part of strategy formulation?

What markets or industries will the company pursue?

What unique value should the company offer the customer in those markets?

What resources and capabilities will allow the firm to deliver unique value better than competitors?

How will the company sustain its advantage and prevent imitation of its strategy?

1) What are the two generic strategies companies employ to offer unique value relative to competitors?

Low cost or differentiation

Who is ultimately responsible for a company's strategy? Who does this individual (or individuals) call upon for help in formulating strategy for the firm?

Strategic leaders who develop strategy through the strategic management process. They usually turn to the Board of Directors and other top management for guidance.

1) According to Michael Porter's "Five Forces" model, why do some firms earn higher profits than other firms?

Firms with higher profits may be in an industry with higher average profitability

1) What are resources and capabilities, what is the difference between them, and why do firms need to assess them?

Resources are the tangible and intangible assets a firm employs to create value and competitive advantage. Capabilities are the processes and activities that a firm develops using its resources. Firms need to assess resources and capabilities in order to allocate them properly to achieve key objectives.

What are three keys to the successful implementation of a company strategy?

Functional strategies need to be well aligned with delivering the unique value identified in the overall strategy.

Structure, systems, staff, skills, style, and shared values need to be designed to facilitate the execution of the strategy.

1) Who are the four primary stakeholder groups that influence strategic decisions in a company?

Capital market stakeholders

Product market stakeholders

Organizational stakeholders

Community stakeholders

1) Why is it important for a firm to accurately determine what industry it is in?

So that executives can identify who their real competitors are and the economic forces that will influence the strategies they hope to pursue. Industries also differ in terms of their profitability and performance, and identifying the right industry tells managers and investors what types of returns to expect.

How should a firm decide what industry it is in?

Firms should use the U. S. Government's NAICS codes to determine their industry.

1) What are the five major industry forces? How do they shape average profitability in an industry?

The five forces are: Barriers to (or threat of) Entry, Supplier Power, Buyer Power, Presence of Substitutes, and Competitive Rivalry. The impacts on average profitability are

Threat of Entry—the lower the threat the higher the average profitability

Supplier Power—the lower supplier power, the higher the average profitability

Buyer Power—the lower buyer power, the higher the average profitability

Substitution—the lower the threat of substitution, the higher the average profitability

Rivalry—the lower the degree of rivalry, the higher the average profitability.

What factors determine the intensity of rivalry?

(1) the number and size of competitors; (2) standardization and perishability of products; (3) costs to buyers of switching to another product; (4) growth in demand for products; (5) levels of unused production capacity or fixed costs; and (6) the difficulty for firms of leaving the industry.

Explain why increased buyer concentration would increase buyer power.

Increased buyer concentration (fewer buyers relative to the number of sellers) gives buyers increased pricing leverage over the firm. This is because firms have to compete to sell to fewer buyers, and orders tend to be larger.

1) Explain what it means for suppliers to have a credible threat of forward integration.

This happens when a supplier can easily compete with the firm because it may have the same technology or distribution system. With very little expenditure, the supplier could produce and sell the same product.

What factors determine the intensity of the threat of new entrants?

The presence of economies of scale, experience, or learning or other cost advantages; capital requirements to enter the industry; network effects, government policies and regulations.

1) What are substitutes?

A product that is fundamentally different yet serves the same basic function or purpose as another product.

What are the seven general environmental factors that affect industry profitability?

Complementary products or services

Technological change

General economic conditions

Population demographics

Global competitive forces

Political, legal, and regulatory forces,

Social/Cultural forces

Ecological/Natural Environment

1) How does each of the eight general environmental factors influence industry profitability?

Complementary products or services—raise the attractiveness of the industry's products, and hence its price

Technological change—technology can either enhance profitability (by creating new complements) or it can destroy profitability by creating a new and better substitute product.

General economic conditions—General economic conditions, such as interest rates, affect the cost of capital as well as consumer's overall willingness to spend.

Population demographics—affect the composition, and number, of customers. An aging population is bad for toys and games, but good for vacations and retirement living.

Global competitive forces—Global competitive forces can drive down profitability by removing trade barriers and inviting global competitors to enter the market. However, globalization also helps profitability by giving firms access to new, and sometimes very large, markets.

Political, legal, and regulatory forces—Regulations can increase the costs of doing business, or make some products and services less attractive to buyers. Conversely, government regulations can also raise barriers to entry and increase industry profitability.

Social/Cultural forces—this force influences consumer tastes and preferences. Changes in tastes can reduce profitability (think of the fast food industry), or it can raise profitability (think of all the accessories that make your smartphone more attractive and easier to use).

Ecological/Natural Environment—emerging concerns about the natural environment may open new and profitable industries, such as renewable energy. Threats of ecological damage can invite government regulations or activist concerns. These would drive down profitability.

1) How do the eight general environmental factors affect the five industry forces?

The general environmental forces work primarily to make the five forces dynamic. Often changes in the larger environment cause a significant shift in each of the 5 forces.

1) What are the elements of a complete external analysis?

Managers should begin by defining the industry. They should then analyze and evaluate the 5 forces, and then they should examine the current—and future—impacts of the eight general environmental forces on the industry. A complete analysis will consider how each force or element has changed over time, and what future changes might be expected.

1) Identify and describe the three two major elements of the value chain. How can the value chain help you do internal analysis?

There are only two major elements: the primary or core activities (logistics, production, and marketing), and support activities (firm infrastructure, human resource management policies, and technology development).

What is a resource? What types of resources can firms employ in their search for competitive advantage?

Resources are the tools or assets a firm employs to create value for its customers. Firms can employ tangible resources (physical, financial, and human resources) and intangible resources (such as brands, intellectual property, and reputation).

1) What is a capability? How do capabilities work together with resources to enable companies to create value?

Capabilities are processes that firms have developed to perform activities. Capabilities and resources work hand in hand to create value. Resources are the "what" of value creation, and capabilities are the "how" those get employed

How do different types of resources work together to create competitive advantage?

Firms combine their resources and capabilities into bundles. For example, McDonalds combines its financial resources with its capability to find great locations.

1) Under what conditions will resources lead to competitive advantages? When will those advantages be sustainable?

Resources will lead to competitive advantages when they create value, and are rare (see Figure 3.2). Those advantages will be durable when the resources prove difficult for competitors to imitate, and they will be truly sustainable when the firm is organized in a way to capture and exploit the gains from those resources.

1) Identify three situations in which a Company Diamond analysis would be useful to you. What two rules about data collecting should you remember when you do a diamond analysis?

Three situations:

1. When you are looking for a job (or a new job), the diamond will help you assess the viability of the company, as well as your fit with the organization.

2. When you are formulating a strategy for the organization, the diamond allows you to identify the important values and priorities that will enable your ability to create and implement a new strategy. It may also reveal possible constraints.

3. When you need to evaluate a competitor to see how they will respond to your strategic moves. Understanding their resources, capabilities, values, and priorities will help you anticipate their response.

The two rules are:

1. Garbage in—Garbage out, or the quality of the data you collect (and spend time verifying and comparing to determine its accuracy) will determine the quality of your conclusions, and

2. Collect data from multiple sources to get an accurate picture of the company.