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1 Management Review Exam 1 Chapter 1: What is Strategy and why is it important? What do we mean by STRATEGY? o A company's strategy is its action plan for outperforming its competitors and achieving superior profitability o The objective of a well-crafted strategy is not merely temporary competitive success and profits in the short un, but rather the sort of lasting success that can support growth and secure the company's future over the long term Strategy is about competing differently o Strategy is about competing differently from rivals--doing what competitors DON'T do or doing what they CAN'T do Strategy and the quest for competitive advantage o A company achieves a competitive advantage whenever it has some type of edge over rivals in attracting buyers and coping with competitive forces o A company achieves a competitive advantage when it provides buyers with superior value compared to rival sellers or offers the same value at a lower cost to the firm The advantage is sustainable if it persists despite the best efforts of competitors to match or surpass the advantage o Four most frequently used and dependable strategic approaches: 1 Low-cost provider: aiming for a cost-based competitive advantage over rivals 1 Outcompeting rivals on the basis of differentiating features, such as higher quality, wider product selection, added performance, value- added services, more attractive styling, and technological superiority 1 Best-cost provider: Developing and advantage based on offering more value for the money 1. Focusing on a narrow market niche within an industry Why a Company's strategy evolves over time o Managers of a company need to be willing to modify the strategy in response to changing market conditions, advancing technology, unexpected moves by a competitor, shifting buyer needs, emerging market opportunities, and mounting evidence that the strategy is not working well o Crafting strategy is not a one-time event but always a work in progress o Evolving strategy: adapting to new conditions and constantly evaluating what is working well enough to continue and what needs to be improved A company's strategy is partly proactive and partly reactive o Proactive: planned initiatives to improve the company's financial performance to secure a competitive edge o Reactive: responses to unanticipated developments and fresh market conditions o A company's deliberate strategy consists of proactive strategy elements that are both planned and realized as planned o Its emergent strategy consists of reactive strategy elements that emerge as changing conditions warrant o A company's strategy in toto (its realized strategy) thus tends to be a combination of proactive and reactive elements, with certain strategy 2 elements being abandoned because they have become obsolete or ineffective A company’s strategy and its business model o Center of company’s strategy is it’s business model o A company’s business model sets forth the logic for how its strategy will create value for customers, while at the same time generate revenues sufficient to cover costs and realize a profit o 2 elements of a company’s business model: 1. its customer value proposition: lays out the company’s approach to satisfying buyer wants and needs at a price customers will consider a good value 2. profit formula: the company’s approach to determining a cost structure that will allow for acceptable profits, given the pricing tied to its customer value proposition o just because company managers have crafted a strategy for competing and running the business, this does not automatically mean that the strategy will lead to profitability What makes a strategy a winner? 1. The fit test: how well does the strategy fit the company’s situation? o Must exhibit good external fit and in sync with prevailing market conditions o Must also exhibit good internal fit and be compatible with a company’s ability to execute the strategy in a competent manner o Unless a strategy exhibits good internal and external fit it is likely to be an underperformer and not have winning results o Winning strategies also exhibit dynamic fit in the sense that they evolve over time in a manner that maintains close and effective alignment with the company’s situation even as external and internal conditions change. 2. The competitive advantage test: can the strategy help the company achieve a sustainable competitive advantage? o Strategies that fail to achieve a durable competitive advantage over rivals are unlikely to produce superior performance for more than a brief period of time 3. The performance test: is the strategy producing a good company performance? o 2 performance indicators 1. competitive strength and market standing 2. profitability and financial strength Good Strategy + Good Execution = Good Management o indeed good strategy and good strategy execution are the most telling signs of good management o the better conceived a company’s strategy and the more competently it is executed, the more likely the company will be a standout performer in the marketplace 3 Chapter 2: Charting A Company’s Direction: its vision, mission, objectives, and strategy What does the strategy-making, strategy-executing process entail? o The managerial process of crafting and executing a company’s strategy consists of five integrated tasks 1. Developing a strategic vision that charts the company’s long-term direction, a mission statement that describes the company’s purpose, and a set of core values to guide the pursuit of the vision and mission 2. Setting objectives for measuring the company’s performance and tracking its progress in moving in the intended long-term direction 3. Crafting a strategy to move the company along the strategic course that management has charted and achieve the objectives 4. Executing the chosen strategy efficiently and effectively 5. Monitoring developments, evaluating performance, and initiating corrective adjustments in the company’s vision and mission statement, objectives, strategy, or approach to strategy execution in light of actual experience, changing conditions, new ideas, and new opportunities o A company’s strategic plan lays out its future direction, performance targets, and strategy Task 1: Developing a strategic vision, a mission statement, and a set of core values o Top management’s views and conclusions about the company’s long-term direction and what product-market-customer mix seems optimal for the road ahead constitute a strategic vision for the company o “where are we going” o well conceived visions are distinctive and specific to a particular organization; they avoid generic, feel-good statements Communicating the Strategic Vision o an effectively communicated vision is a valuable management tool for enlisting the commitment of company personnel to engage in actions that move the company forward in the intended direction o a strategic vision can usually be stated adequately in one to two paragraphs, and managers should be able to explain it to company personnel and outsider in 5 to 10 minutes Expressing the essence of the vision in a slogan o summed up vision in a brief phrase o reminder of “where we are headed and why” helps rally organization members to hurdle Developing a company mission statement o the distinction between a strategic vision and a mission statement is fairly clear-cut. A strategic vision portrays a company’s aspirations for its future (“where are we going”) whereas a company’s mission describes its purpose and its present business (“who we are, what we do, and why we are here”) Linking the vision and mission with company values o the values of a company are the beliefs, traits, and behavioral norms that management has determined should guide the pursuit of its vision and missions 4 o most companies have articulated 4-8 core values that company personnel are expected to display and that are supposed to be mirrored in how the company conducts its business o companies don’t always practice what they preach (don’t always follow core values) Task 2: Setting Objectives o objectives are an organization’s performance targets—the specific results management wants to achieve o well stated objectives are quantifiable or measurable, and contain a deadline for achievement The imperative of setting stretch objectives o managers should set high goals high enough to stretch an organization to perform at its full potential and deliver the best possible results o a company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective. Concentrating the full force of its resources and competitive actions on achieving that objective What kinds of objectives to set o Financial objectives relate to the financial performance targets management has established for the organization to achieve o Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive position, and future business prospects The need for a balanced approach to objective setting o Good financial performance is not enough; of equal or greater importance is a company’s strategic performance—outcomes that indicate whether a company’s market position and competitiveness are deteriorating, holding steady, or improving o A stronger market standing and greater competitive vitality is what enables a company to improve its financial performance o The best and most reliable leading indicators of a company’s future financial performance and business prospects are strategic outcomes that indicate whether the company’s competitiveness and market position are stronger or weaker o The balances scorecard is a widely used method for combining the use of both strategic and financial objectives, tracking their achievements, and giving management a more complete and balanced view of how well an organization is performing Setting objectives for every organizational level o Objective-setting is a top-down process that must extend to the lowest organizational levels. And it means that each organizational unit must take care to set performance targets that support—rather than conflict with or negate—the achievement of companywide strategic and financial objectives Task 3 Crafting a Strategy o Masterful strategies come from doing things differently from competitors where it counts—out-innovating them, being more efficient, being more imaginative, adapting faster—rather than running with the herd o Good strategy making is therefore inseparable from good business entrepreneurship. One cannot exist without the other 5 Strategy making involves managers at all organizational levels o CEO is always fully accountable for the results the strategy produces, whether good or bad o In most corporations, strategy is the product of more than just the CEO’s handiwork o Crafing and executing strategy is a collaborative team effort in which every company manager plays a strategy making role—ranging from minor to major—for the area he or she heads A company’s strategy-making hierarchy o Corporate strategy is strategy at the multi-business level, concerning how to improve company performance or gain competitive advantage by managing a set of businesses simultaneously o Business strategy is strategy at the single-business level, concerning how to improve the performance or gain a competitive advantage in a particular line of business o Functional-area strategies concern the actions and approaches employed in managing particular functions within a business (R&D, production, sales and marketing, customer service, and finance) o Operating strategies concern the relatively narrow strategic initiatives and approaches for managing key operating units (plants, distribution centers, purchasing centers) and specific operating activities with strategic significance (quality control, materials purchasing, brand management, internet sales) Uniting the strategy-making hierarchy o Anything less than a unified collection of strategies weakens the overall strategy and is likely to impair company performance o A company’s strategy is at full power only when its many pieces are united o Thus, as a general rule, strategy-making must start at the top of the organizations and then proceed downward from the corporate level to the business level and then from the business level to the associated functional and operating levels A strategic vision + objectives + strategy = a strategic plan o A company’s strategic plan lays out its future direction and business purpose, performance targets, and strategy o Typically, a strategic plan includes a commitment to allocate resources to the plan and specifies a time period for achieving goals (usually three to five years) Task 4 Executing the strategy o Managing the implementation of strategy is easily the most demanding and time consuming part of the strategy management process o Each company manager should think “What has to be done in my area to execute my piece of the strategic plan, and what actions should I take to get the process under way?” o Good strategy execution requires diligent pursuit of operating excellence. It is a job for a company’s whole management team Task 5 Evaluating performance and initiating corrective adjustments o Trigger point for deciding whether to continue or change the company’s vision and mission, objectives, strategy, and/or strategy execution methods 6 Chapter 3: Evaluating a company’s external environment Question 1: What are the strategically relevant factors in the macro-environment? o Every company operates in a broad “macro-environment” that comprises six principal components: political factors, economic conditions in the firm’s general environment, sociocultural forces, technological factors, environmental factors, and legal/regulatory conditions o An analysis of the impact of these factors is referred to as PESTEL analysis, an acronym that serves as a reminder of the six components involved Question 2: How strong are the industry’s competitive forces? o Most powerful and widely used tool for diagnosing the principal competitive pressures in a market is the five forces model of competition 1. Competition from rival sellers 2. Competition from potential new entrants to the industry 3. Competition from producers of substitute products 4. Supplier bargaining power 5. Customer bargaining power Competitive pressures created by the rivalry among competing sellers o Rivalry increases when buyer demand is growing slowly or declining o Rivalry increases as it becomes less costly for buyers to switch brands o Rivalry increases as the products of rival sellers become less strongly differentiated o Rivalry is more intense when there is excess supply or unused production capacity, especially if the industry’s product has high fixed costs or high storage costs o Rivalry intensifies as the number of competitors increases and they become more equal in size and capability o Rivalry becomes more intense as the diversity of competitors increases in terms of long-term directions, objectives, strategies, and countries of origin o Rivalry is stronger when high exit barriers keep unprofitable firms from leaving the industry o When reivalry is strong, the battle for market share is generally so vigorous that the profit margins of most industry members are squeezed to bare-bones levels o When rivalry is moderate, a more normal state, the maneuvering among industry members, while lively and healthy, still allows most industry members to ear acceptable profits o When rivalry is weak, most companies in the industry are relatively well satisfied with their sales growth and market shares, rarely undertake offensives to steal customers away from one another, and—because of weak competitive forces—earn consistently good profits and returns on investment The Choice of competitive weapons o Price discounting, clearance sales o Couponing, advertising items on sale o Advertising product or service characteristics, using ads to enhance a company’s image o Innovating to improve product performance and quality o Introducing new or improved features, increasing the number of styles to provide greater product selection o Increasing customization of product or service 7 o Building a bigger, better dealer network o Improving warranties, offering low-interest financing Competitive pressures associated with the threat of new entrants o Just how serious the competitive threat of entry is in a particular marker depends on 2 classes of factors 1. The expected reaction of incumbent firms to new entry 2. Barriers of entry o Barriers o Cost advantages enjoyed by industry incumbents o Strong brand preferences and high degrees of customer loyalty o Strong “network effects” in customer demand o High capital requirements o The difficulties of building a network of distributors or dealers and securing adequate space on retailers’ shelves o Restrictive government policies o The strongest competitive pressures associated with potential entry frequently come not from outsiders but from current industry participants looking for growth opportunities o Whether an industry’s entry barriers ought to be considered high or low depends on the resources and capabilities possessed by the pool of potential entrants o High entry barriers and weak entry threats today do not always translate into high entry barriers and weak entry threats tomorrow Competitive pressures from the sellers of substitute products o Whether the competitive pressures from substitute products are strong, moderate, or weak depends on 3 factors 1. Whether substitutes are ready available and attractively priced 2. Whether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes 3. Whether the costs that buyers incur in switching to the substitutes are low or high o As a rule, the lower the price of substitutes the higher their quality and performance; and the lower the user’s switching costs, the more intense the competitive pressures posed by substitute products o Other market indicators of the competitive strength of substitute products include 1. Whether the sales of substitutes are growing faster than the sales of the industry being analyzed 2. Whether the producers of substitutes are moving to add new capacity 3. Whether the profits of the producers of substitutes are on the rise Competitive pressures stemming from supplier bargaining power o Whether the suppliers of industry members represent a weak or strong competitive force depends on the degree to which suppliers have sufficient bargaining power to influence their terms and conditions of supply in their favor o Suppliers with strong bargaining power can erode industry profitability by charging industry members higher prices, passing costs on to them, and limiting their opportunities to find better deals o Factors determining strength of suppliers’ bargaining power 8 o Whether demand for suppliers’ products is high and they are in short supply o Whether suppliers provide a differentiated input that enhances the performance of the industry’s product o Whether it is difficult or costly for industry members to switch their purchases from one supplier to another o Whether the supplier industry is dominated by a few large companies and whether it is more concentrated than the industry it sells to o Whether suppliers provide an item that accounts for a sizable fraction of the costs of the industry’s product o Whether it makes good economic sense for industry members to integrate backward and self-manufacture items they have been buying from suppliers o Whether there are good substitutes available for the suppliers’ products o Whether industry members are major customers of suppliers Competitive pressures stemming from buyer bargaining power and price sensitivity o Whether buyers are able to exert strong competitive pressures on industry members depends on o The degree to which buyers have bargaining power o The extent to which buyers are price-sensitive o Individual consumers, for example, rarely have much bargaining power in negotiating price concessions or other favorable terms with sellers o Retailers tend to have greater bargaining power over industry sellers if they have influence over the purchase decisions of the end user or if they are critical in providing sellers with access to the end user o Determining the bargaining power of suppliers o Buyer power increases when buyer demand is weak in relation to industry supply o Buyer power increases when industry goods are standardized or differentiation is weak o Buyers’ bargaining power is greater when their costs of switching to competing brands or substitutes are relatively low o Buyers have more power when they are large and few in number relative to the number of sellers o Buyers gain leverage if they are well informed about sellers’ products, prices, and costs o Buyers’ bargaining power is greater when they pose a credible threat of integrating backward into the business of sellers o Buyer leverage increases if buyers have discretion to delay their purchases or perhaps even not make a purchase at all o Buyer price sensitivity increases when buyers are earning low profits or have low income o Buyers are more price-sensitive if the product represents a large fraction of their total purchases o Not all buyers of an industry’s product have equal degrees of bargaining power with sellers Is the collective strength of the Five Competitive forces conducive to good profitability? 9 o The most extreme case of a “competitively unattractive” industry occurs when all 5 forces are producing strong competitive pressures: rivalry among sellers is vigorous, low entry barriers allow new rivals to gain a market foothold, competition from substitutes is intense, and both suppliers and buyers are able to exercise considerable leverage o Strong competitive pressures coming from all 5 directions drives profits to low levels frequently producing losses and sometimes forcing some out of business o An industry can be competitively unattractive without all five competitive forces being strong o The strongest competitive forces determine the extent of the competitive pressure on industry profitability Matching company strategy to competitive conditions o A company’s strategy is increasingly effective the more it provides some insulation from competitive pressures, shifts the competitive battle in the company’s favor, and positions firms to take advantage of attractive growth opportunities Question 3: What factors are driving industry change, and what impact will they have? The Concept of industry driving forces o driving forces are the major underlying causes of change in industry and competitive conditions o have the biggest influences in reshaping the industry landscape and altering competitive conditions o driving force analysis has 3 steps 1. identifying what the driving forces are 2. assessing whether the drivers of change are, on the whole, acting to make the industry more or less attractive 3. determining what strategy changes are needed to prepare for the impact of the driving forces Identifying an industry’s driving forces o changes in an industry’s long-term growth rate o increasing globalization o emerging new internet capabilities and applications o changes in who buys the product and how they use it o technological change and manufacturing process innovation o product and marketing innovation o entry or exit of major firms o diffusion of technical know-how across companies and countries o changes in cost and efficiency o reductions in uncertainty and business risk o regulatory influences and government policy changes o changing societal concerns, attitudes, and lifestyles Assessing the impact of the factors driving industry change o the most important part of driving forces analysis is to determine whether the collective impact of the driving forces will be to increase or decrease market demand, make competition more or less intense, and lead to higher or lower industry profitability o the real payoff of driving forces analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces 10 Adjusting strategy to prepare for the impacts of driving forces o what strategy adjustments will be needed to deal with the impacts of the driving forces Question 4: how are industry rivals positioned in the market? o Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry Using strategic group maps to assess the market positions of key competitors o A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions o Companies in the same strategic group can resemble one another in a variety of ways The value of strategic group maps? o Strategic group maps reveal which companies are close competitors and which are distant competitors o Not all the positions on the map are equally as attractive o 2 reasons why some positions can be more attractive than others 1. prevailing competitive pressures from the industry’s five forces may cause the profit potential of different strategic groups to vary 2. industry driving forces may favor some strategic groups and hurt others o some strategic groups are more favorable positioned than others because they confront weaker competitive forces and/or because they are more favorably impacted by industry driving forces Question 5: what strategic moves are rivals likely to make next? o Studying competitors’ past behavior and preferences provides a valuable assist in anticipating what moves rivals are likely to make next and outmaneuvering them in the marketplace A Framework for competitor analysis o Michael Porter’s Framework for Competitor Analysis points to four indicators of a rivals likely strategic moves and countermoves; they include: o Rival’s current strategy o Objectives: financial performance objectives and strategic objectives o Capabilities: serve as a strong signal of future strategic actions o Assumptions about itself and the industry: what managers think of their strategic situation can impact how they behave Question 6: What are the industry’s key factors? o An industry’s key success factors (KSFs) are those competitive factors that most affect industry members’ ability to survive and prosper in the marketplace—the particular strategy elements, product attributes, operational approaches, resources, and competitive capabilities that spell the difference between being a strong competitor and a weak competitor—and between profit and loss o All firms in the industry must pay close attention to KSFs or risk becoming an industry laggard or failure o KSF questions: 1. On what basis do buyers of the industry’s product choose between the competing brands of sellers? That is, what product attributes and service characteristics are crucial? 11 2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a company have to be competitively successful? 3. What shortcomings are almost certain to put a company at a significant competitive disadvantage? o Rarely are there more than f key factors for competitive success o KSFs include a strong network of wholesale distributors and clever advertising o KSFs also include superior product differentiation or superior firm size and branding capabilities; KSFs also include full utilization of brewing capacity o The goal of company strategists should be to design a strategy that allows it to compare favorably as compared to rivals on each and every one of the industry’s KSFs and that aims at being distinctively better than rivals on one of the KSFs Question 7: is the industry outlook conducive to good profitability? o All frameworks: PESTEL, five forces analysis, driving forces, strategy groups, competitor analysis, and key success factors—provides a useful perspective on an industry’s outlook for future profitability o The anticipated industry environment is fundamentally attractive if it presents a company with good opportunity for above-average profitability; the industry outlook is fundamentally unattractive is a company’s profit prospects are unappealingly low o The degree to which an industry is attractive or unattractive is not the same for all industry participants and all potential entrants Chapter 4: Evaluating a company’s resources, capabilities, and competitiveness Question 1: How well is the company’s present strategy working? o In evaluating how well a company’s present strategy is working, the best way to start is with a clear view of what the strategy entails o The 3 best indicators of how well a company’s strategy is working are 1. Whether the company is achieving its stated financial and strategic objectives 2. Whether its financial performance is above the industry average 3. whether it is gaining customers and increasing its market shares o indicators of how well a company’s strategy is working o whether firm’s sales are growing faster than, slower than, or about the same pace as the market as a whole, thus resulting in a rising, eroding, or stable market share o whether the company is acquiring new customers at an attractive rate as well as retaining existing customers o whether the firm’s image and reputation with its customers is growing stronger or weaker o whether the firm’s profit margins are inc or dec and how well its margins compare to rival firms’ margins o trends in the firm’s net profits and return on investment relative to those of other companies in the industry o whether the company’s overall financial strength and credit rating are improving or declining o how well the company stacks up against rivals on factors relevant to buyer’s choices, such as price, product quality, innovative features, delivery time, and customer service 12 o whether key measures of operating performance are improving, remaining steady, or deteriorating o sluggish financial performance and second-rate market accomplishments almost always signal weak strategy, weak execution, or both Question 2: what are the company’s competitively important resources and capabilities? o A company’s resources and capabilities represent its competitive assets and are big determinants of its competitiveness and ability to succeed in the marketplace o Resource and capability analysis provides managers with a powerful tool for sizing up the company’s competitive assets and determining whether they can provide the foundation necessary for competitive success in the marketplace o 2 step process: first step is to identify the company’s resources and capabilities. Second step is to examine them more closely to ascertain which are the most competitively important and whether they can support a sustainable competitive advantage over rival firms nd o the 2 step involves applying the four tests of a resource’s competitive power identifying the company’s resources and capabilities o a resource is a productive input or competitive asset that is owned or controlled by the firm o a capability or competence is the capacity of a firm to perform some internal activity competently. Capabilities are developed and enabled through the deployment of a company’s resources o organizational capabilities are developed and enabled through the deployment of a company’s resources or some combination of its resources Types of company resources o Tangible resources are the most easily identified, since tangible resources are those that can be touched or quantified readily (physical resources, financial resources, technological resources, and organizational resources) o Intangible resources include various sorts of human assets and intellectual capital, as well as a company’s brands, image, and reputational assets o More intangible resources: relationships with suppliers, buyers, or partners of various sorts, and the company’s culture and incentive system o It is not exactly how a resource is categorized that matters but, rather, that all of the company’s different types of resources are included in the inventory Identifying Capabilities o Virtually all organizational capabilities are knowledge-based, residing in people and in a company’s intellectual capital or in organizational processes and systems, which embody tacit knowledge o 2 approaches that can make the process of uncovering and identifying a firm’s capabilities more systematic 1. takes the completed listing of a firm’s resources as its starting point. Since capabilities are built from resources and utilize resources as they are exercised, a firm’s resources can provide a strong set of clues about the types of capabilities the firm is likely to have accumulated 13 2. functional approach. Many capabilities relate to fairly specific functions; these draw on a limited set of resources and typically involve a single department or organizational unit o problem with 2 ndapproach: many of the most important capabilities of firms are inherently cross-functional o they spring from the effective collaboration among people with different types of expertise working in different organizational units o cross-functional capabilities and other complex capabilities involving numerous linked and closely integrated competitive assets are sometimes referred to as resource bundles o resource bundles can sometimes pass the four tests of a resource’s competitive power even when the individual components of the resource bundle cannot Assessing the competitive power of a company’s resources and capabilities o to assess their competitive power, one must go beyond merely identifying a company’s resources and capabilities to probe their caliber o if a company’s competitive advantage proves durable despite the best efforts of competitors to overcome it, then the company is said to have a sustainable competitive advantage The Four tests of a Resource’s Competitive power (VRIN tests for sustainable competitive advantage) 1. Is the resource or capability competitively Valuable? o To be competitively valuable, a resource or capability must be directly relevant to the company’s strategy, making the company a more effective competitor, able to exploit market opportunities and ward off external threats 2. Is the resource Rare—is it something rivals lack? 3. Is the resource hard to copy (Inimitable)? 4. Is the resource invulnerable to the threat of substitution from different types of resources and capabilities (non-substitutable)? o the vast majority of companies are not well endowed with standout resources or capabilities, capable of passing all four tests with high marks o passing both of the first two tests requires more—it requires resources and capabilities that are not only valuable but also rare o can only be cleared by resources/capabilities that are competitively superior o to pass the last two tests, a resource must be able to maintain its competitive superiority In the face of competition A company’s resources and capabilities must be managed dynamically o rivals that are initially unable to replicate a key resource may develop better and better substitutes over time o resources and capabilities must be continually strengthened and nurtured to sustain their competitive power and, at times, may need to be broadened and deepened to allow the company to position itself to pursue emerging market opportunities The role of dynamic capabilities o a dynamic capability is an ongoing capacity of a company to modify its existing resources and capabilities or create new ones 14 Question 3: is the company able to seize market opportunities and nullify external threats? SWOT Analysis (Strengths and Weaknesses, market Opportunities, and external Threats) Identifying a company’s internal strengths o A strength is something a company is good at doing or an attribute that enhances its competitiveness in the marketplace; strengths depend on the quality of its resources and capabilities Assessing a Company’s competencies—what activities does it perform well? o Basing a company’s strategy on its most competitively valuable strengths gives the company its best chance for market success o A competence is an activity that a company has learned to perform with proficiency—a capability in other words o A core competence is a proficiently performed internal activity that is central to a company’s strategy and competitiveness o A distinctive competence is a competitively important activity that a company performs better than its rivals—it thus, represents a competitively superior internal strength o The conceptual differences between a competence, a core competence, and a distinctive competence draw attention to the fact that a company’s strengths and competitive assets are not all equal Identifying company weaknesses and competitive deficiencies o A weakness or competitive deficiency is something a company lacks or does poorly (in comparison to others) or a condition that puts it at a disadvantage in the marketplace o Weaknesses can relate to: 1. Inferior or unproven skills, expertise, or intellectual capital 2. Deficiencies in competitively important physical, organizational, or intangible assets 3. Missing or competitively inferior capabilities in key areas o Company weaknesses are thus internal shortcomings that constitute competitive liabilities Identifying a company’s market opportunities o In evaluating a company’s market opportunities and ranking their attractiveness, managers have to guard against viewing every industry opportunity as a company opportunity o The market opportunities most relevant to a company are those that match up well with the company’s competitive assets, offer the best prospects for growth and profitability, and present the most potential for competitive advantage o A company is well advised to pass on a particular market opportunity unless it has or can acquire the resources and competencies needed to capture it Identifying the threats to a company’s future profitability o Threats can stem from the emergence of cheaper or better technologies, the entry of lower-cost foreign competitors into a company market stronghold, new regulations that are more burdensome to a company than to its competitors, unfavorable demographic shifts, political upheaval in a foreign country where the company has facilities, and the like What do the SWOT listings reveal? 15 o The two most important parts of SWOT analysis are drawing conclusions from the SWOT listings about the company’s overall situation and translating these conclusions into strategic actions to better match the company’s strategy to its internal strengths and market opportunities, to correct important weaknesses, and to defend against external threats o The final piece of SWOT analysis is to translate the diagnosis of the company’s situation into actions for improving the company’s strategy and business prospects o A company’s internal strengths should always serve as the basis of its strategy—placing heavy reliance on a company’s best competitive assets is the soundest route to attracting customers and competing successful against rivals Question 4: are the company’s cost structure and customer value proposition competitive? o The value provided to the customer depends on how well a customer’s needs are met for the price paid o The greater the amount of customer value that the company can offer profitably compared to its rivals, the less vulnerable it will be to competitive attack o For managers the key is to keep close track of how cost effectively the company can deliver value to customers relative to its competitors The concept of a company value chain o All the various activities that a company performs internally combine to form a value chain—so-called because the underlying intent of a company’s activities is to do things that ultimately create value for buyers o A company value chain consists of 2 broad categories of activities: 1. The primary activities that are foremost in creating value for customers 2. Support activities that facilitate and enhance the performance of the primary activities o With its focus on value-creating activities, the value chain is an ideal tool for examining how a company delivers on its customer value proposition Comparing the value chains of rival companies o The primary purpose of value chain analysis is to facilitate a comparison, activity-by-activity, of how effectively and efficiently a company delivers value to its customers, relative to its competitors A company’s primary and secondary activities identify the major components of its internal cost structure o Key purposes of value chain analysis and benchmarking are to develop the data for comparing a company’s costs activity by activity against the costs of key rivals and to learn which internal activities are a source of cost advantage or disadvantage o Evaluating a company’s cost-competitiveness involves using what accountants call activity-based costing to determine the costs of performing each value chain activity o A company’s own internal costs may be insufficient to assess whether its product offering and customer value proposition are competitive with those of rivals o Cost and price differences among competing companies can have their origins in activities performed by suppliers or by distribution allies involved in 16 getting the product to the final customer or end user of the product, in which case the company’s entire value chain system becomes relevant The value chain system o Value chains of suppliers and value chains of distributors=value chain system o This value chain system has implications that extend far beyond the company’s costs; it can affect attributes like product quality that enhance differentiation and have importance for the company’s customer value proposition, as well as its profitability o the value chains of a company’s distribution channel partners are relevant because 1. the costs and margins of a company’s distributors and retail dealers are part of the price the ultimate consumer pays 2. the activities that distribution allies perform affect sales volumes and customer satisfaction o accurately assessing a company’s competitiveness entails scrutinizing the nature and costs of value chain activities throughout the entire value chain system for delivering its products or services to end-use customers Benchmarking: a tool for assessing whether the costs and effectiveness of a company’s value chain activities are in line o benchmarking is a potent tool for improving a company’s own internal activities that is based on learning how other companies perform them and borrowing their “best practices” o the tough part of benchmarking is not whether to do it but rather how to gain access to information about other companies’ practices and costs o can obtain information from publishes reports, trade groups, and industry research firms, or by talking to knowledgeable industry analysts, customers, and suppliers o sometimes field trips to the facilities of competing or non-competing companies can be arranged to observe how thing are done, compare practices and processes, and perhaps exchange data on productivity and other cost components o fairly reliable source of benchmarking information are consulting organizations and several associations o gather benchmarking data, distribute information about best practices, and provide comparative cost data without identifying the names of particular companies strategic options for remedying a cost or value disadvantage o there are 3 main areas in a company’s total value chain system where company managers can try to improve its efficiency and effectiveness in delivering customer value 1. company’s own internal activities 2. suppliers’ part of the value chain system 3. forward channel portion of the value chain system Improving internally performed value chain activities o to reduce costs and improve a company’s cost competitiveness: o implement the use of best practices o eliminate some cost-producing activities altogether o relocate high-cost activities 17 o outsource activities o invest in productivity enhancing, cost-saving technological improvements o find ways to detour around the activities or items where costs are high o redesign the product and/or some if its components to facilitate speedier and more economical manufacture or assembly o to improve effectiveness of customer value proposition and enhance differentiation: o implement the use of best practices for quality throughout the company o adopt best practices and technologies that spur innovation o implement the use of best practices in providing customer service o reallocate resources to activities that address buyers’ most important purchase criteria o for intermediate buyers, gain an understanding of how the activities the company performs impact the buyer’s value chain and improve those that have the greatest impact o adopt best practices for marketing, brand management, and enhancing customer perceptions Improving supplier-related value chain activities o a company can gain savings in the suppliers’ part of the overall value chain by pressuring those suppliers for lower prices, switching to lower-prices substitute inputs, and collaborating closely with suppliers to identify mutual cost-saving opportunities o a company can enhance its customer value proposition by working with or through its suppliers to do so Improving value chain activities of forward channel allies o any of 3 mans can be used to achieve better cost competitiveness in the forward portion of the industry value chain 1. pressure distributors, dealers, and other forward channel allies to reduce their costs and markups 2. collaborate with forward channel allies to identify win-win opportunities to reduce costs 3. change to a more economical distribution strategy, including switching to cheaper distribution channels or perhaps integrating forward into company owned outlets translating proficient performance of value chain activities into competitive advantage o a company’s value creating activities can offer a competitive advantage in one of two ways: 1. they can contribute to greater efficiency and lower costs relative to competitors 2. they can provide a basis for differentiation, so customers are willing to pay relatively more for the company’s goods and services o a company that does a first-rate job of managing its value chain activities relative to competitors stands a good chance of profiting from its competitive advantage How activities relate to resources and capabilities o an organizational capability or competence implies a capacity for action; in contrast, a value-creating activity initiates the action 18 o resources and capabilities that are both valuable and rare provide a company with what it takes for competitive advantage o resource analysis is one tool for identifying competitively superior resources and capabilities, but their value and the competitive superiority of that value can only be assessed objectively after they are deployed o value chain analysis and benchmarking provide the type of data needed to make that objective assessment o the road to competitive advantage begins with management efforts to build organizational expertise in performing certain competitively important value chain activities Question 5: is the company competitively stronger or weaker than key rivals? o A more comprehensive assessment needs to be made of the company’s overall competitive strength o First, how does the company rank relative to competitors on each of the important factors that determine market success? o Second, all things considered, does the company have a net competitive advantage or disadvantage versus major competitors? o Much of the information needed for doing a competitive strength assessment comes from previous analyses o Step 1: make a list of industry’s key success factors and other telling measures of competitive strength or weakness o Step 2: assign weights to each of the measures of competitive strength based on their perceived importance o Step 3: calculate weighted strength ratings by scoring each competitor on each strength measure and multiplying the assigned rating by the assigned weight o Step 4: sum the weighted strength ratings on each factor to get an overall measure of competitive strength for each company being rated o Step 5: use the overall strength ratings to draw conclusions about the size and extent of the company’s net competitive advantage or disadvantage and to take specific note of areas of strength and weakness o The higher a company’s overall weighted strength rating, the stronger its overall competitiveness versus rivals o The bigger the difference between a company’s overall weighted rating and the scores of lower-rated rivals, the greater is its implied net competitive advantage o The bigger the difference between a company’s overall rating and the scores of higher-rated rivals, the greater its implied net competitive disadvantage Strategic implications of competitive strength assessments o A company’s competitive strength scores pinpoint its strength and weaknesses against rivals and point directly to the kinds of offensive/defensive actions it can use to exploit its competitive strengths and reduce its competitive vulnerabilities o A competitively astute company should utilize the strength scores in deciding what strategic moves to make o When a company has important competitive strength in areas where one or more rivals are weak, it makes sense to consider offensive moves to exploit rivals’ competitive weaknesses 19 o When a company has important competitive weaknesses in area where one or more rivals are strong, it makes sense to consider defensive moves to curtail its vulnerability Question 6: what strategies issues and problems merit front-burner managerial attention? o What strategic issues company managers need to address—and resolve—for the company to be more financially and competitively successful in the years ahead o Pinpointing the precise things that management needs to worry about sets the agenda for deciding what actions to take next to improve the company’s performance and business outlook o If items on the worry list are relatively minor, company managers seldom need to go much beyond fine-tuning the present strategy o However, if the problems confronting the company are serious and indicate the present strategy is not well suited for the road ahead, the task of crafting a better strategy need to be at the top of management’s action agenda Chapter 5: The Five Generic Competitive Strategies -A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully: 1. A low-cost provider strategy-striving to achieve lower overall costs than rivals on comparable products that attract a broad spectrum of buyers 2. A broad differentiation strategy-seeking to differentiate the company’s product offering from rivals’ with superior attributes that will appeal to a broad spectrum of buyers 3. A focused low-cost strategy-concentrating on a narrow buyer segment and outcompeting rivals on costs 4. A focused differentiation strategy-concentrating on a narrow buyer segment and outcompeting rivals with a product offering that meets the specific tastes and requirements of niche members better than the product offerings of other rivals 5. A best-cost provider strategy-giving customers more value for their money by satisfying buyers’ expectations on key quality/features/performance/service attributes 1. Low-cost Provider Strategy -a low-cost provider’s basis for a competitive advantage is lower overall costs than competitors -successful low-cost leaders who have the lowest industry costs, are exceptionally good at finding ways to drive costs out of their businesses and still provide a product or service that buyers find acceptable. Two Major Avenues for Achieving a cost advantage 1. perform value chain activities more cost-effectively than rivals 20 2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities A cost driver is a factor that has a strong influence on a company’s costs Cost Cutting methods that demonstrate an effective use of the cost drivers includes: 1. striving to capture all available economies of scale 2. Taking full advantage of experience and learning-curve effects 3. Trying to operate facilities at full capacity 4. Improving supply chain efficiency 5. Using lower cost inputs wherever doing so will not entail too great a sacrifice in quality 6. Using the company’s bargaining power vis-à-vis supplies or others in the value chain system to gain concessions 7. Using communication systems and information technology to achieve operating efficient 8. Employing advanced production technology and process design to improve overall efficiency 9. Being alert to the cost advantages of outsourcing or vertical integration 10.Motivating employees through incentives and company culture. Revamping the Value Chain System to Lower Costs -Cost advantages can often emerge from redesigning the company’s value chain system in ways that eliminate costly work steps such revamping can include: 1. Selling direct to consumers and bypassing the activities and costs of distributors and dealers 2. Streamlining operations by eliminating low value-added or unnecessary work steps and activities 3. Reducing materials handling and shipping costs by having suppliers locate their plants or warehouses close to the company’s own facilities. When a Low-Cost Provider works best: 1. Price competition among rival sellers is vigorous 2. The products of rival sellers are essentially identical and readily available from many eager sellers 3. There are few ways to achieve product differentiation in ways that have value to buyers 4. Most buyers use the product in the same ways 5. Buyers incur low costs in switching their purchases from one seller to another 6. The majority of industry sales are made to a few, large volume buyers 7. Industry newcomers use introductory low prices to attract buyers and build a customer base Pitfalls to Avoid 1. Getting carried away with overly aggressive price cutting 2. Relying on an approach to reduce costs that can be easily copied by rivals 3. Becoming too fixated on cost reduction 2. Broad Differentiation Strategies 21 -Attractive whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product offering Successful differentiation allows a firm to do one or more of the following: 1. Command a premium price for its product 2. Increase unit sales 3. Gain buyer loyalty to its brand -The essence of a broad differentiation strategy is to offer unique product attributes that a wide range of buyers find appealing and worth paying for -a uniqueness driver is a factor that can have a strong differentiating effect Managers can enhance differentiation based on these drivers: 1. Striving to create superior product features, design, and performance 2. Improving customer service or adding additional services 3. Pursuing production R&D activities 4. Striving for innovation and technological advances 5. Pursing continuous quality improvement 6. Increasing emphasis on marketing and brand-building activities 7. Seeking out high-quality inputs 8. Emphasizing human resource management activities that improve the skills, expertise, and knowledge of company personnel Revamping the Value Chain System to Increase Differentiation 1. coordinationg with channel allies to enhance customer perceptions of value 2. Coordinating with suppliers to better address customer needs -Differentiation can be based on tangible or intangible attributes When a Differentiation Strategy Works Best: 1. Buyer needs and uses of the product are diverse 2. There are many ways to differentiate the product or service that have value to buyers 3. Few rival firms are following a similar differentiatio
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