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Strategic Position
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firm's strategic profile based on the difference between value creation and cost (V - C)
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Five Forces Model
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framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy
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Threat of Entry
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risk that potential competitors will enter an industry
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Entry Barriers
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obstacles that determine how easily a firm can enter an industry and often predict industry profit potential
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Network Effects
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value of a product or service for an individual user increases with the number of total users
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Competitive Industry Structure
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elements and features common to all industries, including number and size of competitors, firms degree of pricing power, type of product or service offered, and height of entry barriers
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Exit Barriers
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obstacles that determine how easily a firm can leave an industry
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Complement
answer
product, service, competency that adds value to original product by being offered when two are used together
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Complementor
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company that provides good or service that leads customers to value firm's offering more when two are combined
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Co-opetition
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cooperation by competitors to achieve a strategic objective - attractive industries have high entry barriers, low exit barriers, lower buyer and supplier power, a low threat of subs, and availability of complements
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Industry Convergence
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process where formerly unrelated industries begin to satisfy the same customer need
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Perfectly Competitive Industry
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many small firms, commodity product, low entry barriers, no pricing power for individual firms
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Monopolistic Industry
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many firms, differentiated product, medium entry barriers, some pricing power
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Oligopolistic industry
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few large firms, differentiated product, high entry barriers, some degree of pricing power
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Monopoly
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only one large firm supplying market, has unique product, barriers to entry might be high, and has pricing power
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Resource-Based View
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model sees certain types of resources as key to superior firm performance
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Tangible resources
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resources that have physical attributes and thus are visible
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Intangible Resources
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that do not have physical attributes and thus are invisible (CA more based on this)
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Resource Heterogeneity
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assumption in resource-based view that a firm is a bundle of resources and capabilities that differ across firms
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Resource Immobility
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assumption in the resource-based view that a firm has resources that tend to be sticky and that do not move easily from firm to firm
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VRIO Framework
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theoretical framework that explains and predicts firm-level competitive advantage
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Valuable
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if resource helps exploit an external opportunity or offset an external threat
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Rare
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number of firms that possess it is less than number of firms it would require to reach a state of perfect competition
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Costly-to-imitate
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firms do not possess resources and are unable to buy resource at a comparable cost
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Organized to capture value
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characteristic of having in place an effective structure, processes, systems to fully exploit competitive potential of the firm's resources, capabilities, and competencies
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Isolating Mechanism
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barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy
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Better expectations of future resource value
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getting resources at a low cost now and using later as advantage (buying real estate now)
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Path dependence
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situation in which options one faces in the current situation are limited by decisions made in the past (competitor could try to replicate but would take a long time and might not turn out the same way)
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Causal Ambiguity
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situation in which the cause and effect of a phenomenon are not readily apparent (managers have to have understanding of companies and put skills to test)
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Social Complexity
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situation which different social and business systems interact with one another (company culture used in every department process)
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Intellectual property (IP) protection
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critical intangible resource that can provide strong isolating mechanism and help sustain competitive advantage (R&D investments & patents)
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Core Rigidity
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former core competency that turned into a liability because firm failed to hone, refine, and upgrade competency as environment changed
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Accounting Profitability
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Limitations:
All accounting data are historical and thus backward-looking
Accounting data do not consider off-balance sheet items
Accounting data focus mainly on tangible assets, which are no longer the most important
All accounting data are historical and thus backward-looking
Accounting data do not consider off-balance sheet items
Accounting data focus mainly on tangible assets, which are no longer the most important
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Shareholder Value Creation
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Limitations:
Stock prices can be highly volatile, making it difficult to assess firms performance, specifically in short term
Overall macroeconomic factors such as economic growth or contraction, the unemployment rate, and interest and exchange rates all have a direct bearing on stock prices
Stock prices frequently reflect the psychological mood of investors, which can be irrational
Stock prices can be highly volatile, making it difficult to assess firms performance, specifically in short term
Overall macroeconomic factors such as economic growth or contraction, the unemployment rate, and interest and exchange rates all have a direct bearing on stock prices
Stock prices frequently reflect the psychological mood of investors, which can be irrational
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Economic Value Creation
answer
difference between Value (V) and cost (C), V-C
Limitations:
Determining value of good in eyes of consumers is not a simple task
Value of a good in the eyes of consumers changes based on income, preferences, time, and other factors
To measure firm-level CA, we must eliminate economic value created for all products and services offered by the firm
Limitations:
Determining value of good in eyes of consumers is not a simple task
Value of a good in the eyes of consumers changes based on income, preferences, time, and other factors
To measure firm-level CA, we must eliminate economic value created for all products and services offered by the firm
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ROIC
answer
net profits / Invested Captial
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ROE
answer
net profits / equity
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ROA
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net profits / assets
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ROR
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Net profits / Revenue
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Shareholders
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individuals or orgs that own one or more shares of stock in a public company
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Risk Capital
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money provided by shareholders in exchange for equity share in company; cannot be recovered if firm goes bankrupt
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Total Return to Shareholders
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return on risk capital that includes stock price appreciation plus dividends received over a specific period
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Market Capitalization
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firm performance metric that captures total dollar market value of a company's total outstanding shares at any given point in time
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Reservation Price
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max price consumer willing to pay for product or service based on total perceived consumer benefits (Value)
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Value
answer
dollar amount a consumer attaches to a good or service, consumer's max WTP; (reservation price)
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Profit
answer
difference between price charged (P) and cost to produce (C), or (P-C); (producer surplus)
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Producer Surplus
answer
difference between price charged (P), and cost to product (C), (P-C) (Profit)
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Consumer Surplus
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difference between value consumer attaches to a good or service (V) and what they paid (P), or (V-P)
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Opportunity Costs
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value of the best forgone alternative use of the resources employed
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CA = EVC
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(V - C) = (V-P) + (P-C)
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$100
answer
V: $1000
P: $900
C: $400
EVC: $600
CS:
PS: $500
What is Consumer Surplus (CS)?
P: $900
C: $400
EVC: $600
CS:
PS: $500
What is Consumer Surplus (CS)?
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$600
answer
V: $1000
P: $900
C: $400
EVC:
CS: $100
PS: $500
What is What is Economic Value Created (EVC) or CA?
P: $900
C: $400
EVC:
CS: $100
PS: $500
What is What is Economic Value Created (EVC) or CA?
question
$900
answer
V: $1000
P:
C: $400
EVC: $600
CS: $100
PS: $500
What is Price (P)?
P:
C: $400
EVC: $600
CS: $100
PS: $500
What is Price (P)?
question
$500
answer
V: $1000
P: $900
C: $400
EVC: $600
CS: $100
PS:
What is Producer Surplus (PS)?
P: $900
C: $400
EVC: $600
CS: $100
PS:
What is Producer Surplus (PS)?
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Business-Level Strategy
answer
goal-directed actions managers take in their quest for competitive advantage when competing in a single product market
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Strategic Trade Offs
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strategic positioning - Choices between a cost or value position - such choices are necessary because higher value creation tends to generate a higher cost
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Differentiation strategy
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(increasing value at relative cost parity) generic business strategy that seeks to create higher value for customers than value that competitors create (make people pay higher price for additional features)
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Focused differentiation strategy
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same as the differentiation strategy except with a narrow focus on a niche market
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Value Drivers of Differentiation
answer
a) Product/Service Features: higher perceptions of value (Quality, R&D/Innovation, Design, higher inputs, Intangibles/Brand)
b) Customer Service: HR/Culture, Warranty, Reputation/Trust
c) Complements: Ecosystem Effects, increase in switching costs, economies of scope
b) Customer Service: HR/Culture, Warranty, Reputation/Trust
c) Complements: Ecosystem Effects, increase in switching costs, economies of scope
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Cost-leadership strategy
answer
(value parity with decrease in costs and lower prices) generic business strategy that seeks to create the same or similar value for customers at a lower cost
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Focused Cost-leadership strategy
answer
same as the cost-leadership strategy except with a narrow focus on a niche market
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Cost Drivers of Cost-leadership strategy
answer
Cost of inputs
Economies of Scale
Transaction Specific Investments
Minimum Efficient Scale
Learning Curve Affects
Experience curve Affects
Economies of Scale
Transaction Specific Investments
Minimum Efficient Scale
Learning Curve Affects
Experience curve Affects
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Economies of Scale
answer
decreases in cost per unit as output increases
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Minimum Efficient Scale (MES)
answer
(barrier to entry) output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale
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Learning Curve Affects
answer
path dependent (increase output within existing tech process over time)
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Experience curve Affects
answer
path dependent (process innovation - change in tech even if output remains constant)
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Transaction Specific Investments (TSI)
answer
tremendous value for first use, but not secondary - Tesla using robots to build cars
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Scope of Competition
answer
size-narrow or broad of the market in which a firm chooses to compete
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Economies of Scope
answer
savings that come from producing 2 or more outputs at less cost than producing each output individually, despite using same resources and tech
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Diseconomies of Scale
answer
increases in cost per unit when output increases
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Blue Ocean Strategy
answer
Integration strategy that successfully combines differentiation and cost leadership activities using value innovation to reconcile the inherent tradeoffs (uncontested marketplace, eliminating threat of competition)
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Value Innovation
answer
simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy
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Red Ocean Strategy
answer
Intense competition, overcrowded, products commodities, all things lead to price based competition, zero sum game
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Being stuck in the middle
answer
firm fails to resolve strategic trade offs between differentiation and cost - succeed at neither business strategy, leading to competitive disadvantage (Jet Blue)
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Value Curve
answer
horizontal connection of points of each value on the strategy canvas that helps strategists diagnose and determine courses of action
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Strategy canvas
answer
graphical depiction of a company's relative performance vis-a-vis its competitors across the industry's key success factors
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