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Industry effects
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firm performance attributed to the structure of the industry in which the firm competes
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Firm effects
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firm performance attributed to the actions strategic leaders take
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industry
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a group of incumbent companies that face more or less the same set of suppliers and buyers
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industry analysis
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a method to (1) identify an industry's profit potential and (2) derive implications for a firm's strategic position within an industry
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strategic position
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a 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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a 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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the 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 significantly predict industry profit potential
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network effects
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the value of a product or service for an individual user increases with the total number of users
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competitive industry structure
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elements and features common to all industries, including the number and size of competitors, the firms' degree of pricing power, the type of product or service offered, and the height of entry barriers
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strategic commitments
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firm actions that are costly, long-term oriented and difficult to reverse
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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
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a product, service, or competency that adds value to the original product offering when the two are used in tandem
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complementor
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a company that provides a good or service that leads customers to value your firm's offering more when the two are combined
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co-opetition
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cooperation by competitors to achieve a strategic objective
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shareholders
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individuals or organizations that own one or more shares of stock in a public company
are the legal owners of public companies
are the legal owners of public companies
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risk capital
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the money provided by shareholders in exchange for an equity share in a company; it cannot be recovered if the firm goes bankrupt
measure of competitive advantage that matters most to the shareholders
measure of competitive advantage that matters most to the shareholders
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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
primary interest of investors
external and forward looking
primary interest of investors
external and forward looking
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efficient market hypothesis
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the idea that all available information about a firm's part, current state, and expected future performance is embedded in the market price of the firm's stock
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market capitalization
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a firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time
helpful for comparing firms over the long term
helpful for comparing firms over the long term
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market capitalization equation
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market cap = number of shares outstanding x share price
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economic value created
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difference between value (V) and cost (C), or (V-C)
difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it
difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it
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reservation price
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the maximum price a consumer is willing to pay for a product or service based on the total perceived consumer benefits
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value
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the dollar amount (V) a consumer attaches to a good or service; the consumer's maximum willingness to pay (also called a reservation price)
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producer surplus
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another term for profit, the difference between price charged (P) and the cost to produce (C), or (P-C); also called profit
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profit
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difference between price charged (P) and the cost to produce (C), or (P-C); also called producer surplus
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consumer surplus
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difference between the value a consumer attaches to a good or service (v) and what he or she paid for it (P), or (V-P)
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opportunity costs
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the value of the best forgone alternative use of the resources employed
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business-level strategy
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the 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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choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost
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differentiation strategy
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generic business strategy that seeks to create higher value for customers than the value that competitors create, while containing costs
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cost-leadership strategy
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generic business strategy that seeks to create the same or similar value for customers at a lower cost
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scope of competition
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the size - narrow or broad - of the market in which a firm chooses to compete
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focused cost-leadership strategy
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same as the cost-leadership strategy except with a narrow focus on a niche market
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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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economies of scale
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decreases in cost per unit as output increases
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economies of scope
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savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology
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cube-square rule
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the volume of a body such as a pipe or tank increases disproportionately more than its surface
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minimum efficient scale
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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
returns to scale are constant
returns to scale are constant
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diseconomies of scale
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increases in cost per unit when output increases
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learning curve
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goes down, takes less and less time to produce the same output as we learn to be more efficient
driven by increasing the cumulative output while holding technology constant
move along/down the same curve
driven by increasing the cumulative output while holding technology constant
move along/down the same curve
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experience curve
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driven by changing the technology while holding the cumulative output constant
make an entirely new and steeper curve
make an entirely new and steeper curve
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process innovation
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a new method or technology to produce an existing product
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blue ocean strategy
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business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs
represent untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth
represent untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth
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red oceans
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the known market space of existing industries
the rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game
the rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game
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value innovation
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the simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; consider a corner-stone of blue ocean strategy
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value curve
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horizontal connection of the points of each value on the strategy canvas that helps strategic leaders diagnose and determine courses of action
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strategy canvas
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graphical depiction of a company's relative performance vis-a-vis its competitors across the industry's key success factors
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markets-and-technology framework
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a conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions
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incremental innovation
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an innovation that squarely builds on an established knowledge base and steadily improves an existing product or service
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radical innocation
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an innovation that draws on novel methods or materials, is derived either from an entirely different knowledge base or from a recombination of the existing knowledge bases with a new stream of knowledge
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winner-take-all markets
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markets where the market leader captures almost all of the market share and is able to extract a significant amount of the value created
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innovation ecosystem
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a firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic decision making
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architectural innovation
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a new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets
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disruptive innovation
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an innovation that leverages new technologies to attack existing markets from the bottom up
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reverse innovation
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an innovation that was developed for emerging economies before being introduced in developed economies. Sometimes also called frugal innovation.
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platform business
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an enterprise that creates value by matching external producers and consumers in a way that creates value for all participants, and that depends on the infrastructure or platform that the enterprise manages
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platform ecosystem
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the market environment in which all players participate relative to the platform
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