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What is Strategy?
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Strategy is the integrated set of choices that positions a firm in its industry so as to generate superior financial returns (value) over the long run by creating and sustaining competitive advantage. Strategy is usually resource intensive and generally hard to reverse
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What are elements of a strategy statement?
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The elements of a strategy statement are the choices the firm makes about the objective, scope, and advantage.
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What is a firm's objective?
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A firm's objective is the precise end point that will drive the business over a specific time period
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What is a firm's scope?
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A firm's scope is the domain including the customer or offering, the geography, and the boundaries of the firm's activities.
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What is a firm's advantage?
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A firm's advantage is the means by which the firm will achieve its objective. The advantage contains the customer value proposition and the unique combination of activities that allow the firm to deliver the value proposition.
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What is a strategy (in terms of differing from tactics?)
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Competitive business strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value. They involve significant commitment of resources and are not easily reversible.
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What is a tactic (in terms of differing from strategy?)
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Tactics are the specific actions or steps taken to implement the strategy. Tactical decisions involve lower commitment of resources and are more easily reversible.
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What is strategy about?
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Strategy is about creating and capturing value by establishing the firm's unique position in the competitive landscape. Specifically, it is about creating economic value and capturing as much of it as possible.
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What are some key questions in strategy?
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1. What choices is the firm going to make to have competitive advantage
2. What choices will enable the firm to sustain the competitive advantage over time?
2. What choices will enable the firm to sustain the competitive advantage over time?
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Profit Equation
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total revenue - total costs
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Total Revenue Equation
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price * quantity sold
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Total Equation
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Total fixed costs + total variable costs
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What are fixed costs?
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Fixed costs are invariant with the firm's output (Q). Examples include management salaries, rent, utilities, interest expense, etc.
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What are variable costs?
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Variable costs increase as output increases. Examples include direct materials, direct labor, etc.
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Average total cost equation
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total cost / quantity
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When is a company at breakeven?
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A company breakevens when total revenue is equal to total costs
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Contribution margin per unit equation
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price - variable costs
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What is the breakeven volume?
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The breakeven volume represents the number of units needed to cover the total fixed costs
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Breakeven volume equation
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total fixed costs / price - variable costs (can also be written as total fixed costs / contribution margin units)
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Accounting Profit Equation
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(price x quantity) - total costs
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Economic profit equation
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(price x quantity) - total costs - opportunity cost
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How does economic profit differ from accounting profit?
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Economic profit takes into account opportunity cost while accounting profit does not
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What is opportunity cost?
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Opportunity cost is the value of the next best opportunity foregone when a decision is mad. An economic loss or profit is the difference between your choice and the corresponding opportunity cost.
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What is economic value created?
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Economic value created is the buyer's surplus + the economic profits (producer surplus) + the supplier's surplus.
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How does strategy relate to breakeven?
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A firm's strategic goal is to maximize economic profit by considering opportunity costs since the firm must choose from competing alternatives.
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What does PESTEL stand for?
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P- political
E- economics
S- sociocultural
T- technological
E- environmental
L- legal and regulatory
E- economics
S- sociocultural
T- technological
E- environmental
L- legal and regulatory
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What are PESTEL factors?
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PESTEL factors are factors external to an industry and are usually beyond the firm's control. There can be cross-factor relationships, meaning one factor can influence other factors.
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Political factors?
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Political factors result from processes and actions of government bodies that can influence the decisions and behaviors of firms.
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Economic factors?
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Economic factors relate to the health and direction of the economy in which the firm competes.
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Sociocultural factors?
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Sociocultural factors capture the values, beliefs, lifestyles, and demographic trends of society.
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Technological factors?
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Technological factors are outcomes of innovation and knowledge that lead to new products and services and disrupt exisiting industries.
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Environmental factors?
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Environmental factors concern broad environmental issues such as natural environmental, global warming, and sustainable economic growth.
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Legal and regulatory factors?
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Legal and regulatory factors include laws, mandates, and regulations that firms must comply with. They are typically the result of political processes and that is how they differ from political processes.
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What is an industry?
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An industry is a group of firms that produce similar products or offer similar services that are close substitutes both on the supply side (similar inputs and processes) and the demand side (similar product performance characteristics and similar occasions for use). In addition, time and context could help define the industry.
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How is the an industry system defined?
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An industry system consists of the focal industry, supplier industries, and distributor industries.
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What are supplier industries?
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Supplier industries are upstream from the focal industry.
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What are distributor industries?
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Distributor industries represent industries and customers that are downstream from the focal industry.
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Who does value creation/capture include?
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Value creation and capture involves all participants in the industry system. Parts of the industry system have greater potential for profitability than others.
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