GEB 4890 Exam 1 Flashcards

Competitive Forces
Terms Definitions
Strategy
Management's action plan for running the business and conducting operations.
Strategy Executing Process
1. Developing a strategic vision
2. Setting objectives
3. Crafting strategy to achieve objectives
4. Implementing and executing the chosen strategy efficiently and effectively
5. Evaluating performance and initiating corrective adjustments
Strategic Vision
Describes the route a company intends to take in developing and strengthening its business.
 
Lays out strategic course in preparing for future.
Characteristics of Effectively Worded Vision Statement
Graphic
Directional
Focused
Flexible
Feasible
Desirable
Easy to communicate
Difference between Vision Statement and Mission Statement
Vision = Future (where are we going?)
Mission = Present (who we are, what we do, why we're here?)
Linking Vision/Mission with company Values
Company's values are the beliefs, traits, and behavioral norms that company personnel are expected to display in conducting the company's business and pursuing is strategic vision and strategy.
Why Strategic Vision?
An effectively communicated vision is a valuable management tool for enlisting the commitment of company personnel to actions that get the company moving in the intended direction.
1. Developing a Strategic Vision
Top management's views and conclusions about the company's direction and future product/customer/market/technology focus constitute a strategic vision for the company.
2. Setting Objectives
The managerial purpose of setting objectives is to convert the strategic vision into specific performance targets.
 
Objectives are an organization's performance targets.
2 types of Objectives to set
Financial Performance - relate to financial performance targets management has established to achieve.
 
Strategic Objectives - relate to target outcomes that indicate a company is strengthening.
Need for Balanced Scorecard:
 
(Phase 2 - Setting Objectives)
Company's financial performance measures are really lagging indicators that reflect the results of past decisions and organizational activities.
Strategic Intent
 
(Phase 2 - Setting Objectives)
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.
3. Crafting a Strategy
(4 levels of strategy)
 
(Involves managers at all levels)
A company's overall strategy involves a collection of strategic actions.
1. Corporate Strategy - figure out how to capture cross-business synergies and turn them into competitive advantage.
2. Business Strategy - concerns actions and approaches crafted to produce successful performance in one specific line of business.
3. Functional-area Strategies - concern practices employed in managing particular business processes within a business.
4. Operating Strategies - concern relatively narrow strategic initiatives and approaches for managing key operating units.
Strategic Vision + Objectives + Strategy = Strategic Plan
Lays out future direction, performance targets, and strategy.
4. Implementing & Executing Strategy
Make-Things-Happen activity aimes at performing core business activities in a strategy-supportive manner.
 
Diligent pursuit of operating excellence.
5. Evaluating Performance & Initiating Corrective Adjustments
Trigger point for deciding whether to continue or change the company's vision, objectives, strategy.
Leading the Strategic Management Process
(6 actions for senior executives)
1. Stay on top of how well things are going.
2. Making sure company has good strategic plan.
3. Putting constructive pressure on organizational units to achieve good results.
4. Pushing corrective actions to improve both the company's strategy.
5. Leading development of stronger core/competitive capabilities.
6. Displaying ethical integrity, leading social responsibility.
5 Competitive Forces
1. Buyers
2. Rival Firms
3. New Entrants
4. Substitute Products
5. Suppliers
 
Why is Strategy important?
 
A strategy-focused firm is more likely to be a strong bottom-line performer than one that views strategy as secondary.
Industry's Dominant Economic Traits
-  Market size & Growth rate
-  Scope of competitive rivalry
-  Number of rivals
-  Buyer needs
-  Production capacity
-  Pace of technological change
-  Vertical integration
-  Product innovation
-  Degree of product differentiation
-  Economies of scale
Learning curve effects
-  "The newer you are, the more expensive."
Learning Experience Effects
Exists when a company's unit costs decline as its cumulative production volume increases because of
-  Accumulating production know how
-  Growing mastery of technology
 
* The bigger the learning curve effect, the bigger the cost advantage of the form with the largest cumulative production volume. 
 
What kinds of Competitive Forces are industry members facing?
Objectives are to identify:
 
-  Main sources of competitive forces
-  Strength of these forces
 
Key analytical tool:
Five Forces Model of Competition
How to analyze 5 Competitive Forces
(3 steps)
1.  Identify the specific competitive pressures assiciated with each of the five forces.
2.  Evaluate the strength of each competitive force - moderate, normal, weak
3. Determine whether the collective strength of the five forces is conductive to earning attractive profits.
(1) Buyers
Buyers and Seller-Buyer Collaboration
 
Seller-Buyer weak or strong depends on:
-  Whether buyers have sufficient bargaining leverage to influence terms of sale in their favor
 
-  Extent and competitive importance of seller-buyer strategic partnerships in the industry
When is bargaining power of Buyers stronger?
- Buyer switching costs to competing brands or subs are low
- Buyers are large & can demand concessions
- Large-volume purchases by buyers are important to sellers
- Buyer demand is weak/declining
- Only few buyers exists
- ID of buyer adds prestige to sellers consumers
- Quantity/Quality of info available to buyers improves
- Buyers have ability to postpone purchases till later
- Buyers threaten to integrate backward
When is bargaining power of Buyers weaker?
- Buyers purchase item in small quantities
- Buyer switching costs to competing brands are high
- Surge in buyer demand creates a "sellers market"
- Seller's brand reputation is important to buyer
- Specific seller's product delivers quality/performance that is very important to buyer
- Buyer collaboration with selected sellers provides attractive win-win opportunities
 
(2) Rival Firms
Strongest of five forces
 
Key Factor in determining strength of rivalry
How aggressively are rivals using carious weapons of competition to improve their market positions and performance?
(2) Competitive Rivalry is a combative contest involving:
-  Offensive actions
-  Defensive countermoves
(2) What causes Rivalry to be Stronger?
- Competitors engage in frequent/aggressive launches of new offensives to gain sales & market share
- Slow market growth
- Number of rivals increase and rivals are of equal size
- Buyer cost to switch brands are low
- Industry conditions tempt rivals to use price cuts to boost volume
- Successful strategic move carries big payoff
- Diversity of rivals increases in terms of vision/objectives
- Strong rivals outside the industry acquire weak firms in the industry and use their resources to transform new firms into major market contenders
 (2) What causes Rivalry to be Weaker?
- Industry rivals move only infrequently or in a non-aggressive manner to draw sales from rivals
- Rapid market growth
- Products or rivals are strongly differentiated
- Customer loyalty is high
- Buyer costs to switch brands are high
- There are fewer than 5 rivals or there are numerous rivals so one firms actions has minimal impact on rival's business.
(3) New Entrants
 
Seriousness of threat depends on:
-  Size of pool of entry candidates and available resources
 
-  Barriers to entry
 
-  Reactions of existing firms
 
(3) Evaluating threat of entry involves assessing:
- How formidable entry barriers are for each type of potential entrant
 
- Attractiveness of growth and profit prospects
(3) Common Barriers to Entry
- Sizable economies of scale
- Cost and resource disadvantages independent of size
- Brand preference/customer loyalty
- Capital/specialized requirements
- Access to distribution channels
- Regulatory policies
- Tariffs and international trade restrictions
(3) When is the Threat of Entry Stronger?
- Sizable pool of entry candidates
- Entry barriers are low
- Industry growth is rapid & profit potential is high
- Incumbents are unable to contest a newcomer's entry efforts
- When existing industry members have a strong incentive to expand into new geographic areas where they currently do not have market presence.
(3) When is the Threat of Entry Weaker?
- There's only a small pool of entry candidates
- Entry barriers are high
- Existing competitors are struggling to earn good profits
- Industry's outlook is risky
- Industry growth is slow
(4) Substitute Products
 
Concept:
Substitutes matter when customers are attracted to the products of firms in other industries.
(4) Examples of Substitute Products
Eyeglasses/contacts VS Laser surgery
 
Sugar VS artificial sweeteners
 
Newspaper VS tv VS Internet
(4)  How to tell when Substitute Products are a Strong Force
- Whethre substitutes are readily available and attractively priced
 
- Whether buyers view substitutes as being comparable or better
 
- How much it costs end users to switch substitutes
(4) When is the Competition from Substitutes Stronger?
- There are many good substitutes that are readily available
- The lower the price of substitutes
- The higher the quality/performance of substitutes
- The lower the user's switching costs
(5) Suppliers
 
Whether supplier-seller relationships represent a weak or strong competitive force depends on:
- Whether suppliers can exervise sufficient bargaining leverage to influence terms of supply in their favor
 
- Nature and extent of supplier-seller collaboration in the industry
(5) When is the Bargaining Power of Suppliers Stronger?
- Industry memers incur high costs in switching their purchases to alernative suppliers
- Needed inputs are in short supply
- There are only a few suppliers of a specific input
- Some suppliers threaten to integrate forward
- Supplier provides a differentiated input that enhances the quality/performance of sellers' products or is valuable part of sellers' production process
(5) When is Bargaining Power of Suppliers Weaker?
- Item being supplied is a commodity
- Seller switching costs to alternate suppliers are low
- Good substitute exist or new ones emerge
- Surge in availability of suppliers occurs
- Industry members account for a big fraction of suppliers' total sales
- Members threaten to integrate backward
- Seller collaboration with selected suppliers provides attractive win-win opportunities
 
Strategic Implications
 
Competitive environment is unattractive from the standpoint of earning good profits when:
- Rivalry is vigorous
- Entry barriers are low and entry is likely
- Competition from substitutes is strong
- Suppliers and customers have considerable bargaining power
Strategic Implications
 
Competitive environment is ideal from a profit-making standpoint when:
- Rivalry is moderate
- Entry barriers are high and no firm is likely to enter
- Good substitutes do not exist
- Suppliers and customers are in a weak bargaining position
What factors are driving industry change and what impacts will they have?
- Industries change because forces are driving industry participants to alter their actions.
 
- Driving forces are the major underlying causes of changing industry and competitive conditions.
Analyzing Driving Forces
1. Identify forces likely to exert greatest influence over next 1-3 years (usually no more than 3-4 factors)
 
2. Assess Impact
- Are the driving forces causing demand for product to increase or decrease?
- Are the forces acting to make competition more or less intense?
- Will the driving forces lead to higher or lower industry profitability?
Common Types of Driving Forces
- Internet & e-commerce opportunities
- Increasing globalization of industry
- Changes in long-term industry growth rate
- Changes in who buys the product and how they use it
- Product innovation
- Technological change
- Entry or exit in major firms
- Diffusion of technical knowledge
- Changes is degree of uncertainty and risk
Key Success Factors
Factors affecting every industry member's ability to prosper.
- Specific strategy elements
- Product attributes
- Resources
- Competencies
- Competitive capabilities
Key Success Factors spell the difference between:
- Profit and loss
 
- Competitive success or failure
 
KSF's 3-5 Major Determinants for financial and competitive success
1. Technology-related
2. Manufacturing-related
3. Distribution-related
4. Marketing-related
5. Skills and Capability-related
SWOT Analysis
Powerful tool for sizing up a company's resource capabilities and deficiencies, its market opportunities, and the external threats to its future well-being.
Why we use SWOT Analysis?
For a company's strategy to be well-conceived, it must be
- Matched to its resource strengths and weaknesses
 
- Aimes at capturing its best markey opportunities and erecting defenses against external threats
Strength
 
(SWOT)
Something a firm does well or an attribute that enhances its competitiveness
 
Valuable:
Human assets
Physical assets
Organizational assets
Intangible assets
Competencies, know-how
Weakness
 
(SWOT)
Something a firm lacks or a condition placing it at a disadvantage
 
Resource Weaknesses relate to:
- Unproven skills/intellectual capital
- Lack of important assets
- Missing capabilities in key areas
Opportunities
 
(SWOT)
Opportunities most relevant to a company are those offering:
 
- Good match with its financial and organizational resource capabilities
 
- Best prospects for profitable long-term growth
 
- Potential for competitive advantage
Threats

Identifying them:
 
(SWOT)
 
- Emergence of cheaper/better technologies
- Introduction of better products by rivals
- Entry of lower-cost foreign competitors
- Rise in interest rates
- Potential of a hostile takeover
- Unfavorable demographic shifts
SWOT analysis in crafting a better Strategy
 
(not important to just develop 4 lists)
-  Use the 4 lists to draw conclusions about a company's overall situation
 
- Translaten these conclusions into strategic actions
Strategic cost analysis
(2 analytical tools)
Value Chain alalysis
 
Benchmarking
Value Chain
definition
Identifies the primary activities that creat customer value and the related support activities.
Value Chain
 
Primary Activities and Costs
Supply Chain Management
Operations
Distribution
Sales & Marketing
Service
Profit Margin
Value Chain
 
Support Activities & Costs
Product R&D, Technology, Systems Development
 
HR Management
 
General Administration
Benchmarking
Tool for learning which companies are best at performing particular activities and then using their techniques to improve the cost and effectiveness of a company's own internal activities.
3 main areas in a company's Value Chain where important differences in the costs of competing firms can occur:
1. Company's own activity segments
 
2. Suppliers' part of the industry value chain
 
3. Forward channel portion of the industry chain
What options are available to reduce cost disadvantage in the 3 areas of the Value Chain?
 
(1)
(Internal Cost Disadvantage)
 
Implement the use of best practices throughout the company, particularly for high-cost activities.
 
See if certain internally performed activities can be outsources from vendors/contractors cheaply.
What options are available to reduce cost disadvantage in the 3 areas of the Value Chain?
 
(2)
(Supplier-related Cost Disadvantage)
 
Can be attacked by pressuring suppliers for lower prices, switching to lower priced substitute inputs, and collaborating closely with suppliers to identify mutual cost-saving opportunities.
What options are available to reduce cost disadvantage in the 3 areas of the Value Chain?
 
(3)
(Activities performed by forward channel allies cost disadvantage)
 
- Pressure dealer-distributors to reduce costs
 
- Work closely with forward channel allies to identify win-win opportunities to reduce cost
 
- Change to a more economical distribution strategy
5 Competitive Strategies
1. Low-cost Provider
2. Broad Differentiation
3. Best-cost Provider
4. Market niche based on low costs
5. Market niche based on differentiation
Low-cost Provider Strategy
Striving to achieve lower overall cost than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals.
Broad Differentiation Strategy
Seeking to differentiate the company's product offering from rivals' in ways that will appeal to a broad spectrum of buyers.
Best-cost Provider Strategy
Giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals.
Market Niche Strategy based on Low Costs
Concentrating on a narrow buyer segment and out-competing rivals by having lower costs than rivals and serving niche members at lower price.
Market Niche Strategy based on Differentiation
Concentrating on a narrow buyer segment and out-competing rivals by offering niche members customized attributes that meet their tastes better than rivals' products.
Two Major Avenues for Achieving a Cost Advantage
1. Perform value chain activities more cost-effectively than rivals.
 
2. Revamp the firm's overall value chain to eliminate or bypass some cost-producing activities altogether.
Potential Pitfalls of a Low-Cost Provider Strategy
1. Ending up with lower, rather than higher, profitability from price cutting.
 
2. Not emphasizing avenues of cost advantage that relegate rivals to play catch-up.
 
3. Becoming too fixated on cost reduction.
Potential Pitfalls of a Differentiation Strategy
1. When competitors are able to quickly copy most or all of the appealing attributes a company comes up with.
 
2. Strategy produces a ho-hum market reception because buyers see little value in product.
 
3. Overspending on efforts to differentiate.
 
4.  Trying to charge too high price premium.
Importance of signalling value
Price premium of a differentiation strategy reflects:
 
- Value actually delivered to the buyer
- Value perceived by the buyer
 
Buyers seldom pay for value that is not perceived.
When it's important to signal value
- Nature of differentiation is hard to quantify
 
- Buyers are making first-time purchases
 
- Repurchase is infrequent
 
- Buyers are unsophisticated
Vertical Integration
Extends a firm's competitive and operating scope within the same industry.
Outsourcing
Farming out certain value chain activities to outside vendors.
First-mover Advantages
Arise when:
-  Pioneering helps build firm’s image and reputation
- Loyalty of fist-time buyers is high
- Moving first can be a preemtive strike
-  Early commitments to new technologies,new-style components, and distributionchannels can produce cost advantage
First-mover Disadvantages
When:
- Loyalty of first-time buyers is weak
- Innovator's products are not living up to buyer expectations
- Rapid technological change allows followers to leapfrog pioneers
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