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Chapter 3 & 4 - Flashcards

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Class:BUS 5480 - Strategic Management
Subject:Business
University:Florida Institute of Technology
Term:Fall 2011
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Macro-environment encompasses the broad environment context in which a company's industry is situated.
Strategically Relavant important enough to have a bearing on the decisions the company ultimately makes about direction, objectives, strategy, and business model.
The Seven Components of the Macro-Environment 1. Demographics
2. Social Forces
3. Political, Legal, and Regulatory Factors
4. Natural Environment
5. Technological Factors
6. Global Forces
7. General Economic Conditions
Seven questions to ask when crafting strategy 1. Does the industry offer attractive opportunities for growth?
2. What kinds of competitive forces are industry members facings, and how strong is each force?
3. What factors are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?
4. What market positions do industry rivals occupy - who is strongly positioned and who is not?
5. What strategic moves are rivals likely to make next?
6. What are the key factors for competitive success in the industry?
7. Does the industry offer good prospects for attractive profits?
Generated by Koofers.com
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
Rivalry ...is stronger in markets where buyer demand is growing slowly or declining and it is weaker in fast-growing markets.
Rivalry ...increases as it becomes less costly for buyers to switch brands.
Rivalry ...increases as the products of rival sellers become more alike and it diminishes as the products of industry rivals become more strongly differentiated.
Generated by Koofers.com
Rivalry ...is more intense when there is unused production capacity, especially if the industry product has high fixed costs or high storage costs.
Rivalry ...intensifies as the number of competitors increases and as competitors become more equal in size and competitive strength.
Rivalry ...often becomes more intense - as well as more volatile and unpredictable - as the diversity of competitors increases in terms of long-term directions, objectives, strategies, and countries of origin.
Rivalry ...is stronger when high exit barriers keep unprofitable firms from leaving the industry.
Generated by Koofers.com
Barriers to Entry Sizable economies of scale in production, distribution, advertising, or other areas of operation.
Barriers to Entry Significant cost advantages held by existing firms due to experience and leaning curve effects.
Barriers to Entry Other cost advantages enjoyed by industry incumbents
Barriers to Entry Strong brand preferences and high degrees of customer loyalty.
Generated by Koofers.com
Barriers to Entry Strong "network effects" in customer demand.
Barrier to Entry High capital requirements
Barrier to Entry The difficulties of building a network of distributors or dealers and securing adequate space on retailer's shelves.
Barrier to Entry Restrictive government policies.
Generated by Koofers.com
High entry barriers and weak entry threats today do not always translate into high energy barriers and weak entry threats tomorrow.
the threat of entry is stronger when entry barriers are low, when incumbent firms are unable or unwilling to vigorously contest a newcomer's entry and when there's a sizable pool of entry candidates with resources and capabilities well suited for competing in the industry.
Factors that determine strength of substitute products 1. Whether substitutes are readily available.
2. Whether buyers view the substitutes as attractively priced in relation to their quality, performance, and other relevant attributes.
3. Whether the costs that buyer incur in switching to the substitutes are low or high.
Factors that determine the strength of supplier's bargaining power 1. Whether supplier's products are in short supply.
2. Whether suppliers provide a differentiated input that enhances the performance of quality of the industry's product.
3. Whether item being supplied is a standard item or a commodity that is readily available from a host of suppliers.
4. Whether it is difficult or costly for industry members to switch their purchases from one supplier to another.
5. Whether there are any good substitutes available for supplier's products.
Generated by Koofers.com
Factors that determine the strength of supplier's bargaining power 6. Whether industry members account for sizable fraction of suppliers' total sales.
7. Whether the supplier indsutry is dominated by a few large companies and whether it is more concentrated than the industry it sells to.
8. Whether it makes good economic sense for industry members to integrate backward and self-manufacture items they have been buying from suppliers.
Factors affecting bargaining power 1. Is greater when their costs of switching to competing brands or substitutes are relatively low.
2. Increases when industry goods are standardized or differentiation is weak.
3. Have more power when they are large and few in number relative to the number of sellers.
4. Increases when buyer demand is weak and industry members are scrambling to sell more units.
5. Gain leverage if they are well informed about sellers' products, prices and costs.
Factors affecting bargaining power 6. Bargaining power is greater when they pose a credible threat of integrating backward into the business of sellers.
7. Leverage increases if buyers have discretion to delay their purchases or perhaps even not make a purchase at all.
8. Price sensitivity increases when buyers are earning low profits or have low income.
9. Buyers are more price-sensitive if the product represents a large fraction or their total purchases.
10. Buyers are more price-sensitive if product performance has limited consequences.
The strongest of the five forces determines how strong the forces of competition are overall and the extent of the downward pressure on an industry's level of profitability.
Generated by Koofers.com
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.
Dynamic industry analysis ...involves determining how the drovers of change are affecting industry and competitive conditions.
Most common industry drivers of change 1. Changes in the long-term industry growth rate
2. Increasing globalization
3. Changes in who buys the product and how they use it
4. Technological change
5. Emerging new Internet capabilities and applications
6. Product and marketing innovation
7. Entry or exit of major firms
8. Diffusion of technical know-how across companies and countries
9. Improvements in efficiency and business risk
Most common industry drivers of change 10. Reductions in uncertainty and business risk
11. Regulatory influences and government policy changes
12. Changing societal concerns, attitudes, and lifestyles
Generated by Koofers.com
The most important part of dynamic industry analysis is to determine whether the collective impact of the change of drivers will be to increase or decrease market demand, male competition more or less intense, and lead to higher or lower industry profitability.
Dynamic industry analysis, when done properly, pushes company managers to think about what's around the corner and what the company needs to be doing to get ready for it.
Strategic Group ...is a cluster of industry rivals that have similar competitive approaches and market positions.
Strategic group mapping ...is a technique for displaying the different market or competitive positions that rival firms occupy in the industry.
Generated by Koofers.com
Strategic group maps reveal which companies are close competitors and which are distant competitors.
Some strategic groups are more favorably positioned than others because they confront weaker competitive forces and/or because they are more favorably impacted by the drivers of industry change.
Competitive Intelligence Good Competitive Intelligence helps managers avoid the damage to sales and profits that comes from being caught napping by the surprise moves of rivals.
Key Success Factors Key Success Factors are the strategy elements, product and service attributes, operational approaches, resources and competitive capabilities with the greatest impact on competitive success in the marketplace.
Generated by Koofers.com
The degree to which an industry is attractive or unattractive is not the same for all industry participants and all potential entrants.
The stronger a company's financial performance and market position, the more likely it has a well-conceived, well-executed strategy.
Key Financial Ratios: Profitability Ratios Page 94-96 Gross Profit Margin
Operating Profit margin
net profit margin
return on total assets
return on stockholder's equity
return on invested capital
earnings per share
Key Financial Ratios: Liquidity Ratios Page 94-96 Current Ratio
Working Capital

Generated by Koofers.com
Key Financial Ratios: Leverage Ratios Page 94-96 Debt-to-asset ratio
long-term debt-to-captial ratio
debt-to-equity ratio
long-term debt-to-equity ratio
times-interest earned
Key Financial Ratios: Activity Ratios Page 94-96 Days of inventory
inventory turnover
average collection period

Key Financial Ratios: Other Ratios Page 94-96 Dividend Yield on Common Stock
Price-earnings ratio
Internal cash Flow
Free cash flow
Competitive Assets A company's resources and capabilities represent its competitive assets and are big determinants of its competitiveness and ability to succeed in the marketplace.
Generated by Koofers.com
Resource 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.
Resource A resources is a competitive asset that is owned or controlled by a company
capability a capability is the capacity of a firm to perform some activity proficiently.
Resources have two main categories Tangible - Physical, Financial, technological, organizational
Intangible - Human assets, intellectual capital,brands, company image, reputational assets, relationships, company culture and incentive systems.
Generated by Koofers.com
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.
Resource Bundle A resource bundle is a linked and closely integrated set of competitive assets centered around one or more cross-functional capabilities.
Sustainable Competitive Advantage a sustainable competitive advantage is an advantage over market rivals that persists despite efforts of the rivals to overcome it.
Four tests of a resource's competitive power 1. Is the resource competitively valuable?
2. Is the resources rare - is it something rivals lack?
3. Is the resource hard to copy?
4. Can the resource be trumped by different types of resources and capabilities - are there good substitutes available for the resource?
Generated by Koofers.com
Social complexity and causal ambiguity Social complexity and causal ambiguity are two factors that inhibit the ability of rivals to imitate a firm's most valuable resources and capabilities. Causal ambiguity makes it very hard to figure out how a complex resource contributes to competitive advantage and therefore exactly what to imitate.
A company requires a dynamically evolving portfolio of resources and capabilities to sustain its competitiveness and help drive improvements in its performance.
Dynamic Capability A dynamic capability is the capacity of a company to modify its existing resources and capablities or create new ones.
SWOT analysis SWOT analysis is a simple but powerful tool for sizing up a company's strengths weaknesses, its market opportunities, and the external threats to its future well-being.
Generated by Koofers.com
Basing a company's strategy on its most competitively valuable resource and capability strengths gives the company its best chance for market success.
Competence A competence is an activity that a company has learned to perform with proficiency - a capability, in other words.
Core Competence A core competence is an activity that a company performs proficiently that is also central to its strategy and competitve success.
Distinctive Competence A distinctive competence is a competitively important activity that a company performs better than its rivals - it thus represents a competitively superior internal strength.
Generated by Koofers.com
A company's strengths represents its competitive assets; its weaknesses are shortcomings that constitute competitive liabilities.
A company is well advised to pass on a particular market opportunity unless it has or can acquire the competencies needed to capture it.
The higher a company's costs are above those of close rivals, the more competitively vulnerable it becomes.
The greater the amount of customer value that a company can offer profitably relative to close rivals, the less competitvely vulnerable it becomes.
Generated by Koofers.com
Value Chain A company's value chain identifies the primary activities that create customer value and the related support activities.
A company's cost competitiveness depends not only on the cost of internally performed activities (its own value chain) but also on costs in the value chains of its suppliers and distribution channel allies.
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".
Benchmarking the costs of company activities against rivals provides hard evidence of whether a company is cost-competitive.
Generated by Koofers.com
Performing value chain activities in ways that give a company the capabilities to either outmatch rivals on differentiation or beat them on costs will help the company to secure a competitive advantage.
High weighted competitive strength ratings signal a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage.
A company's competitive strength scores pinpoint its strengths 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.
Zeroing in on the strategic issues a company faces and compiling a "worry list" of problems and roadblocks creates a strategic agenda of problems that merit prompt managerial attention.
Generated by Koofers.com
Actually deciding on a strategy and what specific actions to take is what comes after developing the list of strategic issues and problems merit front-burner amangement attention.
A good strategy must contain ways to deal with all the strategic issues and obstacles that stand in the way of the company's financial and competitive success in the years ahead.
Generated by Koofers.com

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 Macro-environmentencompasses the broad environment context in which a company's industry is situated.
 Strategically Relavantimportant enough to have a bearing on the decisions the company ultimately makes about direction, objectives, strategy, and business model.
 The Seven Components of the Macro-Environment1. Demographics
2. Social Forces
3. Political, Legal, and Regulatory Factors
4. Natural Environment
5. Technological Factors
6. Global Forces
7. General Economic Conditions
 Seven questions to ask when crafting strategy1. Does the industry offer attractive opportunities for growth?
2. What kinds of competitive forces are industry members facings, and how strong is each force?
3. What factors are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?
4. What market positions do industry rivals occupy - who is strongly positioned and who is not?
5. What strategic moves are rivals likely to make next?
6. What are the key factors for competitive success in the industry?
7. Does the industry offer good prospects for attractive profits?
 The five forces model of competition1. 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
 Rivalry...is stronger in markets where buyer demand is growing slowly or declining and it is weaker in fast-growing markets.
 Rivalry...increases as it becomes less costly for buyers to switch brands.
 Rivalry...increases as the products of rival sellers become more alike and it diminishes as the products of industry rivals become more strongly differentiated.
 Rivalry...is more intense when there is unused production capacity, especially if the industry product has high fixed costs or high storage costs.
 Rivalry...intensifies as the number of competitors increases and as competitors become more equal in size and competitive strength.
 Rivalry...often becomes more intense - as well as more volatile and unpredictable - as the diversity of competitors increases in terms of long-term directions, objectives, strategies, and countries of origin.
 Rivalry...is stronger when high exit barriers keep unprofitable firms from leaving the industry.
 Barriers to EntrySizable economies of scale in production, distribution, advertising, or other areas of operation.
 Barriers to EntrySignificant cost advantages held by existing firms due to experience and leaning curve effects.
 Barriers to EntryOther cost advantages enjoyed by industry incumbents
 Barriers to EntryStrong brand preferences and high degrees of customer loyalty.
 Barriers to EntryStrong "network effects" in customer demand.
 Barrier to EntryHigh capital requirements
 Barrier to EntryThe difficulties of building a network of distributors or dealers and securing adequate space on retailer's shelves.
 Barrier to EntryRestrictive government policies.
  High entry barriers and weak entry threats today do not always translate into high energy barriers and weak entry threats tomorrow.
  the threat of entry is stronger when entry barriers are low, when incumbent firms are unable or unwilling to vigorously contest a newcomer's entry and when there's a sizable pool of entry candidates with resources and capabilities well suited for competing in the industry.
 Factors that determine strength of substitute products1. Whether substitutes are readily available.
2. Whether buyers view the substitutes as attractively priced in relation to their quality, performance, and other relevant attributes.
3. Whether the costs that buyer incur in switching to the substitutes are low or high.
 Factors that determine the strength of supplier's bargaining power1. Whether supplier's products are in short supply.
2. Whether suppliers provide a differentiated input that enhances the performance of quality of the industry's product.
3. Whether item being supplied is a standard item or a commodity that is readily available from a host of suppliers.
4. Whether it is difficult or costly for industry members to switch their purchases from one supplier to another.
5. Whether there are any good substitutes available for supplier's products.
 Factors that determine the strength of supplier's bargaining power6. Whether industry members account for sizable fraction of suppliers' total sales.
7. Whether the supplier indsutry is dominated by a few large companies and whether it is more concentrated than the industry it sells to.
8. Whether it makes good economic sense for industry members to integrate backward and self-manufacture items they have been buying from suppliers.
 Factors affecting bargaining power1. Is greater when their costs of switching to competing brands or substitutes are relatively low.
2. Increases when industry goods are standardized or differentiation is weak.
3. Have more power when they are large and few in number relative to the number of sellers.
4. Increases when buyer demand is weak and industry members are scrambling to sell more units.
5. Gain leverage if they are well informed about sellers' products, prices and costs.
 Factors affecting bargaining power6. Bargaining power is greater when they pose a credible threat of integrating backward into the business of sellers.
7. Leverage increases if buyers have discretion to delay their purchases or perhaps even not make a purchase at all.
8. Price sensitivity increases when buyers are earning low profits or have low income.
9. Buyers are more price-sensitive if the product represents a large fraction or their total purchases.
10. Buyers are more price-sensitive if product performance has limited consequences.
  The strongest of the five forces determines how strong the forces of competition are overall and the extent of the downward pressure on an industry's level of profitability.
  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.
 Dynamic industry analysis...involves determining how the drovers of change are affecting industry and competitive conditions.
 Most common industry drivers of change1. Changes in the long-term industry growth rate
2. Increasing globalization
3. Changes in who buys the product and how they use it
4. Technological change
5. Emerging new Internet capabilities and applications
6. Product and marketing innovation
7. Entry or exit of major firms
8. Diffusion of technical know-how across companies and countries
9. Improvements in efficiency and business risk
 Most common industry drivers of change10. Reductions in uncertainty and business risk
11. Regulatory influences and government policy changes
12. Changing societal concerns, attitudes, and lifestyles
  The most important part of dynamic industry analysis is to determine whether the collective impact of the change of drivers will be to increase or decrease market demand, male competition more or less intense, and lead to higher or lower industry profitability.
  Dynamic industry analysis, when done properly, pushes company managers to think about what's around the corner and what the company needs to be doing to get ready for it.
 Strategic Group...is a cluster of industry rivals that have similar competitive approaches and market positions.
 Strategic group mapping...is a technique for displaying the different market or competitive positions that rival firms occupy in the industry.
  Strategic group maps reveal which companies are close competitors and which are distant competitors.
  Some strategic groups are more favorably positioned than others because they confront weaker competitive forces and/or because they are more favorably impacted by the drivers of industry change.
 Competitive IntelligenceGood Competitive Intelligence helps managers avoid the damage to sales and profits that comes from being caught napping by the surprise moves of rivals.
 Key Success FactorsKey Success Factors are the strategy elements, product and service attributes, operational approaches, resources and competitive capabilities with the greatest impact on competitive success in the marketplace.
  The degree to which an industry is attractive or unattractive is not the same for all industry participants and all potential entrants.
  The stronger a company's financial performance and market position, the more likely it has a well-conceived, well-executed strategy.
 Key Financial Ratios: Profitability Ratios Page 94-96Gross Profit Margin
Operating Profit margin
net profit margin
return on total assets
return on stockholder's equity
return on invested capital
earnings per share
 Key Financial Ratios: Liquidity Ratios Page 94-96Current Ratio
Working Capital

 Key Financial Ratios: Leverage Ratios Page 94-96Debt-to-asset ratio
long-term debt-to-captial ratio
debt-to-equity ratio
long-term debt-to-equity ratio
times-interest earned
 Key Financial Ratios: Activity Ratios Page 94-96Days of inventory
inventory turnover
average collection period

 Key Financial Ratios: Other Ratios Page 94-96Dividend Yield on Common Stock
Price-earnings ratio
Internal cash Flow
Free cash flow
 Competitive AssetsA company's resources and capabilities represent its competitive assets and are big determinants of its competitiveness and ability to succeed in the marketplace.
 Resource 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.
 ResourceA resources is a competitive asset that is owned or controlled by a company
 capabilitya capability is the capacity of a firm to perform some activity proficiently.
 Resources have two main categoriesTangible - Physical, Financial, technological, organizational
Intangible - Human assets, intellectual capital,brands, company image, reputational assets, relationships, company culture and incentive systems.
  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.
 Resource BundleA resource bundle is a linked and closely integrated set of competitive assets centered around one or more cross-functional capabilities.
 Sustainable Competitive Advantagea sustainable competitive advantage is an advantage over market rivals that persists despite efforts of the rivals to overcome it.
 Four tests of a resource's competitive power1. Is the resource competitively valuable?
2. Is the resources rare - is it something rivals lack?
3. Is the resource hard to copy?
4. Can the resource be trumped by different types of resources and capabilities - are there good substitutes available for the resource?
 Social complexity and causal ambiguitySocial complexity and causal ambiguity are two factors that inhibit the ability of rivals to imitate a firm's most valuable resources and capabilities. Causal ambiguity makes it very hard to figure out how a complex resource contributes to competitive advantage and therefore exactly what to imitate.
  A company requires a dynamically evolving portfolio of resources and capabilities to sustain its competitiveness and help drive improvements in its performance.
 Dynamic CapabilityA dynamic capability is the capacity of a company to modify its existing resources and capablities or create new ones.
 SWOT analysisSWOT analysis is a simple but powerful tool for sizing up a company's strengths weaknesses, its market opportunities, and the external threats to its future well-being.
  Basing a company's strategy on its most competitively valuable resource and capability strengths gives the company its best chance for market success.
 CompetenceA competence is an activity that a company has learned to perform with proficiency - a capability, in other words.
 Core CompetenceA core competence is an activity that a company performs proficiently that is also central to its strategy and competitve success.
 Distinctive CompetenceA distinctive competence is a competitively important activity that a company performs better than its rivals - it thus represents a competitively superior internal strength.
  A company's strengths represents its competitive assets; its weaknesses are shortcomings that constitute competitive liabilities.
  A company is well advised to pass on a particular market opportunity unless it has or can acquire the competencies needed to capture it.
  The higher a company's costs are above those of close rivals, the more competitively vulnerable it becomes.
  The greater the amount of customer value that a company can offer profitably relative to close rivals, the less competitvely vulnerable it becomes.
 Value ChainA company's value chain identifies the primary activities that create customer value and the related support activities.
  A company's cost competitiveness depends not only on the cost of internally performed activities (its own value chain) but also on costs in the value chains of its suppliers and distribution channel allies.
 Benchmarkingis 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".
  Benchmarking the costs of company activities against rivals provides hard evidence of whether a company is cost-competitive.
  Performing value chain activities in ways that give a company the capabilities to either outmatch rivals on differentiation or beat them on costs will help the company to secure a competitive advantage.
  High weighted competitive strength ratings signal a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage.
  A company's competitive strength scores pinpoint its strengths 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.
  Zeroing in on the strategic issues a company faces and compiling a "worry list" of problems and roadblocks creates a strategic agenda of problems that merit prompt managerial attention.
  Actually deciding on a strategy and what specific actions to take is what comes after developing the list of strategic issues and problems merit front-burner amangement attention.
  A good strategy must contain ways to deal with all the strategic issues and obstacles that stand in the way of the company's financial and competitive success in the years ahead.
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