STRATEGIC MANAGEMENT TEST 2 (Chapters 3, 4, and 6): STUDY GUIDE •Know definitions and be able to recognize examples of concepts •Test will be multiple choice, 45-50 items •Bring scantron sheet and #2 pencil Additional free student study resources available including an interactive quiz from the publisher at: http://highered. mcgraw-hill. com/sites/0078029317/student_view0/chapter1/chapter_quiz. html Chapter 3: Assessing the Internal Environment •What is value chain analysis? How is it useful for understanding competitive advantages?
Strategic analysis of an organization that uses value-creating activities. It is useful for understanding the building blocks of competitive advantages. •In the value chain, what are the 5 primary activities? Which 4 activities are support activities? Primary- inbound logistics, operations, outbound logistics, marketing and sales, and service. Support- general admininistration, human resource management, technology development, and procurement. •Relating to primary activities, what specific activities are associated with inbound logistics? Operations? Outbound logistics?
Marketing and sales? Service? Inbound logistics- receiving, storing, and distributing inputs of a product. Operations- all activities associated with transforming inputs into the final product form. Outbound logistics- collecting, storing, and distributing the product or service to buyers. Marketing and sales- activities associated with purchases of products and services by end users and the inducements used to get them to make purchases. Service- actions associated with providing service to enhance or maintain the value of the product. •What is a Just-in-time inventory system? were designed to achieve efficient inbound logistics. Parts and deliveries arrive only hours before they are needed. •Relating to support activities, what specific activities are associated with procurement? Technology development? HR management? General administration? Procurement- purchasing inputs used in the firm’s value chain, including raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings. Technology development- development of new knowledge that is applied to the firm’s operations.
HR management- activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel. General administration- general management, planning, finance, accounting, legal and government affairs, quality management, and information systems: activities that support the entire value chain and not individual activities. •How has Walgreen’s used information systems to be a sources of competitive advantage? Introduction of a computer based prescription management system- automates telephone refills, store to store prescription transfers, and drug reordering.
Also provides information on drug interactions and frees up pharmacists from administrative tasks to devote more time to patient counseling. •What are the two levels of interrelationships among value-chain activities? 1. Interrelationships among activities within the firm 2. Interrelationships among activities within the firm and other stakeholders. •What is resource-based view of the firm? Perceptions that firms’ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. What are the 3 types of firm resources? Tangible, Intangible, and Organizational Capabilities. •What are the 4 kinds of tangible resources? Financial, physical, technological, and organizational. •What are the 3 kinds of intangible resources, Human, Innovation and Creativity, and Reputation. •What examples of organizational capabilities? Ex. Outstanding customer service. Excellent product development capabilities, innovativeness of products and services. Ability to hire, motivate, and retain human capital. What are the four criteria that a firm’s resources must possess to maintain a sustainable advantage? 1. Resource must be valuable in the sense that it exploits opportunities and/or neutralizes threats in the firm’s environment. 2. It must be rare among the firm’s current and potential competitors. 3. It must be difficult to imitate. 4. Must have no strategically equivalent substitutes. •How can the following four resource characteristics help sustain a competitive advantage based on inimitability: physical uniqueness, path dependency, causal ambiguity, and social complexity? 1.
Inherently difficult to copy. 2. Resources are scarce because they were acquired through a unique series of events. 3. Costly to imitate because competitor cannot determine what the resource is and/or how it can be re-created. 4. Costly to imitate because the social engineering required is beyond the capability of competitors, including interpersonal relations among managers, organizational culture, and reputation with suppliers and customers. •Substitutability can take which two forms? 1. Substitute a similar resource that enables it to develop and implement the same strategy. . Very different firm resources can become strategic substitutes. • See exhibit 3. 7 – what are the implications for competitiveness based on differing characteristics of a resource or capability? The less valuable, less rare, easier to imitate, more substitutes, the less competitive advantage. •What are the four factors that help explain the extent to which employees will be able to obtain a proportionally high level of a firm’s profits? 1. Employee bargaining power. 2. Employee replacement costs. 3. Employee exit costs. 4. Manager Bargaining Power. What are the two approaches to use when evaluating a firm’s performance? Financial ration analysis and taking a broad stakeholder view. •What is financial ratio analysis? How can historical comparisons, industry norm comparisons, and competitor comparisons each serve as useful reference points? 1. Technique for measuring the performance of a firm according to its balance sheet, income statement, and market valuation. 2. Provides a means of evaluating trends. 3. Assesses relative performance. 4. Gain valuable insights into a firm’s financial and competitive position. What is the balanced scorecard? Why is it useful? a method of evaluating a firm’s performance using performance measures from the customers, internal innovation, and learning, and financial perspectives. Provides managers with a fast, but comprehensive review of the business (operations measures that drive the future financial performance). •What are the four key perspectives of the balanced scorecard? 1. Customer perspective- measures of firm performance that indicate how well firms are satisfying customer’s expectations. 2.
Internal business perspective- measures of firm performance that indicate how well firms internal processes, decisions, and actions are contributing to customer satisfaction. 3. Innovation and learning perspective- measures of a firm performance that indicate how well firms are changing their product and service offerings to adapt to changes in the internal and external environments. 4. Financial perspective- measure of firm’s financial performance that indicate how well strategy, implementation and execution are contributing bottom-line improvement. •What are the limitations of the balanced scorecard?
Lack of a clear strategy, limited or ineffective executive sponsorship, too much emphasis on financial measures rather than nonfinancial measures, poor data on actual performance, inappropriate links of scorecard measures to compensation, inconsistent or inappropriate terminology. Chapter 4: Recognizing a Firm’s Intellectual Assets: Moving Beyond a Firm’s Tangible Resources •What is the knowledge economy? An economy where wealth is created through the effective management of knowledge workers instead of by the efficient control of physical and financial assets. How has the emphasis shifted between intangible and tangible resources as a result of changes in the competitive environment? Shifted from tangible resources such as land, equipment, and money. Efforts were more directed toward the efficient allocation of labor and capital. Now intellectual and information processes create most of the value for firms in large service industries. •What is the market value of a firm? What is the book value of a firm? What does the difference between the two values represent? In what types of firms does this difference tend to be the greatest?
Market value- the value of a share of its common stock times the number of shares outstanding. Book value- is primarily a measure of the value of its tangible resources: total assets- total liabilities. The difference between the two represents the firm’s intellectual capital ( a measure of the firm’s intangible assets). In firms where knowledge and the management of knowledge workers are relatively important contributors to developing products and services and physical resources are less critical, the ratio of market to book value tends to be much higher. •What is intellectual capital and how can it be increased?
Intellectual capital= market value of firm-book value of the firm. To increase: attract and leverage human capital effectively through mechanisms that create products and services of value over time. •What is human capital? Social capital? Explicit knowledge? Tacit knowledge? Human capital- the individual capabilities, knowledge, skills, and experience of a company’s employees and managers. Social capital- the network of friendships between talented people both inside and outside the organization. Explicit knowledge- knowledge that is codified, documented, easily reproduced, and widely distributed.
Tacit knowledge- knowledge that is in the minds of employees and is based on their experiences and backgrounds. •How is new knowledge created? Through the continual interaction of explicit and tacit knowledge. •How has employee loyalty to the company changed relative to loyalty to the profession? Knowledge workers place professional development and personal enrichment above company loyalty. •What is a first critical step in the process of of building intellectual capital? What are the other processes organizations use to build human capital?
Hiring talented individuals, developing them to fulfill their full potential to maximize their joint contributions. Retain the best and brightest. •Why do many companies use employee referrals for new hires? Incentive bonuses paid to the referrers are cheaper than what they would have to pay headhunters to find candidates, plus the current employees would find good candidates because they are putting their reputation on the line for them. •What strategies are used to develop human capital? Encouraging widespread involvement, Transferring knowledge, monitoring progress and development, and evaluating human capital. How as the importance of evaluating human capital changed in recent years? Collaboration and interdependence are vital to organizational success. Individuals must work collectively. Traditional past systems evaluate performance from a single perspective. •What is 360 degree feedback? Superiors, direct reports, colleagues, and even external and internal customers rate a person’s performance. •What are the 6 benefits of diversity in a firm’s workforce? 1. Cost argument- firms with more effective management in diversity will have a cost advantage over those that are not. 2.
Resource acquisition argument- firms with excellent reputations as prospective employers for minorities will have an advantage in the competition for top talent. 3. Marketing argument- for multinational firms this will be useful. 4. Creativity argument- less emphasis on conformity to norms of the past and diversity of perspectives will improve the level of creativity. 5. Problem solving argument- people with different perspectives have a better shot at solving complex problems than those who all think alike. 6. Organizational flexibility argument- greater flexibility leads means better reactions to environmental changes. What is network analysis? Closure relationships? Bridging relationships? Analysis of the pattern of social interactions among individuals. •How can effective social networks be advantageous to an individual’s career? Private information now available. Access to diverse skill sets. Power. •What is groupthink? – tendency in an organization for individuals not to question shared beliefts. •What are intellectual property rights? What actions can be taken to manage intellectual property? Intangible property owned by a firm in the forms of patents, copyrights, trademarks, or trade secrets. What are dynamic capabilities? The ability to sense and seize new opportunities, generates new knowledge, and reconfigure existing assets and capabilities. Chapter 6: Corporate-Level Strategy: Creating Value Through Diversification •What is corporate-level strategy? What two related issues does it address? a strategy that focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses. Acquisitions and mergers. •How is related diversification different than unrelated diversification? What are the potential benefits of each?
Related diversification- a firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Unrelated diversification- a firm entering a different business that has little horizontal interaction with other businesses of a firm. •Be familiar with the classifications of Exhibit 6. 2 3M was using exorbitant rebates to retailers, which pushed them into a “monopolistic position” and courts ordered 3M to pay 68. 5 million dollars to another tape company. •In related diversification, what is meant by economies of scope?
Cost savings from leveraging core competencies, sharing activities, or building market power. •What is a core competency? What are the three criteria for assessing if a core competency creates value? Firm’s strategic resources that reflect the collective learning in the organization. 1. Must enhance competitive advantage by creating superior customer value. 2. Different businesses in the corporation must be similar in at least one important way related to the core competence. 3. Must be difficult for competitors to imitate or find substitutes for. •What are sharing activities?
What are the two payoffs associated with sharing activities. -Having activities of two or more businesses value chains done by one of the businesses. -1. Cost savings -2. Revenue enhancement •In related diversification, what is market power? Firm’s ability to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment. •What is pooled negotiating power? the improvement in bargaining position relative to customers and suppliers. •What is vertical integration, in its associated risks and benefits? an xpansion or extension of the firm by integrating preceding or successive production processes (occurs when a firm becomes its own supplier or distributer). Pros- secure supply of raw materials or distribution channels. Protection and control over assests and services required to produce and deliver. Access to new business opportunities and new forms of technology. Eliminating the need to deal with a wide variety of suppliers and distributors. Cons- costs and expenses associated with increased overhead and capital expenditures. Loss of flexibility resulting from large investments.
Problems associated with unbalanced capacities along the value chain. Additional administrative costs associated with managing a more complex set of activities. •What 5 issues should be considered in making vertical integration decisions? 1. Is the company satisfied with the quality of the value that its present suppliers and distributors are providing? 2. Are there activities in the industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? 3. Is there a high level of stability in the demand for the organization’s products? . Does the company have the necessary competencies to execute the vertical integration strategies? 5. Will the vertical integration initiative have potential negative impacts on the firm’s stakeholders? •What is the transaction cost perspective? A perspective that the choice of a transaction’s governance structure such as vertical integration or market transaction, is influenced by transaction costs, including, search, negotiating, contracting, monitoring, and enforcement costs, associated with each choice. •What is unrelated diversification? What is a parenting advantage?
A firm entering a different business that has little horizontal interaction with other businesses of a firm. Parenting advantage- the positive contributions of the corporate office to a new business as a result of expertise and support provided and not as a result of substantial changes in assets, capital structure, or management. •What is restructuring? What are the three types of restructuring? The intervention of the corporate office in a new business that substantially changes assets, capital structure and management. 1. Asset restructuring 2. Capital restructuring 3. Management restructuring What is portfolio management?
Method of assessing the competitive position of a portfolio of businesses within a corporation, suggesting strategic alternatives for each business, and identifying priorities for the allocation of resources across the businesses. •What is the Boston Consulting Group’s (BCG) growth/share matrix? What are the 4 quadrants in the matrix? What are the suggested strategies associated with each of the quadrants? What are the limitations of the BCG matrix? Each of the firm’s strategic business units is plotted on a two-dimensional grid in which the axes are relevant market share and industry growth rate. 1.
Stars-competing in high growth industries with high market shares, long term growth potential and should continue to receive substantial investment funding. 2. Question marks- competing in high growth industries with but have weak market share, resources should be invested to enhance their competitive positions. 3. Cash cows- have high market shares in low growth industries. Have limited long run potential, but represent a source of current cash flows to fund investments into starts and question marks. 4. Dogs- have weak market shares in low growth industries, weak positions and limited potential.
Most recommend they become divested. Limitations of BCG matrix- 1. the only compare based on two dimensions. 2. View them as a stand-alone entity, ignoring common business practices and value creating activities that may hold promise for synergies across business units. 3. The process becomes largely mechanical, substituting an overly simplified graphical model for the important contributions of the CEO or other managers experience. •What are the three primary means by which a firm can diversify? 1. Through acquisitions or mergers 2.
Pool the resources of other companies with their resource base, commonly known as a joint-venture or strategic alliance. 3. Diversify into new products, markets, and technologies through internal development. •What are the benefits and potential of mergers and acquisitions? 1. A means of obtaining valuable resources that can help an organization expand its product offerings and services 2. Can provide the opportunity for firms to attain the three bases of synergy—leveraging core competencies, sharing activities, and building market power. 3. Can lead to consolidation within an industry and can force other players to merge.
Cons- competing firms can often imitate any advantages realized from the M&A. there can be cultural issues that may doom the intended benefits from the endeavors. •What is a divestment? The exit of a business from a firm’s portfolio. •What is a strategic alliance? Joint venture? How do they differ? What are their potential advantages and downsides? Strategic alliance- a cooperative relationship between two or more firms. Joint venture- new entities formed within a strategic alliance in which two or more firms, the parents, contribute equity to form the new legal entity.
A strategic alliance is a cooperative relationship. A joint venture is a special case of alliances where both firms contribute equity to form a new legal entity. Pros- Reducing manufacturing or other costs in the value chain. Developing and diffusing new technologies. Cons- many fail to meet expectations. Without proper partner, a firm should never consider it. Little attention is often given to nurturing the close working relationships and interpersonal connections that bring together the partnering organizations. •What is internal development?
What are its potential downsides? -Entering a new business through investment in new facilities, often called corporate entrepreneurship and new venture development. -It may be time consuming, firms may forfeit the benefits of speed that growth through mergers and acquisitions can provide. •How can managerial motives erode value creation? They may often act in their own self-interests (CEOS). “growth for growth’s sake”, excessive egotism, and the creation of a wide variety of antitakeover tactics. •What is meant by growth for growth’s sake? Egotism? Manager’s actions to grow the size of their firms not to increase long-term profitability, but to sever managerial self-interest. -Manager’s actions to shape their firm’s strategies to serve their selfish interests rather than to maximize long-term shareholder value. •What are the antitakeover tactics of greenmail, the golden parachute, and poison pill? Greenmail- a payment by a firm to a hostile party for the firm’s stock at a premium, made when the firm’s management feels that the hostile party is about to make a tender offer. (sort of like a bribe)