SI 422QST SI422 Miterm Study Guide. Strategy Midterm Study Guide

Strategy Midterm Study Guide Lecture 1:  Focus on strategy rather than management or tactics  Lesson from Taxi/Coffee Case o No mater how “hard working” some employees are, they will find it hard to make profits b ...

Strategy Midterm Study Guide Lecture 1:  Focus on strategy rather than management or tactics  Lesson from Taxi/Coffee Case o No mater how “hard working” some employees are, they will find it hard to make profits because their industries are extremely competitive o Industry affiliation has a substantial impact on firm profitability  Supermarkets have historically low profits  Pharmaceutical companies have high profits  result of economies of those industries  Lesson from Soccer/Zappos Case o Demonstrate the impact of Strategy at the firm level within a difficult competitive environment  Within a particular competitive environment (or industry), Strategy can affect a firm’s performance relative to its rivals  An effective Strategy requires trade-offs Porterian View:  Operational Effectiveness – refers to the extent to which a firm performs similar activities better than rivals (or “at least as good”) o The important sources of differences in profits o Productivity frontier shifts outward as new inputs, technologies, and management approaches become available o Constant improvement in OE is necessary to stay ahead of the competition o Necessary but not sufficient for long-run competitive advantag  Strategy – refers to performing different activities from those of rivals or performing them in a different way o Chose the right configuration of activities incentives, systems o Make the right trade-offs o Rests on unique activities  Ultimately, Porter believes that firms can achieve competitive advantage only if they have both operational effectiveness and superior strategy  What is Strategy: Exists as a field of research and practice o In practice  the goal is to enable organizations to achieve the greatest organizational performance o In research  the goal is to understand what are the determinants of long-term organizational performance Lecture 2:  Strategic Activities Map – a picture that identifies the key activities of a firm and identifies the linkages between them (via lines)  Different industries have different profitability ROE  good to compare firms in the same industry  ROS  how well is a company getting from its sales (good for retail)  ROE  good for comparing firms with the same capital structure How does Grant/Jordan define Strategy  “Strategy is not a detailed plan or program of instructions; it is a unifying theme that gives a coherence and direction to the actions and decisions of an individual or an organization”  using your internal resources and capabilities to deal with its external environment  Corporate  choosing industry/business  Business Unit  how you’ll win Mintzberg  it is incomplete to consider strategy to be something that can simply be designed (analyzed); instead it is important to recognize that strategy emerges & changes over time, regardless of how carefully it is planned Lecture 4:  Five Forces o Helps us understand whether an industry’s incumbents are likely to earn high/low economic profits o To help understand trends and events on average industry profitability o To help us make recommendations to firms on how to improve  Monopoly o Monopolists facet he industry demand curve o They choose prices equal to marginal revenue to maximize profits o Good for company profits but bad for consumers because they have to pay higher prices and get lower quality  Oligopolists o Exist when there are only a few firms in an industry o An industry with 3-6 firms is probably an oligopoly  The more firms the industry has, the less likely it is an oligopoly  C4, C5, C6  combined market share of top 4, 5, 6 firms respectively  If they are all together above 80% concentration, then oligopoly!  Industr y – define the industry based on similar products that have common suppliers and buyers Two Dimensions  The power of Buyers/Suppliers/Industry Rivalry  determines who gets the profits that the industry could potentially generate o If supplier/buyers  Are very price sensitive  Have high bargaining power   can squeeze profits out of the industry  The Threat of Entry and Threat of Substitutes  determine whether the industry value chain can generate any profits at all o Compare price-value ratio of the industry’s products vs. those of alternative products  if alternative products have similar price-value ratio, power of substitutes is high  Switching costs – costs that customers must bear when they try to switch from one product to another Rivalry Among Existing Competitors Supplier Power Buyer Power Threat of New Entrants Threat of Substitutes Determinants of Buyer Power • Bargaining leverage • Buyer concentration vs. industry • Buyer volume • Buyer switching costs • Price/total purchases • Product differences • Brand identity Determinants of Substitution Threat • Relative price performance of substitutes • Switching costs • Buyer propensity to substitute Determinants of Supplier Power • Dominated by few companies • Differentiation of product (inputs) causes high switching costs • Few substitute inputs • Supplier concentration • Importance of volume to supplier • Cost relative to total purchases in the industry • Threat of forward integration relative to threat of backward integration by firms in the industry Entry Barriers • Economies of scale • Proprietary product differences • Brand identity • Capital requirements • Access to distribution • Government policy • Expected retaliation Rivalry Determinants • Industry growth • Demand conditions (overcapacity) • Exit barriers (corporate stakes, high fixed costs) • Product differences • Brand identity • Concentration and balance Economies of scale – when average costs decline as output increases o Economies of scale arise when size matters  big firms = much lower average costs  Suppose our Five Forces Analysis suggested that our firm competed in a Favorable Industry o We would expect that data shows a positive industry influence  Industry average Profits > Economic wide average Profits  Compare firms five Forces to industry’s Five Forces