Chapter 7 / Week 7: Leadership, Profitability, and Generic Strategies

Question 1

eBook – Read page 52-53 Is the industry outlook conducive to good profitability.

Answer 1

eBook – Read page 52-53 Is the industry outlook conducive to good profitability.

Question 2

PESTEL, five forces analysis, driving forces, strategy groups, competitor analysis, and key success factors—provides a useful perspective on an industry’s outlook for

Answer 2

future profitability.

Question 3

The important factors on which to base a conclusion include (conclusion as in after you conduct the analyses provided in card 2)

Answer 3

• How the company is being impacted by the state of the macro-environment. • Whether strong competitive forces are squeezing industry profitability to subpar levels.
• Whether the presence of complementors and the possibility of cooperative actions improve the company’s prospects.
• Whether industry profitability will be favorably or unfavorably affected by the pre-vailing driving forces.
• Whether the company occupies a stronger market position than rivals. • Whether this is likely to change in the course of competitive interactions.
• How well the company’s strategy delivers on the industry key success fact

Question 4

As a general proposition, the anticipated industry environment is fundamentally attractive if it presents a company with:

Answer 4

Good opportunity for above-average profitability;

the industry outlook is fundamentally unattractive if a company’s profit prospects are unappealingly low.

Question 5

When a company decides an industry is fundamentally attractive and presents
good opportunities,

Answer 5

a strong case can be made that it should invest aggressively to capture the opportunities it sees and to improve its long-term competitive position in the business.

Question 6

When a strong competitor concludes an industry is becoming less attractive,

Answer 6

it may elect to simply protect its present position, investing cautiously—if at all—and looking for opportunities in other industries.

Question 7

A competitively weak company in an unattractive industry may see its best option as

Answer 7

finding a buyer, perhaps a rival, to acquire its business

Question 8

Grant, R. ((2013). Contemporary strategy analysis (8th ed.) West Sussex: Wiley Read pages 62-63

BEYOND

Answer 8

Grant, R. ((2013). Contemporary strategy analysis (8th ed.) West Sussex: Wiley Read pages 62-63

BEYOND

Question 9

The level of industry profitability is neither random nor the result of entirely industry specific- influences:

Answer 9

it is determined by the systematic influences of the industry’s structure

Question 10

Profits earned by the firms in an industry are determined by three factors:

Answer 10

1) The value of product to customers
2) The intensity of competition
3) The bargaining power of industry members relative to their suppliers and buyers

Question 11

eBook – 139-148, 158-161 How to compete for advantage. Differentiation Strategy. Cost-leadership strategy.

BEYOND

Answer 11

eBook – 139-148, 158-161 How to compete for advantage. Differentiation Strategy. Cost-leadership strategy.

BEYOND

Question 12

Business-level strategy

Answer 12

The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market

Question 13

To formulate an appropriate business-level strategy, managers must answer the who, what, why, and how questions of competition:

Answer 13

■Who are the customer segments we will serve?
■What customer needs, wishes, and desires will we satisfy?
■ Why do we want to satisfy them?
■How will we satisfy them?

Question 14

Competitive advantage is determined jointly by _____ and ______ effects

Answer 14

Industry

Firm

Question 15

At the firm level, performance is determined by _____ and _________ relative to competitors

Answer 15

Value

Cost positions

Question 16

Competitive advantage is based on

Answer 16

the difference between the perceived value a firm is able to create for consumers (V), captured by how much consumers are willing to pay for a product or service, and the total cost (C) the firm incurs to create that value.

Question 17

The greater the economic value created = (V−C),

Answer 17

the greater is a firm’s potential for competitive advantage.

Question 18

To answer the business-level strategy question of how to compete, managers have two primary competitive levers at their disposal:

Answer 18

value (V) and cost (C)

Question 19

Strategic trade-offs

Answer 19

Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost.

Question 20

A business strategy is more likely to lead to a competitive advantage if a firm has a clear strategic profile,

Answer 20

either as differentiator or a low-cost leader

Question 21

blue ocean strategy

Answer 21

is only successful, in contrast, if the firm can implement some type of value innovation that reconciles the inherent trade-off between value creation and underlying costs.

Question 22

There are two fundamentally different generic business strategies

Answer 22

1) differentiation

2) cost leadership.

Question 23

A differentiation strategy (generic strategy)

Answer 23

Generic business strategy that seeks to create higher value for customers by delivering products or services with unique features, than the value that competitors create, while containing costs.

Incorporate features that appeal to buyers and create sustainably distinctive product

Use higher prices to recoup differentiations costs

Can be tangible or intangible

Question 24

A cost-leadership strategy (generic strategy)

Answer 24

Generic business strategy that seeks to create the same or similar value for customers at a lower cost.

Leads to lower cost for consumers to buy at

Question 25

These two business strategies are called generic strategies because

Answer 25

they can be used by any organization—manufacturing or service, large or small, for-profit or nonprofit, public or private, domestic or foreign—in the quest for competitive advantage, independent of industry context.

Question 26

Because value creation and cost tend to be positively correlated

Answer 26

however, important trade-offs exist between value creation and low cost.

Question 27

A business strategy, therefore, is more likely to lead to a competitive advantage if it allows a firm to either ______________ or __________ than its rivals that result in creating more value or offering similar products / services at lower costs

Answer 27

perform similar activities differently perform different activities

Question 28

Scope of competition

Answer 28

The size—narrow or broad—of the market in which a firm chooses to compete

Question 29

Focused cost-leader-ship strategy

Answer 29

Same as the cost-leadership strategy except with a narrow focus on a niche market.

Question 30

Focused differentiation strategy

Answer 30

Same as the differentiation strategy except with a narrow focus on a niche market.

Question 31

The goal of a differentiation strategy is to

Answer 31

add unique features that will increase the perceived value of goods and services in the minds of consumers so they are willing to pay a higher price.

Question 32

Economies of scale

Answer 32

denote decreases in cost per unit as output increases

Question 33

Economies of scope

Answer 33

Savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology.

Question 34

Here, we will study the most salient value drivers that strategic leaders have at their disposal, they are:

Answer 34

1) Product features 2) Customer service 3) Complements

Question 35

The condition of ∆V > ∆C must be fulfilled if a

Answer 35

Differentiation strategy is to strengthen a firm’s strategic position and thus enhance its competitive advantage.

Question 36

1) PRODUCT FEATURE

Answer 36

Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price

Question 37

2) CUSTOMER SERVICE

Answer 37

Exceptional customer service such as not using a script when talking to customers, having free shipping on returns,

Question 38

3) COMPLEMENTS

Answer 38

Complements add value to a product or service when they are consumed in tandem. Finding complements, therefore, is an important task for strategic leaders in their quest to enhance the value of their offerings. Example: Smartphones and cellular services (one without the other is useless)

Question 39

The goal of a cost-leadership strategy is to

Answer 39

reduce the firm’s cost below that of its competitors while offering adequate value.

Question 40

Cost leader

Answer 40

as the name implies, focuses its attention and resources on reducing the cost to manufacture a product or on lowering the operating cost to deliver a service in order to offer lower prices to its customers.

Question 41

A cost leader can achieve a competitive advantage as long as

Answer 41

its economic value created | (V − C) is greater than that of its competitors

Question 42

The most important cost drivers that strategic leaders can manipulate to keep their costs low are

Answer 42

1) Cost of input factors. 2) Economies of scale. 3) Learning-curve effects. 4) Experience-curve effects

Question 43

1) COST OF INPUT FACTOR

Answer 43

One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.

Question 44

2) ECONOMIES OF SCALE

Answer 44

Decreases in cost per unit as output increases. Think of a bowl and the area that doesn't go up (the middle) is the economies of scale

Question 45

What causes per-unit cost to drop as output increases (up to point Q1)? Economies of scale allow firms to:

Answer 45

1) Spread their fixed costs over a larger output. 2) Employ specialized systems and equipment. 3) Take advantage of certain physical properties

Question 46

Minimum efficient scale (MES)

Answer 46

Output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.

Question 47

Diseconomies of scale

Answer 47

Increases in cost per unit when output increases.

Question 48

A differentiation strategy is defined by

Answer 48

establishing a strategic position that creates higher perceived value while controlling costs.

Question 49

A successful differentiation strategy is likely to be based on

Answer 49

unique or specialized features of the product, on an effective marketing campaign, or on intangible resources such as a reputation for innovation, quality, and customer service

Question 50

The threat of entry is reduced:

Answer 50

Competitors will find such intangible advantages time-consuming and costly, and maybe impossible, to imitate.

Question 51

If the differentiator is able to create a significant difference between perceived value and current market prices,

Answer 51

the differentiator will not be so threatened by increases in input prices due to powerful suppliers.

Question 52

Exhibit 6.8 (textbook green 159, ebook 157)

Answer 52

Good diagram comparing porters five forces and differentiation and cost leadership

Question 53

A cost-leadership strategy is defined by

Answer 53

obtaining the lowest-cost position in the industry while offering acceptable value.

Question 54

The success of cost leadership, differentiation, and focused variations thereof depends on context and relies on two factors:

Answer 54

How well the strategy leverages the firm’s internal strengths while mitigating its weak-nesses. How well it helps the firm exploit external opportunities while avoiding external threats

Question 55

Pearce, Robinson (2015). Strategic management ((14th ed.). New York McGrawHill.

Answer 55

Pearce, Robinson (2015). Strategic management ((14th ed.). New York McGrawHill.

Question 56

To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas

Answer 56

1) Profitability 2) Productivity 3) Competitive position 4) Employee Development 5) Employee Relations 6) Technological leadership 7) Public Responsibility

Question 57

1) Profitability

Answer 57

Obviously need these, best measured in earnings per share or return on equity

Question 58

2) Productivity

Answer 58

Commonly used items for this: Number of items produced, number of services rendered per unit of input Can be based on cost decreases, such as reducing defective items, customer complaints leading to litigation, or overtime

Question 59

3) Competitive position

Answer 59

Commonly used terms: Total sales or Market share

Question 60

4) Employee Development

Answer 60

Employee value education and training

Question 61

5) Employee Relations

Answer 61

Believe that productivity is linked to employee loyalty and to appreciation from managers

Question 62

6) Technological leadership

Answer 62

Firms must decide whether to lead or follow in the marketplace Good technology helps the company

Question 63

7) Public Responsibility

Answer 63

Examples may be charitable donations, educational contributions, minority training, public or political activity, community welfare, or urban revitalization

Question 64

5 Qualities of long-term objectives

Answer 64

1) Flexible 2) Measurable 3) Motivating 4) Suitable 5) Understandable

Question 65

1) Flexible

Answer 65

Objectives should be adaptable to unforeseen or extraordinary changes in the firm's competitive or environmental forecasts

Question 66

2) Measurable

Answer 66

Objectives must clearly and concretely state what will be achieved and when it will be achieved, thus measurable over time

Question 67

3) Motivating

Answer 67

Challenges evoke motivation when they are difficult, but not so hard they can not be completed

Question 68

4) Suitable

Answer 68

Objectives must be suited to the broad aims of the firm, which are expressed in its mission statement

Question 69

5) Understandable

Answer 69

Must understand what is to be achieved and the major criteria in which their performance will be evaluated

Question 70

Balance scorecard

Answer 70

Set of four measures directly linked to a company's strategy: financial performance, customer knowledge, internal business processes, and learning and growth

Question 71

Generic strategy

Answer 71

A core idea about how a firm can best complete in the marketplace

Question 72

Shareholder value

Answer 72

Share price Total return to shareholders Market capitalization Negatives: Stock prices are volatile, effects overall macro-economic forces, irrationality of stock price evaluations These are not always the best measure of industry/firm attractiveness because:

Question 73

Return on invested capital (ROIC)

Answer 73

Best measure of performance and attractiveness in an industry

Question 74

Incumbent's advantage

Answer 74

Deeper insights into needs of customers you serve + understand profitability of serving and retaining them = Knowledge of needs and profits are less susceptible to imitation than features of

Question 75

Multi-dimensional Approach to Assessing Attractiveness of an Industry

Answer 75

1) Quantitative approach | 2) Qualitative approach

Question 76

1) Quantitative approach

Answer 76

Economic value Shareholder value Accounting/financial measures

Question 77

2) Qualitative approach

Answer 77

Leadership Range of strategic options to gain Competitive advantage Complements

Question 78

Firm's Cost

Answer 78

= C

Question 79

Firm's profit

Answer 79

= P-C

Question 80

Limitations of Accounting Data

Answer 80

Past performance -Historical records look backward Do not consider off-balance sheet items -Assets owned or leased Focus on tangible assets -Difficulty with measuring intangible assets such as patents/trademarks, brand reputation, innovation, customer experience, quality Differing financial structures/practices of firms make it difficult for direct comparison Book value vs market value

Question 81

Growth Ratios

Answer 81

Measure change year over year - Sales - Various expense categories - Income - Earnings per share - Dividends per share - Price-earnings ratio Indicate trends -Ability to rationalize trends

Question 82

General Growth Ratio % =

Answer 82

(Current - past) / Past

Question 83

Profitability Ratios

Answer 83

See slides 20 + 21 for all the equations from Accounting 201

Question 84

Leverage Ratios

Answer 84

Indicate the source of the firm’s capital - Owners - Creditors Leverage refers to using capital with a fixed interest charge to “amplify” profits in relation to equity shares Most common ratio measures the % of total funds provided by debt

Question 85

Leverage / Solvency Ratios

Answer 85

See slide 23

Question 86

Liquidity/Activity Ratios

Answer 86

Indicators of a firm’s ability to meet short term obligations including: - Current liabilities - Currently maturing long term debt Normal cash cycle (B2B) Sales > Accounts Receivables > Cash Indicate how effectively a firm is using its resources -Compare revenues earned to the resources used in generating them

Question 87

Liquidity / Activity ratios

Answer 87

See slide 25

Question 88

Levels of competitive advantage

Answer 88

``` From top to Bottom: Distinct competence, Core competences Core Skills Capabilities ```

Question 89

Costs can be categorized by:

Answer 89

Direct/Indirect Variable/Fixed COGS/Operations Administration & Overhead

Question 90

Differentiation Advantages

Answer 90

Command premium prices for the firm’s products Increased unit sales due to attractive differentiation Brand loyalty that bonds buyers to the firm’s products

Question 91

Differentiation Risks

Answer 91

Adding too much so that product exceeds the needs and use patterns of most buyers Overspending on efforts to differentiate the firm’s product offering Competitors achieve new, more valued point of differentiation

Question 92

Uniqueness can be created through:

Answer 92

Product features and product performance Complementary services Brand image and intensity of marketing activities Technology embodied in design and manufacture Quality of purchased inputs Procedures impacting customer experience Skill and experience of employees Location

Question 93

Effective Low-Cost Approaches:

Answer 93

Pursue cost-savings that are difficult imitate. Perform value chain activities more cost-effectively than rivals. Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities. Work to quickly achieve economies of scale and learning curve advantages