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Final exam Review.docx

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Ryerson University
BUS 800
Neil Wolff

Chapter 1 What is strategy and why is it important? Acompany’s strategy is its action plan or outperforming its competitors and achieving superior profitability; Lasting success and growth. • How to attract and please customers • How to compete against rivals • How to position the company in the marketplace • How best to respond to changing economic and market conditions • How to capitalize on attractive opportunities to grow the business • How to achieve the company’s performance targets Strategy is about competing differently from rivals- doing what competitors don’t do or even better, doing what they can’t do; provides guidance. Distinctive strategy- meeting the customers’needs better or operating more efficiently than rivals Sustainable strategy- durable, not temporary; having elements that give buyers lasting reason to prefer a company’s products or services over those of competitors; reasons that competitors are unable to nullify or overcome despite their best efforts Four most used strategies: 1. Striving to be the industry’s low-cost provider, thereby aiming for a cost-based competitive advantage over rivals 2. Outcompeting rivals on the basis of differentiation features, such as higher quality, wider product selection, added value, value-added services, more attractive styling, and technological superiority. 3. Developing an advantage based on offering more value for the money. 4. Focusing on a narrow market niche within an industry. a. Greater efficiency b. Effectively meeting needs Changing circumstance and ongoing management efforts to improve the strategy cause a company’s strategy to evolve over time- a condition that makes the task of crafting strategy a work in progress, not a one-time event. Evolving strategy- adapting to new conditions and constantly evaluating what is working well enough to continue and what needs to be improved are normal parts of the strategy-making process. Proactive strategy is planned initiative to improve the company’s financial performance and secure a competitive edge Reactive strategy responds to unanticipated developments and fresh market conditions. Acompany’s deliberate strategy consists of proactive strategy elements that are both planned and realised as planned Acompany’s emergent strategy consists of reactive strategy elements that emerge as changing conditions warrant. Realized strategy is observed over time in the pattern of actions taken Abandoned strategy elements Realized strategy Current strategy Emergent strategy Reactive elements Deliberate strategy Proactive elements Business Model is management’s blueprint for delivering a valuable product or service to customers in a manner that will generate revenues sufficient to cover costs and yield an attractive profit. 1. Customer value proposition lays out the company’s approach to satisfying buyer wants and needs at a price customers will consider a good value 2. Profit formula describes the company’s approach to determining a cost structure that will allow for acceptable profits, given the pricing tied to its customer value proposition. Awinning strategy passes the following three tests: 1. Fit test: How well does the strategy fit the company situation? a. External fit- market conditions b. Internal fit- company must be capable of following through on the strategy and have the resources c. Dynamic fit- evolves over time in a manner that maintains close and effective alignment with the company’s situation even as internal and external conditions change 2. CompetitiveAdvantage test: Can the strategy help the company achieve a sustainable competitive advantage? 3. Performance test: Is the strategy producing good company performance? a. Competitive strength and market standing b. Profitability and financial strength Good strategy and good strategy execution are the most telling signs of good management. The better conceived a company’s strategy and the more completely it is executed, the more likely the company will be a standout performer in the marketplace. Chapter 2 Charting company direction: vision, mission, objectives, and strategy The managerial process of crafting and executing a company’s strategy consists of five integrated tasks: 1. Developing strategic vision that charts the company’s long-term direction, a mission statement that describes the company’s purpose, and a set of core values to guide the pursuit of the vision and mission. 2. Setting objectives for measuring the company’s performance and tracking its progress in moving in the intended long-term direction. 3. Crafting a strategy to move the company along the strategic course that management has charted and achieve the objectives. 4. Executing the chosen strategy efficiently and effectively. 5. Monitoring developments, evaluating performance, and initiating correction adjustments in the company’s vision and mission statement, objectives, strategy, or approach to strategy execution in light of actual experience, changing conditions, new ideas, and new opportunities. Revise due to actual performance, conditions, new opportunities, and new ideas 1 2 3 4 5 Astrategic plan maps out where a company is headed, established strategic and financial targets, and outlines the competitive moves and approached to be used in achieving the desired business results. Strategic vision describes management’s aspirations for the futures and delineates the company’s strategic course and long-term direction. • • Distinctive/Specific • Makes good business sense • Graphic • Forward looking • Focused • Feasible • Flexible • Memorable An effectively communicated vision is a valuable management tool for enlisting the commitment of company personnel to engage in actions that move the company forward in the intended direction. Why a good vision matters: 1. Crystallizes senior executives own views about the firms long-term directions 2. Reduces the risk of rudderless decision making 3. Is a tool for winning the support of organization members to help make the vision a reality 4. Provides a beacon for lower-level managers in setting departmental objectives and crafting departmental strategies that are in sync with the company’s overall strategy 5. Helps an organization prepare for the future The distinction between a strategic vision and a mission statement is fairly clear-cut: • Vision is future oriented “where we are going?” • Mission is purposeful and present “who we are, what we do, and why we are here?” Mission statement describes the enterprise’s present business, purpose, and is descriptive. 1. Identifies the company’s products and services 2. Specifies the buyer needs that it seeks to satisfy and the customer groups or markets it serves 3. Gives the company its own identity Core values of a company are the beliefs, traits, and behavioural norms that management has determined should guide the pursuit of its vision and mission; “walking the talk” Objectives are an organization’s performance targets- the specific results management wants to achieve. • Quantifiable • Measurable • Have a deadline for achievement Why are objectives important? 1. They focus efforts and align actions throughout the organization 2. They serve as yardsticks for tracking a company’s performance and progress 3. They motivate employees to expend greater effort and perform at a high level Acompany exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieve that objective. “Stretch” setting targets high enough to force organizations to perform at its full potential and deliver the best possible results. Financial objectives relate to the financial performance targets management has established for the organization to achieve. Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive position, and future business prospects. Objectives can be long-term (3-5 years) or short-term (annual or quarterly) and long term take precedence if a “trade off” is necessary unless the short-term are of unique importance. A stronger market standing and greater competitive vitality is what enabled a company to improve its financial performance. Lagging indicators- the results of financial objectives that ensure your made the right decisions in the past. Leading indicators- strategic outcomes that indicate whether the company’s competitiveness and market position are stronger or weaker The accomplishment of strategic objectives signals that the company is well positioned to sustain or improve performance. The balance scorecard is a widely used method for combining the use of bother strategic and financial objective, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing. Objective setting is a top down process that must extend to the lowest organizational levels. In most companies, crafting and executing strategy is collaborative team effort in which every manager has a role for the area he or she heads; it is rarely something that only high level mangers do. Corporate strategy is strategy at the multi-business level, concerning how to improve company performance or gain competitive advantage by managing a set of businesses simultaneously. Corporate Strategy For the set of businesses as a whole Business Strategy One for each business the company has diversified into Functional Area Strategies (Within each business) Operating Strategies (Within each functional area) Two-way influence Two-way influence Two-way influence CEO and Senior Executives General Managers, Senior Management, and functional area heads Heads of major functional activities in collaboration with other people Brand, operating, distribution, purchasing managers, and managers of important activities Business strategy is strategy at the single business level, concerning how to improve the performance or gain a competitive advantage in a particular line of business. Functional-area strategies concern the actions and approaches employed in managing particular functions within a business- like R&D, production, sales and marketing, customer service, and finance. Operating strategy concerns the relatively narrow strategic initiatives and approaches for managing key operating units and specific operating activities with strategic significance. Anything less than a unified collection of strategies weakens the overall strategy is likely to impair company performance. Acompany’s strategic plan lays out its future direction and business purpose, performance targets, and strategy. • Includes a commitment to allocate resources to the plan and specifies a time period for achieving goals (three to five years). Corporate Governance: 1. Oversee the company’s financial accounting and financial reporting activities. 2. Critically appraise the company’s direction, strategy, and business approaches. 3. Evaluate the caliber of senior executive’s strategic leadership skills. 4. Institutes a compensation plan for top executives that reward them for actions and results that serve shareholder interests. Every corporation has a strong independent board of directors that: • Are well informed about the company’s performance • Guides and judges the CEO and other top executives • Has the courage to curb management actions the board believes are inappropriate or unduly risky • Certifies to shareholders that the CEO is doing what the board expects • Provides insight and advice to management • Intensely involved in debating the pros and cons of key decisions and actions Chapter 3 Evaluating a company’s external environment The macro-environment encompasses the board environment in which a company’s industry is situated. PESTELAnalysis focuses on the six principle components of strategic significance in the macro- environment: • Political- factors including political policies, processes, and government intervention. • Economic- the general economic climate. • Social- the societal values, attitudes, cultural factors, and lifestyle that impact businesses. • Technological- the pace of the technological change and technical developments that have the potential for wide-ranging effects on society. • Environmental- ecological and environmental forces such as weather, climate, and climate change, and associated factors like water shortages. • Legal- the regulations and laws with which companies must comply. Five Forces Model of Competition is a tool used for diagnosing the principal competitive pressures in a market: • Competition from rival sellers o Rivalry increases when buyer demand is growing slowly or declining o Rivalry increase as it becomes less costly for buyers to switch brands o Rivalry increases as the products of rival sellers become less strongly differentiated o Rivalry is more intense when there is excess supply or unused production capacity, especially if the industry’s product has high fixed costs or high storage costs o Rivalry intensifies as the number of competitors increases and they become more equal in size and capacity o Rivalry becomes more intense as the diversity of competitors increases in terms of long- term directions, objectives, strategies, and countries of origin. o Rivalry is stronger when high exit barrier keep unprofitable firms from leaving the industry Rivalry is strong when competitors are fighting over market share Rivalry is moderate when market is healthy and normal Rivalry is weak when competitors are satisfied with their market share Weapons for competing rivals: → Price cutting, sales → Couponing and advertising sales → Enhancing company image through advertisement → Innovating to improve product performance and quality → Introducing new or improved features, providing greater product selection → Increasing customization of product or service → Building a bigger, better dealer network → Improving warranties, offering low-interest financing • Competition from potential new entrants o Cost advantages enjoyed by industry incumbents. o Strong brand preferences and high degrees of customer loyalty. o Strong “network effects” in customer demand. o High capital requirements. o The difficulties of building a network of distributors or dealers and securing adequate space on retailers’shelves. o Restrictive government policies. The strongest competitive pressures associated with potential entry frequently come not from outsiders but from current industry participants looking for growth opportunities. High entry barriers and weak entry threats today do not always translate into high entry barriers and weak entry threats tomorrow. • Competition from producers of substitute products (1) determining whether the industry boundaries lie and (2) figuring out which other products or services can address the same basic customer needs as those produced by industry members. o Whether substitutes are readily available and attractively priced. o Whether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes. The lower the price of substitutes, the higher their quality and performance and the lower the user’s switching costs, the more intense the competitive pressures posed by substitute products. • Supplier bargaining power o Whether demand for suppliers’products is high and they are in short supply. o Whether suppliers provide a differentiated input that enhances the performance of the industry’s product. o Whether it is difficult or costly for industry members to switch their purchase from one supplier to another. o Whether the supplier industry is dominated by a few large companies and whether it is more concentrated than the industry it sells to. o Whether suppliers provide an item that accounts for a sizable fraction of the costs of the industry’s product. o Whether it makes good economic sense for industry members to integrate backward and self-manufacture items they have been buying from suppliers. o Whether there are good substitutes available for the suppliers’products. o Whether industry members are major customers of suppliers. • Customer bargaining power (1) the degree to which buyers have bargaining power and (2) the extent to which buyers are price-sensitive o Buyer power increases when buyer demand is weak in relation to industry supply. o Buyer power increases when industry goods are standardized or differentiation is weak. o Buyer’s bargaining power is greater when their costs of switching to competing brands or substitutes are relatively low. o Buys have more power when they are large and few in numbers relative to the number of sellers. o Buyers gain leverage if they are well informed about sellers’products, prices, and costs. o Buyers’bargaining power is greater when they pose credible threat of integrating backward into the business of sellers. o Buyer leverage increases if buyers have discretion to delay their purchases or perhaps even not make a purchase at all. o Buyer price sensitivity increases when buyers are earning low profits or have low income. o Buyers are more price-sensitive if the product represents a large fraction of their total purchases. For each determine: 1. The different parties involved, along with the specific factors that bring about competitive pressures. 2. Evaluate how strong the pressures stemming from each of the five forces are (strong, moderate, or weak) 3. Determine whether the strength of the five forces, overall is conductive to earning attractive profits in the industry The strongest competitive forces determine the extent of the competitive pressure on industry 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 possibilities. Effectively matching a company’s business strategy prevailing competitive conditions has two aspects: 1. Pursuing avenues that shield the firm from as many of the different competitive pressures as possible. 2. Initiating actions calculated to shift the competitive forces in the company’s favor by altering the underlying factors driving the five forces. Driving forces are the major underlying causes of change in industry and competitive conditions. Steps: 1. Identifying what the driving forces are 2. Assessing whether the drivers of change are acting to make the industry more or less attractive 3. Determining what strategy changes are needed to prepare for the impact of the driving forces Examples: • Changes in an industry’s long-term growth rate • Increasing globalization • Emerging new internet capabilities and applications • Changes in who buys the product and how they use it • Technological change and manufacturing process innovation • Product and marketing innovation • Entry and exit of major firms • Diffusion of technical know-how across companies and countries • Changes in cost and efficiency • Reductions in uncertainty and business risk • Regulatory influences and government policy changes • Changing societal concerns, attitudes, and lifestyle The most important part of driving forces analysis is to determine whether the collective impact of the driving forces will be to increase or decrease market demand, make competition more or less intense and lead to higher or lower industry profitability. Impact is expressed through three questions: 1. Are the driving forces as a whole causing demand for the industry’s product to increase or decrease? 2. Is the collective impact of the driving forces making competition more or less intense? 3. Will the combined impacts of the driving forces lead to higher or lower industry profitability? The real payoff of driving forces analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces. Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry. Astrategic group is a cluster of industry rivals that have similar competitive approaches and market positions; revealing which companies are close competitors and which distance competitors are; Some strategic groups are more favorably positioned than others because they confront weaker competitive forces and or because they are more favorably impacted by industry driving forces. Not all positions are equally attractive: 1. Prevailing competitive pressures from the industry’s five forces may cause the profit potential of different strategic groups to vary. 2. Industry driving forces may favor some strategic groups and hurt others. Studying competitors’past behaviour and preferences provides a valuable assist in anticipating what moves rivals are likely to make next and outmaneuvering them in the marketplace. Framework for competitor analysis points to four indications of a rival’s likely strategic moves and countermoves; including • Current strategy- how the company is competing currently? • Objectives- strategic and performance objectives • Capabilities- key strengths and weaknesses • Assumptions- held about itself and the industry Key Success Factors are those competitive factors that most affect industry members’ability to survive and prosper in the marketplace; the strategy elements, products, and service attributes, resources, and competitive capabilities that are essential to surviving and thriving in the industry. Based on: 1. On what basis do buyers of the industry’s product choose between the competing brands of sellers? 2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a company have to be competitively successful? 3. What shortcomings are almost certain to put a company at a significant competitive disadvantage? The anticipated industry environment is fundamentally attractive if it presents a company with good opportunity for above-average profitability; the industry outlook is fundamentally unattractive if a company’s profit prospects are unappealingly low. Chapter 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness Three best indicators of how well a company’s strategy is working are: 1. Whether the company is achieving its stated financial and strategic objectives 2. Whether its financial performance is above the industry standard 3. Whether its gaining customers and increasing market share Sluggish financial performance and second-rate market accomplishments almost always signal weak strategy, weak execution, or both. Acompany’s resources and capabilities are its competitive assets and determine whether its competitive power in the marketplace will be impressively strong or disappointingly weak. Resource and capability analysis provides manager 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. 1. Identify the company’s resources and capabilities 2. Examine them more closely to ascertain which are the most competitively important and whether they can support a sustainable competitive advantage over rival firms Aresource is a productive input or competitive asset hat is owned or controlled by the firm. • Tangible resources are those can be touched or quantified readily. o Physical resources such as manufacturing facilities and mineral resources, financial resources, technological resources, and organizational resources. • Intangible are various sorts of human assets and intellectual capital, as well as a company’s brand
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