MANAGAEMENT EXAM 1 REVIEW
Strategy: a company’s action plan for outperforming its competitors and achieving
- how to attract and please customers
- how to compete against rivals
- how to position the company in the marketplace
- how to best 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 – set them apart
- provides direction and guidance
- highlights what a company should or should not do
Sustainable Competitive Advantage
- Provide buyers with what they see as superior value compared to rivals
- Offer same product/service at lower cost
1. Strive to be industries low-cost provider, thereby aiming for a cost-based
competitive advantage over rivals
2. Outcompeting rivals on the basis of differentiating features, such as higher
quality, wider product selection, added performance, value-added services,
more attractive styling, and technological superiority
3. Developing an advantage based on offering more value for the money
4. Focusing on narrow market niche within an industry
Understand that a company’s strategy evolves over time because of changing
circumstances and ongoing management efforts to improve the strategy
A company’s strategy has to be both proactive and reactive
1. proactive – have planned initiatives to improve financial performance
2. reactive – responses to unforeseen developments
- deliberate strategy: consisting of proactive strategy elements that are
both planned and realized as planned
- emergent (realized) strategy: consisting of reactive strategy elements
that emerge as changing conditions warrant.
Sets forth logic for how its strategy will create value for customers while at the same
time generate revenues sufficient to cover costs and realize a profit.
2 elements of business model:
1. Customer value proposition: lays out company’s approach to
satisfying buyer wants and needs at a good price. 2. Profit formula: describes company’s approach to determining a cost
structure that will allow for profits.
3 tests can be applied to determine whether a strategy is a winning strategy:
1. Fit Test – does it fit the company’s situation?
2. Competitive Advantage Test – can it help the company achieve a SCA?
3. Performance Test – does it produce good company performance?
Crafting and executing strategy are core management functions. How well a
company performs and the degree of market success it enjoys are directly
attributable to the caliber of its strategy and the proficiency with which the strategy
What does the strategy-making, strategy-executing process entail?
1. Developing a strategic vision
a. Describes management’s aspirations for the future and delineates
the company’s strategic course and long-term direction.
i. Usually is about 1 or 2 paragraphs long and takes 10
minutes to explain
ii. The statement should not be vague, dwell on present, be
generic, run on and on, or rely on superlatives
iii. The statement should be graphic, focused, forward-looking,
b. Vision statement leads to a catchy, easy to remember slogan.
c. Developing a mission statement
i. Describes purpose and present business, gives company its
own identity, identifies company’s products or services,
and specifies buyer needs
d. The values within both statements will be what guides the
2. Setting objectives
a. Objectives: convert vision and mission into performance targets.
i. Financial objectives: goals of financial performance. A
stronger market standing and greater competitive vitality is
what enables a company to improve its financial
ii. Strategic objectives: goals concerning marketing standing
and competitive position
b. Balanced Scorecard: widely used method for combining the use f
both strategic and financial objectives, tracking their
achievements, and giving management a more complete and
balanced view of how well an organization is performing. 3. Crafting a strategy
a. Strategic Vision + Objectives + Strategy = Strategic Plan
b. Strategy making hierarchy:
i. Corporate Strategy
1. For the set of businesses as a whole
ii. Business Strategy
1. One for each business the company has diversified
iii. Functional Area Strategies
1. Within each business
iv. Operating Strategies
1. With each functional area
4. Executing the chosen strategy
a. Become aware of what a company must do to achieve operating
excellence and it execute its strategy proficiently
b. This is a job for the company’s entire management team.
5. Monitoring developments, evaluating performance, and initiating
a. Managing strategy is an ongoing process
i. The company’s vision, mission, objectives, and approach to
strategy execution are never final
The strategic plan lays out a company’s future direction performance targets and
Corporate Governance: The role of the board of directors in the strategy-crafting,
1. Oversee the company’s financial accounting and financial reporting
2. Critically appraise the company’s direction, strategy, and business
3. Evaluate the caliber of senior executives’ strategic leadership skills
4. Institute a compensation plan for top-executives that rewards them for
actions and results that serve shareholder interests
Every corporation should have strong independent board of directors:
- They should be well-informed about company’s performance
- They should guide and judge the CEO and other top executives
- They should have the courage to curb risky management actions
- They should certify to shareholders that the CEO is acting responsibly
- They should provide insight and advice to management
- They should be highly involved in debating pros and cons of key actions Chapter 3
Evaluating a company’s external environment
Q1: What are the strategically relevant factors in the macro-environment?
PESTEL – Political, Economic, Social, Technological, Environmental, Legal
Q2: How strong are the industry’s competitive forces?
Porter 5 Forces:
1. rival sellers
2. potential new entrants
3. substitute products
4. supplier bargaining power
5. customer bargaining power
o Price discounting, clearance sales
o Couponing, advertising items on sale
o Advertise product characteristics, enhance company image
o Innovating to improve product performance and quality
o Introducing new features, increase # of styles
o Increase customization of product or service
o Building a bigger, better dealer network
o Improving warranties, offering low-interest financing
Q3: What factors are driving industry change, and what impact will they have?
o Changes in long-term growth rate
o Increasing Globalization
o Emerging new Internet capabilities and applications
o Changes in who buys the product and how they use it
o Technological change and manufacturing process innovation
o Product and marketing innovation
o Entry or exit of major firms
o Diffusion of technical know-how across companies and countries
o Changes in cost and efficiency
o Reductions in uncertainty and business risk
o Regulatory influences and gov’t policy changes
o Changing societal concerns, attitudes, and lifestyles
Q4: How are industry rivals positioned in the market?
Strategic group mapping: technique for displaying the different market or
competitive positions that rival firms occupy in the industry.
- Strategic group: consists of those industry members with similar
competitive approaches and position in the market
Q5: What strategic moves are rivals likely to make next? Michael Porter – Framework for Competitor Analysis
Current Strategy, Objectives, Capabilities, and Assumptions
Q6: What are the industry’s key factors?
Key Success Factors (KSFs) – competitive forces that most affect industry
members’ ability to survive and prosper in the marketplace
Vary from industry to industry
Q7: Is the industry outlook conductive to good profitability?
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 lower.
Evaluating a Company’s resources, capabilities, and competitiveness
Q1: How well is the company’s present strategy working?
Check on Key financial Ratios
- Gross profit margin
- Operating profit margin (or return on sales)
- Net Profit margin (or net return on sales)
- Total return on assists
- Net return on total assets (ROA)
- Return on Stockholder Equity (ROE)
- Return on invested capital (ROIC) (ROCE)
Q2: What are the company’s competitively important resources and capabilities?
- Resource and 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 – is a productive input or competitive asset that is
owned or controlled by the firm
- Capability: the capacity of a firm to perform some internal
- Tangible: resources that can be touched or quantified readily
* financial resources, technological resources,
- Intangible: harder to discern, often among the most important
of a firm’s competitive assets
* brands, image, reputational assets - 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: linked and closely integrated set of
competitive assets centered around one or more cross-
Assess the Competitive Power of a company’s resources and capabilities.
Sustainable Competitive Advantage: what a company is said to have if a
certain advantage proves durable despite the best efforts of
competitors to overcome it.
The 4 tests of a resources competitive power:
V – is the resource valuable?
R – is the resource rare?
I – is the resource hard to copy? (inimitable)
social complexity: company culture, interpersonal
relationships among managers or R&D teams
casual ambiguity: makes it very hard to figure out
and therefore hard to imitate
N – Is the resource non-substitutable?
A company’s resources and capabilities must be managed dynamically.
The role of dynamic capabilities:
- an ongoing capacity of a company to modify its existing resources and
capabilities or create new ones
Q3: Is the company able to seize market opportunities and nullify external threats?
SWOT – Strength, Weakness, Opportunity, Threat
Simple but powerful tool for sizing up a company’s strengths and
weaknesses, its market opportunities, ad the external threats to its
future well being
Assessing a company’s competencies – what activities does it perform well?
Competence – a true capability, an activity that a company has learned
to perform with proficiency
Core competence – is an activity that a company performs proficiently
that is also central to its strategy and competitive success
Distinctive competence – is a competitively important activity that a
company performs better than its rivals – competitively superior
Weakness - competitive deficiency
Strength – competitive asset Identifying a company’s market opportunities
A company is well advised to pass on a particular market opportunity
unless it has or can acquire the resources and competencies needed to
Identifying the threats to a company’s future profitability.
Simply making lists of a company’s strengths, weaknesses,
opportunities, and threats is not enough; the payoff from SWOT
analysis comes from the conclusion about a company’s situation and
the implications for strategy improvements that flow from the four
What do the SWOT listings reveal?
- What are the attractive aspects of the company’s situation?
- What aspects are of the most concern?
- Are the company’s internal strength and competitive assets sufficiently
strong to enable it to compete successfully?
- Are the company’s weaknesses and competitive deficiencies of small
consequence and readily correctable, or could they prove fatal if not
- Do the company’s strengths outweigh its weaknesses by an attractive
- Does the company have attractive market opportunities that are well
suited to its internal strengths? Does the company lack the competitive
assets to pursue the most attractive opportunities?
- All things considered, where on a scale of 1 to 10 do the company’s
overall situation and future prospects rank?
A company’s internal strengths should always serve as the basis of its
strategy – placing heavy reliance on a company’s best competitive assets
is the soundest route of attracting customers and competing successfully
Q4: Are the company’s cost structure and customer value proposition competitive?
- The higher the 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
profitability relative to close rivals, the less competitively vulnerable it
The concept of a company value chain:
Value chain: identifies the primary activities and related support
activities that create customer value. A company’s value chain consists of 2 broad categories of activities:
1. primary activities: foremost in creating value for customers
2. support activities: facilitate & enhance performance of primary
Comparing the value chains of rival companies:
The primary purpose of value chain analysis is to facilitate a
comparison, activity-by-activity, of how effectively and efficiently a
company delivers value to its customers, relative to its competitors.
A company’s primary and secondary activities identify the major
components of its internal cost structure.
A company’s cost competitiveness depends not only on the costs of
internally performed activities (its own value chain) but also on
costs in the value chains of its suppliers and distribution channel
The Value Chain System
The value chains of a company’s distribution channel partners are
1. the costs and margins of a company’s distribution and retail
dealers are part of the price the ultimate consumer pays
2. the activities that distribution allies perform affect sales
volumes and consumer satisfaction
Accurately assessing a company’s competitiveness entails scrutinizing
the nature and costs of value chain activities throughout the entire
value chain system for delivering products or services to end-use
Benchmarking: a tool for assessing whether the costs and effectiveness
of a company’s vale chain activities are in line.
- this includes comparing how different companies perform various
value chain activities.
- benchmarking: a potent tool for improving a company’s own internal
activities based on learned how other companies perform them and
borrowing their “best practices”
Strategic options for remedying a cost or value disadvantage
Three main areas in a company’s total value chain system where
company managers can try to improve efficiency and effectiveness in
delivering customer value:
1. A company’s own internal activities
2. Suppliers’ part of the value chain system
3. The forward channel portion of the value chain system Improving internally performed value chain activities:
o implement use of best practices
o eliminate some cost-producing activities altogether
o relocate high-cost activities
o outsource activities
o invest in productivity enhancing, cost-saving technological
o find ways to detour around the activities or items where costs are
Improving supplier-related value chain activities:
Work with or through suppliers
Improve supplier performance (JIT deliveries)
Improve value chain activities of forward channel allies:
1. Pressure distributors, dealers, and other forward channel allies to
reduce costs and markups
2. Collaborate with forward channel allies to identify win-win
opportunities to reduce costs
3. Change to a more economical distribution strategy, including
switching to cheaper distribution channels
The means to enhance differentiation through activities at the forward
end of the value chain system include:
1. Engaging in cooperative advertising and promotions with forward
2. Creating exclusive arrangements with downstream sellers or other
merchants that increase their incentives to enhance delivered
3. Creating and enforcing stands for downstream activities and
assisting in training channel partners in business practices.
Translating proficient performance of value chain activities into
A company’s value-creating activities can offer a competitive
advantage in one of two ways:
1. they can contribute to greater efficiency and lower costs
relative to competitors
2. they can provide a basis for differentiation, so customers
are willing to pay relatively more for the company’s goods
How activities relate to resources and capabilities:
- performing value chain activities with capabilities that permit the
company to either outmatch rivals on differentiation or beat them on
costs will give the company a competitive advantage. Q5: Is the company competitively stronger or weaker than key rivals?
High weighted competitive strength ratings signal a strong competitive
position and possession of competitive advantage; low ratings signal a
weak position and competitive advantage.
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.
Q6: What strategic issues and problems merit front-burner managerial attentions?
Zeroing in on the strategic issues a company faces and compiling a list of
problems and roadblocks creates a strategic agenda of problems that
merit prompt managerial 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.
The company’s competitive strategy deals exclusively with the specifics of
management’s game plan for competing successfully.
2 main factors that distinguish one competitive strategy from another:
1. Whether a company’s market target is broad or narrow
2. Whether the company is pursuing a competitive advantage linked to
lower costs or differentiation.
The 5 generic competitive strategies:
1. Low cost provider strategy: lower overall costs than rivals on
comparable products that attract a broad spectrum of buyers.
2. Broad differentiation strategy: seek to differentiate the company’s
product offering from rivals’ with superior attributes that will
appeal to a broad spectrum of buyers
3. Focused low cost strategy: concentrating on a narrow buyer
segment and outcompeting rivals on costs
4. Focused differentiation strategy: concentrating on a narrow buyer
segment and outcompeting rivals with a product offering that
meets specific tastes.
5. Best-cost provider strategy: give customers more value for their
money by satisfying expectations on key quality features while
beating price expectations. LOW COST PROVIDER STRATEGY
How to achieve this:
1. perform value chain activities more cost-effectively than rivals
2. revamp the firm’s overall value chain to eliminate or bypass some
Cost-efficient management of value-chain activities:
Cost driver – a factor that has a strong influence on a company’s cost
Ex – input costs, incentive systems, bargaining power, supply
chain efficiencies, communication systems, info technology….
Cost cutting methods that demonstrate an effective use of the cost drivers
1. Striving to capture all available economies of scale
2. Taking full advantage of experience and learning cure effects
3. Trying to operate facilities at full capacity
4. Improving supply chain efficiency
5. Using lower cost inputs whenever doing so will not entail too great
a sacrifice in quality
6. Using the company’s bargaining power vis-à-vis suppliers or other
in the value chain system to gain concessions
7. Using communications systems and information technology to
achieve operating efficiencies
8. Employing advanced production technology and process design to
improve overall efficiency
9. Being alert to the cost advantages of outsourcing or vertical
10.Motivating employees through incentives and company culture
Revamping the value chain system to lower costs:
- Selling direct to consumers and bypassing the activities and costs of
distributors and dealers
o Create own direct sales force
o Conduct sales operations at the company’s website
- Streamlining operations by eliminating low value-added or unnecessary
work steps and activities
o Ex- supermarkets have reduced in-store meat butchering by
shifting to meats that are cut and packaged at the meatpacking
plant and then delivered to the stores
- Reducing materials handling and shipping co