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Chapter 5

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York University
Administrative Studies
ADMS 1000
Len Karakowsky

Chapter 5: Strategic Management Learning Objectives:  Strategic management includes external (5-Forces) and internal (VRIO) models for explaining differential firm performance  SWOT Analysis combines both  Business (3 generic) and corporate-level (diversification) strategies  Contingencies of strategy/structure What is Strategic Management?  The analyses, decisions and implementations a firm undertakes to create and sustain its competitive advantage  Why are some firms successful than others? o Strategic management attempts to explain differential performance  External and internal models for explaining competitive advantage Chapter 5: Strategic Management EXTERNAL ENVIRONMENT (Industry) – Porter’s 5 Forces Model Overall, the five-forces model provides managers with an assessment of the industry structure to help get some sense of industry attractiveness. 1. Threats of new entrants (how existing companies defend)  Existing industries must create barriers to entry:  Economies of scale o New entrants = lower prices. Existing companies need to produce more to decrease price = threat decreased.  Capital requirements o Start-up capital increase = decrease threats  Access to distribution channels o Defer entry b/c: existing company control dist. Chan.  Cost disadvantages unrelated to scale o Not related to econ factors (patents, trademarks, trade secrets) 2. Bargaining Power of Suppliers  Suppliers have power when product is needed by buyers. o  2 suppliers of (product) and 4 existing companies in some (industry) that needs those products 3. Bargaining Power of Buyers  Switching cost: o Bargaining power of buyers increase as the cost to switch to a competitor decrease  Undifferentiated products: o Buyers find alternatives when existing companies provide similar products  Importance of product to buyers o If product important to buyer, buyer have no power 4. Threats of Substitutes o Air vs. rail travel o Movie theaters vs. DVD rentals o CDs vs. MP3 downloads 5. Rivalry among existing firms  Undifferentiated products and low switching costs encourage more intense rivalry  Many similar producers tend to compete more fiercely  High exit barriers increase competitive rivalry o High fixed costs o Specialized assets and sunk costs o Escalating commitment o Social pressures Chapter 5: Strategic Management SUMMARY:  The 5-Forces model is static and assumes all firms experience the forces in the same way  If industry attractiveness explains profits, why then do some firms within the same industry perform significantly better than others?  Ex: Wal-Mart and K-Mart INTERNAL ENVIRONMENT Intro to analyzing internal environment:  Resources are the financial, physical, human and organizational assets used by the firm to develop, manufacture and deliver products or services to its customers The VRIO Model (J. Barney): Resources & Capabilities to achieve high performance  Are theyValuable? Do they provide added value that customers are willing to pay a premium for? o Ex:  Buying shoes @ Wal-Mart instead of Footlocker. Will you be willing to pay a higher premium @ Foot-locker as oppose to Wal-Mart?
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