Assignment 1

This assignment covers chapter one, Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage, and two, External analysis: The Identification of Opportunities and Threats.

Chapter 1 Questions:

  1. What is competitive advantage, and how does it relate to a company’s business model?
  2. Describe the strategic planning model, and who is involved in the strategy-making process
  3. Describe the SWOT analysis, its components, and how it aids a company in making strategic decisions. Provide examples of each component in the SWOT analysis.
  4. What are the various levels of management, and how do they participate in the process of strategic decision making?

 Chapter 2 Questions:

  1. Define “Industry”, “Business” and “Sector”. How are these related?
  2. How can Porter’s five-forces model aid in strategic decision making?
  3. Describe how “Risk of Entry”, “Bargaining Power of Buyers”, “Bargaining Power of Suppliers”, and industry competition (“Threat of Substitutes”) affect the external threats a company faces. Provide examples of each.
  4. Describe the industry life cycle, what strategic groups are, and what mobility barriers are.

Chapter 3

Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objective

Discuss the source of competitive advantage.

Identify and explore the role of efficiency, quality, innovation, and customer responsiveness in building and maintaining a competitive advantage.

Explain the concept of the value chain.

Understand the link between competitive advantage and profitability.

Explain what impacts the durability of a company’s competitive advantage.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Competitive advantage

Exists when a company’s profitability is greater than the average profitability of all companies in its industry.

Sustained competitive advantage – Exists when a company maintains its competitive advantage over a number of years.

Primary objective of strategy

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Distinctive competencies

Firm- Specific strengths that allow a company to differentiate its products and/or achieve lower costs than its rivals.

Arise from resources and capabilities

Resources: Assets of a company.

Tangible resources: Physical entities.

Land, buildings, and inventory, and money.

Intangible resources: Nonphysical entities created by managers and other employees.

Brand names, company reputation, and intellectual property.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Distinctive competencies

Capabilities- Company’s skills at coordinating its resources and putting them to productive use:

reside in an organization’s rules, routines, and procedures.

Intangible.

lead to sustained competitive advantage if they are rare and protected from copying.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Distinctive competencies

Requirements

Firm-specific and valuable resource, and the capabilities to take advantage of that resource.

Firm-specific capability to manage resources.

Distinctive competency is strongest when a company possesses both.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Competitive advantage, value creation, and profitability

Profitability of a company depends on the:

value customers place on its products.

price it charges for its products.

costs of creating those products.

When a company strengthens the value of its products, it can:

raise prices to reflect the value.

reduce prices to induce more customers to purchase its products.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Competitive advantage, value creation, and profitability

Point-of-sale price is less than the utility value placed on the product by many customers, due to:

consumer surplus – customers capture some of that utility.

customer’s reservation price – each individual’s unique assessment of the value of a product.

competition from rivals.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Value creation and pricing options

Managers must understand:

dynamic relationships among value, pricing, demand, and costs.

how value creation and pricing decisions affect demand.

how unit costs change with increases in volume.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Primary activities

Relate to a product’s design, creation, delivery, marketing, support, and after-sales service.

Research and development

Design of products and production processes.

Superior product design increases a product’s functionality and add value.

Production

Creation process of a good or service.

Helps lower cost structure and leads to differentiation.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Primary activities

Marketing and sales

Brand positioning and advertising – increase customers’ perceived value of a product.

Help create value by discovering customers’ needs.

Customer service

Provide after-sales service and support.

Create superior utility by solving customer problems and supporting customers after a purchase.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

support activities

Provide inputs that allow the primary activities to take place.

Materials management

Controls the transmission of physical materials through the value chain.

Lowers cost and creates more profit .

Human resources

Ensures value creation by making sure that the company has the right combination of skilled people.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

support activities

Information systems

Electronic systems to improve efficiency and effectiveness of a company’s value creation activities.

Company infrastructure

Companywide context within which all the other value creation activities occur.

Organizational structure, control system and company culture

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

BUILDING BLOCKS OF COMPETITIVE ADVANTAGE

Efficiency

Measured by the quantity of inputs that it takes to produce a given output.

Employee productivity – Output produced per employee

Helps attain competitive advantage through a lower cost structure.

Quality

Superior quality – Customers’ perception that a product’s attributes provide them with higher utility than those sold by rivals.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

BUILDING BLOCKS OF COMPETITIVE ADVANTAGE

Quality as excellence – Product features and functions, and level of service associated with its delivery.

Quality as reliability – Occurs when a product consistently performs the function it was designed for, and seldom breaks down.

Innovation

Product innovation: Development of products that are new to the world or have superior attributes to existing products.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

BUILDING BLOCKS OF COMPETITIVE ADVANTAGE

Process innovation: Development of a new process for producing products and delivering them to customers.

Customer responsiveness

Superior responsiveness – Achieved by identifying and satisfying customer needs better than one’s rivals.

Customer response time: Time that it takes for a good to be delivered or a service to be performed.

Other sources – Superior design, service, and after-sales service and support.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Definitions of basic accounting terms

Term Definition Source
Cost of Goods Sold (COGS) Total costs of producing products Income statement
Sales, General, and Administrative Expenses ( SG&A) Costs associated with selling products and administering the company Income statement
R&D Expenses (R&D) Research and development expenditure Income statement
Working Capital Amount of money the company has to work with in the short term: Current assets – current liabilities Balance sheet
Property, Plant, and Equipment (PPE) Value of investments in the property, plant, and equipment that the company uses to manufacture and sell its products
Also known as fixed capital
Balance sheet

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Definitions of basic accounting terms

Term Definition Source
Return on Sales (ROS) Net profit expressed as a percentage of sales
Measures how effectively the company converts revenue into profits
Ratio
Capital Turnover Revenues divided by invested capital
Measures how effectively the company uses its capitals to generate revenue
Ratio
Return on Invested Capital (ROIC) Net profit divided by invested capital Ratio
Net Profit Total revenues minus total costs before tax Income statement
Invested Capital Interest-bearing debt plus shareholders’ equity Balance sheet

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Barriers to imitation

Make it difficult for a competitor to copy a company’s distinctive competencies.

Greater the barrier, more sustainable a company’s competitive advantage.

Imitating resources

Firm-specific and value tangible resources are the easiest to imitate.

Intangible resources

Brand names – Imitating them is prohibited by law.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Barriers to imitation

Marketing and technical knowhow – Easy to imitate owing to movement of skilled personnel between companies and visibility of strategies to competitors.

Technological knowhow – Easy to imitate as patents do not provide complete protection.

Imitating capabilities is difficult because:

they are not visible to outsiders.

no one individual has access to all the internal operating routes and procedures of a company.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Capability of competitors and industry dynamism

Capability of competitors is determined by the:

nature of the competitors’ prior strategic commitments.

strategic commitment – company’s commitment to a particular way of doing business.

Absorptive capacity – Ability of an enterprise to identify, value, assimilate, and use new knowledge.

Most dynamic industries are those with a very high rate of product innovation.

Where product life cycles and competitive advantages are short-lived.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Reasons for failure of companies

Inertia – Companies find it difficult to adapt to changing competitive conditions.

Power struggles and hierarchical resistance make change difficult.

Prior strategic commitments – Limit a company’s ability to imitate rivals.

Cause competitive disadvantage.

The Icarus paradox – Companies become very specialized and myopic.

Lose sight of market realities.

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Steps to avoid failure

Focus on the building blocks of competitive advantage

Institute continuous improvement and learning

Track best industrial practice and use benchmarking

Overcome inertia

The role of luck

©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.