Concepts of Strategy
What is strategy?
Central integrated, externally oriented concept of how the business will achieve its objectives.
What are two tools for internal analysis and four tools for external analysis?
Internal: RBV, value chain analysis
External: PESTEL, Porter's Five Forces, Strategic Groups, SWOT Analysis
What is diversification? Also distinguish between related and unrelated diversification.
Diversification: when a firm operates in two or more lines of business (SBUs).
Related: Revenue is spread across multiple SBUs with overlapping value chain activities.
Unrelated: Revenue is spread across multiple businesses with no overlap in value chain activities.
What is an acquisition?
One firm buys a controlling stake in another firm. The acquiring firm intends to make the acquired firm a subsidiary business within its portfolio.
What is corporate governance?
Mechanisms used to manage relationships among stakeholders and to determine and control the strategic direction of organizations.
What is the difference between strategy formulation and strategy implementation?
Formulation: what we are going to do?
Implementation: how are we going to do it?
What is the difference between internal and external strategic analysis?
Internal analysis looks within the firm to match the firm's resources and capabilities with its opportunities and threats.
External analysis looks outside the firm to assess what elements in the firm's macro environment might influence the firm's strategy.
What is the difference between business-level and corporate-level strategy?
Business-level strategy focuses on how a firm will achieve its objectives within a particular industry or segment.
Corporate-level strategy can involve multiple industries or segments.
What is the difference between a merger and a joint venture?
Merger: Two firms agree to integrate their operations on a relatively co-equal basis.
Joint venture: Two firms create a legally independent company by sharing resources and capabilities, JV typically has a defined scope and duration.
What are three key goals of corporate governance?
1) Prioritize shareholders
2) Avoid managerial opportunism
3) Avoid information assymetry
Is this a complete strategy?: To be the low-cost provider. Why or why not?
No, it is an isolated initiative, not an integrated concept that answers how a firm will achieve its objectives.
When the force of any one of Porter's Five Forces increases, what is the impact on profitability and why?
Impact: decrease in profitability
Why: prices decrease while costs increase
What are some pitfalls of pursuing cost leadership and differentiation strategies (separately)?
Cost leadership:
1) cost cutting leads to the loss of desirable features
2) too much focus on a few value-chain activities
3) rivals share a common input or raw material
4) strategy is imitated too easily
Differentiation:
1) uniqueness might not be valuable
2) too much differentiation can be problematic
3 too high a price premium to make money
4) some differentiation can be easily imitated
Compare and contrast the three types of strategic alliances in terms of their ownership structures.
Joint venture: Two firms create a legally independent company by sharing resources and capabilities (partner firms jointly own and operate the new entity).
Equity strategic alliance: partners who own different percentages of equity in a separate company they have formed.
Nonequity strategic alliance: Two firms develop a contractual relationship to share their resources and capabilities (no independent third company is created).
What are three internal corporate governance mechanisms? Briefly explain what each entails.
1) Ownership concentration: Stock owned by individual shareholders and institutional investors
2) Board of directors: Represent firm’s owners by monitoring managers’ strategic decisions
3) Executive compensation: Salary, bonuses, long-term incentives to align managers’ and shareholders' interests
How can I test the quality of my strategy? What are some questions I can ask?
1) Does your strategy fit what's happening in the environment?
2) Does your strategy exploit your key resources?
3) Will your differentiators be sustainable?
4) Are the elements of your strategy internally consistent?
5) Do you have enough resources to pursue this strategy?
6) Is your strategy implementable?
What are the drivers of competitive advantage and what is the criteria for a sustainable competitive advantage?
Drivers: resources and capabilities
Criteria: valueable, rare, imitable, non-substitutable
What are the three types of business-level strategies and what do they each entail?
1) Cost leadership: provide similar value at lower cost to a broad population
2) Differentiation: provide a unique and desirable perceived value to a broad population
3) Focus: provide a targeted product or service for a narrow, distinct market segment
*You should also know how managers would go about achieving success through each of these
What are two tests you can do to help ensure you do not overpay for an asset you are looking to acquire? What do these tests tell you?
1) ABC Test: attractiveness of the industry, better off? (synergies and strategic fit), and cost of entry.
2) BCG Matrix: evaluates a company’s portfolio of businesses based on market share and growth potential (stars, question marks, cash cows, and dogs).
What are four items a shareholder could find in a proxy statement?
1) Board of director nominations/background information
2) Executive compensation details
3) Corporate governance policies/proposed changes
4) Auditor selection and financial disclosures
Identify the five elements of the strategy diamond and the types of questions they ask.
1) Arenas: where will we be active?
2) Vehicles: how will we get there
3) Differentiation: how will we win?
4) Staging: what will be our speed and sequence of moves?
5) Economic logic: how will we profit?
Compare the elements of PESTEL with the elements of Porters Five Forces.
PESTEL: political, economic, social, technology, environmental, and legal.
Porters Five Forces: threat of new entrants, bargaining power of buyers, threat of substitutes, bargaining power of suppliers, rivalry among existing competitors.
Discuss the benefits and detriments of diversification.
Benefits: synergies, economies of scope (economic factors that lead to cost savings through successfully sharing resources), increase market power.
Detriments: Potential loss of focus, core competency dilution, increased complexity & management challenges.
Under what circumstances would it be best to acquire as opposed to form an alliance?
1) Full control over operations, strategy, and intellectual property is necessary.
2) The target company provides a competitive advantage that justifies the cost.
3) Integration of supply chains or customer base offers long-term synergy.
4) The industry is consolidating, and acquisition prevents losing market share.
Who are the stakeholders involved in the agency relationship? What are some of the challenges that result from the separation of ownership and management within a firm?
Stakeholders: shareholders/owners (principals) and managers (agents)
Challenges:
1) Principal and agent have different interests
2) Individual shareholders typically lack direct control of firm
3) Agent makes decisions that result in the pursuit of goals that conflict with those of the principal
4) It is difficult or expensive for the owner to always monitor the manager