(Textbook) Behavior in Organizations, 8ed (A. B. Shani)

Strategy & Policy

Review for Exam 11

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The Requirement of Exam 1Textbook chapters: 1, 2, 3, 4

Format:9 true-false questions27 Multiple choice questions36 questions, 20 points total (0.56 pt for each question)

You can take: One page, double-sided, hand written note on an A4 paperPencil (with eraser)Seat assigned alphabetically

Time: 80 min2

Seat assignment according to your last name

Row1: B-CRow2: E-HRow3: L-MRow4: N-TRow5: W-Y

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Distribution of Exam Questions by Chapter4

Studying Strategies for Textbook Chapters

Know the required chapter objectives (highlighted in lecture notes)Know whats covered in the lecture notesBe familiar with the textbook sections covered in the lecture notes No requirement on case material

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How to Prepare for the ExamEquipment: Textbook, Computer to read lecture notes, three A4 papers, pen, highlighters (of different colors)

Step 1. Read the review slide quickly (20-25 min)

Step 2. Read the chapter quickly (10 min each)First page the list of chapter learning objectivesLast page summary, review questions (optional)Whole chapter read the first sentence of each paragraphWrite down key points on the first scratch paper (no need to be complete)6

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How to Prepare for the ExamStep 3. Read the chapter slowly (about 40 min each)

Pay attention to required materialUnderstand the concepts, be able to give examplesWrite down key concepts on the second scratch paper, mark those ones you cannot rememberPrepare your notes based on the second scratch paper, expand to include details of those concepts, use highlighters to mark different levels of titles

Step 4. Repeat Step 2&3 for each chapter, prepare your one-page note on the third paper7

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Outline of Chapters 1-4Ch1: Strategic Management and Strategic Competitiveness

Ch2: The External Environment

Ch3: The Internal Organization

Ch4: Business Level Strategy8

Chapter 1 Strategic Management and Strategic Competitiveness

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Studying this chapter should provide you with the strategic management knowledge needed to: Learning ObjectivesDefine strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process.Describe the competitive landscape and explain how globalization and technological changes shape it.Use the industrial organization (I/O) model to explain how firms can earn above-average returns.Use the resource-based model to explain how firms can earn above-average returns.Describe vision and mission and discuss their value.Define stakeholders and describe their ability to influence organizations.Describe the work of strategic leaders.Explain the strategic management process.

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Important DefinitionsSTRATEGIC COMPETITIVENESS - achieved when a firm successfully formulates and implements a value-creating strategy

STRATEGY - an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage

COMPETITIVE ADVANTAGE - when a firm implements a strategy that creates superior value for customers; competitors are unable to duplicate it or find too costly to imitate it 111

Important DefinitionsRISK - an investors uncertainty about the economic gains or losses that will result from a particular investment ABOVE-AVERAGE RETURNS - returns in excess of what an investor expects to earn from other investments with a similar amount of risk Will appear in exam!!!

AVERAGE RETURNS - returns equal to those an investor expects to earn from other investments with a similar amount of risk 112

The Industrial Organization (I/O) Model of Above-Average Returns113

I/O Model AssumptionsThe external environment imposes pressures and constraints that determine strategic choices.Similarity in strategically relevant resources causes competitors to pursue similar strategies.Resource differences among competitors are short-lived due to resource mobility across firms.Strategic decision makers are rational and engage in profit-maximizing behaviors.114

Five Forces Model of CompetitionSuppliersSubstitutesBuyersPotential EntrantsIndustry Rivalry115

Five Forces Model AssumptionsIndustry profitability (i.e., rate of return on invested capital relative to cost of capital) is a function of interactions among the five forces.Industry attractiveness equates to its profitability potential for earning above-average returns by:Producing standardized goods or services at costs below competitor costs (a cost leadership strategy).Producing differentiated goods or services for which customers are willing to pay a price premium (a differentiation strategy).

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The Resource-Based Model of Above-Average ReturnsResourcesPhysical, human, and organizational capital(tangible and intangible)CapabilityAn integrated set of resourcesCore competenceA source of competitive advantage Building competitive advantage117

Resource-Based Model AssumptionsFirms acquire different resources.Firms develop unique capabilities based on how they combine and use resources.Resources and certain capabilities are not highly mobile across firms.Differences in resources and capabilities are the bases of competitive advantage and a firms performance rather than its industrys structural characteristics. 118

Resources As Core CompetenciesCostly to imitateRareNonsubstitutableValuableHow resources become core competencies119

Strategic Decision MakingIndustry Organization (I/O) Model Resource-Based Model Competitive StrategyDecision120

Classification of StakeholdersCapital Market StakeholdersProduct Market StakeholdersOrganizational StakeholdersCategories of stakeholders121

Figure 1.4The Three Stakeholder Groups

122Requirement: Be able to distinguish between the three groups

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Chapter 1 Sample QuestionsQ1. Above-average returns are

a. higher profits than the industry averaged over the last 10 years.b. returns in excess of what an investor expects to earn from other investments with a similar level of risk. c. profits in excess of what an investor expects to earn from a historical pattern of performance of the firm. d. higher profits than the firm earned last year.123

Answer: b.23

Chapter 1 Sample QuestionsQ2. Customers, suppliers, unions, and local governments are examples of capital market stakeholders.

a. Trueb. False

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Answer: b. False24

Chapter 1 Sample QuestionsQ3. Although McDonald's is competing in an unattractive industry, it has improved its performance by focusing on product innovations and by enhancing existing facilities. This improved performance is best explained by

a. globalization.b. the resource-based model. c. the I/O model.d. hypercompetition125

Answer: b25

Chapter 2 The External Environment26

Studying this chapter should provide you with the strategic management knowledge needed to: Learning ObjectivesExplain the importance of analyzing and understanding the firms external environment.Define and describe the general environment and the industry environment.Discuss the four activities of the external environmental analysis process.Name and describe the general environments seven segments.Identify the five competitive forces and explain how they determine an industrys profitability potential.Define strategic groups and describe their influence on firms.Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them.

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Figure 2.1The External Environment

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General EnvironmentDimensions in the broader society that influence an industry and the firms within it:DemographicEconomicPolitical/legalSocioculturalTechnologicalGlobalPhysical229

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Table 2.1The General Environment: Segments and Elements

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Industry EnvironmentThe set of factors directly influencing a firm and its competitive actions and competitive responsesThreat of new entrantsPower of suppliersPower of buyersThreat of product substitutesIntensity of rivalry among competitors231

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Competitor AnalysisGathering and interpreting information about all of the companies that the firm competes against.Understanding the firms competitor environment complements the insights provided by studying the general and industry environments.

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233Opportunities and ThreatsOpportunityA condition in the general environment that, if exploited effectively, helps a firm achieve strategic competitiveness.ThreatA condition in the general environment that may hinder a firms efforts to achieve strategic competitiveness.

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234Industry Environment AnalysisIndustry DefinedA group of firms producing products that are close substitutes.Firms use a rich mix of different competitive strategies to pursue above-average returns when competing in a particular industry. An industrys structural characteristics influence a firms choice of strategies

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35Porters Five Force Model

Threat of New Entrants: Barriers to EntryEconomies of scaleProduct differentiationCapital requirementsSwitching costsAccess to distribution channelsCost disadvantages independent of scaleGovernment policyExpected retaliation236

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237Bargaining Power of SuppliersSupplier power increases when:Suppliers are large and few in number.Suitable substitute products are not available.Individual buyers are not large customers of suppliers and there are many of them.Suppliers goods are critical to the buyers marketplace success.Suppliers products create high switching costs.Suppliers pose a threat to integrate forward into buyers industry.

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238Bargaining Power of BuyersBuyer power increases when:Buyers are large and few in number.Buyers purchase a large portion of an industrys total output.Buyers purchases are a significant portion of a suppliers annual revenues.Buyers switching costs are low.Buyers can pose threat to integrate backward into the sellers industry.

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239Threat of Substitute ProductsThe threat of substitute products increases when:Buyers face few switching costs.The substitute products price is lower.Substitute products quality and performance are equal to or greater than the existing product.Differentiated industry products that are valued by customers reduce this threat.

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240Intensity of Rivalry Among CompetitorsIndustry rivalry increases when:There are numerous or equally balanced competitors.Industry growth slows or declines.There are high fixed costs or high storage costs.There is a lack of differentiation opportunities or low switching costs.When the strategic stakes are high.When high exit barriers prevent competitors from leaving the industry.

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241Low entry barriersInterpreting Industry Analyses

UnattractiveIndustrySuppliers and buyers have strong positionsStrong threats from substitute productsIntense rivalry among competitors(Low profit potential)

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242Interpreting Industry Analyses (contd)

AttractiveIndustryHigh entry barriersSuppliers and buyers have weak positionsFew threats from substitute productsModerate rivalry among competitors(High profit potential)

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Chapter 2 Sample QuestionsQ4. Which of the following is NOT an entry barrier to an industry?

a. expected competitor retaliation b. economies of scalec. customer product loyaltyd. bargaining power of suppliers

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Answer: D43

Chapter 2 Sample QuestionsQ5. In the airline industry, consolidation among fuel providers serving airport facilities would be considered as factor in the five forces model of competition.

a. a reduction of the airlines' ability to benefit from economies of scale.b. an increase in switching costs because the airlines have no choice but to use jet fuel and other oil products.c. an increase in the bargaining power of suppliers of a critical input.d. an increase in the intensity of rivalry among airlines for scarce resources.

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Answer: C44

245Figure 2.3Competitor Analysis Components

Not required for the exam45

Chapter 3 The Internal Organization46

Studying this chapter should provide you with the strategic management knowledge needed to: Learning ObjectivesExplain why firms need to study and understand their internal organization.Define value and discuss its importance.Describe the differences between tangible and intangible resources.Define capabilities and discuss their development.Describe four criteria used to determine whether resources and capabilities are core competencies.Explain how firms analyze their value chain for the purpose of determining where they are able to create value when using their resources, capabilities, and core competencies.Define outsourcing and discuss reasons for its use.Discuss the importance of identifying internal strengths and weaknesses.Discuss the importance of avoiding core rigidities.347

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348Analyzing the External EnvironmentBy studying the external environment, firms identify what they might choose to do.

Opportunities and threats

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349Analyzing the Internal OrganizationBy studying the internal environment, firms identify what they can do

Unique resources, capabilities, and competencies(required for sustainable competitive advantage)

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350Figure 3.1Components of an Internal Analysis

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351Creating ValueBy exploiting their core competencies or competitive advantages, firms create value.Value is measured by:Product performance characteristicsProduct attributes for which customers will payFirms create value by innovatively bundling and leveraging their resources and capabilities.Superior value Above-average returns

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Chapter 3 Sample QuestionsQ6. Which of the following is NOT a component of internal analysis leading to competitive advantage?

a. tangible and intangible resources b. analysis of supplier powerc. capabilitiesd. core competencies252

Answer: B52

Resources, Capabilities and Core Competencies353ResourcesAre the source of a firms capabilities.Are broad in scope.Cover a spectrum of individual, social and organizational phenomena.Alone, do not yield a competitive advantage.

Competitive Advantage

ResourcesTangibleIntangible

Capabilities

CoreCompetencies

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ResourcesAre a firms assets, including people and the value of its brand name that represent inputs into a firms production process:Capital equipmentSkills of employeesBrand namesFinancial resourcesTalented managersTypes of ResourcesTangible resourcesFinancial resourcesPhysical resourcesTechnological resourcesOrganizational resourcesIntangible resourcesHuman resourcesInnovation resourcesReputation resources354Resources

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355Table 3.1Tangible ResourcesFinancial Resources The firms borrowing capacityThe firms ability to generate internal fundsOrganizational ResourcesThe firms formal reporting structurePhysical ResourcesThe sophistication and location of a firms plant and equipment and the attractiveness of its locationDistribution facilitiesProduct inventoryTechnological ResourcesAvailability of technology-related resources such as copyrights, patents, trademarks, and trade secrets

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356Table 3.2Intangible ResourcesHuman ResourcesKnowledgeTrustSkillsAbilities to collaborate with othersInnovation ResourcesIdeasScientific capabilitiesCapacity to innovateReputational ResourcesBrand namePerceptions of product quality, durability, and reliabilityPositive reputation with stakeholders such as suppliers and customers

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Resources, Capabilities and Core Competencies357CapabilitiesRepresent the capacity to deploy resources that have been purposely integrated to achieve a desired end stateEmerge over time through complex interactions among tangible and intangible resourcesOften are based on developing, carrying and exchanging information and knowledge through the firms human capital

Competitive Advantage

ResourcesTangibleIntangible

Capabilities

CoreCompetencies

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Resources, Capabilities and Core Competencies358Capabilities (contd)The foundation of many capabilities lies in:The unique skills and knowledge of a firms employeesThe functional expertise of those employeesCapabilities are often developed in specific functional areas or as part of a functional area.

Competitive Advantage

ResourcesTangibleIntangible

Capabilities

CoreCompetencies

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Resources, Capabilities and Core Competencies359Core CompetenciesResources and capabilities that are the sources of a firms competitive advantage:Distinguish a firm competitively and reflect its personality.Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities.

Competitive Advantage

ResourcesTangibleIntangible

Capabilities

CoreCompetencies

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Resources, Capabilities and Core Competencies360Core CompetenciesActivities that a firm performs especially well compared to competitors.Activities through which the firm adds unique value to its goods or services over a long period of time.

Competitive Advantage

ResourcesTangibleIntangible

Capabilities

CoreCompetencies

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Building Core Competencies361The Four Criteria of Sustainable Competitive AdvantageValuable capabilitiesRare capabilitiesCostly to imitateNonsubstituable

SustainableCompetitive Advantage

ValuableRareCostly to imitateNonsubstitutable

Four Criteria of Sustainable Advantages

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362Table 3.4The Four Criteria of Sustainable AdvantageValuable CapabilitiesHelp a firm neutralize threats or exploit opportunitiesRare CapabilitiesAre not possessed by many othersCostly-to-Imitate CapabilitiesHistorical: A unique and a valuable organizational culture or brand nameAmbiguous cause: The causes and uses of a competence are unclearSocial complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customersNonsubstitutable CapabilitiesNo strategic equivalent

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Chapter 3 Sample QuestionsQ7. Several months ago, a restaurant developed a new appetizer that is a hit with customers. Many customers go to the restaurant just for the appetizer, and it was at the center of a recent highly positive review by a food critic. Preparation involves common ingredients and average culinary skills but requires a very high oven temperature, which significantly increases utility costs. Several competing restaurants have since added their own version of the appetizer to their menu. Which criterion for assessing capabilities/core competencies is met?

a. The restaurant has the capability to develop something that is valuable. b. The restaurant has the capability to develop something that is rare.c. The restaurant has the capability to develop something that is difficult to imitate.d. All of these criteria are met.363

Answer: A63

Outcomes from Combinations of the Four Criteria364

Valuable?Rare?Costly to Imitate?Nonsubstitutable?CompetitiveConsequencesPerformanceImplicationsNoNoNoNoCompetitiveDisadvantageBelow AverageReturnsYesNoNoYes/NoCompetitiveParityAverage ReturnsYesYesNoYes/NoTemporary Com-petitive AdvantageAbove Average to Average ReturnsYesYesYesYesSustainable Com-petitive AdvantageAbove AverageReturns

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Chapter 3 Sample QuestionsQ8. Firms that achieve competitive parity can expect to

a. earn below-average returns.b. earn average returns.c. earn above-average returns.d. initially earn above-average returns, declining to average returns.

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Answer: B65

366Value Chain AnalysisAllows a firm to understand the parts of its operations that create value and those that do not.A template that firms use to:Understand their cost position.Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy.

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367Value Chain Analysis (contd)Primary activities (or value chain activities in your textbook) are involved with: A products physical creationA products sale and distribution to buyersThe products service after the saleSupport ActivitiesProvide the assistance necessary for the primary activities to take place.

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368Value Chain Analysis (contd)Value ChainShows how a product moves from the raw-material stage to the final customer.To be a source of competitive advantage, a resource or capability must allow the firm:To perform an activity in a manner that is superior to the way competitors perform it, orTo perform a value-creating activity that competitors cannot complete.

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369Figure 3.3A Model of the Value Chain

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370OutsourcingThe purchase of a value-creating activity from an external supplierFew organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities.By performing fewer capabilities:A firm can concentrate on those areas in which it can create value.Specialty suppliers can perform outsourced capabilities more efficiently.

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Chapter 3 Sample QuestionsQ9. A major U.S. manufacturer of children's toys believes its main competitive advantage lies in its continuing development of innovative toys and games. The company is facing increasing competition on price, and it is strongly considering outsourcing to offshore firms as a means of reducing costs. The LAST function this firm should consider outsourcing is

a. operations.b. research and development. c. supply-chain management. d. distribution.

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Answer: B71

Chapter 4 Business Level Strategy72

Studying this chapter should provide you with the strategic management knowledge needed to (all required): Learning ObjectivesDefine business-level strategy.Discuss the relationship between customers and business-level strategies in terms of who, what, and how.Explain the differences among business-level strategies.Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy.Describe the risks of using each of the business-level strategies.473

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Business-Level Strategy (Defined)An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets.474

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Core Competencies and Strategy475Resources and superior capabilities that are sources of competitive advantage over a firms rivalsProviding value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

Core Competencies

Strategy

Business-level StrategyAn integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage

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Customers: Their Relationship with Business-Level Strategies476

Key IssuesinBusiness-levelStrategy

Who will be served?

What needs will be satisfied?

How will those needs be satisfied?

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The Purpose of a Business-Level StrategyBusiness-Level StrategiesAre intended to create differences between the firms competitive position and those of its competitors.To position itself, the firm must decide whether it intends to:Perform activities differently orPerform different activities as compared to its rivals.477

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Types of Potential Competitive AdvantageAchieving lower overall costs than rivalsPerforming activities differently (reducing process costs)Possessing the capability to differentiate the firms product or service and command a premium pricePerforming different (more highly valued) activities.478

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Competitive ScopeBroad ScopeThe firm competes in many customer segments.Narrow ScopeThe firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others.479

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Types of Business-Level Strategies480Lowest CostDistinctiveness

Differentiation

Cost Leadership

Focused Differentiation

Focused Cost Leadership

Integrated Cost Leadership/ DifferentiationBroadTargetNarrowTargetBasis for Customer ValueTarget Market

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Five Business Level Strategies481Definition be able to give example or identify the five strategies

Use five forces model to explain how above-average returns can be earned through each business-level strategy

Risks related to each strategy

Read Ch4 slides (Lecture Note #6) for details: slide # 18-52, #56, skip #33-39, 41

Chapter 4 Sample QuestionsQ10. Firms implementing cost leadership strategies often sell no-frills standardized goods or services (but with competitive levels of differentiation) to the industry's most typical customers.

a. Trueb. False482

Answer: A82

Chapter 4 Sample QuestionsQ11. The differentiation strategy is effective for products that are expensive, luxury consumer goods. It is not effective for common, inexpensive products such as doughnuts.

a. True b. False483

Answer: b False83

Chapter 4 Sample QuestionsQ12. All of the following are ways that a good or service can be differentiated EXCEPT

a. responsive customer service. b. perceived prestige and status.c. economies of scale and efficient operations.d. engineering design and performance.

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Answer: C84

Key to the sample questionsQ1. BQ2. BQ3. BQ4. DQ5. CQ6. BQ7. AQ8. BQ9. BQ10. A185Q11. BQ12. C

Questions?Good luck!86