BusinessPolicy&Strategy

GlossaryCompre

AddedValue:Foraplayerinaverticalchain(Supplier>Competitor>Buyer)
added value is the difference between costs and willingness to pay minus the
maximalvaluethatwouldbecreatedwithoutthatparticularplayer.
Appropriability: The extentto which businesses canretain their added value
againstthreatsofholdupandslack.
BATNA: Best Alternative to a Negotiated Agreement with a particular buyer,
supplier,orcomplementisawayofmeasuringacompanysbargainingpower
inthevaluenet.ImprovingacompanysBATNAinvolvesspurringcompetition
on the other side of the bargaining, while maintaining ones own uniqueness
andaddedvalue.
BehavioralTheory:Providesinsightsintoacompanyspredispositions,which
oftenhaveanirrationalimpactonitsdecisions;thusitprovidesacomplement
togametheoreticalanalysis.
Benchmarking: Comparing a companys performance to that of other
organizations,especiallydirectcompetitors,helpsinidentifyingslack.
Best alternative test: When the business units of a corporation can create
more value under common ownership than they would as isolated entities
(linkedbyalliances,licenses,jointventuresetc)onanetbasis,thenatestfora
broadscopeofthecorporationcanbesaidtobepassed
Better off test: This implies that combining and coordinating activities of
multiplebusinessunitsenablestheunitstocreatemorevaluethantheycould
asindependent,unassociatedunits
Bilateralmonopoly:Atransactionthatinvolvesjustonebuyerandoneseller,
resultinginanextremeriskofholdup.
Buyer Power: Is one of the two vertical forces in industry analysis that
influences the appropriation of the value created by an industry. It allows
buyers to squeeze industry margins by compelling players to either reduce
pricesorraisethelevelofserviceofferwithoutrecompense
Causalambiguity:Theideathatasuccessfulfirmmayitselfbeuncertainabout
whattrulydrivesitssuperiorperformance.Thiscomplexitydetersimitation.
Choice/Tradeoffs:Theideawhenacompanypursuescompetitiveadvantage
in a certain way, it must sacrifice other ways. For example, when a company
chooses an integrated set of activities and resources to compete on say, cost
leadership, it implies that it will not pursue another set of activities and
resourcestocompeteonsay,productdifferentiation.
CompetitiveAdvantage:Afirmthatearnssuperiorreturnswithinitsindustry
overthelongrunissaidtoenjoyacompetitiveadvantageoveritsrivals.
Competitive Position: A companys advantage or disadvantage relative to
competition, assessed on some dimension of strategy (e.g., cost or
differentiation).
Competitor analysis: Is the detailed analysis of individual competitor data
(e.g., historical factors, resources, capabilities, management predispositions,
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etc.)withtheaimofunderstandingcurrentandpotentialactionsacompetitor
maytake.
Complementors: Defined as being a mirror image of competitors could
increase willingness to pay or reduce supplier opportunity cost; an explicit
componentofthevaluenetframeworkofindustryanalysis
Complexity: A possible defense against imitation, complexity of a business
strategymayimpedeitsimitation.
Cospecialization:Occurswhensuppliers,complementsand/orbuyersdevelop
specialized activities in order to benefit from each others unique abilities.
Whilemutuallybeneficialtobeginwith,cospecializationcarriesathreatofhold
up.
Cost Analysis: Analysis of cost is a basis of assessing competitive positioning,
by disaggregating the components of a companys cost and analyzing its cost
drivers.
CostDrivers:Arethefactorsthatmakethecostofanactivitytoriseorfall
Cost Leadership: The strategy used by a company to compete on the basis of
lowercostsrelativetocompetitors.
Deaveraging:Processofsplittingcustomerbaseintosegmentsbasedoncost
toserve as well as customer needs; for example when 20% of a businesss
customersaccountformorethan80%ofitsprofits.
Differentiation:Thestrategyusedbyacompanytocommandapricepremium
bysatisfyingsomevaluedcustomerneedinadifferentiatedway.
DistinctiveCompetence:Distinctivecompetenceisasetofuniquecapabilities
thatcertainfirmspossessallowingthemtomakeinroadsintodesiredmarkets
and to gain advantage over the competition; generally, it is an activity that a
firmperformsbetterthanitscompetition
Dual competitive advantage: Is a situation in which a company is able to
extract competitive advantage from both differentiation as well as cost
leadership.
Entry barriers: Exists whenever it is difficult or not economically feasible for
anoutsidertoreplicatetheincumbentsposition.Entrybarriersusuallyreston
irreversible commitments. Some barriers reflect intrinsic physical or legal
obstacles to entry. The most common forms of entry barriers however are
usuallythescaleandtheinvestmentrequiredtoenteranindustryasanefficient
competitor.
Equilibrium:Isastablecombinationofcompetitoractionsinagame;unilateral
deviationfromequilibriumiscostlyforaplayer.
Focusoption:Optionforacompanytogaincompetitiveadvantagebyfocusing
onanarrowscopetargetmarket(e.g.,bygeographyorcustomerniche);while
stillpursuingagenericstrategyofcostleadershipordifferentiation.
Free cash flow: Cash flow in excess of that required to fund all projects that
have positive net present values, free cash flow can be misappropriated by a
companysmanagers,thuscreatingslack.
Freewheeling games: Competitive games or interactions with unrestricted
bargaining,inwhichplayerscaninteractwithoutanyconstraints.
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Game Theory: Study of interactions among players whose payoffs depend on

one anothers choices and who take that interdependence into account when
tryingtomaximizetheirrespectivepayoffs.
Genericstrategies:Asuccessfulcompanyinagivenindustryusuallyhasmade
a choice to compete on either of the two generic strategies: cost leadership or
differentiation;basedonthestrategictargetthesecouldbefocusedorindustry
wide
Goodparenttest:Eveniftheproposedopportunitytoexpandcorporatescope
apparentlysatisfiesthetestsofbetteroffandbestalternative,itisworthasking
yourself whether your company is particularly placed to observe or act upon
theopportunityidentifiedbeforeactuallymovingtocapitalizeonit
Holdup: Threatens to divert a companys added value to buyers, suppliers,
complementorsand/orotherplayersinthecompanysnetwork.
Horizontal differentiation: occurs when customers differ in their preference
fordifferentproducts.
Imitation: Threatens the originator of a successful business model as the
businessmodeliscopiedbycompetitorsovertime.
Incentive intensity: A measure of manager compensation as a function of a
companystotaladdedvalue.Forexample,topU.S.executivesreceivenomore
than $3.25 for each $1,000 of shareholder value created is a statement of US
incentiveintensity.
Internalfit:Whenacompanysactivitiesandresourceshaveinternalfit,their
effects on each other are well aligned to produce competitive advantage. For
examplewhenproductionchoicesfitwithmarketingdecisions,whichinturnfit
withdistributionchoicesandsoon.
Interorganizational relationships: A broad set of strategies to deal with the
threat of holdup, interorganizational relationships focus on the relationship
betweenbuyersandsuppliers,asopposedtotheoptionofverticalintegration
orcontracting.
Learning:Adefenseagainstthethreatofimitation,learningistheacquisition
of superior information or knowhow as a result of a companys scale in a
particularbusinessovertime.
Mass customization: When companies begin to tailor their products to
individualcustomers.
Moralsuasion:Isanapproachtodealingwithslackbyappealingtoemployee
values,norms,asenseofmission,etc..
Nonzerosumgames:Competitiveinteractionsorgamesinwhichoneplayers
gainsdonotequalotherplayerslosses;thisimpliesagameinwhichthereare
opportunitiesforcooperationaswellascompetition.
Opportunity cost: Supplier opportunity cost is the smallest amount that
suppliers would accept for the services and resources that are required by a
companytoproduceitsfinalproduct/service.
Payoff matrix: Is a decision making tool in game theory that specifies each
playerspayoffsforallpossiblescenariosofactionsandconditions,andassists
indeterminingtheequilibriumpointsinacompetitivegame.
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Privacy of information: The more a company can protect its learning

advantage through the privacy of information, the greater the inhibition to
threatofimitation
Reaction functions: Is a game theory concept of drawing up the response of
oneplayertoarangeofactionsbyotherplayers.
Reconstruct market boundaries:Inordertoopenacommerciallyimportant
blueocean,managerscancreateuncontestedmarketspacebysixpaths:looking
across alternative industries, across strategic groups, across buyer groups,
across complementary products and service offerings, across functional
emotionalorientationofanindustryandevenacrosstime
Red Queen effect: Applied to business context, the Red Queen effect implies
that as organizations struggle to adapt to competitive pressures, their fitness
levelsimprove,raisingtheindustrybaselineofperformance.Thisimpliesthat
companypeakperformancewillregresstotheindustryaverageovertime.
Resources:Differencesinresourcespossessedbyafirmmaydrivedifferences
inactivitycosts.E.g.,afarmwithmoreproductivesoilwillincurlowercostsof
fertilization.
Retaliation:Whenacompanymakesacrediblethreatofmassiveretaliation,it
inhibitsimitation.
Ruggedlandscape:Istheideathatthereismorethanoneinternallyconsistent
waytodobusinessoftenexistswithinthesameindustry.i.e.,thereareseveral
viablepositionsorpeaksthatareavailableforacompanytopursuewithinthe
businesslandscape.
Rulebased games: Competitive interactions or games in which interaction
betweenplayersisgovernedbyrules,i.e.,isnotunrestricted.
Scaleeconomies:Abarriertoimitation,scaleeconomiesaretheadvantagesa
companygainsbybeinglargeinaparticularmarketorsegment.
Scopeeconomies:Abarriertoimitation,scopeeconomiesaretheadvantagesa
companygainsbybeinglargeininterrelatedmarketsorsegments.
Scope:Therangeofbusinessactivitiesandcustomersthatacompanypursues;
anarrowscopeimpliesfocusonatargetsegmentormarket.
Segmentation: The process of identifying clusters of customers who share
preferences, and then analyzing these clusters for how the company can
maximizethewillingnesstopayforeachsegment.
Sensitivityanalysis:Ascompetitive/relativecostanalysisinvolvesalargeset
ofassumptions,itisimportanttotesttherobustnessofunderlyingassumptions
through sensitivity analysis, in which the assumptions are varied through a
reasonablerange,andimpactonoverallcostisexamined.
SevenSframework:Amanagementtoolthathelpstoanalyzeseveninternal
aspects of an organization that need to be aligned for success shared values,
structure,systems,skills,staff,styleandstrategy
Shared Values:arethecorevaluesofthecompanythatareevidencedinthe
corporatecultureandthegeneralworkethic.
Skills:meansthatemployees/theorganizationhavetherightcompetenciesto
executetheactivitiesneeded
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Slack: Is an internal threat to a companys added value and is the extent to

whichthevalueappropriatedbyacompanyfallsshortofthevaluepotentially
availabletoit.
Social complexity: The idea that corporate culture is too complex to
deliberately manage and influence; and hence if it is a driver of superior
performance,thenthiscomplexitydetersimitation.
Staff:hiringemployeesandplacingtheminappropriatejobs.
Strategic Options: is the set of different ways by which a company can
maximizethedifferencebetweenitscostsanditscustomerswillingnesstopay
Strategic sequence: In Blue Ocean Strategy, the sequence that ensures that
both the company and customers win is defined by utility, price, cost and
adoption
Structure: The way in which people and activities are organized, often in a
hierarchy
Style: means that company employees share a common way of thinking and
behaving,oftenpromotedbymangers.
Substitutionthreattosustainability:Thethreatthatanewproduct/business
modelwilldisplaceanoldone.
Systems: the processes and routines that characterize how important work is
tobedone.E.g.financialsystems,incentivesystems,informationsystems.
Unrestricted bargaining: Is a situation when the players in a vertical chain
(suppliers>competitors>buyers)arefreetonegotiateonhowtodivideup
thetotalvaluecreatedinthechain.
Valuechain:Thevaluechaindisaggregatesafirmintoitsstrategicallyrelevant
activities in order to understand the behavior of costs and sources of
differentiation.
Vertical Differentiation: Arises when customers agree on which products is
better,butdifferonhowmuchtheyarewillingtopayforthebetterproduct.
Willingnesstopay:Theactivitiesofacompanymakeitscustomerswillingto
payforthecompanysproductorservice.
Zerosumgames:Acompetitiveinteractionorgameinwhichoneplayersgain
isexactlyequaltotheotherplayerslosses

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