Strategy & Policy

Review for Exam 1

The Requirement of Exam 1

Textbook chapters: 1, 2, 3, 4
Format:
9 true-false questions
27 Multiple choice questions
36 questions, 20 points total (0.56 pt for each question)
You can take:
One page, double-sided, hand written note on an A4 paper
Pencil (with eraser)
Seat assigned alphabetically
Time: 80 min
2

 Seat assignment according to your last name

Row1: B-C
Row2: E-H
Row3: L-M
Row4: N-T
Row5: W-Y

Distribution of Exam Questions by

Chapter

Studying Strategies for Textbook

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

How to Prepare for the Exam

Equipment: 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 objectives
Last page summary, review questions (optional)
Whole chapter read the first sentence of each paragraph
Write down key points on the first scratch paper (no need to be
complete)

How to Prepare for the Exam

Step 3. Read the chapter slowly (about 40 min each)
Pay attention to required material
Understand the concepts, be able to give examples
Write down key concepts on the second scratch paper, mark
those ones you cannot remember
Prepare 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 paper
7

Outline of Chapters 1-4

Ch1: Strategic Management and Strategic Competitiveness
Ch2: The External Environment
Ch3: The Internal Organization
Ch4: Business Level Strategy

Chapter 1
Strategic Management and Strategic
Competitiveness

Learning Objectives
Studying this chapter should provide you with
the strategic management knowledge needed to:
1. Define strategic competitiveness, strategy, competitive advantage,
above-average returns, and the strategic management process.
2. Describe the competitive landscape and explain how globalization
and technological changes shape it.
3. Use the industrial organization (I/O) model to explain how firms can
earn above-average returns.
4. Use the resource-based model to explain how firms can earn
above-average returns.
5. Describe vision and mission and discuss their value.
6. Define stakeholders and describe their ability to influence
organizations.
7. Describe the work of strategic leaders.
8. Explain the strategic management process.
10

Important Definitions
STRATEGIC COMPETITIVENESS - achieved when a
firm successfully formulates and implements a valuecreating 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 Definitions
RISK - 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 Returns
Diversification

Product
differentiation

Barriers to
market entry

Economies
of scale

Industry
concentration

The Firms
Strategic
Choices

Market
frictions

113

I/O Model Assumptions

1. The external environment imposes pressures
and constraints that determine strategic choices.
2. Similarity in strategically relevant resources
causes competitors to pursue similar strategies.
3. Resource differences among competitors are
short-lived due to resource mobility across firms.
4. Strategic decision makers are rational and
engage in profit-maximizing behaviors.

114

Five Forces Model of Competition

Substitutes
Substitutes

Suppliers
Suppliers

Industry
Industry
Rivalry
Rivalry

Buyers
Buyers

Potential
Potential
Entrants
Entrants

115

Five Forces Model Assumptions

Industry 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).

116

The Resource-Based Model

of Above-Average Returns

e
g
a
t
n
a
v
d
a
e
v
i
t
i
t
e
p
m
o
Core
c
g
n
i
competence
d
l
Capability
i
A source of
Bu
Resources

An integrated
set of resources

competitive
advantage

Physical, human, and

organizational capital
(tangible and intangible)
117

Resource-Based Model Assumptions

1. Firms acquire different resources.
2. Firms develop unique capabilities based
on how they combine and use resources.
3. Resources and certain capabilities are
not highly mobile across firms.
4. 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 Competencies

Costly to imitate

Rare

How resources
become core
competencies

Valuable

Nonsubstitutable

119

Strategic Decision Making

Industry Organization
(I/O) Model

Resource-Based
Model

Competitive
Strategy
Decision

120

Classification of Stakeholders

Categories of
stakeholders

Capital Market
Stakeholders

Product Market
Stakeholders

Organizational
Stakeholders

121

Figure 1.4
The Three
Stakeholder
Groups

Requirement:
Be able to
distinguish
between the
three groups
122

Chapter 1 Sample Questions

Q1. 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

Chapter 1 Sample Questions

Q2. Customers, suppliers, unions, and local
governments are examples of capital market
stakeholders.
a. True
b. False

124

Chapter 1 Sample Questions

Q3. 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. hypercompetition

125

Chapter 2 The External Environment

26

Learning Objectives
Studying this chapter should provide you with
the strategic management knowledge needed to:
1. Explain the importance of analyzing and understanding the firms
external environment.
2. Define and describe the general environment and the industry
environment.
3. Discuss the four activities of the external environmental analysis
process.
4. Name and describe the general environments seven segments.
5. Identify the five competitive forces and explain how they determine
an industrys profitability potential.
6. Define strategic groups and describe their influence on firms.
7. Describe what firms need to know about their competitors and
different methods (including ethical standards) used to collect
intelligence about them.
27

Figure 2.1

The External Environment

228

General Environment
Dimensions in the broader society that influence
an industry and the firms within it:
Demographic
Economic
Political/legal
Sociocultural
Technological
Global
Physical
229

Table 2.1

The General Environment: Segments and Elements

230

Industry Environment
The set of factors directly influencing a firm
and its competitive actions and competitive
responses
Threat of new entrants
Power of suppliers
Power of buyers
Threat of product substitutes
Intensity of rivalry among competitors

231

Competitor Analysis
Gathering 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.
232

Opportunities and Threats

Opportunity
A condition in the general
environment that, if exploited
effectively, helps a firm achieve
strategic competitiveness.

Threat
A condition in the general
environment that may hinder
a firms efforts to achieve
strategic competitiveness.

233

Industry Environment Analysis

Industry Defined
A group of firms producing products
that are close substitutes.
Firms use a rich mix of different
competitive strategies to pursue aboveaverage returns when competing in a
particular industry.
An industrys structural characteristics
influence a firms choice of strategies

234

Porters Five Force Model

35

Threat of New Entrants:

Barriers to Entry

Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Expected retaliation

236

Bargaining Power of Suppliers

Supplier 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.
237

Bargaining Power of Buyers

Buyer 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.

238

Threat of Substitute Products

The 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.

239

Intensity of Rivalry Among Competitors

Industry 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.

240

Interpreting Industry Analyses

Low entry barriers
Suppliers and
buyers have strong
positions
Strong threats
from substitute
products
Intense rivalry
among
competitors

Unattractive
Industry
(Low profit potential)

241

Interpreting Industry Analyses (contd)

High entry
barriers
Suppliers and
buyers have weak
positions
Few threats from
substitute
products
Moderate rivalry
among
competitors

Attractive
Industry
(High profit potential)

242

Chapter 2 Sample Questions

Q4. Which of the following is NOT an entry barrier to
an industry?

a. expected competitor retaliation

b. economies of scale
c. customer product loyalty
d. bargaining power of suppliers

243

Chapter 2 Sample Questions

Q5. 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.
244

Figure 2.3

Competitor Analysis Components

245

Chapter 3 The Internal Organization

46

Learning Objectives
Studying this chapter should provide you with
the strategic management knowledge needed to:
1. Explain why firms need to study and understand their internal organization.
2. Define value and discuss its importance.
3. Describe the differences between tangible and intangible resources.
4. Define capabilities and discuss their development.
5. Describe four criteria used to determine whether resources and
capabilities are core competencies.
6. 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.
7. Define outsourcing and discuss reasons for its use.
8. Discuss the importance of identifying internal strengths and
weaknesses.
9. Discuss the importance of avoiding core rigidities.

347

Analyzing the External Environment

Opportunitie
s and
threats

By studying the external environment, firms

identify what they might choose to do.
348

Analyzing the Internal Organization

Unique resources,
capabilities, and
competencies
(required for
sustainable
competitive
advantage)
By studying the internal environment,
firms identify what they can do
349

Figure 3.1

Components of an Internal Analysis

350

Creating Value
By exploiting their core competencies or
competitive advantages, firms create value.
Value is measured by:
Product performance characteristics
Product attributes for which customers will pay

Firms create value by innovatively bundling and

leveraging their resources and capabilities.
Superior value Above-average returns
351

Chapter 3 Sample Questions

Q6. Which of the following is NOT a component
of internal analysis leading to competitive
advantage?

a. tangible and intangible resources

b. analysis of supplier power
c. capabilities
d. core competencies

252

Resources, Capabilities
and Core Competencies
Competitive
Advantage

Core
Competencies
Capabilities

Resources
Tangible
Intangible

Resources
Are 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.

353

Resources
Resources
Are a firms assets,
including people and
the value of its brand
name that represent
inputs into a firms
production process:

Capital equipment
Skills of employees
Brand names
Financial resources
Talented managers

Types of Resources
Tangible resources
Financial resources
Physical resources
Technological
resources
Organizational
resources

Intangible resources
Human resources
Innovation resources
Reputation resources

354

Table 3.1 Tangible Resources

Financial
Resources

The firms borrowing capacity

The firms ability to generate internal funds

Organizational
Resources

The firms formal reporting structure

Physical
Resources

The sophistication and location of a firms

plant and equipment and the attractiveness of
its location
Distribution facilities
Product inventory

Technological
Resources

Availability of technology-related resources

such as copyrights, patents, trademarks, and
trade secrets

355

Table 3.2 Intangible Resources

Human
Resources

Knowledge
Trust
Skills
Abilities to collaborate with others

Innovation
Resources

Ideas
Scientific capabilities
Capacity to innovate

Reputational
Resources

Brand name
Perceptions of product quality, durability, and
reliability
Positive reputation with stakeholders such as
suppliers and customers

356

Resources, Capabilities
and Core Competencies
Competitive
Advantage

Core
Competencies
Capabilities
Resources
Tangible
Intangible

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

357

Resources, Capabilities
and Core Competencies
Capabilities (contd)
Competitive
Advantage

Core
Competencies
Capabilities
Resources
Tangible
Intangible

The foundation of many

capabilities lies in:
The unique skills and
knowledge of a firms
employees
The functional expertise of
those employees

Capabilities are often

developed in specific
functional areas or as part
of a functional area.
358

Resources, Capabilities
and Core Competencies
Core Competencies
Competitive
Advantage

Core
Competencies
Capabilities
Resources
Tangible
Intangible

Resources 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.
359

Resources, Capabilities
and Core Competencies
Core Competencies
Competitive
Advantage

Core
Competencies
Capabilities

Activities 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.

Resources
Tangible
Intangible

360

Building Core Competencies

Sustainable
Competitive
Advantage
Four Criteria of
Sustainable
Advantages

The Four Criteria of

Sustainable Competitive
Advantage
Valuable capabilities
Rare capabilities
Costly to imitate

Valuable
Rare
Costly to imitate
Nonsubstitutable

Nonsubstituable

361

Table 3.4 The Four Criteria of Sustainable Advantage

Valuable
Capabilities

Help a firm neutralize threats or exploit

opportunities

Rare
Capabilities

Are not possessed by many others

Costly-to-Imitate
Capabilities

Historical: A unique and a valuable organizational

culture or brand name
Ambiguous cause: The causes and uses of a
competence are unclear
Social complexity: Interpersonal relationships,
trust, and friendship among managers, suppliers,
and customers

Nonsubstitutable
Capabilities

No strategic equivalent

362

Chapter 3 Sample Questions

Q7. 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

Va
lu
ab
le
?
R
ar
e?
C
os
tly
to
N
Im
on
ita
su
te
bs
?
tit
ut
ab
le
?

Outcomes from Combinations

of the Four Criteria

Competitive
Consequences

No

No

No

No

Yes

No

No

Yes

Yes

Yes

Yes

Performance
Implications

Competitive
Disadvantage

Below Average
Returns

Yes/
No

Competitive
Parity

Average Returns

No

Yes/
No

Temporary Competitive Advantage

Above Average to
Average Returns

Yes

Yes

Sustainable Competitive Advantage

Above Average
Returns
364

Chapter 3 Sample Questions

Q8. 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.

365

Value Chain Analysis

Allows 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 businesslevel strategy.

366

Value Chain Analysis (contd)

Primary activities (or value chain activities in
your textbook) are involved with:
A products physical creation
A products sale and distribution to buyers
The products service after the sale

Support Activities
Provide the assistance necessary for the primary
activities to take place.

367

Value Chain Analysis (contd)

Value Chain
Shows 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, or
To perform a value-creating activity that competitors
cannot complete.

368

Figure 3.3

A Model of the Value Chain

369

Outsourcing
The purchase of a value-creating activity from
an external supplier
Few 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.

370

Chapter 3 Sample Questions

Q9. 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.
371

Chapter 4 Business Level Strategy

72

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

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

Core Competencies and Strategy

Core
Competencies

Resources and superior capabilities that are

sources of competitive advantage over a
firms rivals

Strategy

An integrated and coordinated set of

actions taken to exploit core competencies
and gain competitive advantage

Business-level
Strategy

Providing value to customers and gaining

competitive advantage by exploiting core
competencies in individual product markets

475

Customers: Their Relationship

with Business-Level Strategies
Who will be
served?

Key Issues
in
Business-level
Strategy

What needs will

be satisfied?

How will those

needs be satisfied?

476

The Purpose of a
Business-Level Strategy
Business-Level Strategies
Are 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 or
Perform different activities as compared to its rivals.

477

Types of Potential
Competitive Advantage
Achieving lower overall costs than rivals
Performing activities differently (reducing process
costs)

Possessing the capability to differentiate the

firms product or service and command a
premium price
Performing different (more highly valued) activities.

478

Competitive Scope
Broad Scope
The firm competes in many
customer segments.

Narrow Scope
The firm selects a segment or
group of segments in the
industry and tailors its strategy
to serving them at the
exclusion of others.

479

Types of Business-Level Strategies

Basis for Customer Value

Broad
Target

Lowest Cost

Distinctiveness

Cost Leadership

Differentiation

Integrated Cost
Leadership/
Differentiation

Target
Market
Narrow
Target

Focused Cost
Leadership

Focused
Differentiation

480

Five Business Level Strategies

Definition
be able to give example or identify the five strategies

Use five forces model to explain how aboveaverage 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
481

Chapter 4 Sample Questions

Q10. 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. True
b. False

482

Chapter 4 Sample Questions

Q11. 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. False

483

Chapter 4 Sample Questions

Q12. 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.

484

Key to the sample questions

Q1. B
Q2. B
Q3. B
Q4. D
Q5. C
Q6. B
Q7. A
Q8. B
Q9. B
Q10. A

Q11. B
Q12. C

185

Questions?
Good luck!

86