Mgmt 441

• Key elements of a mission/vision:
• Define the organization’s long-term purpose
• Often includes broad goals and philosophy
• Best if inspirational/motivational

• Communicate organizational priorities to all employees (and stakeholder groups)
• Can influence employee behavior
• Research has shown that when employees know and accept their company’s mission:
• -Turnover is reduced
• -Satisfaction and commitment improves
• The key is effective communication

• Types of objectives:
• ◦strategic and financial
• ◦short term and long term

The need for a top-down approach to objective setting

• Realistic/challanging
• Clear/specific
• Time frame
• Measurable

Set goals outside of what the company can do

• Develop Mission and Objectives
• Analyze External Environment and Internal Capabilities
• Formulate Strategy (corporate/business)
• Implement Strategy
• Achieve Competitive Advantage and Assess Performance

• Corporate- actions firms take to gain competitive advantage in multiple markets or industries
• Business- actions firsms take to gain competitive advantages in a single market or industry
• Functional

• A firm has a competitive advantage when it is able to create more economic value than rivals
• Two forms of competitive advantage:
• Differentiation: customers are willing to pay a premium due to some attribute of a firm’s product/service (Example: Nordstrom)
• Low cost: the firm incurs lower costs in producing/ distributing its product/service (Example: Wal-Mart)

• Competitive advantage should lead to increased profitability
• Economic theory suggests that this should attract increased competition, ultimately making the competitive advantage temporary
• In certain circumstances, the source of the competitive advantage may not be imitable, thus leading to a sustainable competitive advantage

The difference between the perceived benefits gained by a customer that purchases a firms products or services and the full economic cost of these products or services

• Technological Change
• Dempgraphic Trends
• Cultural Trends
• Economic Climate
• Legal & Political Considerations
• Specific International Events

• Threat of New Entry
• Threat of Rivalry
• Threat of Substitutions
• Threat of Powerful Suppliers
• Threat of Powerful Buyers

• 1.) Economies of Scale- A firms costs fall as a function of its volume of production
• 2.) Product Differentiation- incumbant firms possess brand identification and customer loyalty that potential entrants to not
• 3.) Cost Advantages Indepentent of Scale- proprietary technology, manegerial know-how, favorable access to raw materials, learning curve
• 4.) Government Regulation of Entry

• Attributes of an industry that increase the threat of rivalry:
• 1.) A large number of competing firms that are roughly the same in size
• 2.) Slow industry growth
• 3.) Lack of product differentiation
• 4.) Capacity added in large increments

• Indicators of the Threat of Suppliers:
• 1.) Suppliers' industry is dominated by a small number of firms
• 2.) Suppliers sell unique or highly differentiated products
• 3.) Suppliers are NOT threatened by substitutes
• 4.) Suppliers threaten forward vertical integration (suppliers become competitors)
• 5.) Firms are NOT important customers for suppliers

• Indicators of Threat of Buyers
• 1.) Number of buyers is small
• 2.) Products sold to buyers are undifferentiated and standard
• 3.) Products sold to buyers are a significant percentage of a buyer's final costs
• 4.) Buyers are NOT entering significant economic profits
• 5.) Buyers threaten backwards vertical integration (Buyers become suppliers)

• ROA
• ROE
• Gross Profit Margin
• Earnings Per Share (EPS)
• Price earnings Ratio (p/e)
• Cash flow per share

• Current ratio
• Quick ratio

• Debt to Assets
• Debt to equity
• Times interest earned

• Inventory turnover
• Accounts receivable turnover
• Average collection period

• Profit after taxes/Total assets (%)
• A measure of return on the total investment in a firm- larger is better
• Used to measure the amount earned on each dollar of assets invested

• Profit after taxes/Total stockholders equity (%)
• NI/OE
• NPM x Assets Turnover x Assets/Equity
• NPM= NI/Sales
• Assets t/o= Sales/Total assets
• A measure of return on total equity investment in a firm- larger is better
• Used to measure the amount earned on each dollar of equity

• Sales-COGS/ Sales
• A measure of sales availible to cover operating expenses and still generate a profit

• Current mkt price/earnings per share
• How much the company is earning per $1 in shares

• Current assets/Current liabilities
• A measure of the ability of a firm to cover its current liabilities with assets that can be converter to cash in the short term (range 2-3 good)

• Debt/assets
• measure of the extent to which debt has financed a firms business activities- higher is greater risk of brankruptcy

Profit before interest and taxes/total interest charges

Sales/Total assets

• sales/inventory
• measure of the speed at which a firms inventory is turning over

• Internal analysis can be thought of as consisting of two interrelated activities:
• 1.Evaluate current performance
• 2.Evaluate current resources/capabilities:
• -Are your current capabilities sufficient for you to execute your strategy?
• -Do your current capabilities enable you to capitalize on opportunities or form the basis for a sustainable competitive advantage?

• The entire organization must take responsibility for building a competitive advantage
• Relying only on imitation leads to parity
• Socially-complex resources (like corporate cultures) can often be the most likely source of a sustainable competitive advantage
• It’s often easier to develop/change the organization (supporting assets) than it is to develop new valuable, rare, and inimitable resources/capabilities

• Resources can be either tangible or intangible
• ◦Tangible: financial, physical, etc.
• ◦Intangible: knowledge, culture, reputation, etc.
• Firms must compare their resource positions to their current and potential rivals
• Resources or capabilities (combinations of resources used to accomplish a task) form the basis of competitive advantage

A subset of a firms resources and are defined as the tangible and intangible assets that enable a firm to take full advantage of other resources it controls

• Valuable
• Rare
• Inimitable (hard to copy)
• Organization (supporting assets)

• Does a resource or capability enable a firm to exploit an environmental opportunity and/or nuetralize an environmental threat?
• Value chain- a set of business activities in which it engages to develop, produce, and market its products or services

Is a resource currently controlled by only a small number of competing firms?

• Do firms without a resource face a cost disadvantage in obtaining or devoping it compared to firms that already possess it?
• Why might it be costly to imitate firms?
• Unique historical conditions
• Legal barriers
• casual ambiguity- firms may not understand the relationship between the resources and capabilities controlled by a firm and that firms competitive advantage
• Socal complexity- a lot of social interactions, related to causal ambiguity

Are a firms other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources?

• In business strategy, firms generally follow one of four generic competitive strategies
• Determined by a firm’s choices along two dimensions
• ◦competitive advantage (Differentiation or Cost leader)
• ◦competitive scope/market segmentation (Broad or Focus)

Strategies termed “generic” because they apply in almost every industry

• Broad Cost Leadership- Wal-Mart
• Focus Cost Leadership- Life Uniform
• Broad Differentiation- Macys
• Focus Differentiation- Gymboree

The key is to outperform a broadly-oriented rival in the segment being targeted

• The basis for competitive advantage is either:
• ◦Lower costs than competitors serving the segment
• ◦Better serve targeted customers’ needs

• Examples of focused competitors include:
• -Taco Bell in fast food (low cost)Ritz-Carlton in hotels (differentiation)

• Focusing works best when:
• ◦Large target segment
• ◦Segment is “insulated”
• ◦Customers’ needs within the industry vary widely
• ◦No one else is focusing on your segment

• Focusing is especially risky when:
• ◦Needs in segment start to match rest of industry
• ◦Size of target segment shrinks
• ◦Broadly-oriented rivals can meet segment’s needs

• 1.) Size differences and economies of scale
• 2.) Size differences and diseconomies of scale
• 3.) Experience differences and learning-curve economies
• 4.) Differential low cost access to productive inputs
• 5.) Technological advantages independent of scale
• 6.) Policy Choices

• Develop economies of scale
• Avoid diseconomies of scale
• Follow the experience/learning curve
• Access low cost inputs
• Make smart technological choices
• Effective managerial practices
• Make astute product policy choices

• Rarity?
• Implementing effective managerial practices may be more rare. The experience curve is hard for competitors to compete with.

• Rivalry: Why would a rational competitor start a price war against the cost leader?
• Buyer Power: Buyers have limited leverage against the cost leader.
• Supplier Power: Cost leaders tend to purchase standardized inputs in large quantities.
• Threat of New Entry: New entrants often cannot afford to enter at a size to match the cost leader’s scale economies.
• Substitute Products: While still susceptible, probably less so than average competitors.

Use a functional organization structure with a small centralized staff and few reporting layers

• Use managerial control systems that:
• ◦emphasize quantitative cost control targets
• ◦closely supervise labor and other inputs
• ◦build a culture that focuses on low costs

Reward cost savings at all organization levels