Mgmt 441

  1. Mission/Vision Statements
    • 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
  2. Establishing Objectives
    • Types of objectives:
    • ◦strategic and financial
    • ◦short term and long term

    The need for a top-down approach to objective setting
  3. Characteristics of “good” objectives
    • Realistic/challanging
    • Clear/specific
    • Time frame
    • Measurable
  4. The concept of “stretch” objectives
    Set goals outside of what the company can do
  5. The Strategic Management Process
    • Develop Mission and Objectives
    • Analyze External Environment and Internal Capabilities
    • Formulate Strategy (corporate/business)
    • Implement Strategy
    • Achieve Competitive Advantage and Assess Performance
  6. Three levels of strategy
    • 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
  7. Competitive Advantage
    • 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
  8. Economic value
    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
  9. Sectors of General Environment
    • Technological Change
    • Dempgraphic Trends
    • Cultural Trends
    • Economic Climate
    • Legal & Political Considerations
    • Specific International Events
  10. Five Forces Model
    • Threat of New Entry
    • Threat of Rivalry
    • Threat of Substitutions
    • Threat of Powerful Suppliers
    • Threat of Powerful Buyers
  11. Threat of New Entry
    • 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
  12. Threat of Rivalry
    • 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
  13. Threat if Powerful Suppliers
    • 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
  14. Threat of Powerful Buyers
    • 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)
  15. Profitability Ratios
    • ROA
    • ROE
    • Gross Profit Margin
    • Earnings Per Share (EPS)
    • Price earnings Ratio (p/e)
    • Cash flow per share
  16. Liquidity Ratios
    • Current ratio
    • Quick ratio
  17. Leverage Ratios
    • Debt to Assets
    • Debt to equity
    • Times interest earned
  18. Activity Ratios
    • Inventory turnover
    • Accounts receivable turnover
    • Average collection period
  19. Return on Assets (ROA)
    • 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
  20. Return on Equity (ROE)
    • 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
  21. Gross Profit Margin
    • Sales-COGS/ Sales
    • A measure of sales availible to cover operating expenses and still generate a profit
  22. Price Earnings Ratio
    • Current mkt price/earnings per share
    • How much the company is earning per $1 in shares
  23. Current Ratio
    • 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)
  24. Dept to assets
    • Debt/assets
    • measure of the extent to which debt has financed a firms business activities- higher is greater risk of brankruptcy
  25. Times interest earned
    Profit before interest and taxes/total interest charges
  26. Total Assets turnover
    Sales/Total assets
  27. Inventory Turnover
    • sales/inventory
    • measure of the speed at which a firms inventory is turning over
  28. Internal Capabilities
    • 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?
  29. Implications: Resource-Based View
    • 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
  30. Resource-Based View of the Firm
    • 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
  31. Capabilities
    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
  32. Distinctive Competencies and Sustainable Competitive Advantage (SCA) (VRIO)
    • Valuable
    • Rare
    • Inimitable (hard to copy)
    • Organization (supporting assets)
  33. Question of Value
    • 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
  34. Question of Rarity
    Is a resource currently controlled by only a small number of competing firms?
  35. Question of Imitability
    • 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
  36. Question of Organization
    Are a firms other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources?
  37. Generic Competitive Strategies
    • 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
  38. Focused Strategies
    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)
  39. The pros and cons of a focus strategy
    • 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
  40. Sources of Cost Advantages
    • 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
  41. How do firms become cost leaders?
    • 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.
  42. Cost Leadership and the Five Forces
    • 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.
  43. Implementing Cost Leadership
    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
Card Set
Mgmt 441
Ch 1-4