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MGMT 5-7

*The primary aim of strategic management at the business level is:*
> Achieving competitive advantage
*Primary value chain activities that involve the effective layout of receiving dock operations (inbound) logistics and support value chain activities that include expertise in process engineering (technology development) characterize what generic strategy?*
> Overall cost leadership
*A manufacturing business pursuing cost leadership will likely:*
> Rely on experience effects to raise efficiency
*One aspect of using a cost leadership strategy is that experience effects may lead to lower costs. Experience effects are achieved by:*
> Repeating a process until a task becomes easier
*The experience curve suggests that cutting prices is a good strategy:*
> If it can induce greater demand and thereby help a firm travel down the experience curve faster
*Convincing rivals not to enter a price war, protection from customer pressure to lower prices, and the ability to better withstand cost increase from suppliers characterize which type of competitive strategy?*
> Overall cost leadership
*Which of the following is a risk (or potential pitfall) of cost leadership?*
> Cost cutting may lead to the loss of desirable features
*Support value chain activities that involve excellent applications engineering support (technology development) and facilities that promote a positive firm image (firm infrastructure) characterize what generic strategy?*
> Differentiation
*A firm can achieve differentiation through all of the following means EXCEPT:*
> Offering lower prices to frequent customers
*High product differentiation is generally accompanied by:*
> Decreased emphasis on competition based on price
*Which of the following is FALSE regarding how a differentiation strategy can help a firm to improve its competitive position vis-a-vi Porter’s five forces?*
> Supplier power is increased because suppliers will be able to charge higher prices for their inputs
*A differentiation strategy enables a business to address the five competitive forces by:*
> Lessening competitive rivalry by distinguishing itself
*All of the following are potential pitfalls of a differentiation strategy EXCEPT:*
> All rivals share a common input or raw material
*Which statement regarding competitive advantages is true?*
> If several competitors pursue similar differentiation tactics, they may all be perceived as equals in the mind of the consumer
*A narrow market focus is to a differentiation-based strategy as a:*
> Broadly-defined target market is to a cost leadership strategy
*A firm following a focus strategy:*
> Must focus on a market segment or group of segments
*All of the following are potential pitfalls of a focus strategy EXCEPT:*
> All rivals share a common input or raw material
*Research has consistently shown that firms that achieve both cost leadership and differentiation advantages tend to perform:*
> Higher than firms that achieve either a cost or a differentiation advantage
*The text discuss three approaches to combining overall cost leadership and differentiation competitive advantages. These are the following EXCEPT:*
> Deriving benefits from highly focused and high technology markets
*A ______ can be defined as the total profits in an industry at all points along the industry’s value chain.*
> Profit pool
*All of the following are potential pitfalls of an integrated overall cost and differentiation strategy EXCEPT:*
> Targeting too large a market that causes unit costs to increase
*Which of the following is NOT one of the ways the Internet is lowering transaction costs?*
> Evaluating employee performance
*Dell Computer has an online ordering system that allows consumers to configure their own computers before Dell builds them. This capability is an example of:*
> Mass customization
*Which of the following methods of implementing a differentiation strategy has been greatly enhanced because of the Internet technologies?*
> Mass customization
*Which of the following phrases best completes this sentence: Because of the Internet, firms that use a focus strategy have new opportunities to:*
> Asses niche markets in a highly specialized fashion
*One of the reasons the Internet is eroding sustainable competitive advantages is:*
> Incumbent firms are entering market segments that they previously considered to be too small
*Which of the following statements about the introduction stage of the market life cycle is TRUE?*
> Products or services offered by pioneers may be perceived as differentiated simply because they are new
*In the ____ stage of the industry life cycle, the emphasis on product design is very high, the intensity of competition is low, and the market growth rate is low.*
> Introduction
*The growth stage of the industry life cycle is characterized by:*
> A growing trend to compete on the basis of price
*In the ____ stage of the industry life cycle, there are many segments, competition is very intense, and the emphasis on process design is high.*
> Growth
*In a given market, key technology no longer has patent protection, experience is not an advantage, and there is a growing need to compete on price. What stage of its life cycle is the market in?*
> Maturity
*A market that mainly competes on the basis of price and has stagnant growth is characteristic of what life cycle stage?*
> Maturity
*The size of pricing and differentiation advantages between competitors decreases in which stage of the market life cycle?*
> Maturity
*In the ___ stage of the industry life cycle, there are few segments, the emphasis on process design is low, and the major functional areas of concern are generally management and finance.*
> Decline
*The most likely time to pursue a harvest strategy is in a situation of:*
> Strong competitive advantage
*During the decline stage of the industry life cycle, ____ refers to obtaining as much profit as possible and requires that costs be decreased quickly.*
> Harvesting
*Research shows that the following are all strategies used by firms engaged in successful turnarounds EXCEPT:*
> Global expansion
*As markets mature:*
> There is increasing emphasis on efficiency
*Which of the following is most often true about mature markets:*
> Advantages that cannot be duplicated by other competitors are difficult to achieve
What is corporate level strategy?
A strategy that focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses. (company wide strategies)
What is diversification?
process of firms expanding their operations by entering new businesses
How does diversification create value?
*diversification should create synergy (working together) 1+1=3
Benefits of Related Diversification
-benefits derive from horizontal relationships
-economies of scope
-Gain market power
Economies of scope
Allow a business to save on cost by:
1. leveraging core competencies
2. Share related activities
3. enjoy greater revenues
Core competencies
-reflect the collective learning in organizations
-can lead to the creation of value & synergy if:
1. they create superior customer service
2. the value chain elements in separate businesses require similar skills
2. they are difficult for competitors to imitate or find substitutes
Sharing activities
Sharing tangible & value-creating activities can provide payoffs:
– Cost savings through elimination of jobs, facilities & related expenses, or economies of scale
– Revenue enhancements through increased differentiation & sales growth
Market power
Market power can lead to the creation of value and synergy through…
* Pooled negotiating power – Gaining greater bargaining power with suppliers & customers
* Vertical integration – becoming its own supplier or distributor through – Backward integration, Forward integration
Benefits of Unrelated Diversification
-benefits from vertical or hierarchical relationships
– parenting advantage
– restructuring
-portfolio management
Parenting advantage
-allows the corporate office to create value through management expertise & competent central fuctions
Asset restructuring- involves the sale of unproductive assets

Capital restructuring- involves changing the debt-equity mix, adding debt or equity

Management restructuring- involves changes in the top management team, organizational structure, & reporting relationships

Portfolio Management
Asset restructuring involves the sale of unproductive assets
Capital restructuring involves changing the debt-equity mix, adding debt or equity
Management restructuring involves changes in the top management team, organizational structure, & reporting relationships
Means of diversification
– mergers & acquisition
-strategic alliances
– joint ventures
– internal development
What are mergers?
involve a combination or consolidation of two firms to form a new legal entity
What are acquisitions?
involve one firm buying another either through stock purchase, cash or the issuance of debt
Advantages of mergers & acquisitions?
– Increase market power
– Overcome entry barriers
– Cost of new product development
– Increase speed to market
– Lower risk compared to developing new products
– Increase diversification
– Reshape firms competitive scope
– Learn and develop new capabilities
Limitations of mergers & acquisitions
– takeover premiums for acquisitions are typically very high
-competing firms can imitate advantages
-competing firms can copy synergies
-managers egos get in way of sound business decisions
– cultural issues may doom intended benefit
What are strategic alliances?
A cooperative relationship between two or more firms
What are joint ventures?
Represent a special case of alliances, wherein two (or more) firms contribute equity to form a new legal entity (Two or more companies create one company together. Always private companies
Strategic alliances & joint ventures limitations
-need for the proper partner:

>Partners should have complementary strengths
>Partner’s strengths should be unique
-Uniqueness should create synergies
-Synergies should be easily sustained & defended
>Partners must be compatible & willing to trust each other

Benefits of internal development
– no need to share the wealth w/ alliance partners
-No need to face difficulties associated with combining activities across the value chains
-No need to merge diverse corporate cultures
Limitations of internal development
– time consuming
-need to develop new capabilities
1. increase in international exchange, including trade in goods & services as well as exchange of money, ideas and information.

2. Growing similarity of laws, rules, norms, values, and ideas across countries.

Diamond of national advantage
Diamond of national advantage
Michael Porter’s study that concluded that there are four broad attributes of nations that individually, and as a system constitute the diamond of national advantage. These attributes jointly determine the playing field that each nation establishes & operates for its industries.
What are the four factors described in Porter’s diamond of national advantage?
1. Factor endowments
2. Demand conditions
3. Related & supporting industries
4. Firm strategy, structure and rivalry
Factor endowments
-Companies in advanced nations seeking competitive advantage over firms in other nations create many of the factors of production(land, labor, capital)
-EX: a country/industry dependent on scientific innovation must have a skilled human resource pool, the resource pool is not inherited its created through investment
-pool of resources is less important than the speed & efficiency with which these resources are deployed
-firm specific knowledge & skills created within a country that are rare, valuable, difficult to imitate and rapidly & efficiently deployed are the factors of production that ultimately lead to a nations competitive advantage
Demand conditions
-refers to the demand that consumers place on an industry for goods & services
-consumers who demand highly specific, sophisticated products & services force firms to create innovative, advanced products & services creating a challenge to a country’s industries
-response to challenge: improvements to existing goods & services
-conditions of consumer demand influence how firms view a market & in turn helps a nation’s industries to better anticipate future global demand conditions & proactively respond to product & service requirements
Related & supporting industries
-enable firms to manage inputs more effectively
-related industries create the probability that new companies will enter the market, increasing competition & forcing existing firms to become more competitive
Firm strategy, structure, and rivalry
-rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries
-this competitive rivalry in turn increases the efficiency with which firms develop, market & distribute products & services within the home country
-intense rivalry forces firms to look outside their national boundaries for new markets, setting up conditions necessary for global competitiveness
-domestic rivalry is the strongest indicator of global competitive success
-firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets
What are the motivations for international expansion?
1. increase market size
2. arbitrage opportunities
3. Growth rate of product
4. Location of Value chain activities
5. Reverse innovation
Increase Market size
Increase size of potential markets for a firm’s products and services
– multinational firms are intensifying their efforts to market their products & services to other countries
– expanding a firms global presence also automatically increases its scale of operations, providing it with a larger revenue & asset base
-economies of scale
Arbitrage opportunities
– an opportunity to profit by buying and selling the same good in different markets
– basically buying something from where it is cheap and selling it somewhere where it commands a higher price
– EX: Walmart
– Arbitrage can also be locating call center in India, manufacturing plants in China and R&D in Europe where the specific types of talented personnel may be available at the lowest price
Growth rate of product
-enhancing the growth rate of a product that is in its maturity stage in a firms home country but that has greater demand potential elsewhere
-EX: Proctor & gamble relocated its skin, cosmetics headquarters from Cincinnati to Singapore to be closer to the fast growing Asian market
Location of value chain activities
Reverse innovation
Past: multinational companies developed products for their rich home markets then tried to sell them in developing countries with minor adaptations

Now: companies have committed significant resources to developing products that meet the needs of developing nations, products that deliver adequate functionality at a fraction of the cost.

– these products have found considerable success in value segments in wealthy countries as well

What are the disadvantages of international expansion?
1. Political & economic risk
2. Currency risk
3. Management risk
Political risk
– forces such as social unrest, military turmoil, demonstrations, and even violent conflict and terrorism can pose serious threats
– absence of the RULE OF LAW: absence of rules or the lack of uniform enforcement of existing rules leads to what might often seem to be arbitrary and inconsistent decisions by government officials
Economic risk
– laws and the enforcement of laws, associated with the protection of intellectual property rights can be a major economic risk
-counterfeiting: direct form of theft of intellectual property rights (selling of trademarked goods without the consent of the trademark holder)
Currency risk
– potential threat to a firm’s operations in a country due to fluctuation in the local currency exchange rate
– even a small change in the exchange rate can result in a significant difference in the cost of production or net profit
US dollar appreciates against other currencies:
-US goods can be more expensive to consumers in foreign countries
-profits from abroad must be exchanged for dollars at a more expensive rate of exchange, reducing the amount of profit when measured in dollars
Management risks
-variety of forms: culture, customs, language, income levels, customer preferences, distribution systems etc
-cultural symbols can evoke deep feelings
-Ex: coca cola used the Acropolis in Athens in their coke bottles, Greeks became outraged as they see it as a “holy rock”
Two opposing forces that firms must deal with when they expand internationally.
Cost reduction & adaptation to local markets
Cost Reduction
Firms should standardize all of their products and services for all their worldwide markets, this would help a firm lower its overall costs by spreading investments over a large market

3 Key assumptions
1. customer needs & interest are becoming more homogeneous worldwide
2. people around the world are willing to sacrifice quality & product features for low prices
3. substantial economies of scale in production & marketing can be achieved through supplying global markets

Adaptation to local markets
-many companies adapt line to country preferences
-there are price sensitive segments but they are not increasing
-technological developments enable economies of scale without standardization
What are the four strategies that companies can use to compete in the global marketplace?
1. global strategy
2. International strategy
3. Transnational strategy
4. Multidomestic strategy
How should managers decide which corporate-level international strategy is most appropriate?
Depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets
Global Strategy
– Strategy based on firm’s centralization and control by the corporate office, with the primary emphasis on controlling costs and used in industries where the pressure for local adaptation is low and the pressure for lowering cost cost is high
– corp office strives to achieve a strong level of coordination and integration across the various businesses
– standardized products & services
-only few locations for manufacturing, R&D & mktg activities
– emphasizes economies of scale
-centralization of operations
Global Strategy – Advantages
1. strong integration across various businesses
2. standardization leads to higher economies of scale, which lowers costs
3. helps create uniform standards of quality throughout the world
Global Strategy – Disadvantages
1. limited ability to adapt to local markets
2. concentration of activities may increase dependence on a single facility
3. single locations may lead to higher tariffs and transportation costs
International Strategy
– strategy based on firms diffusion and adaptation of the parent companies knowledge & expertise to foreign markets, used in industries where the pressures for both local adaptation & lowering costs are low
– “orphan drug” industry, virtually no need to adapt their products to local markets
– country units are allowed to make minor adaptations to products and ideas coming from the head office
-have far less independence and autonomy compared to multidomestic
– McDonalds & Kellogs
International Strategy – Advantages
1. leverage and diffusion of a parents firms knowledge and core competencies
2. lower costs because of less need to tailor products and services
International Strategy – Disadvantages
1. limited ability to adapt to local markets
2. inability to take advantage of new ideas and innovations occurring in local markets
Transnational Strategy
– Strategy based on firms optimizing the trade-offs associated with efficiency, local adaptation and learning, used in industries where the pressures for both local adaptation and lowering cost are high
– seeks efficiency not for its own sake but as means to achieve global competitiveness
– recognizes the importance of local responsiveness but as a tool for flexibility in international operations
– innovations are regarded as an outcome of a larger process of organizational learning that includes contributions from everyone
Transnational Strategy – Advantages
1. ability to attain economies of scale
2. ability to adapt to local markets
3. ability to locate activities in optimal locations
4. ability to increase knowledge flows and learning
Transnational Strategy – Disadvantages
1. unique challenges in determining optimal locations of activities to ensure cost & quality
2. unique managerial challenges in fostering knowledge transfer
Multidomestic Strategy
A strategy based on firms differentiating their products and services to adapt to local markets, used in industries where the pressure for local adaptation is high and the pressure for lowering cost is low
– Decisions tend to be decentralized to permit the firm to tailor its products and respond rapidly to changes in demand
– enables firm to expand its market and to charge different prices in different markets
– Ex: green tea oreos in China
Multidomestic Strategy – Advantages
1. ability to adapt products and services to local market conditions
2. ability to detect potential opportunities for attractive niches in a given market, enhancing revenue
Multidomestic Strategy – Disadvantages
1. decreased ability to realize cost savings through scale economies
2. greater difficulty in transferring knowledge across countries
3. may lead to overadaptation as conditions change

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