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U of A WCOB 3016 - Exam 2 Study Guide

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WCOB 3016 1st EditionExam # 2 Study Guide Chapters: 5 - 7Chapter 5: Competitive Rivalry and Competitive DynamicsI. Competitive Dynamics: refer to all competitive behaviors – the total set of actions and responses taken by all firms competing within a marketa. Competitors: firms operating in the same market, offering similar products, and targeting similar customersb. Competitive Rivalry: the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an advantageous marketpositionc. Competitive Behavior: the set of competitive responses the firm takes to build or defend its competitive advantages and to improve its market positionII. Competitive Rivalrya. Strategic Vs. Tacticali. Strategic Action or Strategic Response: market based move that involves asignificant commitment of organizational resources and is difficult to implement or reverseii. Tactical Action or a Tactical Response: a market based move that is taken to fine tune a strategy1. Usually involves fewer resources2. Is relatively easy to implement and reverseb. Competitive Dynamics vs. Rivalryi. Competitive Dynamics: ongoing actions and responses taking place between all firms competing within a market for advantageous positions1. Market speed (slow cycle, fast cycle, standard cycle)2. Effects of market speed on actions and responses of all competitors in the marketii. Competitive Rivalry: ongoing actions and responses taking place between an individual firm and its competitors for an advantageous market position1. Market commonality and resource similarity2. Awareness, Motivation and ability3. First mover incentives, size, and qualityIII. Competitive Dynamicsa. Cyclesi. Slow Cycle: competitive advantage shielded and imitation costlyii. Fast Cycle: competitive advantage not shielded and imitation is not expensiveiii. Standard Cycle: competitive advantage moderately shielded and imitationis moderately costlyChapter 6: Corporate StrategyI. Corporate Strategy: to gain competitive advantage by selecting and managing a group of different businesses competing in different product marketsII. Levels of Diversificationa. Low Leveli. Where 95% or more of revenue comes from a single businessii. EX: Southwest Airlines revenue comes from passenger and cargo servicesb. Dominant Businessi. 70%-95% of revenue comes from a single businessii. Not as successful profit wiseiii. EX: Kellogg’s revenue comes from primarily breakfast and snack foodsc. Moderate to High Leveli. Related Constrained1. Where less than 70% of revenue comes from the dominant businesses2. All businesses share product, technological and distribution linkages3. EX: Darden owns Red Lobster, Olive Garden, etc. Each of their businesses have their own marketing even though they are ownedby the same peopleii. Related Linked1. Less than 70% of revenue comes from the dominant businesses2. There are limited links between businesses3. EX: GE used to be in the small appliance business, but it sold to sunbeam. Then it created GE finance. iii. Both of these are successful profit wised. Very Highi. Unrelated1. Less than 70% of revenues comes from the dominant business2. There are no common links between businesses3. Not as successful profit wise4. EX: United Technologies has many, unrelated businesses that it ownsIII. Reasons for Diversificationa. Value-Creationi. Creating value for your company through economies of scope, market power, and financial economiesii. Strategic Motives1. Economies of Scope (Related Diversification): Sharing activities and transferring core competencies. These activities make you competitive2. Market Power (Related Diversification): blocking competitors through multipoint competition and using vertical integration3. Financial Economies (Unrelated): efficient internal capital allocation and business restructuring.b. Value-Neutrali. To match and neutralize your competitor’s market power through tangible and intangible resources, tax laws, antitrust laws, etc.c. Value-Reducingi. Reducing managerial risk of losing their job if a diversified company fails.IV. Related Diversificationa. A firm creates value by building upon or extending its resources, capabilities, and core competenciesb. Economies of Scope: cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businessi. Think of it as brainpower, ideology, or thinkingii. Value is created through this through:1. Operational Relatedness: sharing activities2. Corporate Relatedness: transferring skills or corporate core competencies among unitsa. The difference between these is based on how the resources are jointly used to create economies of scopec. Sharing Activitiesi. Operational relatedness1. Created by sharing either a primary activity such as inventory delivery systems, or a support activity such as purchasing2. Activity sharing may create risk because business unit ties create links between outcomesd. Transferring Corporate Competenciesi. Corporate Relatedness: using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise1. Pretty much how you take the expertise and transfer that to the part of the business you acquirede. Market Poweri. Market power exists when a firm can:1. Sell its products above the existing competitive level2. Reduce the costs of its primary and support activities below the competitive levelii. Multipoint Competition: two or more diversified firms simultaneously compete in the same product areas or geographic markets1. Sometimes multipoint competition drives strategyiii. Vertical Integration1. Backward Integration: when a firm produces its own inputs2. Forward Integration: when a firm operates its own distribution system for delivering its outputsf. Complexityi. A business is simultaneously in operational relatedness and corporate relatedness1. Must manage two sources of knowledgea. Operational forms of economies of scopeb. Corporate forms of economies of scopeV. Unrelated Diversification (Value Creating)a. Efficient Internal Capital Market Allocationi. Corporate office distributes capital to business divisions to create value for overall company1. Corporate office gains access to information about those businesses’ actual and prospective performanceii. Conglomerates have a fairly short life cycle because financial economies are more easily duplicated by competitors


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