Chapter 1: What is Strategy and the Strategic Management Process?

question

Strategy
answer

defined as theory about how to gain competitive advantages.
question

Good Strategy
answer

strategy that actually generates such advantages.
question

Disney’s Theory
answer

how to gain a competitive advantage in the apps industry is to leverage characters from its movie business.
question

Rovio’s Theory
answer

to develop entirely new content for its apps
question

Strategic Management Process
answer

sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy; that is, a strategy that generates competitive advantages. 1) mission 2) objectives 3) external/internal analysis 4) strategic choice 5) strategic implementation 6) competitive advantage
question

Mission
answer

a firm’s long-term purpose. Define both what a firm aspires to be in the long run and what it wants to avoid in the meantime.
question

Mission Statements
answer

the form that missions are often written down in
question

Visionary Firms
answer

firms whose mission is central to all they do have enjoyed long periods of high performance.
question

Objectives
answer

specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.
question

High-quality Objectives
answer

tightly connected to elements of a firm’s mission and are relatively easy to measure and track over time.
question

Low-quality Objectives
answer

either do not exist or are difficult to measure or difficult to track over time. Can’t be used by management to evaluate how well a mission is being realized.
question

External Analysis
answer

A firm identifies the critical threats and opportunities in its competitive environment. It also examines how competition in this environment is likely to evolve and what implications that evolution has for the threats and opportunities a firm is facing.
question

Internal Analysis
answer

helps a firm identify its organizational strengths and weaknesses. It also helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage and which are less likely to be sources of such advantages.
question

Business-level Strategies
answer

what actions firms take to gain competitive advantages in a single market or industry. Cost Leadership & Product Differentiation
question

Corporate-level Strategies
answer

actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously. Vertical Integration Strategies, Diversification Strategies, Strategic Alliance Strategies, Merger & Acquisition Strategies, & Global Strategies
question

Strategy implementation
answer

occurs when a firm adopts organizational policies and practices are particularly important in implementing a strategy: a firm’s formal organizational structure, its formal and informal management control systems, and its employee compensation policies.
question

Competitive advantage
answer

a firm has this when it is able to create more economic value than rival firms.
question

Economic Value
answer

simply the difference between the perceived benefits gained by a customer that purchases a firm’s products or services and the full economic cost of these products or services.
question

Temporary Competitive Advantage
answer

a competitive advantage that lasts for a very short period of time
question

Sustained Competitive Advantage
answer

lasts much longer than temporary competitive advantage.
question

Competitive Parity
answer

what firms experience when they create the same economic value as their rivals
question

Competitive Disadvantage
answer

what firms have that generate less economic value than their rivals
question

Competitive Advantage
answer

When a firm creates more economic value than its rivals
question

Temporary Competitive Advantages
answer

Competitive advantages that last a short time
question

Sustained Competitive Advantages
answer

Competitive advantages that last a long time
question

Temporary Competitive Disadvantages
answer

Competitive disadvantages that last a short time
question

Sustained Competitive Disadvantages
answer

Competitive disadvantages that last
question

Accounting Performance
answer

Measure of its competitive advantage calculated by using information from a firm’s published profit and loss and balance sheet statements.
question

Accounting Ratios
answer

simply numbers taken from a firm’s financial statements that are manipulated in ways that describe various aspects of a firm’s performance.
question

Business Model
answer

That set of activities that a firm engages in to create and appropriate economic value
question

Business Model Canvas
answer

key partners, cost structure, key activities, key resources, value propositions, revenue streams, customer relationship, channels, customer segments
question

Value Propositions
answer

statements about how it will attempt to create value for its customers, customer problems it is trying to solve through its business operations, which customers it will focus on, and so forth.
question

ROA
answer

profit after taxes / total assets A measure of return on total investment in a firm. Larger is usually better.
question

ROE
answer

profit after taxes / total stockholder’s equity A measure of return on total equity investment in a firm. Larger is usually better.
question

Gross Profit Margin
answer

sales-cost of goods sold / sales A measure of sales available to cover operating expenses and still generate a profit. Larger is usually better.
question

Earnings Per Share (EPS)
answer

profits (after taxes) – preferred stock dividends / number of shares of common stock outstanding A measure of profit available to owners of common stock. Larger is usually better
question

Price Earnings Ratio (p/e)
answer

current market price/share / after-tax earnings/share A measure of anticipated firm performance — a high p/e ratio rands to indicate that the stock market anticipates strong future performance. Larger is usually better.
question

Cash Flow Per Share
answer

after-tax profit + depreciation / number of common shares stock outstanding A measure of funds available to fund activities above current level of costs. Larger is usually better.
question

Profitability Ratios
answer

Ratios with some measure of profit in the numerator and some measure of firms size or assets in the denominator 1. ROA 2. ROE 3. Gross profit margin 4. EPS 5. p/e 6. Cash flow per share
question

Liquidity Ratios
answer

ratios that focus on the ability of a firm to meet its short-term financial obligations 1. Current ratio 2. Quick ratio
question

Current Ratio
answer

current assets / current liabilities A measure of the ability of a firm to cover its current liabilities with assets that can be converted into cash in the short term. Recommended in the range of 2 to 3.
question

Quick Ratio
answer

current assets – inventory / current liabilities A measure of the ability of a firm to meet its short-term obligations without selling off its current inventory. A ratio of 1 is thought to be acceptable in many industries
question

Leverage Ratios
answer

ratios that focus on the level of a firm’s financial flexibility, including its ability to obtain more debt 1. Debt to assets 2. Debt to equity 3. Times interest earned
question

Debt To Assets
answer

total debt / total equity A measure of the extent to which debt has financed a firm’s business activities. Generally recommended less than 1.
question

Debt To Equity
answer

total debt / total equity A measure of the use of debt versus equity to finance a firm’s business activities. Generally recommended less than 1.
question

Times Interest Earned
answer

profit before interest and taxes / total interest charges A measure of how much a firm’s profits can decline and still meet its interest obligations. Should be well above 1
question

Activity Ratios
answer

ratios that focus on the level of activity in a firm’s business 1. Inventory Turnover 2. Accounts receivable turnover 3. average collection period
question

Inventory Turnover
answer

sales / inventory A measure of the speed with which a firm’s inventory is turning over
question

Accounts Receivable Turnover
answer

annual credit sales / accounts receivable A measure of the average time it takes a firm to collect on credit sales
question

Average Collection Period
answer

accounts receivable / average daily sales A measure of the time it takes a firm to receive payment after a sale has been made
question

Above Average Accounting Performance
answer

when its performance is greater than the industry average. Such firms typically have competitive advantages, sustained or otherwise.
question

Average Accounting Performance
answer

when its performance is equal to the industry average. These firms generally enjoy only competitive parity.
question

Below Average Accounting Performance
answer

when its performance is less than the industry average. These firms generally experience competitive disadvantages
question

Cost Of Capital
answer

the rate of return that a firm promises to pay its suppliers of capital to induce them to invest in the firm.
question

Economic Measures Of Competitive Advantage
answer

compare a firm’s level of return to its cost of capital instead of to the average level of return in the industry.
question

Debt
answer

capital from banks and bondholders
question

equity
answer

capital from individuals and institutions that purchase a firm’s stock.
question

Cost Of Debt
answer

equal to the interest that a firm must promise its equity holders
question

Cost Of Equity
answer

equal to the rate of return a firm must promise its equity holders in order to induce these individuals and institutions to invest in a firm.
question

Weighted Average Cost Of Capital (WACC)
answer

simply the percentage of a firm’s total capital, which is debt times the cost of equity.
question

Above Normal Economic Performance
answer

will be able to use its access to cheap capital to grow and expand its business.
question

Normal Economic Performance
answer

a firm that earns its cost of capital
question

Below Normal Economic Performance
answer

implies that a firm’s debt and equity holders will be looking for alternative ways to invest their money, someplace where they can earn at least what they expect to earn; that is, normal economic performance.
question

Privately Held
answer

if it has stock that is not traded on public stock markets or if it is a division of a larger company.
question

Emergent Strategies
answer

Theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshape once they are initially implemented.
question

Unrealized Strategy
answer

an intended strategy a firm does not actually implement.
question

Intended Strategy
answer

a strategy a firm thought it was going to pursue.
question

Deliberate Strategy
answer

an intended strategy a firm actually implements.
question

Realized Strategy
answer

the strategy a firm is actually pursuing.

Get instant access to
all materials

Become a Member