Strategic Management Concepts Quiz

Introduction to Strategy

• Strategic management is the integrative management field combining analysis, formulation, and implementation to achieve competitive advantage.
• Companies succeed or fail based on their strategic choices.
• Strategy is a set of integrated actions to gain and maintain superior performance relative to competitors.

Competitive Advantage

• Competitive advantage is superior performance relative to other competitors or the industry average, always expressed relative to a baseline.
• Sustainable competitive advantage consistently outperforms competitors over time.
• Competitive parity is when two or more firms perform at the same level.
• Differentiation strategy provides goods or services consumers value more than competitors, at a similar cost.
• Cost leadership strategy delivers goods or services similar to those of competitors, but at a lower cost.
• Examples are Nordstrom and Walmart, despite being in the same industry, target different market segments with different strategies.

Crafting and Implementing Strategy

• Strategic management starts with a precise diagnosis of the competitive challenge.
• This includes assessing the firm's external and internal environments.
• Guiding policies guide corporate, business, and functional strategies; they are long-term commitments, embedded in fundamental organisational changes.
• Coherent actions to implement the policies ensure strategic success.

The AFI Strategy Framework

• Analysis, formulation, and implementation (AFI) are crucial and interdependent components.
• External analysis identifies potential to gain competitive advantage; internal analysis details strengths, resources, and competences.
• Formulation includes business and corporate strategies in the chosen markets and geographic area.
• Implementation translates the strategy into action; good governance, ethical considerations, and firm model design are needed at this stage.

Stakeholders

• Stakeholder strategy considers all stakeholders' contributions
• Successful companies value their employees, communities, and all internal and external parties
• Stakeholder management leads to increased cooperation.
• Satisfied stakeholders are more compliant and cooperative.
• A firm with a broad-based approach to stakeholders is more adaptable to changes in its environment.
• Understanding and responding to diverse stakeholder interests creates firm value and sustainability.

The Red Queen Effect

• Refers to the situation where companies constantly run faster to remain in the same place (relative position), due to competitive copy-catting.
• If companies only copy competitors, relative positions may not change.

Decision Analysis

• Decision-making involves probabilities, as certainty in business is impossible.
• Probabilities indicate the likelihood of an event.
• Cumulative probabilities sum the probabilities for a range of possible outcomes.
• Qualitative and quantitative tools help determine the probability of outcomes.

Understanding Distributions

• Random variables: variables that take on different values with assigned probabilities
• Probability distributions: indicate the spread of possible values of a variable
• Uniform distributions: all values have an equal probability
• Normal distributions: values cluster around a central value, with a symmetrical bell shape

Conditional and Joint Probabilities

• Conditional probability: the likelihood of an event given that another event has already occurred
• Joint probability: the probability of two events occurring simultaneously
• Understanding probabilities aids in decision-making in uncertain environments.

Value Creation

• Value creation occurs when companies provide products or services at an affordable price, in addition to controlling costs.
• Firms create value through effective strategic positioning
• Value creation and cost are inversely related
• Firms use a combination of value creation and cost reduction to increase profitability.

Break-even Analysis

• Break-even point (BEP) analysis examines the relationship between volume produced and operating income.
• It models how many units a firm needs to sell to cover total costs.
• Understanding the BEP aids in setting pricing strategies and determining profitability based on volume.
• Cost structures can be rigid or flexible, impacting profit potential/risk
• Firm's ability to manage costs and revenues determines profits

Determinants of Operating Income

• Structural, industry, and price level factors influence the operating income of a firm.
• Variable costs are directly related to production volume, while fixed costs remain constant regardless of production level.
• Profitability and risk are directly correlated to the balance between fixed and variable costs; the more flexible the cost structure the lower the risk.

External Analysis

• Macro-environmental factors (political, economic, sociocultural, etc.) affect firms.
• PESTEL framework helps analyse broad external factors, while Porter's Five Forces model assesses industry attractiveness.
• Competition analysis from these frameworks can identify opportunities and threats affecting a firm.

Internal Analysis

• Resource-based view (RBV) focuses on firm-specific resources, capabilities, and competencies.
• The VRIO framework (Value, Rarity, Imitability, Organisation) helps assess resources' potential to create sustainable competitive advantages.

Corporate Strategy

• Corporate strategy addresses where to compete.
• Related diversification leverages existing competencies in new markets.
• Unrelated diversification (conglomerates) combines unrelated business units.

Diversification

• Diversification is increasing the product or service offerings or geographic markets a company serves, and it affects a firm's performance relative to its size and strategy.

Resource Based View

• The firm has unique resources and capabilities forming core competence.
• Resource heterogeneity - resources differ across firms and are "sticky", leading to a sustained advantage
• Resource immobility - resources aren't easily transferred between firms.
• It results from a firm’s ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources to generate value.
• Understanding resource-based competitive advantages is key in strategic decision-making

Strategic Activity Systems

• Activities and their interaction help sustain a competitive advantage.
• Internal value creating actions are interconnected to form a complex system.
• By carefully understanding firm value chains, and interlinked activities, companies can use them to build and leverage core competencies.

Isolating Mechanisms

• Isolating mechanisms create barriers to imitation, enabling firms to sustain a competitive advantage.
• Causal ambiguity, social complexity, and path dependence contribute to isolating mechanisms.

Dynamic Capabilities

• They are the ability to create, deploy, modify, reconfigure, upgrade, and leverage resources to gain a competitive advantage
• Dynamic capabilities are essential for firms responding effectively to change in their environments
• A firm must adapt and innovate in response to change in business environments
• Dynamic capabilities are especially important for firms operating in rapidly evolving markets.

Strategic Group

• Strategic group refers to firms in an industry following similar strategies.
• Firms in the same strategic group are more intense rivals to each other, while firms in different groups are less direct competitors.
• Understanding strategic groups enables better understanding of competitive forces in the focal market.

Blue Ocean Strategy

• Blue ocean strategy creates new market spaces and allows firms to create more value for customers, rather than competing in existing markets (red oceans) by creating new markets and products.
• Value innovation involves providing a more competitively attractive solution to customers that goes beyond meeting their needs or performing existing operations in new ways.
• It seeks to create higher value for customers while simultaneously lowering costs; it creates demand

This quiz explores key concepts in strategic management, including conditional expectation, joint probability, and the impact of competitive forces on industry profitability. Test your understanding of strategic actions and their definitions in a competitive environment.