Economies of scale reflects a situation where the cost of something declines when more is produced. With larger quantities, bargaining power increase, and there are opportunities for greater systems efficiency. Economies of scope reflects a cost saving when a company produces two or more goods (The Economist, 2008). For example, if McDonalds only produced Big Macs, it would be inefficient because there is not enough demand for those to keep the restaurant busy. By adding other products, the restaurant can become more efficient because it is working closer to capacity and there are always customers.
Transaction costs are the costs associated with a transaction. In some cases, there are fees and commissions that have to be paid in order to do something. Those costs do not add any value in themselves, but they are costs that are necessary to doing the transaction.
Economic Value Added (EVA) is basically the profit earned by the firm, less its cost of capital. This measure is used especially as basically a form of adjusting risk when comparing returns across different companies. The cost of capital reflects the risk of the company -- higher risk companies are supposed to have higher costs of capital, and are supposed to return better. So EVA is a way of looking at returns and incorporating risk into the measure.
Strategic alliances are alliances between businesses, usually ones that have some measure of competition with each other. This creates a situation where there is a trade-off between the benefit to the companies involved and the costs associated with the alliance. An example might be Apple using Samsung parts in the iPhone, or having iTunes for Windows. Real options reflect contingencies -- an option to do something (tangible) that arises from a future condition. Real options can be part of a strategic investment decision, but it difficult to price in such contingencies, other than estimating the odds of the option being exercised.
The balanced scorecard is a method by which the company evaluates its outputs on more than just financial measures. The BSC idea is that companies are a sum total of all outputs. The aspects of the BSC are financial, the customer, the business processes and the knowledge/innovation. By seeking excellence in all of these, a company can find the strategy that allows for the highest possible level of performance, where trade-offs between the output types are not necessary. Values are what the organization values -- maybe which elements of the scorecard are considered to be more important.
Generic strategies is a concept that seeks to organize business strategies. Porter argued that there are basically two that work -- cost leadership and differentiation. Some people feel that striking a balance can also work. These are divided into either mass market or niche (IFM, 2015). There are other conceptualizations of generic strategies. Imitation comes from one of those other frameworks, where a firm seeks to imitate an industry leader, and in that way skim some business from them, maybe by offering the imitation at a slight discount.
Segmentation is a means by which the different industries are understood. There are different bases by which segmentation can occur -- by product, by firm size, etc. Strategic groups are the groups of firms that exist in each segment. One example I have read talks about the automotive industry, where the type of car forms each segment, and then strategic groups help to understand which companies compete in each segment. Companies that overlap in many segments are close competitors (Subramaniam, 1999).
Vertical integration is the system by which the company owns either parts of its supply chain or its distribution network. An example would be the Apple stores or Tesla dealerships, as forwards vertical integration. An example of backwards vertical integration would be the hop farms that Anheuser-Busch owns. Vertical integration typically offers firms greater control over critical elements of the business, which can sometimes be advantageous.
Michael Porter (2008) described the five forces as the means by which companies earn profit. These are the bargaining power of buyers, the bargaining power of suppliers, the threat of substitutes, the threat of new entrants and the intensity of rivalry within the industry. Each dynamic plays a role in defining the ability of the company to set prices at...
Complements are seen almost as the sixth force, being the companies that sell goods or services that are complementary to the product. For example, some of Apple's pricing power relates to the massive selection of apps, relative to some other competitors (though Android is closing this gap).
Each of these concepts is a fundamental part of learning about management and strategy, so it is important to understand each, and the role that each plays in the formation and implementation of strategy.
Unit 1, Discussion Board 3
The concept of non-linear change is important to understand in management. A reliance on linear thinking is a cognitive bias, because quite frankly it is easier to think in linear terms. Using what has worked before or relying on neat and tidy linear extrapolations removes some of the complexity out of thinking and decision-making. The reality, however, is that the world is constantly changing and therefore there is at best only partial linearity. Thus, non-linear change is reality, and any manager worth his or her desk should accept the world for what it is -- nonlinear, constantly changing, and a place where tunnel vision, myopic thinking and a lack of willingness to address cognitive biases are all negative traits.
The strategic manager needs to understand and accept that there is a lot of ambiguity in the world. Obviously, certainty is easier to deal with, as decisions can be made quickly, and with clarity. But those are easy decisions, and anybody could make them. The role of a top level manager is to understand things that other people cannot understand, and to make decisions under conditions that challenge others. The top level manager should handle uncertainty, ambiguity and non-linearity better than the other people in the organization, in order to be superior at the role.
The chief executive officer is at that high level. The CEO is the head of the company, and the one most responsible for determining strategy. The CEO is often the chief architect of the mission and vision for the company. The best people in this role have the ability to understand how all the different pieces of the organization fit together, and how they interact with the external environment. That is the way that the best strategy will be formed, implemented and then adjusted. The best managers have this ability. So when a manager relies on linear thinking, that is a manager whose ceiling should be inherently limited. Such a manager will have a difficult time interpreting major changes in the environment, and will struggle to adjust. To manage at a high level means to be able to handle the nonlinear change that occurs, and fit that change within the vision and mission of the company, and then make the right adjustments to strategy.
The concept of non-linear change relates well to critical thinking, something that a manager must be able to do. A manager has to be able to recognize patterns and understand what they mean, but also to recognize when the patterns have been broken. Companies sometimes struggle when they fail to adjust to changing circumstances. There are actually tools by which managers can start to think more about non-linear change, such as simulation training, where managers are asked to think about outlier events and how those will affect the company. Many outlier events are fairly predictable, but managers still struggle. Consider what happened to Toyota after the 2011 tsunami. Its supply chain was concentrated in the affected region, and was therefore disrupted. This cost the company a lot of money because managers had not anticipated what might happen if there was a major earthquake and tsunami in that region -- in Japan, a country that is famously seismic. The ability to think in a non-linear manner helps managers handle the uncertainty and ambiguity of the world much better than they otherwise could.
Unit 1 Individual Project
Ford and GM have the same strategy -- they provide generic automobiles for the mass market. More or less, they try to have cost leadership and differentiation within that context, and succeed at neither, which is why both of these companies have struggled a lot in the past few decades since foreign competition entered the market. A better company to choose for this would have been Tesla, which has a very different strategy than these two Big Three companies, which are very similar to each other.
Likewise, Apple and Samsung are pretty similar where they compete directly. They both are differentiated players in smartphones, having the two most technologically-advanced phones on the market, and pricing accordingly. Overall, they are differentiated on all products, but they compete in different products from each other in many…
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