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General Resources

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Glossary [complete]

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Absolute cost advantage   A cost advantage that is enjoyed by incumbents in an industry and that new entrants cannot expect to match.

Acquisition and restructuring strategy   A strategy in which a company acquires inefficient and poorly managed enterprises and creates value by putting a superior financial governance structure in place in these acquired companies.

Acquisition   A company's use of capital such as stock, debt, or cash to purchase another company.

Acquisition   The purchase of one company by another.

Agency problem   A problem that arises when managers pursue strategies that are not in the interests of stockholders.

Agency relationship   A relationship that arises whenever one party delegates decision-making authority or control over resources to another.

Agency theory   A theory dealing with the problems that can arise in a business relationship when one person delegates decision-making authority to another.

Agent   A person to whom authority is delegated by a principal.

Anticompetitive behavior   Actions aimed at harming actual or potential competitors, most often by using monopoly power, thereby enhancing the long-run prospects of the firm.

Autonomous action   Action taken by lower-level managers who on their own initiative formulate new strategies and work to persuade top-level managers to alter the strategic priorities of a company.






Bargaining power of buyers   The ability of buyers to bargain down prices charged by companies in the industry or to raise the costs of companies in the industry by demanding better product quality and service.

Bargaining power of suppliers   The ability of suppliers to raise the price of inputs or to raise the costs of the industry in other ways.

Barriers to entry   Factors that make it costly for companies to enter an industry.

Barriers to imitation   Factors that make it difficult for a competitor to copy a company's distinctive competencies.

Behavior control   A system of control based on the establishment of a comprehensive system of rules and procedures to direct the actions or behavior of divisions, functions, and individuals.

Brand loyalty   Preference of consumers for the products of established companies.

Broad differentiator   A company that offers a product designed for each market niche.

Business ethics   Accepted principles of right or wrong governing the conduct of businesspeople.

Business process   Any business activity, such as order processing, inventory control, or product design, that is vital to delivering goods and services to customers quickly or that promotes high quality or low costs.

Business unit   A self-contained division (with its own functions---for example, finance, purchasing, production, and marketing departments) that provides a product or service for a particular market.

Business-level strategy   The plan of action strategic managers adopt to use a company's resources and distinctive competencies to gain a competitive advantage.






Capabilities   A company's skills at coordinating its resources and putting them to productive use.

Capital productivity   Output per unit of invested capital.

Code of ethics   A formal statement of the ethical principles a business adheres to.

Cognitive biases   Systematic errors in human decision making that arise from the way people process information.

Company infrastructure   The companywide context within which all the other value creation activities take place: the organizational structure, control systems, and company culture.

Competitive advantage   A company is said to have a competitive advantage over its rivals when its profitability is greater than the average profitability for all firms in its industry.

Competitors   Enterprises that serve the same basic customer needs.

Concentration on a single industry   The strategy a company adopts when it focuses its resources and capabilities on competing successfully within a particular product market.

Consolidated industry   An industry dominated by a small number of large companies or, in extreme cases, by just one company, which are in a position to determine industry prices.

Corporate governance   The mechanisms that exist to ensure that managers pursue strategies in the interests of an important stakeholder group, the shareholders.

Corruption   Arises in a business context when managers pay bribes to gain access to lucrative business contracts.

Cost-leadership strategy   A strategy of trying to outperform competitors by doing everything possible to produce goods or services at a cost lower than they do.

Customer defection rate   The percentage of a company's customers who defect every year to competitors.

Customer needs   Desires, wants, or cravings that can be satisfied by means of the characteristics of a product or service.

Customer response time   The time that it takes for a good to be delivered or a service to be performed.

Customization   Varying the features of a good or service to tailor it to the unique needs or tastes of groups of customers or, in the extreme case, of individual customers.






Declining industry   An industry wherein primary demand is declining.

Devil's advocacy   A technique in which one member of a decision-making group acts as a devil's advocate, bringing out all the considerations that might make the proposal unacceptable.

Dialectic inquiry   The generation of a plan (a thesis) and a counter-plan (an antithesis) that reflect plausible but conflicting courses of action.

Differentiation strategy   A strategy of trying to achieve a competitive advantage by creating a product that is perceived by customers as unique in some important way.

Differentiation   The way in which a company allocates people and resources to organizational tasks and divides them into functions and divisions so as to create value.

Distinctive competency   A unique, firm-specific strength that enables a company to better differentiate its products and/or achieve substantially lower costs than its rivals and thus gain a competitive advantage.

Diversification discount   The phenomenon that shares of stock in highly diversified companies are often assigned a lower market valuation than shares of stock in less diversified companies.

Diversification   Entering into one or more industries that are distinct or different from a company's core or original industry to find ways to use the company's distinctive competencies to increase the value to customers of the products it offers in those industries.

Diversified company   A company that operates in two or more industries to find ways to increase long-run profitability.

Divestment strategy   A strategy in which a company sells off its business assets and resources to other companies.

Divestment   Selling a business unit to the highest bidder.






Economies of scale   Reductions in unit costs attributed to a larger output.

Efficiency   The quantity of inputs that it takes to produce a given output (that is, efficiency = outputs/inputs).

Embryonic industry   An industry that is just beginning to develop.

Emergent strategies   Strategies that "emerge" in the absence of planning.

Employee productivity   Output per employee.

Environmental degradation   Occurs when a firm takes actions that directly or directly result in pollution or other forms of environmental harm.

Escalating commitment   Occurs when decision makers, having already committed significant resources to a project, commit even more resources if they receive feedback that the project is failing.

Ethical dilemmas   Situations where there is no agreement over exactly what the accepted principles of right and wrong are, or where none of the available alternatives seems ethically acceptable.

Ethics   Accepted principles of right or wrong that govern the conduct of a person, the behavior of members of a profession, or the actions of an organization.

Exit barriers   The economic, strategic, and emotional factors that prevent companies from leaving an industry.

External stakeholders   Individuals and groups outside the company that have some claim on the company.






Fixed costs   Costs that must be borne before the firm makes a single sale,

Flat structure   A structure with few hierarchical levels and a relatively wide span of control.

Flexible manufacturing technology   A range of manufacturing technologies designed to reduce setup times for complex equipment, increase the use of individual machines through better scheduling, and improve quality control at all stages of the manufacturing process. Also known as lean production.

Focus strategy   A strategy of serving the needs of one or a few customer groups or segments.

Fragmented industry   An industry that consists of a large number of small or medium-sized companies, none of which is in a position to determine industry prices.

Franchising   A specialized form of licensing in which the franchiser sells the franchisee intangible property (normally a trademark) and insists that the franchisee agree to abide by strict rules about how it does business.

Functional managers   Managers responsible for supervising a particular function---that is, a task, activity, or operation, such as accounting, marketing, R&D, information technology, or logistics.

Functional structure   A structure in which people are grouped on the basis of their common expertise and experience or because they use the same resources.






General managers   Managers who bear responsibility for the overall performance of the company or for that of one of its major self-contained subunits or divisions.

Global standardization strategy   A strategy that focuses on increasing profitability by reaping the cost reductions derived from economies of scale and location economies.

Goal   A precise and measurable desired future state that a company attempts to realize.

Governance mechanisms   Mechanisms that principals put in place to align incentives between principals and agents and to monitor and control agents.

Growth industry   An industry where demand is expanding as first-time consumers enter the market.






Harvest strategy   A strategy that optimizes cash flow.

Harvest strategy   The halting of investment in a business unit to maximize short-to-medium-term cash flow from that unit.

Heavyweight project manager   A project manager who has high status within the organization and the power and authority required to get the financial and human resources that a project team needs to succeed.

Horizontal differentiation   The process by which strategic managers choose how to divide people and tasks into functions and divisions to increase their ability to create value.

Horizontal integration   Acquiring or merging with industry competitors to achieve the competitive advantages that come with large size.






Illusion of control   The tendency to overestimate one's ability to control events.

Industry   A group of companies offering products or services that are close substitutes for each other---that is, products or services that satisfy the same basic customer needs.

Information asymmetry   A situation in which one party to an exchange has more information about the exchange than the other party.

Information manipulation   Occurs when managers use their control over corporate data to distort or hide information in order to enhance their own financial situation or the competitive position of the firm.

Innovation   The creation of new products or processes.

Intangible resources   Nonphysical entities that are the creation of managers and other employees, such as brand names, the reputation of the company, the knowledge that employees have gained through experience, and the intellectual property of the company, including that protected through patents, copyrights, and trademarks.

Integration   The means a company uses to coordinate people, functions, and divisions to accomplish organizational tasks.

Internal new venture   A company's creation of the value chain functions necessary to start a new business from scratch.

Internal stakeholders   Stockholders and employees, including executive officers, other managers, and board members.

International licensing   An arrangement whereby a foreign licensee buys the rights to produce a company's product in the licensee's country for a negotiated fee.

International strategy   Companies pursuing an international strategy centralize product development functions such as R&D at home. They tend to establish manufacturing and marketing functions in each major country or geographic region in which they do business. Although they may undertake some local customization of product offerings and marketing strategy, this tends to be limited in scope.






Joint venture   A formal type of strategic alliance in which two companies jointly create a new, separate company to enter a new product market or industry.

Joint venture   A separate corporate entity in which two or more companies have an ownership stake.






Leadership strategy   A strategy through which a company seeks to become the dominant player in a declining industry.

Lean production   A range of manufacturing technologies designed to reduce setup times for complex equipment, increase the use of individual machines through better scheduling, and improve quality control at all stages of the manufacturing process. Also known as flexible manufacturing technology.

Learning effects   Cost savings that come from learning by doing.

Liquidation strategy   The shutting down of the operations of a business unit and the sale of its assets.

Localization strategy   A strategy that focuses on increasing profitability by customizing the company's goods or services so that they provide a good match to tastes and preferences in different national markets.

Location economies   The economic benefits that arise from performing a value creation activity in the location optimal for that activity, wherever in the world that might be (transportation costs and trade barriers permitting).






Macroenvironment   The broader economic, global, technological, demographic, social, and political context in which an industry is embedded.

Management buyout (MBO)   The sale of a business unit to its current management,

Market development   A strategy involving a search for new market segments, and therefore new uses, for a company's products.

Market penetration   A strategy in which a company concentrates on expanding market share in its existing product markets

Market segmentation   The way a company decides to group customers based on important differences in their needs or preferences, to gain a competitive advantage,

Marketing strategy   The position that a company takes with regard to pricing, promotion, advertising, product design, and distribution.

Mass customization   The ability of companies to use flexible manufacturing technology to customize output at costs normally associated with mass production.

Mature industry   An industry where the market is saturated, demand is limited to replacement demand, and growth is slow.

Merger   An agreement between two companies to pool their operations and create a new business entity.

Mission   What it is that the company exists to do.

Mobility barriers   Within-industry factors that inhibit the movement of companies between strategic groups.

Multidivisional company   A company that competes in several different businesses and has created a separate, self-contained division to manage each of them.






Niche strategy   The strategy of focusing on pockets of demand that are declining more slowly than demand in the industry as a whole.






Operating budget   A blueprint that states how managers intend to use organizational resources to achieve organizational goals most efficiently.

Operating responsibility   In the multidivisional structure, the responsibility of divisional managers for the day-to-day operations of their divisions.

Opportunistic exploitation   Occurs when the managers of a firm seek to unilaterally rewrite the terms of a contract with suppliers, buyers, or complement providers in a way that is more favorable to the firm, often using their power to force the revision through.

Opportunities   Opportunities arise when a company can take advantage of conditions in its environment to formulate and implement strategies that enable it to become more profitable.

Organizational control   The process by which managers monitor the ongoing activities of an organization and its members to evaluate whether activities are being performed efficiently and effectively.

Organizational culture   The set of values, norms, and standards that control how employees work to achieve an organization's mission and goals.

Organizational culture   The specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization.

Organizational design   The process through which managers select the combination of organizational structure and control systems that they believe will enable the company to create and sustain a competitive advantage.

Organizational norms   Unwritten guidelines or expectations that prescribe the kinds of behavior employees should adopt in particular situations and regulate the way they behave.

Organizational values   Beliefs and ideas about what kinds of goals members of an organization should pursue and what behaviors they should use to achieve these goals.

Output control   A system of control in which strategic managers estimate or forecast appropriate performance goals for each division, department, and employee and then measure actual performance relative to these goals.






Positioning strategy   The specific set of options a company adopts for a product on four main dimensions of marketing: price, distribution, promotion and advertising, and product features.

Potential competitors   Companies that are not currently competing in an industry but have the capability to do so if they choose.

Price leadership   The process by which one company informally takes the responsibility for setting industry prices.

Price signaling   The process by which companies increase or decrease product prices to convey their competitive intentions to other companies.

Primary activities   Activities related to the design, creation, and delivery of the product, its marketing, and its support and after-sale service.

Principal   A person delegating authority to an agent, who acts on the principal's behalf.

Principle of the minimum chain of command   The principle that managers should choose a hierarchy with the minimum number of levels of authority necessary to achieve its strategy.

Prior hypothesis bias   A cognitive bias that occurs when decision makers who have strong prior beliefs tend to make decisions on the basis of these beliefs, even when presented with evidence that their beliefs are wrong.

Process innovation   The development of a new process for producing products and delivering them to customers.

Product bundling   The strategy of offering customers the opportunity to buy a complete range of products at a single, combined price.

Product development   A strategy involving the constant creation of new or improved products to replace existing ones,

Product differentiation   The process of creating a competitive advantage by designing goods or services to satisfy customer needs.

Product innovation   The development of products that are new to the world or have attributes superior to those of existing products.

Product proliferation   A strategy in which leading companies in an industry all make a product in each market segment or niche and compete head-to-head for customers.

Production   The creation of a good or service.

Profitability   The return that a company makes on the capital invested in the enterprise.






Reasoning by analogy   The use of simple analogies to make sense out of complex problems.

Reengineering   A process whereby, in their effort to boost company performance, managers focus not on the company's functional activities but on the business processes underlying its value creation operations.

Related diversification   The strategy of operating a business unit in a new industry that is related to a company's existing business units through some commonality in their value chains.

Representativeness   A tendency to generalize from a small sample or even a single vivid anecdote.

Research and development (R&D)   The design of products and production processes.

Resources   Financial, physical, social or human, technological, and organizational factors that allow a company to create value for its customers. Company resources can be divided into two types: tangible and intangible resources.

Risk capital   Equity capital for which there is no guarantee that stockholders will ever recoup their investment or earn a decent return.

Rivalry   The competitive struggle between companies in an industry to gain market share from each other.






Scenario planning   Formulating plans that are based on "what if" scenarios about the future.

Self-Dealing   Occurs when managers find a way to feather their own nests with corporate monies.

Self-managing team   A team wherein members coordinate their own activities, which might include making their own decisions about hiring, training, work, and rewards.

Shakeout stage   A stage of industry evolution where demand growth goes down, competition intensifies, and weaker competitors exit the industry.

Span of control   The number of subordinates a manager directly manages.

Specialized asset   A value creation tool that is designed to perform a specific set of activities and whose value creation potential is significantly lower in its next best use.

Spinoff   The sale of a business unit to another company or to independent investors.

Stakeholders   Individuals or groups with an interest, claim, or stake in the company, in what it does, and in how well it performs.

Standardization   The degree to which a company specifies how decisions are to be made so that employees' behavior becomes predictable.

Strategic alliance    A cooperative agreement between two or more companies to work together and share resources to achieve a common business objective.

Strategic change   The movement of a company away from its present state toward some desired future state to increase its competitive advantage and profitability.

Strategic control systems   The formal target-setting, measurement, and feedback systems that enable strategic managers to evaluate whether a company is implementing its strategy successfully.

Strategic groups   Groups of companies in which each company follows a strategy that is similar to that pursued by other companies in the group, but different from the strategies followed by companies in other groups.

Strategic responsibility   In the multidivisional structure, responsibility of managers at corporate headquarters for overseeing long-term plans and providing guidance for divisional managers.

Strategy formulation   Analyzing the organization's external and internal environments and then selecting appropriate strategies.

Strategy implementation   Putting strategies into action.

Strategy   A set of actions that managers take to increase their company's performance relative to rivals.

Stuck in the middle   The fate of a company whose strategy fails because it has made product/market choices in a way that does not lead to a sustained competitive advantage.

Substitute products   The products of different businesses or industries that can satisfy similar customer needs.

Support activities:   Activities of the value chain that provide inputs that allow the primary activities to take place.

Sustained competitive advantage   A company has a sustained competitive advantage when it is able to maintain above-average profitability for a number of years.

Switching costs   Costs that consumers must bear to switch from the products offered by one established company to the products offered by a new entrant.

SWOT analysis   The comparison of strengths, weaknesses, opportunities, and threats.






Takeover constraint   The risk of being acquired by another company.

Tall structure   A structure with many hierarchical levels and a relatively narrow span of control.

Tangible resources   Physical resources, such as land, buildings, plant, equipment, inventory, and money.

Threats   Threats arise when conditions in the external environment endanger the integrity and profitability of the company's business.

Tit-for-tat strategy   A form of market signaling in which one company starts to cut prices aggressively, and then competitors respond in a similar way; when this occurs, nobody gains and everybody loses.

Transfer pricing   Establishment of the prices at which the products produced by one business unit are sold to other company-owned business units.

Transnational strategy   Firms pursuing a transnational strategy are trying to simultaneously achieve low costs, differentiate the product offering across geographic markets, and foster a flow of skills between different subsidiaries in the company's global network of operations.






Universal needs   Universal needs exist when the tastes and preferences of consumers in different nations are similar if not identical.

Unrelated diversification   The strategy of operating a business unit in a new industry that has no value chain connection a company's existing business units.






Value chain   The idea that a company is a chain of activities for transforming inputs into outputs valued by customers.

Values   Statements of how managers and employees of a company should conduct themselves, how they should do business, and what kind of organization they should build to help a company achieve its mission.

Vertical differentiation   The process by which strategic managers choose how to distribute decision-making authority over value creation activities in an organization.

Vertical integration   A strategy in which a company expands its operations either backward into industries that produce inputs for its core products (backward vertical integration) or forward into industries that use, distribute, or sell its products (forward vertical integration).

Virtual corporation   A company that outsources most of its functional activities and focuses on one or a few core value chain functions.

Vision   The desired future state of a company.






Wholly owned subsidiary   A subsidiary where the parent company owns 100 percent of the subsidiary's stock.





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