Essential Unit Vocabulary
Abandoned Strategy – A thought-out plan that is no longer used because it is not profitable or not effective for the company. An abandoned strategy is something a company walks away from in order to pursue strategies that are more worth the company’s time and resources.
Above Average Returns (AAR) – refers to profit from the revenue of a firm that is above the average for all competitors within an industry. Investors seek returns equal to or above what they can earn from other investments with a similar amount of risk and reward firms that provide AAR with stronger stock values and willingness to loan capital.
Average Returns – A percentage figure used when reporting the historical return, such as the three-, five- and 10-year average returns of a mutual fund. The average annual return is stated net of a fund’s operating expense ratio, which does not include sales charges, if applicable, or portfolio transaction brokerage commissions.
Broad Differentiation – One of the five generic business-level strategies. A unique quality, perceived or real, of a good or service that distinguish it from a competing good or service; if you cannot be the best then you must be unique. Michael Porter, the grandfather of strategic management, suggested the only sustainable BLS is based on uniqueness because it grows the market; he suggested the alternative, competing on price, is a race to the bottom.
Business Model – A business model is the means by which a company promises to deliver value to its customers, who then pay for the goods and services, and then allows the firm to convert those payments into a profit.
Capital Market – A financial market that channels the flow of money provided by investors (banks, credit unions, insurance companies and individuals) to borrowers through a variety of financial instruments (long term bonds, short term notes and stock shares) called securities. Capital markets play an important role in job creation, innovation and financial security by enabling business to raise the funds they need in order to grow or operate their business.
Competitive Advantage (CA) – The benefit a firm receives by offering a greater value to its customers than its rivals can offer. In order to gain this value, a strategy that is hard to replicate is used so the firm can sustain its advantage over its competitors. A sustainable competitive advantage can be achieved by developing and exploiting core competencies — capabilities that are valuable, rare, costly to imitate and non-substitutable.
Customer Value Proposition – A company uses a customer value proposition to let their customers, and potential customers, know why they should buy that company’s particular product. It lets potential customers know why the specific product is special and why it is different than anything else on the market.
Industrial Organizational (I/O) Model for AAR – Industrial Organizational (I/O) Model for AAR: It starts with an assumption that forces external to the company represent the dominant influences on a company’s strategic actions. This model presumes that the characteristics of and conditions present in the external environment determine the appropriateness of strategies that are formulated and implemented in order for a company to earn above-average returns. The I/O model specifies that the choice of industries in which to compete has more influence on company performance than the decisions made by managers inside their firm. Research shows that 20% of profitability can be directly attributed to this model.
Product Market – The marketplace in which a final good or service is bought and sold. It consists of customers, suppliers, unions, host communities.
Resource-based Model for AAR – Starts with an assumption that internal uniqueness is what the company uses as its dominant influences on implementing a strategic action. This model presumes that the characteristics of and conditions present in the internal environment determine the appropriateness of strategies that are formulated and implemented in order for a company to earn above-average returns. The resource model specifies that the manner in which a firm manages its resources (people and assets) has more influence on the company’s overall performance than the pressure by outside forces. Research shows that 36% of profitability can be directly attributed to this model.
Risk – The degree of uncertainty about the future economic gains or losses that could deviate from the expected outcome of a particular financial investment. Risk includes losing some or all of the investment.
Stakeholder – A person, organization or group that has a stake or significant interest in a business. Even though stakeholders can negatively or positively influence a business with their decisions, they can also be negatively or positively affected by a business’s decisions. Stakeholders typically have ownership, legal and property interests, legal obligations, and/or ethical rights.
Strategic Management Process (SMP) – Involves the planning and execution of a plan of action to create a competitive advantage (CA) and generate above average returns (AAR). The SMP assumes that both planning and execution are essential to success. The process can be broken into four steps including: 1) UNDERSTAND the environment in which the company is operating in order to 2) PLAN the best course of action given its unique strengths, weaknesses and capabilities. Next, the firm must 3) EXECUTE the strategic plan and regularly and systematically conduct a study to 4) EVALUATE the plan to ensure the firm’s long term success.
Strategic Plan – A document used to communicate with the organization about the organization management’s goals, the actions needed to achieve those goals and all of the other essential questions such as answer to questions like who are we, where do we want to go, how will we get there and how will we know when we have arrived?
