a national information resource for value-added agriculture
Agricultural Marketing Resource Center

Business Strategy Terms

Don Hofstrand
Co-director, Ag Marketing Resource Center
Iowa State University Extension
Revised, February 2006

Agency theory - A theory that deals with the use of financial incentives to motivate workers.

Benefit drivers - Attributes of a product that form the basis on which a firm can differentiate itself. Attributes can include the characteristics of the product itself, service characteristic, characteristics of product sale or delivery, characteristics that shape consumers’ perceptions and characteristics that affect the subjective image of the product.

Competitive advantage - What a firm does better than its competitors. Characteristics that allow a firm to outperform its rivals.

  • Cost advantage - One of the major strategies to achieve a competitive advantage; When pursuing a cost advantage, firms seek to attain lower costs while maintaining a perceived benefit that is comparable to competitors.
  • Differentiation advantage – Achieving a competitive advantage by seeking to offer a product of higher perceived value while maintaining costs that are comparable to competitors.
  • Distinctive competence - Special skills and resources that generate strengths that competitors cannot easily match or imitate.
  • First mover advantage - The competitive advantage held by a business from being first in a market or first to use a particular strategy.
  • Late mover advantage - The competitive advantage held by businesses that are late in entering a market. Late movers often imitate the technological advances of other businesses or reduce risks by waiting until a new market is established.
  • Sustainable competitive advantage - A competitive advantage that cannot easily be imitated and won’t erode over time.

Competitive strategy - How a firm competes within a specific industry or market.

Competitor analysis - The competitive nature of an industry. It determines how a rival will likely react in a given situation.

  • Five-forces analysis – An approach that uses economic tools to analyze an industry.  The five forces are internal rivalry, entry, substitute and complement products, supplier power and buyer power.
  • Internal rivalry – Competitiveness of firms within an industry.
  • Buyer power - The ability of individual customers to negotiate purchase prices that extract profits from sellers.
  • Supplier power - The ability of input suppliers to negotiate prices that extract profits from their customers.
  • Barriers to entry - Factors that reduce or impede entry into an industry.
    • Blockaded entry - A condition where the existing firms in the industry firm need not undertake any entry-deterring strategies to deter entry by outsiders.
    • Deterred entry - Occurs when an existing firm in the industry can keep an outside firm out of the industry by employing an entry-deterring strategy.
    • Barriers to exit - Factors that impede the exit of a firm from an industry.

Concentration - Focuses the business's efforts and resources in one industry.

Consumer surplus – The consumer's perceived value or benefit of a product less the product's purchase price.

Core business - The central or major business of the company. The core business is formed around the core competency of the company. Management of the company's core business is central to any decision about strategic direction.

Core competency - What a firm does well. The core competency forms the core business of the firm.

Critical success factors - Those few things that must go well if a company is to succeed. Typically 20 percent of the factors determine 80 percent of the performance. The critical success factors represent the 20 percent. Also called key success factors.

Culture - The collection of beliefs, expectations, and values learned and shared by the company's members and passed on from one generation to another.

Diversification - The process of a company moving into new products or enterprises.

  • Concentric diversification - Diversification into a related industry.
  • Conglomerate diversification - Diversification into an unrelated industry.

Economic profit - A concept that represents the difference between the profits earned by investing resources in a particular activity, and the profits that could have been earned by investing the same resources in the most lucrative alternative activity.

Economies - Cost savings.

  • Constant returns to scale – The average cost per unit of output remains unchanged as total output increases.
  • Diseconomies of scale – The average cost per unit of output increases as total output increases.
  • Economies of density - Cost savings that arise with a greater geographic density of consumers.
  • Economies of integration - Cost savings generated from joint production, purchasing, marketing or control.
  • Economies of scale – The average cost per unit of output decreases as total output increases.
    • Minimum efficient scale - The smallest level of output for which unit costs are minimized.
  • Economies of scope – By sharing resources in the production of two or more products, the cost per unit of output decreases.

Enterprise (Strategic Business Unit) – In a farm operation, the production of a single crop or type of livestock, such as wheat or dairy. A "responsibility" center.

  • Primary enterprise - An enterprise that provides the foundation of the business. The success of the primary enterprise is critical to the success of the business.
  • Secondary enterprise - An enterprise that supports a primary enterprise and/or the mission and goals of the business.
  • Competitive enterprises - Enterprises for which the output level of one can be increased only by decreasing the output level of the other.
  • Complementary enterprise - Enterprises for which increasing the output level of one also increases the output level of the other.
  • Supplementary enterprises - Enterprises for which the level of production of one can be increased without affecting the level of production of the other.
  • Enterprise strategy - How an enterprise competes within a specific market or industry. Also called business or competitive strategy.

Entrepreneur - An entrepreneur sees change as normal and healthy. He/she is involved in searching for change, responding to it and exploiting it as an opportunity.

Environmental scanning - To monitor, evaluate and disseminate information from the external environment to key people within the business.

  • Environmental analysis - An analysis of the environmental factors that influence a company's operations.
  • Environmental opportunity - An attractive area for a company to participate in where the company would enjoy a competitive advantage.
  • Environmental threat - An unfavorable trend or development in the company’s environment that may lead to an erosion of the company’s competitive position.

Experience curve - Systematic cost reductions that occur over the life of a product. Product costs typically decline by a specific amount each time accumulated output is doubled.

Externalities - A cost or benefit imposed on one party by the actions of another party. Costs are negative externalities and benefits are positive externalities.

Firm vision – A mental picture of how you want the firm to look in the future.

  • Mission – An action statement of how the firm will achieve its vision.
  • Goals - General statements of what the firm want to achieve in reaching its vision.
  • Objectives - Specific and quantifiable statements of what the firm is to accomplish and when it is to be accomplished.  Objectives are milestones that are reached along the road to achieving the goals and reaching the firm’s vision.

Innovation - A new way of doing things.

  • Diffusion curve - The rate over time at which innovations are copied by rivals.
  • Systematic innovation - The purposeful and organized search for changes, and the systematic analysis of the opportunities these changes might offer for economics and social innovation.

Industry – A group of firms producing identical or similar products.

  • Industry concentration – The degree to which a few firms dominate an industry and control large market shares.
  • Strategic groups - Clusters of businesses within an industry that share certain critical asset configurations and follow common strategies.

Internal scanning - Looking inside the business and identifying strengths and weaknesses of the company.

Learning curve - The cost advantages that flow from accumulating experience and know-how over the life of a product.

Make-or-buy decision - The decision of whether a firm should produce a product or service within the firm or buy it. Usually relates to decisions relating to upstream or downstream activities or business support activities.

Operations management - Focuses on the performance and efficiency of the production process. It involves the day-to-day decisions of the business.

Portfolio - A group of strategic business units or enterprises within a firm that are managed as individual responsibility centers.

  • Portfolio analysis - Each strategic business unit or enterprise is considered as an individual responsibility center for purposes of strategy formulation.
  • Portfolio management – The collective management of a firm’s individual strategic business units or enterprises and the resources across these enterprises.

Proactive - Seek out opportunities and take advantage of them. Anticipate threats and neutralize them.

Product life cycle - A model where product demand is low when it is introduced.  The product then enters a period of rapid demand growth that gradually levels off and sometimes declines.

Resources - Firm-specific assets such as patents and trademarks, brand-name reputation, financial assets, trained labor force, management capabilities and organizational culture that provide the basis for the firm’s profitability and competitiveness.

Responsibility center – A strategic business unit or enterprise within a firm whose performance is evaluated separately and is held responsible for its contribution to the company’s mission and goals.

  • Cost center - A strategic business unit or enterprise that has a manager who is responsible for cost performance and controls most of the factors affecting cost.
  • Investment center - A strategic business unit or enterprise that has a manager who is responsible for profit and investment performance and who controls most of the factors affecting revenues, costs and investments.
  • Profit center – A strategic business unit or enterprise that has a manager who is responsible for profit performance and who controls most of the factors affecting revenues and costs.

Restructuring - Selling off unrelated parts of a business in order to streamline operations and return to a core business.

Stakeholder - Individuals and groups inside and outside the firm who have an interest in the actions, decisions and performance of the firm.

Strategic - Maneuvering yourself into a favorable position to use your strengths to take advantage of market and other business opportunities.

  • Strategic alliance - An agreement between two or more firms to collaborate on a business project or to share information.
  • Strategic audit - A checklist of questions that provide an assessment of a company’s strategic position and performance.
  • Strategic commitments - Decisions that have long-term business performance impacts and are difficult to reverse.
  • Strategic decisions - A series of decisions used to implement a strategy.
  • Strategic group - A set of firms within an industry that are similar.  They are different from firms outside the group on one or more key dimensions of their strategy.
  • Strategic myopia - Management’s failure to recognize the importance of responding to changes in the external environment because they are blinded by their shared, strongly held beliefs.
  • Strategic thinking - How decisions made today will effect the firm years in the future.
  • Strategic predisposition - A tendency of a company by virtue of its history, assets, or culture to favor one strategy over other possibilities.

Strategic management - The act of identifying markets and assembling the resources needed to compete in these markets. The set of managerial decisions and actions that determine the long term performance of the business.

Strategic planning - A comprehensive planning process designed to determine how the company will achieve its mission, goals and objectives over the next five or ten years or longer.

  • Business planning - A plan that determines how a strategic plan will be implemented. It specifies how, when and where a strategic plan will be put into action. Also known as tactical planning.

Strategy - A pattern in a stream of decisions and actions.

  • Competitive strategy - How an firm competes within a specific industry or market. Also known as business strategy or enterprise strategy.
  • Customer specialization - A targeting strategy in which the firm offers a variety of related products to a particular class of customers.
  • Dominant strategy - A strategy that is the best decision for the firm, no matter what decision its competitor makes.
  • Emergent strategy – An unplanned strategy that emerge from within the organization.
  • Enterprise (strategic business unit) strategy - How an enterprise competes within its specific market or industry. Also called business or competitive strategies.
  • Firm (company) strategy - How a firm will reach its goals and achieve its vision using firm strengths to take advantage of environmental (market and other business) opportunities.
  • Focus strategy - A targeting strategy that concentrates either on offering a single product or serving a single market segment or both.
  • Intended strategy - Planned strategy developed through the strategic planning process.
  • Niche strategy - A strategy serving a specialized part of the market.
  • Predatory act - A strategy that increases profits by deterring entry or promoting exit of competitors.
  • Realized strategy - The real strategy of a business that is either an intended (planned) strategy of management or an emergent (unplanned) strategy from within the organization.
  • Strategy formulation - The development of long-range plans for the management of environmental opportunities and threats in light of the business's strengths and weaknesses.
  • Strategy implementation - The process by which strategies and policies are put into action through the development of programs, budgets and procedures.
  • Strategy control - Compares performance with desired results and provides the feedback for management to evaluate results and take corrective action.

SWOT analysis - Analysis of the strengths and weaknesses of the business and the opportunities and threats of the business's environment.

  • Strategic issues - Trends and forces which occur within the business or within the environment surrounding the business.
  • Strategic factors - Strategic issues expected to have a high probability of occurrence and impact on the business.
  • Opportunities and threats - Strategic factors in the firm’s external environment are categorized as opportunities or threats to the firm.
  • Strengths and weaknesses - Strategic factors within the firm are categorized as strengths or weaknesses of the firm.
  • Strategic fit - Fit between what the environment wants and what the firm has to offer.
  • Strategic alternatives - Alternative courses of action that achieve business goals and objectives, by using firm strengths to take advantage of environmental opportunities.

Tactical decisions - Decisions that are easily reversed and where impact persists only in the short run.

Throughput - The movement of inputs and outputs through a production process.

Value created - The difference between the value that resides in a finished good and the value that is sacrificed to produce the finished good.

Value chain - A concept, developed by Michael Porter, which describes the activities within firms and across firms that add value along the way to the ultimate transacted good or service.

Vertical integration - The process in which either input sources or output buyers of the firm’s products are moved inside the business.

  • Backward (upstream) integration - Input sources are brought into the firm.
  • Forward (downstream) integration - Output buyers are brought into the firm.
  • Contractual integration - Separate firms in the value chain are linked through contractual arrangements.
  • Full integration - Where one firm has full ownership and control over all the value chain of a product.
  • Quasi-integration - A firm that gets most of its requirements from an outside supplier who is under its partial control.
  • Tapered integration - A firm that produces part of its own input requirements and/or markets part of its own products and buys the rest of the inputs from outside suppliers and/or sells the rest of its products to outside markers.

Vertical chain - The process that begins with the acquisition of raw materials and ends with the distribution and sale of finished goods.

Vertical coordination - The stages in the value chain of a product that are linked by more than open markets but less than full ownership.

  • Vertical merger - Firms in various stages of the value chain are linked together.

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