Strategic Management and Decision Making
Core concepts
Understand strategy frameworks and how they inform managerial decisions: SWOT, Porter's Five Forces, value chain analysis, and generic strategies (cost leadership, differentiation, focus). Know the product life cycle and the BCG matrix (stars, cash cows, question marks, dogs). For decision making, focus on relevant costing: incremental revenues and costs, opportunity costs, and sunk costs (which are irrelevant). Understand make-or-buy, special-order pricing, keep-or-drop, and constrained-resource decisions (maximize contribution margin per unit of the scarce resource).
Traps in questions
- Sunk costs must be ignored - a common distractor is a past purchase price.
- Allocated fixed costs usually do not disappear when a segment is dropped; only avoidable costs matter.
- Special orders: accept only if incremental revenue exceeds incremental cost and idle capacity exists.
- Opportunity cost is real even when no cash changes hands.
- Confusing contribution margin with gross margin.
Worked example
A company can make 1,000 units of either Product A (contribution margin 8, needs 2 machine hours) or Product B (contribution margin 12, needs 4 machine hours). With 400 machine hours available: A yields 4 per hour, B yields 3 per hour. Prioritize A - it maximizes contribution per constrained hour, not per unit.
Rule of thumb
For any decision, ask: What changes if I choose this option? Only incremental cash flows and opportunity costs belong in the analysis.