short answers

Describe specifically how a low cost structure allows a firm to offset each of the 5 profit destroying forces

1. Threat of new entrants- new entrants bring additional supply, not demand. Low cost structure, high volume, economies of scale, barrier to entry. Low cost leader can further reduce prices in retaliation of new entrants

2. Threat of powerful suppliers- can increase the cost or decrease quality of key inputs, low cost structure allows firm to absorb higher cost of inputs and still earn a profit. High volume positions the low cost leader to better negotiate with powerful suppliers

3. Threat of powerful buyers- can decrease prices paid or negotiate terms for products or services. Low cost structure allows the firm to better absorb lower prices and still earn a profit. Powerful buyers are less likely to seek price concessions from low cost leader

4. Threat of substitutes- can negate firms ability to pass on increase costs to buyers. Low cost leaders prices make subs less attractive, lows cost structure allows firm to further reduce prices (and still earn a profit) to further reduce the attractiveness of subs

5. Threat of rivalry: results in price wars or increase costs costs of promotion, competitors are unlikely to get into a price way with lost cost leader, low cost leaders reputation can decrease promotional costs

Describe specifically how a differentiated position allows a firm to offset each of the 5 profit destroying forces

1. Threat of new entrants: creates a barrier to entry by having unique value, customer loyalty, and then an increase in investment cost to enter and succeed

2. Threat of powerful suppliers: can increase the cost or decrease the quality of key inputs. High margins associated with premium prices allows the differentiated firm to better absorb higher costs. Unique value, customer loyalty, allows the firms to better pass on higher costs

3. Threat of powerful buyers- can decrease prices paid or negotiate terms for products or services, unique values can provide buyers with fewer alternatives, unique value can increase buyers switching costs

4. Threat of substitutes- can negate firms ability to pass on increase costs to buyers, customer loyalty decreases the attractiveness of subs, unique value can increase switching costs which decreases attractiveness of subs

5. Threat of rivalry- results in price wars or increase costs of promotion, goods provided by the differentiated rim are unique. There are few, if any, direct competitors

Define economies of scope and give specific examples of two firms exploiting such economies

Decreased costs, increased revenue, or both (value creation)

-Achieved by sharing of value chains activities-usually is the sharing of tangibles such inbound logistics, purchasing, production, distribution between or among different business units

-Or sharing of core competencies- usually is the sharing of intangibles such as brand name, reputation, marketing skills, etc between or among business units

Two examples: Honda Motor Company by using brand name on different products to create additional value

Proctor and Gamble- sharing purchasing function among different business units in the firms portfolio to reduce to create additional value

Defined tacit collusion and explicit collusion, explain the difference between the two, and the implication of explicit collusion.

-Tacit collusion- firms in an industry indirectly coordinate output and pricing decisions by observing competitors’ actions and responses. Result is supply below and/or prices above, fully competitive levels. Legal in most industrialized nations

-explicit collusion- firms in an industry directly negotiate output and pricing agreements. Illegal in most industrialized nations unless regulated by government

Difference: tacit collusion is indirect and based on observations but explicit collusion is direct communication.

Implication of explicit: the illegality. Most countries prohibit this type of agreement because of competition and it harms consumers through higher prices and reduced choices.

List and clearly define and differentiate the three methods of restructuring.

1. Downsizing- reduction in number of mangers or employees and potentially the size of other parts of the firm in order to reduce costs (does not result in a change in the make up of the firms portfolio of business units)

2. Downscoping- the divestiture (selling, spin off, liquidation) or closing of underperforming business units often unrelated to the firms core in order to refocus and or raise capital (does change in the make up of the firms portfolio of business units)

3. Financial restructuring- reorganizing the capital structure of the firm to reduce the “cost of capital” (percentage of debt vs equity) ex: firm might seek to reduce excessive debt incurred during an acquisition by issuing additional shares of stock and using the funds raised to pay down debt (other things being equal, a highly leveraged firm has less strategic flexibility and thus has a higher risk of failure)