Strategy, Innovation, Global Competition Midterm Exam

What is the five forces model?

A framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy.

Each factor of the five forces model?

- Rivalry
- Threat of new entrants
- Bargaining power of buyers
- Threat of substitutes
- Bargaining power of suppliers

Rivalry

- competition for the same objective or for superiority in the same field.

The logic of the model is that the stronger the forces are the more intense rivalry is. Therefore the lower profitability should be in that industry

When rivalry is intense:

-Price discounts - we see more competition in price
-Product and service enhancements - we see firms competing on product features
-New Products - creating new products
-Advertising - spending a lot of money on advertising

- When products and services are almost identical, rivalry should be higher because it makes the firms compete more on price
- When buyers face low switching costs such as they don't incur many costs to switch from buying from one supplier and switching to another, then we expect the rivalry to be more intense

- when rivalry is intense there is downward pressure on price and upward pressure on costs as firms are spending money to make product enhancements and new products, advertising so profit margins get reduced

Threat of new entrants

a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry

When the threat of new entrants is strong:

- Potential loss of customers
- Price pressure
- Cost pressure

- potential downward pressure on price and potential upward pressure on costs so incumbent firms has to worry about new entrants coming into the industry and defend themselves against the threat

Barriers to Entry

business practices or conditions that make it difficult for new firms to enter the market

- when barriers are low, the threat is strong

- when barriers are high, the threat is low

Economies of Scale

factors that cause a producer's average cost per unit to fall as output rises

-Economies of Scale are the efficiencies, the cost savings, the cost reductions that the firms enjoy because they're operating at a large scale because they're big

-firms in the industry are already enjoying economies of scale, a new entrant has to come in at a large size in order to be competitive
- it is more difficult to come in at a larger size than it is to come in at a smaller size

Network Effects

the value of a product or service for an individual user increases with the number of total users

- all you value you get comes from other people having the product

- if you want to see something you want to go where all the buyers are

Switching costs

costs that make customers reluctant to switch to another product or service

- switching costs are a barrier to entry because they make it less likely that somebody is going to switch from one product to another

Example) switching phone providers from AT&T to Verizon. The switching costs are time and effort: researching services, shopping for a new phone, learning new apps, transfer contacts. Money: buy out contract

Other Entry Barriers

- Capital requirements: refers to how much money it takes to enter an industry and be competitive
- Incumbency advantages: such as a strong brand, if industry incumbents already have strong brands then it's hard for a firm to come in and compete against them
- Unequal access to distribution: difficult for a new entrant to come in
- Restrictive government policy: such as tariffs or regulated monopolies

Threat of Substitutes

an alternative to the industry's product that comes from outside the industry

Example) substitutes for a bike would be.... moped, taxi, rower, treadmill

A substitute threat if:

- good performance at an attractive price
- low switching costs for buyers (it's easy to switch from an industry product to a substitute or alternative outside the industry)

Bargaining power of suppliers

the threat that suppliers may raise prices or reduce the quality of purchased goods and services with a trading partner

Example) If suppliers are makers of bicycle tires... Suppliers have the bargaining power to charge higher prices, limit quantities and services, and shift costs to industry firms (such as shipping costs)

Fragmentation

having several suppliers (don't have a lot of power)

Concentration

few incumbents (has more power)

Other factors that increase bargaining power of suppliers

- No substitutes (suppliers have more power if there are no substitutes for their products)
- Differentiated products
- Little dependence on the industry for revenue
- High switching costs of industry firms
- Suppliers can credibly threaten to enter the industry

Bargaining power of buyers

the threat that buyers may force down prices, bargain for higher quality or more services, and play competitors against each other

Example) if buyers(industry firms) are the bicycle makers... Buyer has the bargaining power to demand lower prices, demand higher quality, and play incumbents off each other

Other factors that increase bargaining power of buyers

- Price-sensitivity
- Standardized or undifferentiated products
- Low switching costs for buyers
- Buyers can credibly threaten to enter the industry

Competitive advantage

a company earns more profit than the industry average because: it costs are lower than the industry average, or it earns more revenue than the industry average, or a combination of both

Four generic strategies

1. Cost Leadership
2. Differentiation
3. Cost Focus
4. Differentiation Focus

Cost Leadership

the positioning strategy of producing a product or service of acceptable quality at consistently lower production costs than competitors can, so that the firm can offer the product or service at the lowest price in the industry

- Low cost and Broad scope (customer segment)

Examples) Dell, Walmart, Southwest Airlines, and Ikea

Differentiation

actually differentiating the market offering to create superior customer value

- High cost and Narrow scope

Example) Harry Winston, Ferrari, and Rent the Runway (Ultra-luxury firms)

Cost Focus

low-cost competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche to the exclusion of others

- Low costs and Narrow scope

Example) DSW, Dollar Shave Club, Food Lion, Service Credit Union

Overall Differentiation

firms that are competing on differentiated products and services, not on the price or cost

- Broad scope and differentiated source meaning keeping costs low

Example) Starbucks, Harley Davidson, Apple, Whole Foods

Willingness to Pay (WTP)

the maximum price at or below which a customer will definitely buy a product or service

VISOR Criteria

To give a firm a sustainable competitive advantage, a resource or capability must be: Valuable, Imitate, Substitutes, Organized, Rare

Valuable

(must create value)

a resource that gonna be used to create a sustained competitive advantage, must be valuable. It must create value for the firm and for its customers

Imitate

(expensive to imitate or difficult to imitate)

resource should be difficult to imitate or expensive to imitate. If it weren't, other firms would have it and no firm would be able to create a competitive advantage from it

Substitutes

(no substitutes exist)

there shouldn't be any substitutes for this valuable resource, for the same reason that it should be difficult or expensive to imitate

Organized

(the firm is organized to leverage the resource)

the firm should be organized to leverage an important resource, and firms leverage the resource often through their organizational structure, their compensation schemas, or their organizational culture

Rare

(rare among competitors)

the resource should be rare among competitors so that the other competitors can't get it and level the playing field

External Analysis

the business environment outside the firm

External Analysis (STEEP)

Social, Technological, Economic, Ecological, and Political

Socio-Cultural

- demographic changes
- leisure habits
- attitudes and values of consumers

Technological

- government spending on R&D
- Telecom. infrastructure
- Transport. infrastructure

Economic

- disposal income
- currency exchange rates
- consumer confidence

Ecological

- environment protection laws
- effects on climate change
- social responsibility

Political-Legal

- laws and regulations
- trade restrictions and tariffs
- wars and conflicts

Three dimensions of corporate scope

- Horizontal Diversification
- Vertical Integration
- Geographic Dimension

Horizontal Diversification

operating in an adjacent or unrelated market that is not in the value chain of the firm

Example) Toro first made snowblowers and then made lawnmowers, Amazon first sold books and then now sells compact discs

Vertical Integration

operating in more stages of the value chain

Geographic Dimension

means where in the world should a firm compete and how in different places of the world might a firm be able to create or expand a competitive advantage that is already has someplace else

Better-off test

does the presence of the corporation in a given market improve the competitive advantage of other business units over and above what they could achieve on their own?

Ownership test

Does ownership of the business unit produce a greater competitive advantage than an alternative arrangement would produce?

Economies of scope

increases in efficiency (cost savings or reductions) due to sharing of activities across products

Examples)
- one factory produces similar products with the same staff and equipment
- sales staff sells a new product during the same sales call