MIE 480 Exam Review

According to Industrial Organization (I/O) Theory, what must a firm do to achieve a competitive advantage?

The firm must locate itself in the most profitable industry.

When defining an industry for analysis, why should brand names be avoided?

Industries must be identified by their common/generic product or service name, not individual corporate brand names.

What geographic scope questions must be evaluated when identifying an industry boundary?

Whether products are sold nationally or globally, whether competition is contained within state boundaries, and whether competition takes place regionally or in a single global market.

How do market conditions differ at the two extreme ends of the market continuum?

In Perfect Competition, all firms are identical, yield zero profit, and have no competitive advantage. In a Monopoly, one firm dominates, captures all profits, and holds all competitive advantage.

According to the Range of Markets framework, in what market environment does firm strategy make the biggest difference?

In markets between perfect competition and monopoly, where industry profits exist, firms are differentiated, and entry or mobility barriers prevent easy imitation.

What is the strategic definition of an 'Industry'?

A collection of firms offering the same or very similar products/services, sourcing inputs from the same supplier group, and selling to the same buyer group.

What diagram illustrates the core supply and demand relationships defining an industry?

Diagram illustrating suppliers providing inputs to an industry which produces products for buyers

In strategic terminology, what is an 'Incumbent'?

A firm that is currently operating within a given industry.

In strategic terminology, what is a 'New Entrant'?

A firm that is not currently operating in an industry but has the potential to begin operating in it.

How is the 'Threat' or 'Bargaining Power' of a competitive force defined?

The degree of influence a force has on an industry's or firm's profitability, or the ease with which it can drive down prices or drive up costs.

How do Sector, Industry, and Segment hierarchically relate to each other?

Sector is the broadest category (e.g., Entertainment), Industry is a specific subset (e.g., Music Recording), and Segment divides the industry by group type (e.g., Majors vs. Independents).

What coding system is commonly used to standardize industry definitions?

NAICS (North American Industry Classification System) codes.

If a multi-business firm operates across several industries, how do you decide which industry to analyze?

Select the industry directly relevant to the specific strategic issue you need to address.

What is the primary purpose of Michael Porter's Five Forces framework?

To uncover the underlying roots of industry profitability and help managers position their company strategically against competitive forces.

From whose perspective is industry structure analyzed in the Five Forces framework?

From the perspective of existing incumbent companies in the focal industry.

In what two main ways do new entrants threaten incumbent profitability?

They increase overall industry capacity and steal market share/customers from incumbents.

What are supply-side economies of scale, and how do they act as an entry barrier?

Incumbents producing at larger volumes achieve lower unit costs, forcing entrants either to enter at large scale or accept a cost disadvantage.

What are demand-side economies of scale (network effects)?

A situation where a buyer's willingness to pay for a product increases as the total number of other buyers using the product grows.

Under what conditions do potential entrants expect vigorous retaliation from incumbents?

When incumbents have a history of fighting back, hold substantial cash/resources, cut prices, or when industry growth is slow.

What market factors cause the intensity of rivalry among incumbents to be HIGH?

Slow industry growth, high exit barriers, highly differentiated products, numerous equal-sized rivals, and strong commitment to leadership.

Herfindahl-Hirschman Index (HHI) for market concentration

$HHI = \sum_{i=1}^{N} s_i^2$, where $s_i$ is the market share of firm $i$ expressed as a percentage.

How are HHI values interpreted regarding market concentration?

"- $HHI < 1,500$: Low concentration (Highly competitive)

$1,500 \le HHI \le 2,500$: Moderate concentration

$HHI > 2,500$: High concentration (Oligopoly or near-monopoly)"

How can rivalry among incumbents become a positive-sum game rather than zero-sum?

When competitors target different customer segments with distinct product mixes, pricing, services, or brand identities.

When does a buyer group possess HIGH bargaining power over an industry?

When buyers buy in large volumes, are more concentrated than suppliers, purchase undifferentiated products, face low switching costs, or pose a credible backward integration threat.

What is backward vertical integration by buyers?

A scenario where buyers credibly threaten to produce the supplier's product themselves instead of purchasing it.

When does a supplier group possess HIGH bargaining power over an industry?

When suppliers are more concentrated than buyers, offer highly differentiated/critical products, face low switching costs, or pose a forward integration threat.

What is forward vertical integration by suppliers?

A scenario where suppliers credibly threaten to enter the buyer industry directly (e.g., beverage concentrate makers establishing their own bottling plants).

What five shared criteria evaluate the relative power of both buyers and suppliers?

1. Relative size and concentration

2. Mutual degree of reliance

3. Switching costs

4. Differentiation

5. Threat of vertical integration

Substitute

A product or service from a different industry that performs the same function or meets the same underlying customer need.

When does the threat of substitute products become HIGH?

When the substitute offers an attractive price-performance trade-off and the buyer's cost of switching to the alternative industry is low.

Why is a customer switching from Delta Air Lines to American Airlines NOT considered a threat of substitution?

Both firms belong to the same industry; switching between them represents incumbent rivalry, not substitution from an outside industry.

What Five Forces profile characterizes an UNATTRACTIVE industry?

Intense incumbent rivalry, low entry barriers (high entry threat), strong buyer power, strong supplier power, and strong threat of substitutes.

What Five Forces profile characterizes an ATTRACTIVE industry?

Low-to-moderate rivalry, high entry barriers (low entry threat), weak buyer power, weak supplier power, and weak threat of substitutes.

Why should managers avoid using the Five Forces model solely to label an industry as attractive or unattractive?

Because the model's primary value is guiding strategic choices to improve competitive positioning, even within structurally unattractive industries.

What are Key Success Factors (KSFs) in an industry?

The top vital factors in which every firm in an industry must make strategic investments to succeed.

How should Key Success Factors (KSFs) be measured across competitors?

KSFs must be measured using objective empirical data rather than subjective estimates or guesses.

How do strong competitive forces impact firm profitability, prices, and costs?

High force strength decreases overall profitability by suppressing prices (due to buyer, entrant, substitute, or rivalry pressure) and/or raising costs (due to supplier power, entrant defense, or competitive rivalry).

What is the first step in conducting a practical industry analysis?

Define the relevant industry by naming the industry product, product scope, and geographic scope.

In industry analysis, why is it necessary to segment participants within a force into distinct groups?

Different sub-groups (e.g., large vs. small competitors) have varying degrees of influence on firm profitability.

What major assumption limitation exists when analyzing an industry where all five forces are extremely weak?

Strict Five Forces logic implies the industry is a monopoly and advises entering, ignoring potential regulatory or antitrust interventions.

Why is the Five Forces framework less applicable to emerging industries?

Industry structure in emerging fields is unstable; Five Forces assumes a relatively stable structure found in growth, maturity, or decline stages.

What macro-environmental factors surrounding industry competition are missing from Porter's Five Forces model?

The model excludes general PESTEL factors: Political/Legal, Technological, Demographic, Social, Macro-Economic, and Global drivers.

What key analytical error occurs when strategic analysts confuse cyclical changes with structural changes?

They misinterpret temporary economic fluctuations as permanent shifts in underlying industry structure.

What is a 'Strategic Group' in industry analysis?

A set of firms within an industry emphasizing similar strategic dimensions to pursue similar strategies.

What are common strategic dimensions used to map strategic groups?

Extent of technological leadership (R&D intensity), product quality level, and pricing policies.

In internal Value Chain Analysis (VCA), what administrative office oversees Poole's Operations Team and Facilities Director?

The Office of Business Services.

In Poole College's value chain, what entities handle Outbound Alumni Relations and Student Support activities?

Alumni relations are handled by Development and External Relations; student career services and records are handled by the UG Career Center and Student Records.

Attractive Industry

An industry with high profit potential where the five competitive forces are overall weak (low rivalry

Unattractive Industry

An industry with low profit potential where competitive forces are strong (intense rivalry)

Scope

Defining an industry by naming its specific common product/service

Threat of New Entrants

The risk that potential incoming firms will enter an industry

Threat of Rivalry Among Incumbents

The intensity of competition among existing firms in an industry

Bargaining Power of Buyers

The degree of influence customers have to demand lower prices or higher quality

Bargaining Power of Suppliers

The degree of influence input providers have to raise prices or reduce quality

Threat of Substitutes

The threat posed by products/services from a different industry that perform a similar function and offer an attractive price-performance trade-off.

Key Success Factors (KSFs)

The 4–6 essential strategic investments and operational achievements required for any firm in an industry to satisfy customer needs and compete effectively against rivals.

Resource-Based View (RBV)

An internal strategic framework holding that a firm's unique bundle of internal tangible/intangible resources and capabilities drives superior performance and competitive advantage.

RBV Core Assumptions

Resource Heterogeneity (competitors control different resource bundles) and Resource Immobility (resources do not move easily between firms).

Tangible Resources

Physical or financial assets that can be easily seen and quantified

Intangible Resources

Non-physical assets deeply rooted in a firm's history and routines

Capabilities

The ability of a firm's employees to integrate and coordinate resources to perform specific activities and achieve desired organizational outcomes.

Core Competencies

Extraordinary capabilities that satisfy all VRIST criteria and serve as the primary internal sources of sustained competitive advantage.

Competitive Advantage (CA)

Implementing a value-creating strategy not simultaneously implemented by current or potential rivals

Sustained Competitive Advantage (SCA)

Implementing a value-creating strategy not implemented by current or potential rivals AND which rivals are unable to duplicate over time.

Value Chain Analysis (VCA)

An internal analysis tool that dissects a firm's operations into primary and support activities to understand how customer value is created and costs are incurred.

Executional vs. Structural Activity Drivers

Structural drivers are strategic, long-term factors related to an organization's foundational economic choices and underlying architecture. They shape the nature of the activities themselves and cannot easily be altered in the short term. Executional drivers are operational, short-term factors that determine how successfully a firm executes its day-to-day activities relative to its capability. These can be managed, tuned, or improved in the short-to-medium term without changing the underlying business structure.

Business-Level Strategy

An integrated and coordinated set of actions taken in specific product or geographic markets to satisfy customer needs by exploiting core competencies.

Low-Cost Strategy

A business-level strategy aiming to produce goods/services at the lowest cost relative to competitors with acceptable attributes

Differentiation Strategy

A business-level strategy aiming to deliver unique product features

Differentiation based on Responsiveness to customers requires value chain excellence in:

Customer Service, Administration

Differentiation based on Marketing & Advertising requires value chain excellence in:

Marketing research, Creative marketing

Differentiation based on Quality Inputs requires value chain excellence in:

R&D, Procurement

Differentiation based on Product or service integrity control requires value chain excellence in:

Operations, Manufacturing

Differentiation based on products or service characteristics requires value chain excellence in:

Marketing research, R&D, Operations

Sources of Psychographic Benefits

Marketing & Advertising

Reputation for customer responsiveness

Corporate reputation and trust

Experience Curve

As organizations gain greater experience over the years in producing a product or a service, employees usually learn how to perform many functions quicker, cheaper, and with fewer mistakes.

Capacity Utilization

Closely related to economies of scale. Costs are particularly sensitive to the ability of companies with large facilities to fully utilize them. If they are not fully utilized, then the fixed-cost burden of the facilities is spread across fewer units produced.

Economies of Scale

Unit costs drop when quantities produced each period grow larger

Five Business-Level Strategies

Overall Low Cost

Broad Differentiation

Focused Low Cost

Focused Differentiation

Integrated Low Cost & Differentiation

Stuck in the middle

A condition where a company simultaneously pursues both a differentiation and a low cost strategy. The result is often that such companies are out-competed by competitors which pursue "pure" business-level strategies more single-mindedly.

Scope

The degree to which a company competes broadly or narrowly within an industry. Differences in geography, customer segments, and user needs can describe broad versus narrow ____.

Parity

Though companies compete on cost or some dimensions of differentiation, they must maintain relative equality on other dimensions that are valued in the marketplace. Without reasonable ____ on other valued conditions, the lowest-cost competitor or most-effective differentiator on some dimension may not succeed.

Outsourcing

When another outside organization is contracted to perform a business process or service

Low cost leadership

Of the companies that pursue a low cost strategy, only one company will enjoy the lowest cost structure. This company has the strongest competitive position among low cost seekers, since it enjoys greater pricing flexibility and can more easily weather industry conditions that compress profit margins.

Low cost

One type of business-level strategy. It implies a broad market approach where a company can earn superior economic returns by rigorously reducing costs and expenses below its competitors, while simultaneously maintaining parity pricing.

Focus

A narrow scope for either of the two types of business-level strategies of differentiation and low cost. The company pursues a narrow targeted market, geographic area, and/or particular customer group.

Experience curve

Reductions in cost per unit that are achieved through the learning that occurs in cumulative production over time (in contrast to economies of scale, in which unit cost reductions are associated with volume during a fixed time interval).

Differentiation

One type of business-level strategy. It implies a broad market approach where activities performed by the company provide sufficiently differentiated value to allow the company to generate superior economic returns, generally through higher pricing.

Business-level strategies

A term for strategic approaches at a high, overarching level. Often referred to as "generic strategies." Appropriate for a single line of business with related products or services. It is not appropriate as a means of organizing a diversified corporation with many lines of business.

Social Complexity

Resources that may result from a socially complex phenomenon, something which cannot be systematically managed or influenced.

Historical Conditions

The ability to develop unique resources often depends on the time and place in which the business began operations.

Resource Based Analysis Steps

1. Develop a listing of all resources and capabilities, including those that are tangible and those that are intangible;

2. Divide those resources and capabilities into the categories of ordinary and extraordinary for the industry in which the company competes. Ordinary resources are those that must be developed, but no better than the standard for the industry.

3. For those resources and capabilities that appear to be extraordinary, use the VRIST framework to determine which are truly extraordinary

4. For those resources and capabilities that pass the VRIST test, develop the means to leverage these extraordinary positions.

5. Evaluate the relevance of extraordinary resources for the Key Success Factors required for success in the industry. If there is a mismatch, consider how to develop appropriate resources that address the KSFs.

Resource-based analysis

Allows each resource or capability to be examined for its potential to provide a competitive advantage.

Causal ambiguity

A condition that exists when the link between a business’s resources and its competitive advantage are poorly understood.

Capabilities

Sets of tightly integrated activities, organizational skills, and internally developed routines that build upon extraordinary resources and allow the company to create value in a fashion superior to other companies.

Three ways to Leverage Extraordinary Resources

1. Extending the current business model into additional products or customer segments

2. Replicating the resource or capability elsewhere in the organization to enhance the performance of the business

3. Developing complementary resources.

Foundations of Superior Performance

Extraordinary Resources -> Capabilities -> Ordinary Resources -> Products and Services = Superior Performance

Sources of Durability of Advantage of a Product

Historical conditions, Casual ambiguity, and Social complexity

Intellectual Property Protection

One way to make a product difficult to imitate. Ex: patents or trademarks.

VRIST

Extraordinary Resource Dimensions

Valueable, Rare, (un) Imitable, (un) Substitutable, (un) Tradeable.