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MGMT 290: Industry Analysis > Chapter 2 / Week 2 (Economies of Scale, INV, Learning Curves, HHI index) > Flashcards

Chapter 2 / Week 2 (Economies of Scale, INV, Learning Curves, HHI index) Flashcards

1
Q

Contemporary Strategy Analysis - Robert M. Grant

A

All slides beyond this until slide 13

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2
Q

Economic definition of industry

A

A group of firms that supplies a market

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3
Q

What is the difference between analyzing industry structure and analyzing market structure

A

Principle difference is that industry analysis, notably five forces analysis, looks at industry profitability being determined by competition in two markets:

1) Product markets
2) input market

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4
Q

Industries

A

Identified with relatively broad sectors

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5
Q

Markets

A

Related to specific products

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6
Q

Two sides of sustainability

A

1) Substitutability on the demand side

2) Substitutability on the supply side

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7
Q

1) Substitutability on the demand side

A

Are customers willing to substitute between Jaguars and mass-market brands on the basis of price difference?

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8
Q

2) Substitutability on the supply side

A

If manufacturers were able to switch their production from family sedans to luxury cars, and if jaguar could could enter other parts of the automobile market

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9
Q

The key test of geographical boundaries of a market is PRICE:

A

If price differences for the same product between different locations tend to be eroded by demand-side and supply-side substitution, then these locations llie within a single market

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10
Q

Substitutability is ____ in the long run then in the ____ run

A

Long

Short

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11
Q

The boundaries of a market or industry are seldom clear-cut: the market in which an offering competes is a ______ rather than a bounded space

A

Continuum

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12
Q

Example: If we define Disneyland as competing within the broad entertainment industry, then beach and ski resorts are _______, if we define Disneyland as competing in the theme park industry, then bean and ski resorts are _____

A

Rivals

Substitutes

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13
Q

END OF Contemporary Strategy Analysis - Robert M. Grant

A

END OF Contemporary Strategy Analysis - Robert M. Grant

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14
Q

The Herfindahl-Hirschman Index

A

All slides beyond this

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15
Q

The Herfindahl-Hirschman Index (AKA Herfindahl index)

HHI

A

Is a statistical measure of concentration

Can be used to measure concentration in a number of context

(become so popular by its use by the Department of Justice and the Federal Reserve in the analysis of the competitive effects of mergers)

Score less than 1800 or a change less than 50 = no concentrated

Above 1800 is concentrated or a merger increase of larger than 50 = concentrated

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16
Q

Market concentration

A

The degree of concentration of the output of firms in banking or industrial markets

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17
Q

Horizontal mergers

A

Firms operating in the same product and geographic markets

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18
Q

1992 Revised Guidelines

A

The guidelines, as applied to banking, specify that if a bank merger would result:
1) in a post-merger HHI in a market of less than 1,800
2) in a change in the HHI of less than 200 (less than 50 in other industries),
it is likely that the market structure would not reach a concentration level, or concentration would not increase enough, such that firms in the market would have the market power to maintain prices above competitive level for a significant period

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19
Q

If the post-merger HHI does not exceed the numerical guidelines:

A

It is generally presumed that the merger would not be seriously anticompetitive, and no further analysis is conducted

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20
Q

If the post-merger HHI exceeds the numerical:guidelines:

A

A detailed economic analysis of competition is undertaken to determine whether other factors, such as potential competition, indicate that the market would be more (or less) competitive then the HHI alone suggests

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21
Q

The HHI accounts for:

A

the number of firms in a market, as well as concentration, by incorporating the relative size (that is, market share) of all firms in a market

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22
Q

HHI = n>E, i=1 (MSi)>2

A

It is on paper for easier sake

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23
Q

Examples: Bank A holds 40 percent of bank deposits, Bank B holds 30 percent, Bank C holds 20 percent, Bank D holds 10 percent

Assume that Bank C with 20 percent of the market acquired Bank D, which has 10 percent of the market, calculate the HHI

A

(40)>2+(30)>2+(20)>2+10>2
1600 + 900+ 400+ 100 = 3000

(40)>2 + (30)<2 + (20+10)<2 =
1600 + 900 + 900 = 3400

Increases HHI by 400 from 3000 to 3400

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24
Q

The HHI reaches a maximum at

A

10000 when a monopoly exists

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25
Q

The HHI reaches zero, in theory

A

In purely competitive markets with many firms with small market share

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26
Q

Common HHI

A

1000: 10 firms, 10% per firm
2000: 5 firms, 20% per firm
3300: 3 firms, 33.3% per firm
5000: 2 firms, 50% per firm

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27
Q

END OF The Herfindahl-Hirschman Index

A

END OF The Herfindahl-Hirschman Index

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28
Q

Highly Concentrated: Companies That Dominate Their Industries IBIS World

A

Highly Concentrated: Companies That Dominate Their Industries STARTS HERE

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29
Q

IBISWorld has
identified the 10 most concentrated
industries in the United States,

A

with the
four largest companies in each industry
generating at least 90 percent of revenue.

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30
Q

Search Engines stats

A

Top four market share: 98.5%

Major companies:
Google: 64.1%
Yahoo: 18.0%
Microsoft: 13.6%

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31
Q

Search Engines explanation

A

This industry’s concentration has increased steadily during the past five years, primarily driven by Google’s growth while smaller search engines like Ask.com and AOL decline in prevalence.

Difficult entry due to skilled software programmers, IT professionals, and system engineers being needed

Unless an entrant chooses to license a competitor’s
technology, companies in this industry would need to develop their own algorithms

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32
Q

Arcade, Food & Entertainment Complexes

A

Top four market share: 96.2%

Major companies:
CEC Entertainment Inc.: 52.2%
Dave & Buster’s: 35.0%
Sega Entertainment USA Inc. 
Namco Cybertainment Inc.

*CEC is commonly known as Chuck E. Cheese’s

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33
Q

Sanitary Paper Product Manufacturing

A

Top four market share: 92.7% Major companies:
Kimberly-Clark Corporation: 35.5%
Proctor & Gamble: 30.0%
Georgia-Pacific: 27.2%

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34
Q

Wireless Telecommunications Carriers

A

Top four market share: 94.7%

Major companies:
Verizon Wireless: 36.5%
AT&T Inc.: 32.1%
Sprint Nextel Corporation: 15.4%
T-Mobile USA: 10.7%
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35
Q

Wireless Telecommunications Carriers explanation

A

There were two waves of mergers and acquisitions (M&As) in this industry over the past decade.

First, there was a high level of M&A activity among the “baby bells” (the spin-offs of the former AT&T
monopoly) which led to the creation of new number-one and number-two players.

This event was then followed by a second wave of M&A activity that yielded a significant increase in concentration across the various telecommunications industries.

A large subscriber base is critical to competitiveness
because it delivers considerable scale economies, enabling a carrier to offer cheaper prices and realize higher margins.

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36
Q

Satellite TV Providers

A

Top four market share: 94.5%

Major companies:
DirecTV: 57.6%
Dish Network: 36.9%

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37
Q

Satellite TV Providers explanation

A

It is difficult for smaller players to compete
in terms of quality and the level of services they can offer to consumers at a reasonable price

In addition to the intense competition, high start-up costs and regulation have prohibited small producers from developing niche markets.

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38
Q

Soda Production

A

Top four market share: 93.7%

Major companies:
The Coca-Cola Company: 41.2%
PepsiCo: 33.6%
Dr Pepper Snapple Group: 15.4%

Expected to decline 4.5% first company with decline

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39
Q

Food Service Contractors

A

Top four market share: 93.2%

Major companies:
Compass Group: 32.8%
Aramark: 28.3%
Sodexo: 25.6%
Delaware North: 6.5%
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40
Q

Food Service Contractors explanation

A

Major industry clients are increasingly looking for
food-service contractors that can handle catering, property maintenance, security and other services.

This trend favors larger operators because smaller ones may not have the capital and infrastructure that is required to fill all of these roles for clients.

Additionally, new entrants are discouraged from entering the market because the large operators have higher marketing budgets, bargaining power in contract negotiations, better brand recognition and existing contacts.

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41
Q

Lighting & Bulb Manufacturing

A

Top four market share: 91.9%

Major companies:
General Electric Company: 32.9%
Koninklijke Philips Electronics NV: 31.7%
Siemens AG: 27.3%

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42
Q

Lighting & Bulb Manufacturing explanation

A

In addition to the dominance of existing players, many other factors make it difficult for any new companies to enter the industry, including:

1) significant government regulation,
2) resource constraints,
3) technological changes
4) the industry’s declining life cycle

New entrants must have the
resources to stock high inventories and
have a strong knowledge of niche
markets to survive the high levels of
internal competition.
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43
Q

Tire Manufacturing

A

Top four market share: 91.3%

Major companies:
The Goodyear Tire & Rubber Company: 39%
Michelin North America: 28.2%
Copper Tire & Rubber Company: 12.5%
Bridgestone: 11.6%
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44
Q

Tire Manufacturing Explanation

A 
Experienced a wave of mergers and
acquisitions since the 1980s, largely
driven by an increase in cross-border
production and trade by automobile
manufacturers.
As a result, most tire
manufacturers were taken over and
control transferred to foreign owners
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45
Q

Major Household Appliance Manufacturing

A

Top four market share: 90.0%

Major companies:
Whirlpool Corporation: 43.8%
AB Electrolux: 20.7%
General Electric Company: 17.1%
LG Electronics: 9.2%
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46
Q

END OF Highly Concentrated: Companies That Dominate Their Industries IBIS World

A

END OF Highly Concentrated: Companies That Dominate Their Industries IBIS World

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47
Q

EBOOK pg 148-158 Focus on Economies of Scale/Scope, learning curve and experience curve

A

EBOOK pg 148-158 Focus on Economies of Scale/Scope, learning curve and experience curve

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48
Q

ECONOMIES OF SCALE

A

Decreases in cost per unit as output increases.

(Example: You already own the radio tower and pay for it, the more people who use it, up to a certain degree, will keep owning the tower be cheaper over time

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49
Q

Economies of

scale allow firms to

A

1) Spread their fixed costs over a larger output.
2) Employ specialized systems and equipment.
3) Take advantage of certain physical properties

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50
Q

SPREADING FIXED COSTS OVER LARGER OUTPUT

A

Larger output allows firms to spread their fixed costs over more units. That is why gains in market share are often critical to drive down per-unit cost.

Spending 20 million on R&D looks bad at first, but when selling over 100 million copies of window 10, the price is significantly cheaper, and the more they sell the more the price per unit lowers

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51
Q

cube-square rule:

A

The volume of a body such as a pipe or a tank increases disproportionately more than its surface.

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52
Q

minimum efficient scale (MES)

A

Output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.

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53
Q

diseconomies of scale

A

Increases in cost per unit when output increases.

As firms get too big, the complexity of managing and coordinating the production process raises the cost, negating any benefits to scale.

Dampens motivation, shortages of inputs, time pressures

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54
Q

Scale economies

A

are critical to driving down a firm’s cost and strengthening a cost-leadership position.

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55
Q

LEARNING CURVE History

A

first documented in aircraft manufacturing as the United States ramped up production in the 1930s, before its entry into World War II. Every time production was doubled, the per-unit cost dropped by a predictable and constant rate (approximately 20 percent)

56
Q

The steeper the learning curve

A

the more learning has occurred.

As cumulative output increases, firms move down the learning curve, reaching lower per-unit costs.

57
Q

In a 90 percent learning curve, per-unit cost drops

A

10 percent every time output is doubled.

58
Q

It is important to note that the learning-curve effect is driven by

A

increasing cumulative output within the existing technology over time.

That implies that the only difference between two points on the same learning curve is the size of the cumulative output

59
Q

Differences in timing

A

Learning effects occur over time as output accumulates, while economies of scale are captured at one point in time when output increases.

60
Q

There are no diseconomies to learning

A

there are no diseconomies to learning

61
Q

Differences in complexity

A

In some production processes (e.g., the manufacture of steel rods), effects from economies of scale can be quite significant, while learning effects are minimal. In contrast, in some professions (brain surgery or the practice of estate law), learning effects can be substantial, while economies of scale are minimal.

62
Q

EXPERIENCE CURVE

A

Holds cumulative output constand (whereas learning curve held price constant and changed cumulative)

63
Q

Process

innovation

A

a new method or technology to produce an existing product

64
Q

Learning vs experience curve

A

Learning by doing allows a firm to lower its per-unit costs by moving down a given learning curve, while experience-curve effects based on process innovation allow a firm to leap-frog to a steeper learning curve, thereby driving down its per-unit costs

65
Q

END OF 148-158

A

END OF 148-158

66
Q

Start of Vertical integration along the industry value chain; Pages 191-197.

A

Start of Vertical integration along the industry value chain; Pages 191-197.

67
Q

The first key question when formulating corporate strategy is:

A

In what stages of the industry value chain should the firm participate?

68
Q

Vertical integration

A

the firm’s ownership of its production of needed inputs or of the channels by which it distributes its outputs.

Shirt manufacturer going to clothing store

69
Q

Industry value chain (vertical value chain)

A

Depiction of the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing.

70
Q

Examples of a backward and forward vertical integration along the industry value chain

A 
Stage 1: raw materials
Stage 2: Components, intermediate goods
Stage 3: FInal assembly, manufacturing 
Stage 4: Marketing, Sales
Stage 5: After-sales service and support
71
Q

Stage 1: raw materials

A

The raw materials to make your cell phone, such as chemicals, ceramics, metals, oil for plastic, and so on, are commodities.

72
Q

Stage 2: Components, intermediate goods

A

Elements such as integrated circuits, dis-plays, touchscreens, cameras, and batteries are provided by firms

73
Q

Stage 3: FInal assembly, manufacturing

A

Original equipment manufacturing firms (OEMs) such as Flextronics (Singapore) or Foxconn (Taiwan) typically assemble cell phones under contract for consumer electronics and telecommunications companies such as Apple

74
Q

Stage 4: Marketing, Sales

Stage 5: After-sales service and support

A

Finally, to get wireless data and voice service, you pick a service provider such as AT&T,

75
Q

How many people use this full 5-step model?

A

In general, fewer firms are fully vertically integrated.

Most firms concentrate on only a few stages in the industry value chain, and some firms just focus on one

76
Q

backward vertical integration

A

Changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain.

77
Q

forward vertical integration

A

Changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.

78
Q

BENEFITS OF VERTICAL INTEGRATION

A

Vertical integration, either backward or forward, can have a number of benefits, including:

1) Lowering costs. Improving quality.
2) Facilitating scheduling and planning.
3) Facilitating investments in specialized assets.
4) Securing critical supplies and distribution channels.

79
Q

specialized assets

A

Unique assets with high opportunity cost: They have significantly more value in their in-tended use than in their next-best use. They come in three types: site specificity, physical-asset specificity, and human-asset specificity

80
Q

Site specificity

A

assets required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting.

81
Q

Physical-asset specificity

A

assets whose physical and engineering properties are designed to satisfy a particular customer. Examples include the bottling machinery for E&J Gallo.

82
Q

Human-asset specificity

A

investments made in human capital to acquire unique knowl-edge and skills, such as mastering the routines and procedures of a specific organization, which are not transferable to a different employer.

83
Q

Opportunism

A

defined as self-interest seeking with guile

84
Q

RISKS OF VERTICAL INTEGRATION

A

It is important to note that the risks of vertical integration can outweigh the benefits. Depending on the situation, vertical integration has several risks, some of which directly counter the potential benefits, including:

1) Increasing costs.
2) Reducing quality.
3) Reducing flexibility.
4) Increasing the potential for legal repercussions.

85
Q

vertical market failure

A

When the markets along the industry value chain are too risky, and alternatives too costly in time or money.

86
Q

END OF Start of Vertical integration along the industry value chain; Pages 191-197.

A

END OF Start of Vertical integration along the industry value chain; Pages 191-197.

87
Q

Strategic Management Frank T. Rothaermel

A

Strategic Management Frank T. Rothaermel

88
Q

M&A

A

Mergers and acquisitions

89
Q

Merger defintion

A

Joining of two independent companies to form a combined entity

90
Q

Aspects of a merger

A

Tend to be friendly
Example: Disney’s acquisition of Pixar was a friendly one, in which both management teams believed the joining was a good idea

91
Q

Acquisition definition

A

The purchase or takeover of one company by another

Can be friendly or unfriendly

92
Q

____ can also be a defining factor for mergers and acquisitions

A

Size!

The combining of two firms of comparable size is often described as a merger when it may be an acquisition

93
Q

Hostile takeover

A

Acquisition in which the target company does not wish to be acquired

94
Q

Horizontal integration

A

The process of merging with competitors, leading to industry consolidation

Clothing store buying another clothing store

95
Q

3 benefits to horizontal integration:

A

1) Reduction in competitive intensity
2) Lower costs
3) Increased differentiation
4) Gain access to new capability or competency
5) Gain access to new market

96
Q

Horizontal integration can favourably affect several of Porter’s five forces for the surviving firms:

A

1) Strengthening bargaining power vis-a-vis supplies and buyers
2) Reducing the threat of entry
3) Reducing rivalry among existing firms

97
Q

The FTC and or the European commision usually must do what?

A

Approve any large horizonal integration activity

98
Q

Horizontal integration for lower costs

A

Through economies of scale, enhance their economic value creation, and in turn their performance

Firms with high fixed costs must reach economies of scale to make money

99
Q

Horizontal integration through M&A can help firms strengthen their competitive positions by increasing the differentiation of their products and service offerings

A

This is done by filling in gaps in a firm’s product offerings

100
Q

END OF Strategic Management Frank T. Rothaermel

A

END OF Strategic Management Frank T. Rothaermel

101
Q

START OF Concepts in strategic management and business policy

A

START OF Concepts in strategic management and business policy

102
Q 
Value chain
(Industry value chain IVC)
A

Linked set of value-creating activities that begin with basic raw materials coming from suppliers, moving on to a series of value-added activities involved in producing and marketing a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer

103
Q

Value-chain analysis works for every type of business

A

Regardless if it is a service or manufacture a product

104
Q

Typical value-chain for a manufactured prouct

A

Raw materials > Primary manufacturing > Fabrication > Distributor > Retailer

105
Q

The value chains of most industries can be split into two segments

A

1) Upstream

2) Downstream

106
Q

Center of gravity

A

Part of the chain where the company’s greatest expertise and capabilities lie – its core competencies

107
Q

Porter proposes that a manufacturing firm’s primary activities usually begin with _____

A

Inbound logistics (raw materials handling and warehousing)

108
Q

Primary activities

A

Inbound logistics > Operations > Outbound logistics > Marketing and Sales > Sales

109
Q

Corporate value-chain analysis involves 3 steps

A

1) Examine each product line’s value chain in terms of the various activities involved in producing that product or service
2) Examine the “linkages” within each product line’s value chain
3) Examine the potential synergies among the value chains or different product lines or business units

110
Q

Linkages

A

The connections between the way one value activity (IE marketing) is performed and the cost of performance of another activity (IE quality control)

111
Q

Economies of scope

A

Results when the value chains of two sperate products or services share activities, such as the same marketing channels or manufacturing facilities

112
Q

Video From Norine

A

Company’s portion of the total scales in relation to the market or industry in which it operates

113
Q

Questions to ask for market share

A

What market is most relevant to you?
What time period is required?
What specific sales info can be used?

114
Q

CHanges in market share are monitored by investors and industry analsysts

A
  • Signals the relative competitiveness of a company

- Increases in MS should allow a company to achieve a greater scale in operations (lower costs, increase profitability)

115
Q

Market share reflects state of industry

A
  • If industry is growing, the company wants to grow at the same pace or faster
  • Mature companies and major players “fight” to increase market share
116
Q

Why may a market share differ over time?

A
  • New competitor enter or competitor exits
  • Competitor has undertaken some M&A activity
  • MS calculated during a competitor promotion / sale
117
Q

Industry Structure

A

Largely determined by number and size of competitors (Aka degree of concentration)

118
Q

Reasons for merger and acquisitions

A
  • improve cost and quality
  • Acquire new capabilities / technologies
  • Gain market share
  • Stop intense competition
  • Enter new markets
119
Q

HHI in theory

A

A^2+B^2+C^2+N^2
1

For this course we ONLY USE THE FIRST 4 INDUSTRIES

120
Q

If HHI is less than 1800 or change in HHI is less than 50, than the industry is _______________________

A

not concentrated

(Therefore, HHI>1800 =

121
Q

Lecture and beyond

A

Lecture and beyond

122
Q

“Diamond E Framework”

A

1) Want to do
2) Need to do
3) Can do

123
Q

How does a company attain Economies of scale?

A
  • Spread fixed costs over greater volume
  • Perform operations differently and more efficiently at larger volume
  • “Redesign” products for volume production, including specialized systems and equipment
  • Use purchasing power to reduce material costs
  • Take advantage of physical properties (ie bigger stores)
  • Improve capacity utilization (some plants only operate 1-2 8 hour shifts)
124
Q

First mover advantage (FMA)

A

Generally accepted belief that an early entry into a new industry or product category yields an insuperable head start

  • Better access to resources / channels / customers
  • Steps ahead on experince and learning curve

Research shows this doesn’t always hold true

Depends on dynamic of industry

  • Market growth
  • Tech changes
125
Q

Hyper-competition

A

Everyone is fighting to be the best and be the first, no one can get ahead of the game

Frequency, boldness, and aggressiveness of dynamic movement by players accelerates to create a condition of constant disequilibrium and change

Short product life cycles
New technologies
Frequent entry by outsidersRepositioning by incumbents
Tactical redefinition of industry boundaries
Companies are willing to cannibalize their own products to gain any competitive advantage

Hard to maintain competitive advantage as the competitors imitate successful strategies (Samsung releasing a product, apple soon having that too)

126
Q

Cannibalization from a business POV

A

Competing against your own products

Example: New iPhone coming out each year

127
Q

Upstream players

A

Your suppliers and your suppliers suppliers

Costs, performance features, and quality of inputs provided by suppliers
Upstream providers influence your costs and product performance

Upstream providers influence your costs and product performance

128
Q

Down stream players

A

All whole sale /retail channel intermediaries between you and the buyer/user

Costs and margins are part of price paid by ultimate end-user
Activities performed by downstream partners affect the satisfaction of your end-users

Activities performed by downstream partners affect the satisfaction of your end user, and the price

129
Q

Steps to identify a IVC

A

1) Identify the major activities / stages
2) Determine the required elements at each stage (equipment, supplies, resources, knowledge, labor)
3) Determine the unique value/quality contributed at each stage
4) Identify which stage(s) are core to industry and undertaken by industry players (center of gravity)

130
Q

Revised generic industry value chain for a manufactured product

A 
Sage 0: Product design 
Stage 1: raw materials
Stage 2: Components, intermediate goods
Stage 3: FInal assembly, manufacturing 
Stage 4: Marketing, Sales
Stage 5: After-sales service and support
STage 6: Recycling
131
Q

DO NOT USE INTERNAL OR ORGANIZATIONAL VALUE CHAIN

A

DO NOT USE MICHAEL PORTER’S CHAIN

132
Q

Market share definition

A

A company’s portion of the total sales in relation to the market or industry in which it operates

133
Q

Changes in MS are monitored by investors and industry analysts

A

Signals the relative competitiveness of a company
Increases in MS should allow a company to achieve greater scale in operations
Lower costs
Increase profitability

134
Q

Why might your market share differ over time

A

Assuming a company has not done anything different, and there are no major breakthroughs or product launches
A new competitor enters market/competitor exits market
A competitor has undertaken some M&A activity
MS Calculated during competitor promotion / sale
Industry grows
it depends on how much business you gain from
growth and if your company grows faster or slower
than industry

135
Q

Reasons for M&A (merger and acquisition)

A 
Improve cost and quality
Acquire new capabilities/technologies
Gain market share
Stop intense competition
Enter new markets
136
Q

How does a company attain EOS (Economies of scale)

A

Spread fixed costs over greater volume
Perform operations differently and more efficiently at larger volume
“Redesign” products for volume production, including specialized systems and equipment
Use purchasing power to reduce material costs
Take advantage of physical properties (ie big box stores)
Improve capacity utilization

MGMT 290: Industry Analysis (11 decks)

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