Class 1: Envir. Analysis / Five Forces / Value Based Competition Flashcards
What are the three players or topics in this course?
- Firm 2. Environment 3.Change
How many and which are the frameworks in which to think about strategy?
Broad (SWOT) and Deep
What macro-environment tool and microenvironmental tools are emphasized at the start of this course?
Macro = Environmental Analysis Micro = Five Forces Framework by Michael Porter
What are the 6 categories contained within an Environmental Analysis?
D.S.T. (Distance) M.P.G( Miles Per Gallon) 1. Demographic Trends (age, birth, locations) 2. Socio-Cultural Influences (ways people interact with each other) 3. Technological Developments 4. Macroeconomic Impact (growth rates, incflation, income per capita) 5. Political Pressuer (law that enables or limits transactions) 6. Global Trade Issues (flow of goods, transport/trade)
How is an industry defined within strategy academically? How should this be approached practically?
From an academic standpoint in strategy, and the industry is defined based on SUBSTITUTION. (1) In the buyer’s eye toward products/services and (2) If the supplier/seller can make changes to satisfy demand needs In real life, a company should a BROAD and NARROW approach to defining this industry to uncover the most insights
What are the 5 Forces Framework by M. Porter? How does each one play in broad terms?
Rivals - 2Ts - 2Bs
1. Intensity of Rivalry [Less intense with fewer firms, lowering cost is a lose/lose for all | Minimum Efficient Firm Size or Scale= how much of the industry they must have to be a viable business]. Firms have to INNOVATE to be more efficient and/or provide more value.
2. Threat of New Entrants [Sunk costs, patents, location, loyalty, location)
3. Treats of Substitution [Buyers can easily switch. NOTE: If substitutes become too close, maybe they become a competitor and we include them as part of the same industry analysis]
4. Bargaining Power of Buyers [Few buyers, willing to switch, Appe differentiated by offering unique products]
5. Bargaining Power of Suppliers [Few of suppliers, goods are unique to the buyer market. Ex. Apple avoided Microsoft and Dell by vertically integrating. Dell bought made-to-order to not but materials at release cost]
What is the point of strategy and rivalry with regard to WTP?
To divert the value created (the difference between the cost of production and the WTP) towards an organization away from the central players.
What is a value-based competition? What are the two “ends” from where this can be done?
When firms seek to provide more value than a rival, value-added to the customer. A price war eventually can become a lose lose.
- Increasing the WTP by customers
- Lowering the cost of production
Why would a low cost option (Nissan Versa) not seek to charge the minimum to price out the rest of the market? 3 reasons
- The price would be so low that decreases profits, as they are going much below WTP. They would make the same profit, assuming a certain level of the market, while making fewer cars.
- Not all buyers have the same WTP do the same car, people make “irrational choices”, the dealer is close to my house for example
- Buyer variability creates different segments in real life, beyond price.
How do rivalries shape strategy? [2]
- Less similarity betwene firms, less profitable to try to take away those other customers.
- Firm develop strategies around specific segments, WHERE THEY CREATE MORE VALUE THAN OTHERS. Firms intentionally magnify differences
What is a Focused Differentiator?
A company whose strategy is to boost the willingness to pay for a specific segment of the market.
What is the Cost Leadership Strategy?
- A strategy focused on costs, but not from a close-focus standpoint. Instead, from BREADTH of offering and SCALE.
- Toyota
- High production scale
- Lower cosrts
- Create valiue across several markers (with main shares in various large markets)
- Substantial up front fixed costs (R&D and production readiness)
- High production scale
- What are the 4 strategy positions quadrants and the 2 respective axis?
2 axis
x = Source of advanatge (Cost and Uniqueness)
y =Breadth of competitive scope within industry (Borad and Narrow)
What are ways to 1. Increasing WTP and 2. Decreasing cost? Why not pursue both, say Target and Walmart attaching each other (give two reasons)?
- Differentiation reduces the intensity of rivalry, and then each company can be more profitable on their own segments
- The difficulty of following both firms approaches effectively at the same time -> trade-offs below
