Day 1 Porter competitive forces pg second half 84- 87

Question 1

how can the threat of a substitute be downstream or indirect?

Answer 1

when a substitute replaces a buyer industry’s product. ex. sell software to travel agents but the buyer (travel agency) product (travel agents) have been substituted by the internet.

Question 2

with substitutes always being present, how are they easy to overlook?

Answer 2

because they may appear to be very different from the industry’s product. ex. for gift necktie and powertool can be substitutes

Question 3

T/F It is a substitute to do without, buy used, or do it yourself

Answer 3

T

Question 4

substitute products limit an industries profit potential. how do they do this?

Answer 4

by placing a ceiling on prices

Question 5

how does an industry avoid suffering in profitability and growth potential in regards to substitutes?

Answer 5

they have to distance themselves from substitutes through product performance, marketing, or other means

Question 6

T/F Substitutes only limit the profits in normal times. they do not limit profits an industry can reap in good times.

Answer 6

F

Question 7

The threat of a substitute is high if one of what 2 things is true?

Answer 7

1. the substitute offers an attractive price-performance trade-off to the industry’s product. ex. netflix instead of video rental store. 2. the buyers cost of switching to substitute is low. ex. switching from brand name to generic drug

Question 8

T/F Strategists should be alert to changes in other industries that may make them attractive substitues when they were not before. ex. now plastic can be used instead of steel in some auto components

Answer 8

T

Question 9

T/F High rivalry doesn’t limit the profitability of an industry

Answer 9

F

Question 10

The degree to which rivalry drives down an industry’s profit potential depends on what 2 things?

Answer 10

1. the intensity with which companies compete 2. the basis on which they compete (price, quality, etc)

Question 11

The intensity of rivalry is greatest if one of what 4 things is true?

Answer 11

1. competitors are numerous or are roughly equal in size and power 2. Industry growth is slow 3. exit barriers are high 4. rivals are highly committed to the business and have aspiration for leadership, especially if have goals that go beyond economic performance in the industry

Question 12

when there is not an industry leader, what is the result for the industry’s health?

Answer 12

the practices that are desirable for the industry go unenforced

Question 13

why does slow growth in an industry lead to fierce competition?

Answer 13

because there are fights for market share

Question 14

why do high exit barriers lead to fierce competition?

Answer 14

they keep the company in the market even with low or negative returns.

Question 15

what are examples of exit barriers (2)

Answer 15

1. highly specialized assets 2. managements devotion to a particular business

Question 16

how does the profitability of healthy competitors get hurt by high exit barriers?

Answer 16

because the excess capacity of the sick companies remains in use and they drag down the healthy ones

Question 17

rivalry is especially destructive to profitability if it gravitates solely to competing on what?

Answer 17

price

Question 18

price competition transfers profits directly from an industry to who?

Answer 18

its customers

Question 19

sustained price competition trains customers to pay less attention to what?

Answer 19

product features and service

Question 20

Price competition is most liable to occur if one of what 4 things are true?

Answer 20

1. products of rivals are nearly identical and there are few switching costs for buyers 2. fixed costs are high and marginal costs are low 3. capacity must be expanded in large increments to be efficient 4. the product is perishable

Question 21

products being nearly identical and having few switching costs for buyers encourages competitors to do what?

Answer 21

cut prices to win new customers

Question 22

what do high fixed costs and low marginal costs pressure competitors to do to their prices?

Answer 22

cut them below average costs and even close to marginal costs so they can steal some customers while still making some contribution to covering fixed costs

Question 23

Why is competing on dimensions other than price less likely to erode profitability?

Answer 23

because it improves customer value and can support higher prices

Question 24

What can competing on dimension other than price do besides improve customer value and support higher prices? (2)

Answer 24

1. it improves value relative to substitutes 2. it can raise the barriers facing new entrants

Question 25

which type of rivalry is more likely to undermine industry profitability? price or nonprice

Answer 25

price

Question 26

as important as the dimension on rivalry is whether rivals compete on the ____ dimension

Answer 26

same

Question 27

when all or many competitors aim to meet the same needs or compete on the same attributes, what is the result regarding competition?

Answer 27

it becomes a zero sum game

Question 28

T/F Zero sum compettion drives down profitability

Answer 28

T

Question 29

price competition can avoid becoming a zero sum game if companies do what?

Answer 29

take care to segment their markets, targeting their low price offering to different customers

Question 30

T/F Rivalry can be positive sum or increase the average profitability of an industry

Answer 30

T

Question 31

when can rivalry be a positive sum game?

Answer 31

when each competitor aims to serve the needs of different customer segments

Question 32

the opportunity for positive sum competition will be greater in industries with what type of customer groups?

Answer 32

diverse

Question 33

Why does industry structure, as manifested in the strength of the 5 competitive forces, determine the industry’s long run profit potential?

Answer 33

because the structure determines how the economic value created by the industry is divided (companies, substitues, suppliers, customers)

Question 34

It is a mistake to confuse the underlying industry structure with certain visible attributes of an industry. what are some examples of these? (4)

Answer 34

1. industry growth rate 2. technology and innovation 3. government 4. complementary products and services

Question 35

Why is a fast growing industry not always attractive?

Answer 35

because it can put suppliers in a powerful position, it can draw in entrants if there are low entry barriers, it wont guarantee profitability if customers are powerful or substitutes are attractive

Question 36

what is an example of how advanced technology or innovations are not by themselves enough to make an industry structurally attractive or not?

Answer 36

for instance you have mundane, low tech industries with price insensitive buyers, high switching costs, and high entry barriers that do better than sexy industries that attract competitors

Question 37

Is government inherently good or bad for industry profitability?

Answer 37

neither

Question 38

What is the best way to understand the influence of government on competition?

Answer 38

analyze how specific government policies affect the five competitive forces

Question 39

when do complements arise?

Answer 39

when the customer benefit of two products combined is greater than the sum of each products value in isolation

Question 40

Complements can be important when they affect what?

Answer 40

the overall demand for an industry’s product

Question 41

T/F The presence of strong complements is good for industry profitability

Answer 41

F not necessarily. can be bad or good

Question 42

how do complements affect profitability?

Answer 42

through the way they influence the five forces

Question 43

does the presence of complements raise or lower entry barriers?

Answer 43

can do either

Question 44

does the presence of complements make the threat of substitution greater or lesser

Answer 44

can do either. not enough feuling stations for electric cars but Itunes makes digital substitution for music easier

Question 45

even though industry structure is relatively stable you have to keep an eye on it. why?

Answer 45

because it is constantly undergoing modest adjustment and occoasionally can change abruptly

Question 46

the 5 competitive forces provide a framework for doing what in regards to shifts in structure?

Answer 46

identifying the most important industry developments and anticipating their impact on industry attractiveness

Question 47

what is an appropriate time horizon for most industries? What is the profitability that we are looking at in this time period?

Answer 47

3-5 years the average profitability

Question 48

The strenth of the competitive forces affects prices, costs, and the investment required to compete;thus the forces are directly tied to what 2 items of industry particupants?

Answer 48

B/S I/S