Lecture 2 Flashcards
What is the role of profit in business?
profitability
What is a challenging thought about businesses, profit and pollution?
more profit is synonymous with more pollution. It’s good to acknowledge that firms have other motivators than just profit. Only focusing on profit does not motivate employees and stakeholders, makes the company have short term value. We don’t wake up to breathe, it’s important but not the purpose of living.
How do we balance strategic and financial goals?
Balance scorecard
how do we look at stakeholders?
how do customers see us?
what must we excel us?
can we continue and improve and create value?
Some ceos want companies to put social responsibility above profit.
How do you create shared value?
Creating shared value - by micheal porter and mark kramer.
creating benefit for customers and society, selling a product and solving a problem
same time creating economic value for the business in the form of profit
How do companies set long term objectives?
for example 50% electrification by 2030
regulations (macro environment)
competition (industry environment)
financial capabilities
demand
Looking at the macro and industry environment to then build objectives and a strategy.
What is strategic fit?
refers to the consistency of a firm’s strategy: (1) with the firm’s external environment and
(2) with its internal environment especially with its goals values, resources and capabilities
what is a major reason for the decline and failure of some companies?
A major reason for the decline and failure of some companies comes from their having a strategy that lacks consistency with either the internal or the external environments.
The decline of Nokia may be attributed to a strategy which failed to take account of a major change in its external environment: the growing consumer demand for smartphones.
Why do an industry analysis?
To understand how industry structure drives competition, which determines the level of industry profitability.
To assess industry attractiveness.
To use evidence on changes in industry structure to forecast future profitability.
To formulate strategies to change industry structure to improve industry profitability.
To identify Key Success Factors.
good example: the music industry
What can affect industry profitability?
Competition. The level of industry profitability is not random, nor is it solely the result of industry-specific factors; instead, it is determined by the systematic influences of the industry’s structure.
What are the 3 key determinants for industry profitability (making one industry more profitable than others):
- the value of the product to costumers
- intensity of competition
- relative bargaining power at different stages of the value chain (rare products for example.. vintage cars)
What determines rivalry between established competitors?
- concentration (number and size distribution of firms
- diversity of competitors (origins, objectives, cost and strategies)
if they are similar, profit is higher. If they are different, profit is lower, lack of creativity
Free was accused of creating illegal relations (cartel)
*Product differentiation
the luxury industry is offering differentiation. They’re creating customer loyalty by the product offered.
What is the underlying theory of how industry structure drives competitive behavior and determines industry profitability?
provided by industrial organization (IO) economics
What are The Structural Determinants of Competition?
Porters five forces of competition:
- supplier power (Buyers’price sensitivity, Relative bargaining power)
- Substitute competition (Relative prices & performance of substitutes)
- Buyer power (Buyers switching costs, Buyers information) ¨
- Threat of new entrants (Economies of scale, Legal/regulatory barriers)
- Industry rivalry (Product differentiation, Diversity of competition)
What is the general rule of higher/lower profitability?
- If rivalry is intense and primarily focused on price, it will lead to a decrease in profitability.
- However, if rivalry is based on features, differentiation, brand, and service, it can support higher profitability.
What are some historical products that have never been threatened?
tobacco, gasoline
their profitability has been protected. When the prices go up people look for substitutes.
substitute products are not made in the same industry! For example, the electronic cigarette is a substitute for the traditional cigarette. Tablet/ipad for the newspaper.
