Lecture 4 - Context of Strategy - Strategic Purpose: The external macro and micro Environment

Question 1

The highest level layer is

Answer 1

The macro environment

Question 2

The macro environment consists of

Answer 2

Broad environmental factors that impact to a greater or lesser extent on all organisations

Question 3

What is the next layer after the macro environment?

Answer 3

Industry/sector

Question 4

What is an industry/sector made up of?

Answer 4

Organisations producing the same sorts of products and services

Question 5

Competitors and markets are…

Answer 5

…the most immediate layer surrounding organisations

Question 6

The concept of strategic groups helps to…

Answer 6

…identify different kinds of competitors

Question 7

What are Porter’s 5 forces that identify industry attractiveness in terms of competition?

Answer 7

1. Threat of entry
2. Power of suppliers
3. Power of buyers
4. Threat of substitutes
5. Rivalry amongst existing competitors

Question 8

The threat of entry puts a…

Answer 8

…cap on profit potential of industry

Question 9

When the threat of entry is high, incumbents must:

Answer 9

Hold down their prices

or

Boost investment to deter new competitors

Question 10

The threat of entry in an industry depends on…

Answer 10

…height of entry barriers present and reaction entrants can expect from incumbents

Question 11

What are the 7 main sources of barriers to entry?

Answer 11

1. Supply-side economies of scale
2. Demand-side benefits of scale
3. Customer switching costs
4. Capital requirements
5. Incumbency advantages independent of size
6. Unequal access to distribution channels
7. Restrictive government policy

Question 12

Buyers are powerful if…

Answer 12

…they have negotiating leverage relative to industry participants

…especially if they are price sensitive, using their clout primarily to pressure price reductions.

Question 13

Buyer power is likely to be high when:

Answer 13

• Purchase a large part of suppliers’ output (big customer
• Buyers are concentrated
• Buyers have low switching costs
• Buyers can supply their own inputs (backward vertical integration

Question 14

Powerful suppliers capture more of the value for themselves by:

Answer 14

• charging higher prices
• limiting quality or services
• shifting costs to industry participants.

Question 15

Suppliers’ power is likely to be high when:

Answer 15

• Suppliers are concentrated (few of them)
• Provide specialist/rare service
• Switching costs are high (disruptive & expensive)
• Suppliers can integrate forwards (e.g. low cost airlines have cut out the use of travel agents)

Question 16

Substitutes

Answer 16

Products or services that offer a similar benefit to an industry’s products or services, but by a different process…(e.g. trains are substitute for cars)

Question 17

Substitutes take different forms:

Answer 17

• New products which are better, cheaper…
• Changing needs which means the product is no longer needed.
• Competitors’ product is NOT necessarily a substitute

Question 18

Customers will switch to substitute products if:

Answer 18

• The price/performance ratio of the substitute is superior (e.g. aluminium maybe more expensive than steel but it is more cost efficient for some car parts)
• The substitute benefits from an innovation that improves satisfaction

Question 19

Rivalry is increased when:

Answer 19

• Competitors are of roughly equal size
• Competitors are aggressive in seeking leadership
• Market is mature or declining
• High fixed costs
• Exit barriers are high
• Low level of differentiation

Question 20

Competitive rivals

Answer 20

Organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market (not substitutes).

Question 21

Advantages of the Five Forces Framework

Answer 21

• Identifies the attractiveness of industries.
• Good starting point for identifying the right strategies to compete in an industry.
• Easy to apply to all organisations, 
pubic and private.

Question 22

Rivalry is especially destructive to profitability if…

Answer 22

…it gravitates solely to price because price competition transfers profits directly from an industry to its customers.

Question 23

Disadvantages of the Five Forces Framework

Answer 23

• Difficulty to define the ‘right’ industry level
• Industry boundaries are not easily distinguishable – ‘convergent industries’.
• The forces may have a different impact on different organisations (e.g. large firms can deal with barriers to entry more easily than small firms).
• Does not recognize complementary products - coopetition
• Does not tell you how to get to competitive advantage

Question 24

3 Critiques against Five Forces Framework:

Answer 24

Co-operation critique
Dynamism critique
Complexity critique

Question 25

Co-operation critique

Answer 25

Assumes a competitive environment where a company can only succeed at the expense of others

Question 26

Dynamism critique

Answer 26

Uses static analysis of the industry and ignores trends

Question 27

Complexity critique

Answer 27

Industries may not be homogeneous
(luxury vs budget hotel)
Customer heterogeneity is ignored
Customers too can differ significantly and be part of different sections of the market - market segments

Question 28

Strategic groups

Answer 28

Organisations within an industry or sector with similar strategic characteristics

Question 29

Value innovation critique (Kim and Mauborgne, 2005)

Answer 29

Porter looked at competitive markets (i.e., red oceans)

Uncontested new blue ocean markets might be more attractive:

• Challenging acceptance assumptions about industry definitions,
• Looking across existing industries boundaries or the strategic groups, redefine buyers, etc.

Question 30

Porter looked at competitive markets (i.e., red oceans)

Uncontested new blue ocean markets might be more attractive:

• Challenging acceptance assumptions about industry definitions,
• Looking across existing industries boundaries or the strategic groups, redefine buyers, etc.

Answer 30

Value innovation critique (Kim and Mauborgne, 2005)

Question 31

Market segment

Answer 31

Group of customers who have similar needs that are different from customer needs in other parts of the market

Question 32

Competition within strategic groups

Answer 32

Is stronger than between groups

Question 33

Mobility barriers prevent…

Answer 33

Organisations moving from one strategic group to another (e.g. economies of scale and RD)

Question 34

Characteristics for identifying strategic groups

Answer 34

Scope of activities

Resource commitment

Question 35

Advantages of strategic groups

Answer 35

Understanding immediate - direct competition.

Analysis of mobility barriers - can be used to increase the profitability of an industry.

Analysis of strategic opportunities – attractive ‘strategic spaces’ within an industry.

White spaces (under-occupied) vs. black holes (impossible to exploit)