Midterm Flashcards
Strategy Definition
Definition: A plan for achieving an organization’s goal conditional on the it’s position, capabilities, and the cost to change these conditions.
For most firms, the goal is to maximize profits.
Integrated set of choices that position the business in its industry so as to generate superior financial returns over the long-run.
ICONS - what each letter stands for
I : Industry C: Capabilities & competitive interaction O: Organization N: Novelty S: Society
What is the strategy problem?
Economics says that when markets work properly, profits are zero (they match opportunity costs).
Strategy is about finding a way around this “problem”.
Describe the market power industry typology.
Monopolized Differentiated goods Low Threat of Entry (TofE) Poor Substitutes Low rivalry High profits Average Revenue > Average Costs Profits > 0
Describe the Monopolistic Competition Industry Typology.
Differentiated goods High TofE Partial substitutes Local rivalry Temporary profits. AR = AC Profits = 0
Describe the Perfect Competition Industry Typology
Commodity goods High TofE Good Substitutes High rivalry Low profits. AR = AC Profits = 0
Give an example of a market with undifferentiated products?
Uber & Lyft
Undifferentiated product
No barriers to entry.
Competition depends on opportunity costs.
Takehome estimated to be about the prevailing wage for entry positions.
Give an example of an industry with monopolistic competition?
Restaurants
Classic example of “differentiated” or “monopolistic competition”
Firms compete by positioning
As customers move to other restaurants, firms adjust position.
Long run profits = 0.
Intangibles needed to make profits higher.
Name the 5 forces.
RIVALRY AMONG EXISTING COMPETITORS THREAT OF SUBSTITUTES THREAT OF NEW ENTRANTS BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF CUSTOMERS
Entry Strategies for Defended Industries (do we need this one?)
Coke example:
Pepsi’s attack on Coke in the U.S. illustrates some principles about how to break into an industry and catch up with a dominant player
Take advantage of change in the environment (e.g., rise of supermarkets)
Go to where the customers are going to be (e.g., suburbs)
At first, attack indirectly
Different segment (Young: “Pepsi Generation”)
Different channel (Supermarkets: Coke not entrenched)
Use the incumbent’s strength against them: “Pepsi Challenge”
Do NOT undermine industry structure (you have to live there!)
Pepsi could have tried to gain share by dropping its price, but didn’t.
Describe a case with a duopoly
Coke & Pepsi
Describe some strategies to break into an industry with an existing dominant player.
Coke & Pepsi:
Take advantage of change in the environment (e.g., rise of supermarkets)
Go to where the customers are going to be (e.g., suburbs)
At first, attack indirectly
Different segment (Young: “Pepsi Generation”)
Different channel (Supermarkets: Coke not entrenched)
Use the incumbent’s strength against them: “Pepsi Challenge”
What does VRIN Stand for?
VRIN
Valuable – reduces costs or increases willingness to pay
Rare – not possessed by rivals
Inimitable – difficult to copy
Non-substitutable – Others couldn’t accomplish the same thing in a different way
Describe the 3 consistency checks.
Internal consistency:
Are my systems and operations consistent with my strategy?
External consistency:
Is my strategy consistent with how others will respond?
Dynamic consistency:
Is my strategy consistent with the maintenance of long-term advantage.
Describe a case that had these Industry conditions:
Industry divided into mass and niche producers
For niche, few barriers to entry, many competitors, and some substitutes must compete on VRIN capabilities.
Ducati
Describe a case that used a niche strategy to expand their business.
Ducati
More finely tuned to customer needs
(Better application of intangibles, Greater customer loyalty; better retention, Higher willingness to pay)
Barrier to entry still needed. Ducati uses its community as a barrier.
Focus itself may bar bigger players, because what is needed to serve a niche is often inconsistent with what it takes to be broad.
Niche players can be vulnerable to changes in perception of leading products.
Describe the idea for Porter’s generic strategy.
Firms must avoid getting “stuck in the middle” where operations don’t support strategy. As a result: If they compete at a broad/industry level, they must choose Cost leadership (Walmart), OR Performance leadership ( BMW) If they choose a particular niche, they must focus.
