Midterm

Question 1

Strategy

Answer 1

Strategy is a set of integrated actions to maximize firm performance

Question 2

Draw the value creation diagram

Answer 2

…

Question 3

What is the goal of strategy?

Answer 3

To maximize the gap being the customer’s WTP and the opportunity cost (OC) of suppliers

Question 4

How is value created?

Answer 4

(1) increase WTP
(2) decrease OC

→ The gap between the willingness to pay of its customers and
the total cost it must incur to carry out its business

Question 5

Competitive advantage

Answer 5

Competitive advantage is what makes it possible for a company to sell its products or services at a greater economic profit than rival firms operating in the same business. It requires value creation.

Question 6

Porter’s 5 forces

Answer 6

1. Competition among rivals (8)
2. Threat of new entrants (6)
3. Bargaining power of suppliers (7)
4. Bargaining power of buyers (7)
5. Threat of substitutes

Question 7

List the factors that affect competitive rivalry

Answer 7

• level of differentiation
• number of competitors and concentration
• industry growth
• fixed costs
• switching costs
• exit barriers
• competitors with high strategic stakes
• capacity increased in large increments

Question 8

List the factors that affect the threat of new entrants

Answer 8

• level of differentiation
• economies of scale
• fixed costs
• switching costs
• access to distribution channels
• value of experience

Question 9

List the factors that affect buyer/supplier bargaining power

Answer 9

• concentration among buyers
• buyer’s total product costs as a fraction of industry product costs
• importance of industry’s product to quality of buyer’s product
• standardization
• buyer’s profit level
• buyer’s ability to integrate backwards
• buyer’s knowledge of industry profits

Question 10

What does the availability of substitutes affect most?

Answer 10

It puts a ceiling on the consumer’s WTP.

Question 11

How can you increase WTP?

Answer 11

• differentiation
• perceived differentiation
• complement

Question 12

How can you decrease cost?

Answer 12

• economies of scale
• access to resources

Question 13

What kind of resources create competitive advantage? Give examples.

Answer 13

• rare
  → land for Walmart
• inimitable
  → company culture
• valuable
  → data for AI companies
• non-tradeable / non-separable from the firm
  → Coke’s brand image

Question 14

What kind of competitive advantages are more sustainable?

Answer 14

• those based on rare, inimitable, non-tradeable resources
• those based on intangible resources
• those based on choices/actions that are based on an interdependent system of organizational choices

Question 15

Two features of good strategy

Answer 15

1) Allowing trade-offs
2) Being consistent

Question 16

Why is it hard to be profitable as an airline?

Answer 16

• capital intensive
• competition on price
• substitutes

Question 17

List some of the actions taken by Southwest for value creation

Answer 17

• frequent service
• fleet of same aircraft
• short-haul routes
• no meals
• uncongested airports
• no membership in reservation system
• no seat assignments
• single-class service
• no baggage transfers
• point-to-point system

Question 18

What are some of Southwest’s trade-offs? How does that benefit or hurt them?

Answer 18

1. Single class (no meals, no seat assignment, no reservation)
   → Savings in turn-around time, Savings in costs of meal, Eliminates intermediary cost, Lower training costs
   → Giving up higher paying
   customers: business class
   passengers
2. Point-to-point (not hub-and-spoke)
   → Shorter flights for more capacity utilization, smaller airport which allows savings on landing fees and on time performance with reduced taxi and in-air waiting
   → Flying to and from small
   cities: No possibility of connection/transfer, Cannot do long-haul flights