Porter

Question 1

What is the circular flow model? What is it made up of?

Answer 1

System that shows how the resources and goods market are integrated.
Households (12 o’clock), resources market, firms, goods market

Question 2

Explain the relationship between firms and households

Answer 2

Raw materials are needed by firms and seen as owned by households.
Households expenditure on the firms’goods

Question 3

How are consumers key to a firm’s success?

Answer 3

Estimate sales/revenue - profit
Determine type and quantity of output produced
Determine profit maximising price to charge/effect of price changes on sales and total revenue
Estimate effects of new substitute launch or complement

Question 4

What is the difference between a new substitute and complement?

Answer 4

Substitute is functionally equivalent (e.g. butter and margarine)
Complement is jointly consumed (tennis racket and tennis ball)

Question 5

What is the Business Unit Strategy? (BUS)

Answer 5

Framework useful in organising diverse elements of microeconomics

Question 6

What is the BUS Focus?

Answer 6

The choice of strategy at the level of individual business units
- making appropriate strategic decisions given the market environment faced by the business unit
- decisions like pricing, advertising, product characteristics
Decisions affecting ONE PARTICULAR UNIT

Question 7

Give important determinants of profitability i.e. “playing a good game”

Answer 7

The operating environment

Differing business unit strategy

Question 8

How can firms still perform well in a poor environment?

Answer 8

Choosing the best strategy to outperform their rivals because STRATEGY MUST MATCH ENVIRONMENT

Question 9

List some various strategy frameworks

Answer 9

The Value Net, SWOT (Strengths, Weaknesses, Opportunities, Trends), PEST, PESTLE

Question 10

What are the origins of Porter’s Framework?

Answer 10

Structure-Conduct-Performance (S-C-P) theory

Question 11

What are the two main parts of Porter’s Framework?

Answer 11

Industry Analysis: what makes the market “tick” strong or poor market potential
Generic Strategy Formulation: strategic prescriptions based on industry analysis - what the firm can do

Question 12

Why do you need to define the market and what are the difficulties?

Answer 12

A sensible definition indicates good industry analysis.
It is difficult to define as it could be too broad or too narrow
Hard to include: competing products, geographical area, set of competitors
A solution is to use a number of definitions representing the range of of strategic options and explore the impact of each choice

Question 13

What does Porter’s Five Forces Framework represent?

Answer 13

The categorisation of the fundamental influences on market performance. It suggests that market performance is a function of the strength of 5 forces and the strength of the forces drives overall profitability

Question 14

What are the two hypotheses from Porter’s Framework?

Answer 14

1. Market performance is a relatively simple function of a set of underlying market characteristics
2. Firm performance is determined by inherent profitability of their environment

Question 15

What are the 5 Forces?

Answer 15

Competitive Rivalry within an industry
Bargaining Power of Customers
Bargaining Power of Suppliers
Threat of New Entrants
Threat of Substitute Products

Question 16

Explain Barriers to Entry/Threat of New Entrants and why are they important

Answer 16

Making it difficult for new firms to enter and compete
- advantage for incumbents over entrants e.g. loyal customer base
- low barriers leaders new firms into profitable industry prices DOWN
Significant barriers to entry increase the prosperity of market

Question 17

What are the main Barriers to Entry?

Answer 17

Brand Loyalty: brands customers are comfortable with
Economies of Scale: firms get cost advantages they more they produce
Control of Inputs or Distribution Channels: designing and getting the product out there
High Capital Requirements: high price of factory

Question 18

Outline Threat of Substitutes

Answer 18

Same job as industry’s product/ functionally equivalent
It concerns what the consumers regard as substitutes
Falls in prices of substitutes can reduce profitability
e.g. download music and CD sales

Question 19

What is Bargaining Power of Suppliers and Buyers (Customers)

Answer 19

Dual treatment - not the same force
Strong Suppliers can big up prices, increasing industry costs and reduce profitability e.g. unions, oil prices rise and profitability reduces for distributers
Powerful Buyers force down prices so industry profits fall e.g. Supermarkets power over agricultural markets
There is increased power when the cost of switching buyer or supplier is higher

Question 20

Outline Intensity and Form of Industry Rivalry

Answer 20

Intense rivalry will increase competition and decrease profitability
For mature markets or recessionary business cycles means competition for larger piece of static/shrinking pie
Fixed costs are large means firms must sell large quantities to cover costs and reduce prices
The more firms tolerate each other the lower the competition

Question 21

What does Porter say are the two routes to competitive advantage?

Answer 21

A Low Cost Strategy

A Differentiation Strategy

Question 22

How does Low Cost Strategy work? Remember KEY point and examples

Answer 22

Improving profitability by reducing costs to a minimum
It is a basic product with no differentiated “frills”
- Budget Airlines (no meals or entertainment)
- Own branded goods (fundamentals with basic packaging)
KEY: it almost always involves a reduction in quality and depends how consumers respond
They undercut other firms (EoS)
Higher margins reducing costs more than price

Question 23

How does a Differentiation Strategy work? Remember KEY point and examples

Answer 23

Usually adding extra benefits or features
- Airlines (more space, entertainment and food)
- Pharmaceuticals (new drugs with therapeutic benefits)
KEY: often (always?) involves incurring extra costs
Will only work if consumers perceive the extras as compensating for the increased cost

Question 24

What should differentiators do in order to be successful?

Answer 24

Try to identify sources of perceived higher value for customers
Willing to add costs if it adds value in the eye of the consumer
Communicate how the product is different

Question 25

What is the potential Third Strategy? examples

Answer 25

‘Focus’ Strategy
This doesn’t try to satisfy the entire market, just focuses on one e.g. particular buyer group, segment of product lines or geographical area
FOCUSES on serving a particular target well rather than industry wide
Can be low cost or differentiated
e.g. Weetabix Ltd (healthy wheat based)
Ikea (low cost furniture, build yourself)

Question 26

Which strategy should be chosen?

Answer 26

Choose based on an understanding of the profit drivers in a firm’s environment
Price strategies are viable in elastic markets
Price reductions attract significant extra sales volumes (Eos and decrease price)
Differentiation when people are less concerned with price (addictive or necessity)
Always exceptions and contradictions

Question 27

What are some critical perspectives of Porter? (7)

Answer 27

1. externally orientated/ market driven
2. relegates the importance of firm specific resources, capabilities and competencies
3. Qualitatively based so difficult to quantify, no numbers to discuss the strength of each option
4. Are generic strategies really going to give competitive advantage? easy for others to imitate
5. Prevent uncovering a genuinely innovative strategy?. forces you to think in a constrained way
6. Maybe being stuck in the middle isn’t bad? Firms can pursue both strategies e.g. Skoda (low cost and reliability) Hybrid strategies commonly accepted as viable (British Airways on European routes
7. Is the Government a force?