Prelim Written Flashcards
What are the principles of strategy?
- Being Different
- Making Trade-Offs
- Creating Fit
Principle 1: Being Different
Choose to perform activities differently or to perform different activities than rivals do.
Choose a different set of activities to deliver a unique mix of value.
Principle Two: Making Trade-Offs
Difficult to straddle but necessary due to:
-resource scarcity
-inconsistencies in expectations
-incompatibility in activities
-limits on coordination and control
Principle 3: Creating Fit
Everything matters: creating fit among a company’s activities
Step 1: Consistency between each activity and the overall strategy
Step 2: Activities reinforcing each other
Step 3: Optimization of effort from the question of “how” to “how much”
Fit locks out imitators by creating a chain that is as strong as its strongest link
What are the five forces?
- Threat of entry (focal industry)
- Bargaining power of suppliers (value chain)
- Bargaining power of buyers
- Threat of substitutes (other industries)
- Intensity of rivalry
Intensity of rivalry
Usually the most powerful of the five forces
Threat of rivalry is stronger when
- there are MORE firms in an industry
- it is DIFFICULT to differentiate the product
- when the market is NOT GROWING
- Firms CANNOT exit the market easily
Ex. does the soft drink industry have high, medium, or low rivalry?
Relatively low, structure-wise for the industry
Mainly Coke vs. Pepsi
Threat of entry (focal industry)
Barriers to entry:
- economies of scale and scope
- network effects
- experience and learning curve advantages
- ownership of scarce resources/proprietary technology
- government policy and regulation
- reputation/brand
- access to distribution channels/distributor agreements
- sunk costs & exit barriers
Threat of entry is stronger when
- entry of barriers are LOW
- LARGE pool of entry candidates exists
- entrants CAN expect to earn attractive profits
- incumbents are UNABLE to contest entrants’ efforts
Ex. does the social media industry have high, medium, or low threat of entry?
Relatively low, user base is the most important resource
Bargaining power of suppliers
Suppliers have high bargaining power when
- supplied items make up a LARGE portion of product costs
- HIGH switching costs
- suppliers have GOOD reputations
- CAN supply a component cheaper than industry members can make it themselves
- FEW substitutions for the supplied items
- supplied items are CRUCIAL to production process or product quality
- suppliers EXPERIENCE demand growth
Ex. does the airline industry have high, medium, or low supplier bargaining power?
High because the equipment is crucial and there are no perfect substitutes
Bargaining power of buyers
Buyers have high bargaining power when
- buyers’ power is HIGHLY concentrated (small number of buyers, most people need these buyers)
- they buy LARGE quantities
- they CAN integrate backward
- industry’s product is STANDARDIZED (easy to compare across suppliers)
- their costs of switching to substitutes or competitors are LOW
- they CAN purchase from multiple sellers
Ex. does the hotel industry have high, medium, or low buyer bargaining power?
High, especially in recent years
Hotels’ bargaining power is low
OTAs (online travel agency) charge 20-30%
Threat of substitutes
Substitutes matter when customers are attracted to the products of firms in other industries.
Ex. Eyeglasses vs. contact lens vs. lasik
Sugar vs. artificial sweeteners
Print newspapers vs. TV vs. online media
Competitive threat of substitues is stronger when they are
READILY available
Priced SIMILARLY OR LOWER
Believed to have COMPARABLE OR BETTER performance features
Associated with LOW switching costs
What are the four generic strategies? How do they differ?
- cost leadership (broad and cost)
- focused low-cost (narrow and cost)
- differentiation (broad and uniqueness)
- niche (narrow, uniqueness)
narrow and broad are competitive scope within industry
cost and uniqueness are source of competitive advantage
What are the major cost drivers (5)?
- economies of scale
- economies of scope
- improve production techniques
- lower input costs
- economies of learning
Cost Driver 1: Economies of Scale
optimize use of indivisible resources
specialization and division of labour
average cost per unit declines as volume of output increases (min. efficiency scale) then increases again
- fixed costs
- indivisible resources
Cost Driver 2: Economies of Scope
create a mix of products and services that share inputs
- cost of producing several different products together is lower than the cost of producing them separately
- average cost decreases to optimal level then increases
