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
Cost Driver 3: Improve Production Techniques
mechanization and automation
efficient utilization of materials
increase precision
- ex. southwest airplanes
- ex. cashless toll collection system
Cost Driver 4: Inputs
location advantages
ownership of low-cost inputs
bargaining power
supplier cooperation
ex. woodbury commons premium outlets
- cheaper real estate
- 1 hr from port of nj
Cost Driver 5: Economies of Learning
accumulate cost-related knowledge and innovation
improve coordination and organization of tasks
- average cost per unit declines with cumulative volume over time as learning takes place and practices improve
What are the three types of value drivers (aka bases of differentiation?
- unique attributes of products and services
- features, performance, timing, geography
ex. energizer, #1 longest lasting battery - strong linkages within and between firms
- linkages among functions within the firm
- linkages among products and services
- linkages with other firms
ex. gmail and gcal -> within a firm
ex. spotify and universal music group -> between firms, licensing and agreement - special relationship with the customers
- reputation/marketing
- customization
- service and support
- network externalities
ex. tiktok and mckinsey
The four criteria
- Valuable (no: competitive disadvantage)
- Rare (no: competitive parity)
- Inimitable (no: temporary competitive advantage)
- Organized (no: unused competitive advantage)
-> all yes: sustainable competitive advantage that is difficult to duplicate
Test 1: Valuable
Does the resource drive a wedge between: willingness to pay and cost
Competitive disadvantage: a firm underperforming its rivals in the same industry
Test 2: Rare
Is the resource controlled by a small number of firms within the industry?
Competitive parity: a firm achieving average performance when compared to rivals in the same industry
Test 3: Inimitable
Can other firms imitate, obtain, or substitute your resources at a reasonable cost?
Ex. pharmaceutical patent (legal protections)
Ex. a cool food truck would not be inimitable
Temporary competitive advantage: competitive advantage that would be competed away through imitation and substitution over time
Barriers to imitation
- historical conditions
- access to resources due to the firm’s place in time and space (ex. wineries in Fingerlakes) - causal ambiguity
- others can’t identify the particular resources that create competitive advantage (ex. snapchat) - social complexity
- resources involve culture, relationships, or trust that are developed over the long term (ex. Ivy League) - property rights
- imitation would be illegal due to exclusive rights (ex. patents/trademarks)
Test 4: Organized to capture value
Is the firm organized to exploit the full potential of the resource?
Complementary resources should be available to enable a firm to realize the potential of VRI resource
- Reporting structure
- Compensation scheme
- Management control
- Supporting activities
Unused competitive advantage: potential competitive advantage that is not fully exploited
When VRIO framework is not satisfied: competitive parity and temporary competitive advantage
Taxonomy based on the existence of markets and technologies
Radical Innovation
Incremental Innovation
Architectural Innovation
Disruptive Innovation
Radical innovation
new to the world, novel combination of distant knowledge
Incremental innovation
improvement of existing products and processes
Architectural innovation
existing technologies reconfigured in a new way to attack new markets
disruptive innovation
leverages new technologies to attack existing markets
Different phases of the industry life cycle and key turning points between phases on the bell curve
emergent phase
growth phase
mature phase
key turning points:
annealing
shakeout
disruption
