Week 3 - Chapter 3

Question 1

In order to chart a company’s strategic course wisely, managers must first develop a deep understanding of the company’s present situation.

2 facets of a company’s situation are especially pertinent. What are they?

Answer 1

1 – Its external environment – most notably, the competitive conditions of the industry in which the company operates

2 – Its internal environment – particularly the company’s resources and organizational capabilities.

Question 2

What is the macro-environment?

Answer 2

The macro-environment encompasses the broad environmental context in which a company’s industry is situated.

Question 3

It’s important for managers to determine which macro-economic factors represent the most strategically relevant factors outside the firm’s industry boundaries.

What is meant by strategically relevant?

Answer 3

Strategically relevant means the macro-economic factors which are important enough to have a bearing on the decisions the company ultimately makes about its long-term direction, objectives, strategy and business model.

Question 4

What are the 6 components of the Macro-Environment?

Answer 4

(PESTEL analysis)

1 - Political factors
2 - Economics conditions
3 - Sociocultural forces
4 - Technological factors
5 - Environmental forces
6 - Legal and regulatory factors

Question 5

The most powerful and widely used tool for diagnosing the principal competitive pressures in a market is the 5 forces framework.

This framework, holds that competitive pressures on companies within an industry comes from 5 sources.

What are they?

Answer 5

1 - Competition from rival sellers

2 - Competition from potential new entrants to the industry

3 - Competition from producers of substitute products

4 - Supplier bargaining power

5 - Customer bargaining power

Question 6

Using the 5 forces model to determine the nature and strength of competitive pressures in a given industry involves 3 steps.

What are they?

Answer 6

1 - For each of the 5 forces, identify the different parties involved, along with the specific factors that bring about competitive pressures.

2 - Evaluate how strong the pressures stemming from each of the 5 forces are (strong, moderate, or weak)

3 - Determine whether the 5 forces, overall, are supportive of high industry profitability.

Question 7

The intensity of competition from rival sellers within an industry depends on a number of identifiable factors. What are they?

Answer 7

• Buyer demand is growing slowly or declining
• Buyer costs to switch brands are alow
• The products of rival sellers become less strongly differentiated
• Industry members have too much inventory or significant amounts of idle production capacity.
• The number of competitors increase and they become more equal in size and capability

Question 8

The seriousness of the threat of new entrants in a particular market depends on what 2 factors?

Answer 8

1 - Whether entry barriers are high or low

2 - The expected reaction of existing members to the entry of newcomers.

Question 9

Entry barriers are high (and threat of entry is low) when?

Answer 9

• Incumbents have large cost advantages over potential entrants due to economies of scale, experience, other cost advantages.
• Customers have strong brand preferences
• There are strong network effects
• High capital requirements

Question 10

3 factors determine whether the competitive pressures from substitute products are strong or weak. What are they?

Answer 10

Competitive pressures are stronger when:

1 - Good substitutes are readily available and attractively priced

2 - Buyers view the substitutes as comparable or better in terms of quality, performance, and other relevant attributes.

3 - Low switching costs

Question 11

There are 3 signs that the competitive strength of substitute products are increasing.

What are they?

Answer 11

1 - Whether the sales of substitutes are growing faster than the sale of the industry being analyzed.

2 - Whether the producers of substitutes are investing in adding capacity.

3 - Whether the producers of substitutes are earning progressively higher profits.

Question 12

Before assessing the competitive pressures coming from substitutes, company managers must identify the substitutes which involves what 2 steps?

Answer 12

1 - Determining where the industry boundaries lie

2 - Figuring out which other products or services can address the same basic customer needs as those produced by industry members.

Question 13

A variety of factors determine the strength of suppliers’ bargaining power.

Supplier power is stronger when?

Answer 13

• Demand for suppliers’ products is high and the products are in short supply
• It is difficult or costly for the industry members to switch their purchases from one supplier to another
• Suppliers provide an item that accounts for no more than a small fraction of the costs of the industry’s product.

Question 14

Whether buyers are able to exert strong competitive pressures on industry members depends on 2 factors.

What are they?

Answer 14

1 - The degree to which buyers have bargaining power

2 - The extent to which buyers are price-sensitive

Question 15

Buyer bargaining power is stronger when?

Answer 15

• Buyer demand is weak in relation to the available supply.
• Industry goods are standardized, or differentiation is weak.
• Buyers’ cost of switching to competing brands or substitutes are relatively low.

Question 16

What 3 factors increase buyer price sensitivity, resulting in greater competitive pressures on the industry as a result?

Answer 16

The following factors increase buyer price sensitivity and result in greater competitive pressures on the industry as a result:

1 - when buyers are earning low profits or have low income

2 - the product represents a large fraction of their total purchase

3 - the quality of the product is not uppermost in their considerations

Question 17

Effectively matching a company’s business strategy to prevailing competitive conditions has 2 aspects.

What are they?

Answer 17

1 - Pursuing avenues that shield the firm from as many of the different competitive pressures as possible.

2 - Initiating actions calculated to shift the competitive forces in the company’s favor by altering the underlying factors driving the 5 forces.

Question 18

The value net differs from the 5 forces framework in 3 important ways.

What are they?

Answer 18

1 - The value net focuses on the interactions of industry participants with a particular company. Thus it places the firm in the centre of the framework as shown in the diagram.

2 - The category of “competitors” is defined to included not only the focal firm’s direct competitors or industry rivals, but also the sellers of substitute products and potential entrants.

3 - The value net framework introduces a new category of industry participant that is not found in the 5 forces framework - that of “complementors”

Question 19

In the value net, there are 4 key connections to the center which is “The firm”.

What are they?

Answer 19

1 - Customers

2 - Complementors

3 - Suppliers

4 - Competitors

Question 20

What are complementors?

Answer 20

Complementors are the producers of complementary products, which are products that enhance the value of the focal firm’s products when they are used together (shoes and shoelaces).

Question 21

What are driving forces?

Answer 21

Driving forces are the major underlying causes of change in industry and competitive conditions

Question 22

Driving force analysis has 3 steps.

What are they?

Answer 22

1 - identifying what the driving forces are

2 - assessing whether the drivers of change are, on the whole, acting to make the industry more or less attractive

3 - determining what strategy changes are needed to prepare for the impact of the driving forces

Question 23

Most drivers of industry and competitive change fall into what categories?

Answer 23

• Changes in an industry’s long-term growth rate.
• Increasing globalization
• Emerging new internet capabilities and applications

Question 24

In terms of assessing the impact of the forces driving industry change, what 3 questions need to be answered?

Answer 24

1 –causing demand for the industry’s product to increase or decrease?

2 –making competition more or less intense?

3 – Will the combined impacts of the driving forces lead to higher or lower industry profitability?

Question 25

What is strategic group mapping?

Answer 25

Strategic group mapping is a technique for displaying the different markets or competitive positions that rival firms occupy in the industry.

Question 26

What is a strategic group?

Answer 26

A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions.

Question 27

What are the 4 steps for constructing a strategic group map?

Answer 27

1 – Identify the competitive characteristics that delineate strategic approaches used in the industry. Typical variables used in creating strategic group maps are price/quality range (high, medium, low), geographic coverage, product-line breadth (wide, narrow), degree of service offered, use of distribution channels (retail, wholesale, Internet, multiple), degree of vertical integration), and degree of diversification into other industries.

2 – Plot the firms on a 2 variable map using pairs of these variables.

3 – Assign firms occupying about the same map location to the same strategic group.

4 – Draw circles around each strategic group, making the circles proportional to the size of the group’s share of total industry sales revenues.

Question 28

Several guidelines need to be observed in creating strategic group maps.

What are they?

Answer 28

1 – The 2 variables selected as axes for the map should not be highly correlated; if they are, the circles on the map will fall along a diagonal and reveal nothing more about the relative positions of competitors than would be revealed by comparing the rivals on just one of the variables.

2 – The variables chosen as axes for the map should reflect important differences among rival approaches.

3 – The variables used as axes don’t have to be either quantitative or continuous.

4 – Drawing the sizes of the circles on the map proportional to the combined sales of the firms in each strategic group allows the map to reflect the relative sizes of each strategic group.

5 – If more than 2 good variables can be used as axes for the map, then it is wise to draw several maps to give different exposures to the competitive positioning relationships present in the industry’s structure.

Question 29

Some positions on the strategic map aren’t as attractive as others.

Give 2 reasons for this.

Answer 29

1 - Prevailing competitive pressures from the industry’s 5 forces may cause the profit potential of different strategic groups to vary.

2 - Industry driving forces may favor some strategic groups and hurt others.

Question 30

Why don’t less well-positioned firm on the strategy group map migrate to the more attractive positions?

Answer 30

Mobility barriers - Mobility barriers restrict firms in one strategic group from entering another more attractive strategic group in the same industry.

Question 31

Michael Porter’s SOAR Framework for Competitor Analysis points to 4 indicators of a rival’s likely strategic moves and countermoves.

What are they?

Answer 31

1 - Strategy

2 - Objectives

3 - Assumptions about itself and the industry

4 - Resources and capabilities

Question 32

What are Key Success Factors?

Answer 32

Key success factors - Key success factors are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are essential to surviving and thriving in the industry.

Question 33

An industry’s key success factors can always be deduced by asking what 3 questions?

Answer 33

1 - On what basis do buyers of the industry’s product choose between the competing brand of sellers?

2 - What resources and competitive capabilities must a company have to be competitively successful

3 - What shortcomings are almost certain to put a company at a significant competitive disadvantage?