Week 8/ Chapter 8: Complements and Industry Attractiveness

Question 1

eBook - Read pages 103-104 Industry VS Firm Effects in determining firm performance

Answer 1

eBook - Read pages 103-104 Industry VS Firm Effects in determining firm performance

Question 2

Firm performance is determined primarily by two factors:

Answer 2

1) Industry effects

2) Firm effects

Question 3

1) Industry effects

Answer 3

Firm performance attrib-uted to the structure of the industry in which the firm competes.

Describe the underlying economic structure of the industry.

• They attribute firm performance to the industry in which the firm competes.
• The structure of an industry is determined by elements common to all industries, such as entry and exit barriers, number and size of companies, and types of products and services offered.

Question 4

2) Firm effects

Answer 4

Firm performance attributed to the actions strategic leaders take.

Question 5

Industry effects explain roughly ___ percent of overall firm performance

Answer 5

20%

Question 6

Firm effects (i.e specific managerial actions) explain about ____ percent of firm performance

Answer 6

55%

Question 7

External and internal factors combined explain roughly ____ percent of overall firm performance. The remaining ___ percent relates partly to business cycles and other effects

Answer 7

75%

25%

Question 8

Industry

Answer 8

A group of incumbent companies that face more or less the same set of sup-pliers and buyers

Question 9

Industry analysis

Answer 9

A method to (1) identify an industry’s profit potential and (2) derive implications for a firm’s strategic position within an industry.

Question 10

Strategic position

Answer 10

A firm’s strategic pro-file based on the difference between value creation and cost (V − C).

Question 11

Thompson, Peteraf, Gamble, Strickland (2018). Crafting & executing strategy: Evaluating industry attractiveness

Answer 11

Thompson, Peteraf, Gamble, Strickland (2018). Crafting & executing strategy: Evaluating industry attractiveness

Question 12

Step 1: Evaluating industry Attractivness

Answer 12

1) Does each industry the company has diversified into represent a good market for the company to be in– does it pass the industry attractiveness test?
2) Which of the company’s industries are most attractive, and which are least attractive?
3) How appealing is the whole group of industries in which the company has invested

The more attractive the industries (Both individually and as a group) that a diversified company is in, the better its prospects for good long-term performance

Question 13

Calculating Industry-Attractiveness Scores

Answer 13

A simple and reliable analytic tool for gauging industry attractiveness involves calculating quantitative industry-attractiveness scores based on the following measures

Question 14

Based on following measures (card above)

Answer 14

1) Market size and projected growth
2) The intensity of competition
3) Emerging opportunities and threats
4) The presence of cross-industry strategic fit
5) Resource requirements
6) Social, political, regulatory, and environmental factors
7) Industry Profitability

Question 15

1) Market size and projected growth

Answer 15

Big industries are more attractive than small industries, and fast growing is more attractive than slow-growing

Question 16

2) The intensity of competition

Answer 16

Weak competitive pressures are more attractive than strongly competitive pressures

Question 17

3) Emerging opportunities and threats

Answer 17

Industries with promising opportunities and minimal threats on the near horizon are more attractive than industries with modest opportunities and imposing threats

Question 18

4) The presence of cross-industry strategic fit

Answer 18

The more one industry’s value chain and resource requirements match up well with the value chin activities of other industries which the company operates, the more attractive the industry is

Question 19

5) Resource requirements

Answer 19

Industries in which the Resource requirements are within reach are more attractive than industries in which capital and other resource requirements could strain corporate financial resources and organizational capabilities

Question 20

6) Social, political, regulatory, and environmental factors

Answer 20

Industries that have significant problems in such area as consumer health, safety, or environmental pollution or those subject to intense regulation are less attractive than industries that do not have such problems

Question 21

7) Industry Profitability

Answer 21

Industries with healthy profit margins and high rates of return on investments are generally more attractive than industries with historically low or unstable profits

Question 22

Each attractiveness measure is then assigned a weight reflecting its relative importance in determining and industry’s attractiveness, since not all measures are equally important

Answer 22

The intensity of competition in an industry should nearly always carry a high weight (say 0.20 to 0.30) (important)

Question 23

The importance of weights must add up to

Answer 23

1! (important)

Question 24

Each industry is rated on each of the chosen industry-attractiveness measures, using a rating scale of 1-10

Answer 24

Where a high rating means high attractiveness

Low rating meanings low attractiveness

Question 25

The more intensely competitive an industry is,

Answer 25

the lower the attractiveness rating for that industry

Question 26

The more the resource requirements associated with being in a particular industry are beyond the parent company’s reach

Answer 26

the lower the attractiveness rating

Question 27

The presence of good cross-industry strategic fit should be given a very high attractiveness rating

Answer 27

Since there is good potential for competitive advantage and added shareholder value

Question 28

Weighted attractiveness scores are then calculated by:

Answer 28

Multiplying the industry’s rating on each measure by the corresponding weight

Example: Rating of 8 times a weight of 0.25 = 2

Question 29

Industries with a score much below ___ do not pass the attractiveness test

Answer 29

5 (important)

Question 30

Step 2:

Answer 30

Evaluating Business Unit Competitive Strength

Question 31

Grant, Robert ((2013). Contemporary strategy analysis

Answer 31

Grant, Robert ((2013). Contemporary strategy analysis

Question 32

Porter’s five forces does not consider:

Answer 32

Complements!!

Question 33

Complements have the ______ effect to substitutes

Answer 33

Opposite

Question 34

While substitutes reduce the value of an industry’s product, complements _________

Answer 34

Increase it

Question 35

Hypercompetition

Answer 35

Intense and rapid competitive moves, in which competitors must move quickly to build new advantages and erode the advantages of their rivals

Question 36

Game theory points to five aspects of strategic behaviour through which a firm can improve its competitive outcomes:

Answer 36

1) Cooperation
2) Deterrence
3) Commitment
4) Changing the structure of the game being played
5) Signaling

Question 37

Brandenburger, A. M., & Nalebuff, B. J. (1995). The right game: Use game theory to shape strategy.

Answer 37

Brandenburger, A. M., & Nalebuff, B. J. (1995). The right game: Use game theory to shape strategy.

Question 38

Looking for win-win strategies has several advantages

Answer 38

First, because the approach is relatively unexplored, there is greater potential for finding new
opportunities.

Second, because others are not being
forced to give up ground, they may offer less resistance to win-win moves, making them easier to implement.

Third, because win-win moves don’t force
other players to retaliate, the new game is more
sustainable.

And finally, imitation of a win-win move
is beneficial, not harmful.

Question 39

Coopetition

Answer 39

It means looking for

win-win as well as win-lose opportunities

Question 40

Value Net

Answer 40

a schematic map designed to represent
all the players in the game and the interdependencies among them

Customer (north)
Complementors (East)
Suppliers (south)
Substitutors (west)

Question 41

Interactions take place along two dimensions

Answer 41

The Vertical dimension

The horizontal dimension

Question 42

The Vertical dimension

Answer 42

the company’s customers and suppliers. Resources such as labor and raw materials flow from the suppliers to the company, and products and services flow from the company to its customers.

Question 43

The horizontal dimension

Answer 43

are the players with whom the company interacts but does not transact
They are its substitutors and complementers.

Question 44

Substitutors

Answer 44

are alternative players from whom
customers may purchase products or to whom suppliers may sell their resources

Coca-Cola and PepsiCo are substitutors

Question 45

Complementors

Answer 45

are players from whom customers buy complementary products or to whom
suppliers sell complementary resources

For example, hardware and software companies are classic
complementors

Question 46

The Value Net describes the various roles of the

players.

Answer 46

It’s possible for the same player to’ occupy

more than one role simultaneously

Question 47

The Value Net reveals two fundamental symmetries in the game of business:

Answer 47

First) between customers and suppliers

Second) between substitutors and complementors

Question 48

First step in changing the game

Answer 48

Drawing the Value Net for your business

Question 49

The second step is

Answer 49

identifying all the elements of the game. According to game theory, there are five: players,
added values, rules, tactics, and scope - PARTS
for short.

Question 50

Players come first

Answer 50

As we saw in the Value Net,
the players are customers, suppliers, substitutors,
and complementers

Question 51

Added values

Answer 51

what each player brings to the
game.

There are ways to make yourself a more
valuable player-in other words, to raise your added
value. And there are ways to lower the added values
of other players.

Question 52

Tactics

Answer 52

moves used to shape the way players
perceive the game and hence how they play. Sometimes, tactics are designed to reduce misperceptions; at other times, they are designed to create or
maintain uncertainty

Question 53

Scope

Answer 53

describes ,the boundaries of the game. It’s
possible for players to expand or shrink those
boundaries

Question 54

Complements and attractiveness are in the

Answer 54

Industry section of the corporate ecosystem (third highest)

Question 55

Dumb quote for this (QUIZ)

Answer 55

“Beauty is in the eye of the beholder”

Question 56

Vector (aka Force Field) Analysis

Answer 56

Visual representation of forces impacting industry players (or individual company)
-Competitive forces
-Driving forces
-Ease of achieving KSF
Size, growth and evolution stage of industry

Vector represents:

• Direction: Favorable or unfavorable
• Length: Higher importance/priority/impact have longer arrows

Use as many different vectors as needed to represent forces and gain new insights
-May create multiple vectors to represent different buyer categories, entry barriers, etc

Question 57

Factors for Assessing Industry Attractiveness

Answer 57

Overall financial performance for the industry
Market size and growth potential
Overall degree of risk and uncertainty in future
Impact and implications due to changes in the remote environment
If competitive forces are conducive to rising/falling industry profitability
If profitability will be favorably or unfavorably impacted by driving forces
If there are opportunities and strategies to achieve more favorable positioning in key markets, or potential to capitalize on vulnerabilities of others
How easy/difficult is it to deliver on industry KSFs
Severity of problems facing industry

Question 58

Industry’s competitive environment isideal from a profit-making standpoint when

Answer 58

Rivalry is moderate
Entry barriers are high and no firms are likely to enter Good substitutes do not exist
Suppliers and customers are in a weak bargaining position
Driving forces represent positive change and are manageable

Question 59

Competitive environment is unattractive from the standpoint of earning good profits when

Answer 59

Rivalry is vigorous
Entry barriers are low and entry is likely
Competition from substitutes is strong
Suppliers and customers have considerable bargaining power
Driving forces negatively impact industry and require costly and dramatic change