ECON: Chapter 16: Business Strategy

the ability of your suppliers to charge you high prices depends on

the amount of bargaining power they have - refusal to do business - raising price of inputs

threat of entry depends on

the extent to which barriers of entry shield existing businesses from competition by new entrants

you position your product between

- demand-side considerations (positioning your good to be attractive to as many customers as possible) - supply-side concerns (positioning it to be as different from your competitors as possible)

aspects of product differentiation

- different features - quality - customer service - design - style - reliability - location and convenience - advertising

the basic rules of thumb for product position

- if price competition is particularly intense, differentiate your product - ex: neighboring gas stations - if price competition is subdued, then you want to minimize any differences so that you can appeal to as many people as possible - ex: elections, you can't buy votes

2 solutions to solve the hold-up problem

1. reputation and repeated interactions 2. vertical integration - two companies at different stages of production chain combine to form one company

the 5 forces that describe five strategic actors

1. suppliers 2. customers 3. potential substitutes 4. potential entrants 5. existing competitors

hold-up problem:

after you have made a relationship-specific investment, the other side may try to renegotiate so that it gets a better deal (and you get a worse one)

more rivals mean you

yield more intense competition - you can compete on price and on product

relationship-specific investment:

an investment that is more valuable if the current business relationship continues

non-price competition:

competing to win customers by differentiating your product (market positioning)

price competition:

competing to win customers by offering lower prices