BADM 449 Ch. 3

What does an 89% learning curve mean?

¬ "Doubling the plant scale over time was accomplished by an 11% reduction in unit costs. Thus there is an 89% learning curve" ¬ The per-unit cost drop 11% every time output is doubled

If 5 Forces is the answer, what is the question?

¬ "Why are some industries more attractive than others?"

Under what conditions is a buyer group powerful?

¬ A few large buyers, products are standardized and undifferentiated, buyers face few switching costs, backward integration is credible

What are the 5-Forces?

¬ A framework proposed by Porter that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy ♣ 1. Threat of Entry: entry barriers ♣ 2. Power of Suppliers: bargaining power of suppliers ♣ 3. Power of Buyers: bargaining power of buyers ♣ 4. Threat of Substitutes: ex. coffee vs. tea ♣ 5. Rivalry among Existing Competitors: how competitive the competitors are (This goes in the middle) The stronger a competitive force, the greater a threat it represents

What is the Structure-Conduct-Performance Model?

¬ A framework that explains the differences in industry performance. It identifies 4 industry types: perfect competition, monopolistic competition, oligopoly, monopoly ¬ Industry Structure: Number of buyers and sellers, degree of product differentiation, barriers to entry, cost structures ¬ Firm Conduct: Pricing, Advertising, R&D, Investment in plant and equipment ¬ Performance: Economic profits, accounting profits, NPV ¬ Market structure -> Conduct -> Performance

Why is product differentiation often an effective barrier to entry?

¬ Brand identification and customer loyalty to incumbent products may be barrier to potential entrants (Ex. Coke). Product differentiation appears to be an important barrier in the market for over the counter drugs and in the brewing industry.

Under what conditions is a supplier group powerful?

¬ Dominated by a few companies, no substitutes for supplier products, suppliers products are differentiated, product is important input to buyer

What is meant by economies of scope?

¬ Economies of Scope: The average total cost of production decreases as a result of increasing the number of different goods produced

Name two kinds of barriers to entry in the value chain

¬ Economies of scale, brand loyalty

Explain how exit barriers can be entry barriers

¬ Exit barriers (of incumbents) can be entrance barriers to potential entrants

A key concept in strategy is "irreversible investment." What are some of the ways this idea is expressed in accounting, economics, finance, and management courses?

¬ Firm-specific resources are investments that are difficult to reverse and may provide a source of competitive advantage. Irreversible investments create credible barriers to entry and are thus valuable.

Why is advertising completion preferable for a firm rather than price competition?

¬ Firms will engage in non-price competition, in spite of the additional costs involved, because it is usually more profitable than selling for a lower price, and avoids the risk of a price war.

Explain how switching costs of buyers can be a barrier to entry

¬ For example, changing may require employee retraining (e.g. IV solutions, computer software) ¬ The negative costs that a consumer incurs as a result of changing suppliers, brands or products.

How is product differentiation often measured?

¬ High product quality, fast delivery, design and new products, and unique product features.

How can reputation for toughness be a barrier to entry?

¬ History of incumbent firms reacting aggressively to entrants may play a role in current market interactions

What three factors impact company performance?

¬ Industry Context ¬ National Context ¬ Company Capabilities

Under what conditions will incumbent rivalry be high?

¬ Industry concentration is low i.e. firms are of equal size, exit barriers are high, product differentiation is low. Ex. Coke and Pepsi = low rivalry due to high concentration

What is the difference between intended- and innocent- excess capacity?

¬ Intended Capacity: building extra capacity for the intended purpose of deterring entrants from entering the industry ¬ Excess Capacity: Deters entry by increasing the credibility of price cutting as an entry response by incumbents

What is the definition of an "efficient market?"

¬ Market where all pertinent information is available to all participants at the same time, and where prices respond immediately to available information.

Relationship between PESTEL, SCP, Porter's 5 Forces and Strategic Groups

¬ PESTEL is for global analysis of external forces on all industries ¬ SCP Model shows competitive structure shapes competitive rivalry among competitors Industry level ¬ Porter's 5 Forces are based on SCP Model. Shows what industries are most attractive Industry level ¬ Strategic groups show intra-group rivalry

What are the key elements of a PESTEL Framework?

¬ PESTEL: framework that analyzes set of external forces that might impinge upon a firm. ¬ Political: How processes and actions of gov't bodies can influence the decisions and behavior of firms ¬ Economic: Largely macro-economic forces. Ex. Growth rates, interest rates ¬ Sociocultural: Capture a society's cultures, norms and values. Ex. Demographics ¬ Technological: Capture application of knowledge to create new processes and products. ¬ Environmental: Concern broad environmental issues such as global warming. ¬ Legal: Official outcomes of political processes manifested in laws, regulations and court decisions.

What are the characteristics of perfect competition and oligopoly?

¬ Perfect Competition: Many small firms, firms are price takers, commodity product, low entry barriers ¬ Oligopoly: Few (large) firms, some pricing power, differentiated product, high entry barriers

Strategic Groups?

¬ Set of firms within a specific industry that pursue a similar strategy in quest for competitive advantage ¬ Generally either pursuing low-cost or differentiation strategy

Explain the role of complements as the 6th Force.

¬ Sixth Force: Identifying complements, which add value to original product when the two are together. They increase demand for primary product and enhancing profit potential. Not a zero sum game, searching out compliments that can help both partners. ¬ The suppliers of the complements create value for the industry and can exercise bargaining power; a product or service that adds value to the original product when its performance increases or its price falls

What are some of the uses of industry analysis?

¬ Static Analysis: Explain current rivalry and profitability ¬ Dynamic Analysis: Where is industry headed in the future

When is the threat of substitutes high?

¬ Substitute is a good price, buyers switching costs to substitute is low

What is meant by "barriers to entry?" and examples

¬ Threat of entry ¬ Obstacles that determine how easily a firm can enter an industry ¬ Economies of scale, government policy, capital requirements, learning curve

MAIN POINTS:

• All about external environment • PESTEL Analysis are microenvironment factors that affect industry and firm performance • Porter's five competitive forces can explain the profit potential of different industries o These 5 forces shape competition • SCP Model: The competitive structure of an industry is largely captured by the number and size of competitors in an industry, whether the firms possess some degree of pricing power, type of product or service the industry offers and the height of entry barriers (perfectly competitive industry, monopolistic industry, oligopolistic industry, monopoly)