FINALMGMT449

Five forces bargaining power of buyers

-If you deal with few, powerful buyers, then they are often able to dictate terms to you. Example: Apple keep switching costs high by keeping critical product features only transferred through their products: iCloud, iPhoto, iMovie, iOS. to increase Apples stickiness, the company broadens product from iPod to iWatch but ALWAYS iOS

Five forces bargaining power of suppliers

-The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. -When suppliers are limited or inputs are scarce, the bargaining power of suppliers is high Example: apple reduce the power of chip makers by designing its own chip reduce power of distributor by opening the Apple store

Red ocean strategy

-compete in existing market -beat the competition -exploit existing demand -align strategy choice of differential OR low cost

3 generic competitive strategy

-cost leadership -differentiation -focus

blue ocean strategy

-creating new market, break -the trade-off between value and costs

two types of strategic renewal

-discontinuous strategic transformation -incremental strategic renewal -dynamic capability

Five forces threat of substitutes

-how easy it is for consumers to switch from a business's product or service to that of a competitor. Example: Apple mitigates this effect by selectively making its products of the MacBook or iPhone (newer versions). Other products are similar but satisfy the same need without the brand.

blue ocean strategy

-make competition irrelevant -create and capture new demand -break the value-cost trade-off -simultaneous pursuit strategy of differential AND low cost

Five forces framework list

-threat of new entrants -bargaining power of suppliers -threat of substitutes -bargaining power of buyers -rivalry among existing competitors

Some limitations of the five forces framework:

1. The framework views other parties in firm's environment only a potential threats,not as potential allies. 2. The frame work analyzes industries. It tells almost nothing about specific firms. 3. It provides no guidance on relative weight so the five factors or interactions between them. 4. Theres would be other forces such as 'the role of Government,or 'the role of complements'. They can affect the industry structure. 5. Industry boundaries are rarely clear and also can shift.

What is the unit of analysis of Porter's five forces framework? • According to the five forces framework, which one is true?

All else being equal, when buyers' switching cost is high, a firm is more likely to have strong bargaining power over its buyers

Market Concentration (Competitive Intensity)

An industry in which market share is "concentrated" in the hands of a few firms is likely to be less competitive than one in which market share is dispersed among many small firms.

Advantages in vertical integration

a company can have more control over 1) transaction partner's decision, 2) transaction-specific investments, 3) information flow, 4) production timing across stages. -Also the company can capture margins from both stages (double-margin)

conflict of interest

a decision that is favorable to a company is not favorable to a manager, or vise versa- agency problems (agency costs)

related diversification

a firm expands into a similar field of operation car manufacture ->truck

strategic alliance advantage

access to new technology reduce administrative costs

strategic alliance advantage

aim for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts

moral hazard

an agent does not work hard when his behavior is not easily observed. also, an agent can take risks at the expense of principals.

vertical integration example

apple opens "apple store" to sell its products to customers directly

Economies of scale

are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

As quantity of production increases, the __________ of each unit decreases

average cost

Case specific questions Kodak

avoided severe cannibalization

vertical integration

company includes another stage of production

Red ocean strategy

compete with traditional labors, reduce costs

Agency theory

concerned with resolving two problems that can occur in agency relationship

strategic alliance

cooperative relationship between firms involving the sharing of resources in pursuit of common goals

business strategy vs corporate strategy? to overcome the negative network effect dilemma, Gucci acquired YSL, and other companies that own well-established brands

corporate strategy

business strategy vs corporate strategy? to respond to customers diverse preference quickly , coca-cola vertically integrated by acquiring several bottlers and directly managed the bottling process

corporate strategy

Vertical integration

corporate strategy that a company includes another stage of production in the industry value chain. It can be either backward integration or forward integration

economies of scope

cost economies from increasing the output of multiple products

value creation

economies of scale and scope

internal labor market

efficiencies may arise from the ability of diversified companies to transfer employee between businesses and to reply less on hiring and firing

first mover advantage preemption of assets

employees, suppliers, distribution, location, investment of plants/equipment

first mover advantage example

energy drinks

economies of scope

fedex service has kinks for print, scan, and fax services as well as shipping in one place

why do firms diversify?

growth for firms in a stagnant or declining industry

business strategy

how the firm competes in a particular market or industry

strategic renewal

includes the process, content, and outcome of refreshment or replacement of attributes that have the potential to substantially affect its long-term prospects in a company.

Five forces framework: unit of analysis

industry

disadvantages in vertical integration

it is costly to enter. It can make exit barriers higher. reduces flexibility to choose alternative transaction partners. Sometimes when a company relies on excess debt, it may increase the risk of bankruptcy

vertical integration incorrect example

kmart and sears, two of oldest retailers, were merged to compete against walmart, target, and home depot.

A razor-blade strategy definition

known as freebie marketing one item is sold at a low price in order to increase sales of complementary good

A razor-blade strategy examples

kodak business model camera-> camera film printer -> ink cartridges game console ->video games

economies of scope example

leather manufacture can make: shoes, belts, bags, books, luggage

vertical integration example

netflix started to produce its own original shows to avoid depending heavily on content providers

vertical integration example

nike outsources its production process to suppliers in asian countries

information asymmetry

one party has more or better information than the other party

First-mover advantage primary sources

primary sources: -technological leadership -preemption of assets -buyer switching costs -reputation and brand awareness by consumers

Resource-based view concept

productive assets owned by the from; capabilities are what the firm can do. must work together to create organizational capabilities

first mover advantage buyer switching cost

reputation and brand awareness by consumers

economies of scope

same material can be used to make multiple products

reasons to enter a Strategic Alliance

shared risk shared knowledge opportunities to grow speed to market complexity innovation/diversification access to resources access to target markets economies of scale reduce political risk

Five forces threat of new entrants

tells us how easy or difficult it is for competitors to enter an industry.The goal of those who are already in the industry is to make it difficult to enter. -Government regulations, established brands, high capital investment, unique products, and high customer loyalty all decrease the threat of new entrants. Example: Apple has strong brand image and products so it is difficult for entrants to compete.

First-mover advantage

the ability to pioneering firms to earn positive economic profits

unrelated diversification

the additional product line is VERY different from one's core business tobacco -> food

pareto principal

(80-20 rule) 80% of effects come from 20% of causes

how to reduce agency costs

(general) corporate governance mechanism (specific) align interest by using incentives

Market Concentration (Competitive Intensity)

Extent or degree to which a relatively small number of firms account for a relatively large percentage of the market.

Market Concentration (Competitive Intensity)

Hirschman-Herfindahl Index (HHI) is often used to measure market concentration.

strategic renewal example

IBM: Manufacture ->Service provider (IT solutions) -> consulting -> software developer ->data mining

Five forces rivalry among existing competitors

If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. strongest influence on whether entering an industry would be profitable Example: apple products never go on sale. avoided price-based competition to differentiate themselves.

Unit of Analysis=

Industry

first mover advantage technological leadership

R&D and patents technology

Case specific questions Google

Late mover advantage: able to leverage its status as a late mover by avoiding other players positioning errors and by reverse engineering then improving upon pioneers offerings

strategic renewal example

Netflix: DVD sent home -> Netflix on demand -> create netflix original series

Vertical integration example

Oil companies are vertically integrated. They search for oil, drill the wells, refine the oil to gas, deliver to the gas station, and sell it to the consumer

Case specific questions Ready-to-eat Breakfast Cereal

barriers to entry: customer loyalty, economies of scale, high investment capital.

business strategy vs corporate strategy? apple computers appeal expert in publishing industry by differentiating technological specifications

business strategy

business strategy vs corporate strategy? harley-davidson serves in the motorcycles market, specifically focusing on sport vehicles, not transportation vehicles.

business strategy

business strategy vs corporate strategy? to attract price sensitive customers, walmart purses cost leadership strategy by offering products with cheap prices

business strategy

blue ocean strategy example

circus -> cirque du soleil Recreates Live Entertainment

strategic alliance

collaborate to achieve specific goals -two companies can make the partnership work together

Merger and acquisitions motivation

combing two companies into one. increase market power internal development is too costly alone target has unique resources (brand, copyright, patent).

risk reductions

dont put all your eggs in one basket

how is razor-blade strategy protected?

to make device only capable only with its own suppliers xbox game console - only works with xbox games

corporate strategy transaction costs:

two forms of economic organization: -market mechanism: individuals and firms, guided by MARKET PRICES, make independent decisions to buy/sell -administrative mechanism: decisions concerning production and resources allocation are made by managers imposed by HIERARCHIES

Five forces framework: definition

understand how to get a bigger slice of the profit potential by positioning the company in part of the market where there is little competition

five forces that shape industry structure

understand how we can create/capture more value in the market. It is very important to clearly define the industry boundary

Case specific questions HP-Compaq

vertically integrated strategy

vertical integration example

walmart decided to build manufacturing factories to produce its private brand goods by itself

corporate strategy

where the firm competes the scope of the firm (industry and market), investment in diversification, vertical integration, acquisitions, new ventures, allocation of resources