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