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RSM392 Review Notes (Full)


Department
Rotman Commerce
Course Code
RSM392H1
Professor
C.Liu

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RSM392 Midterm Study Notes
What is Strategy?
A plan that specifies tradeoffs
A vision for how the firm can create a defensible advantage against the forces that
determine industry profitability
Supply & Demand works well to describe certain situations
Focuses on predicting price & quantity
5 Forces is more flexible: works where assumptions of supply/demand don’t hold
Focuses on long run structure & profitability
The two work hand in hand
Supplier power affects marginal costs
Substitutes affect slope, shape of demand curve
Entry barriers affect how steep supply curve is
Porter’s Five Forces
Purpose:
1. To assess current average industry profitability of incumbent firms!
2. To help us understand the impact of trends & events on average industry profitability!
3. To help us make recommendations to firms on how to improve
a) the overall industry environment &
b) the firm’s position relative to its industry environment
It’s a framework to identify the most important industry changes, a starting point for strategy. It allows
firms to understand the structure of an industry, and take a position that is profitable.
All 5 forces are sources of competition, and they DRIVE profits in any industry. Where do they stand,
and why are they profitable? Revealed by the 5 Forces.
What drives competition and profitability?
Industry structure, not the product it produces, emerging or mature, high or low tech, regulated or not.
While many factors can affect profitability in the short run, it is industry structure that affects it in
the medium-long run. AVERAGE LONG RUN PROFITABILITY!
The strongest force determines profitability.
Managers use this framework to position strategically, enter or exit a business by analyzing its
potential, exploit industry change, shape industry structure by redividing or expanding the pie.
Buyer Power determines the revenue structure of the industry.
Supplier Power determines the cost structure of the industry.
Threat of Substitutes exerts pressure on BP and SP.
Together BP, SP, and ToS determine how much value is created in an industry.
Rivalry speaks to the competitive intensity within an industry
Threat of Entry is the extent to which non-incumbents could plausibly enter the industry.
Together, R and ToE determine the extent to which a firm in the industry can capture the
value created.
Threat of Entry:

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RSM392 Midterm Study Notes
Barriers Include:
Supply side economies of scale
Demand side benefits of scale (network of customers, brand recognition, etc)
Customer switching costs (e.g. technology that require new training)
Capital requirements however, some things have high re-sale value and if the industry is
good, profits can be had and people will invest!
Cost of quality advantages for Incumbent
Unequal access to distribution channels (such as shelf space)
Restrictive government policy taxi, liquor, etc. are regulated
Threat increases with expected retaliation from incumbents! If incumbents have resources to fight
back, cut prices, and threat others, than there will be less entrants.
Suppliers:
They are powerful if:
It is more concentrated or monopolized than the industry it sells to (Microsoft)
The supplier serves many industries
Industry participants face switching costs in changing suppliers (If suppliers have switching
costs, than that limits their power)
Suppliers have differentiated products (Pharma)
No substitute for supplier group (Pilots’ Union)
Supplier threatens to integrate into the industry if profits are high
Buyers:
Powerful if
Buyers have negotiating leverage relative to firms
Price sensitive
Few buyers, or each one purchases in large volumes (esp with high fixed costs industries, who
get profits from volume)
Products are the same…so buyers can go elsewhere
Buyers have little switching cost
If buyers threaten to integrate with suppliers
A buyer group is price sensitive if:
The product makes up a bulk of their budget
Buyer doesn’t have much money
Quality of buyer’s product isn’t affected by quality of suppliers
The supplying product has little effect on the buyer’s other costs
Similar with consumers and businesses, but for consumer needs are harder to quantify.
THREAT OF SUBS
Performs a similar function via different means. Always present, easy to overlook.
-High if it offers good price-preformance trade-off
Cost of switching to substitute is low (drugs)
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RSM392 Midterm Study Notes
Rivalry
Different forms including: price, new products, ads, services. Profit decreases depend on the
INTENSITY which companies compete and the BASIS on which they compete.
Many competitors of equal size and power
Industry growth is slow
Exit barriers are high (special assets)
Rivals have high leadership goals
Firms cannot read each others signals
Destructive if it gravitates to price, because it transfers profits from industry to customers.
Price wars are likely if:
Products of rivals are the same
Fixed costs are high and MC are low
Capacity must be expanded in large increments to be efficient
Product is perishable (food, fashion)
Zero-sum when competitors compete on one dimension or meet the same needs. One firm’s gain is
another’s loss. Rivalry can be positive sum, or increase the avg profitability of an industry, when
each aims to serve the needs of DIFFERENT customer segments.
Fast growing industries aren’t always attractive – entrants and suppliers will be powerful.
Technology (sexy industries) aren’t always good.
Government affects different forces.
Complements can affect demand, but is not a sixth force
Influence the amount of value created, and how to protect it. Value captured New Entrants, Rivalry,
Substituion
If buyers/suppliers are price sensitive and have high bargaining power, then profits will
decrease.
Something that has great value to a customer may not just mean a high price (such as glasses).
Not all forces have equal weights.
Proter says profitability can be predicted by the five forces, but not ALWAYS.
How can we break tradeoffs?
Positive sum competition is when firms compete on quality, service, and differentiators other
than price
Strategic Positioning is important and specifies tradeoffs. In economics, due to ss and dd, if we
cut price, demand should increase in the short run. According to Porter, the question is: Should
we even sell this product or be in this business? It has more of a long-run view.
Substitutes affect the slope of the demand curve (the more subs are out there, the flatter the
curve will be??), and the weaker the force is, the higher profitability.
Coke and Pepsi
1. How can CSD make a 20% ROA?
2. Why do botterls tolerate an average return?
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