RSM392H1 Study Guide - Final Guide: Andrew Grove, Image Sensor, Emerging Markets

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27 Jan 2013

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RSM392 Lecture Notes & Readings
1 | P a g e
Strategic Positioning = doing different things than your rivals
Lecture 2
Industry Problem
Craft effective strategy, must take account of external environment
o To decide whether to put your firm in an environment (entry)
o To decide whether to extricate your firm from an environment (exit)
o To positions your firm to succeed in a given industry
o To assess the effect of a major change
o To shape the environment
Strategy = A plan that specifies tradeoffs, A vision for how the firm can create a defensible advantage against the forces that
determine industry profitability
Two Complementary Solutions
Demand/Supply & Porter 5 Forces
D&S works well to describe certain situations, focuses on predicting price & quality
5 Forces more flexible: works where assumptions of D&S don‟t hold, focuses on long run structure & profitability
Two work hand in hand
o Supplier power affects marginal costs
o Substitutes affect slope, shape of demand
o Entry barrier affect steepness supply curve
Key Quotes from Porter
“The state of competition in an industry depends on
five basic forces, which are diagrammed in the
Exhibit on page 6. The collective strength of
these forces determines the ultimate profit
potential of an industry.
“In economists‟ „perfectly competitive‟ industry,
jockeying for position is unbridled and entry to the
industry very easy. This kind of industry structure,
of course, offers the worst prospect for long-run
profitability. The weaker the forces collectively,
however, the greater the opportunity for superior performance.”
Industry: define the industry based on similar products that have common suppliers and buyers
Suppliers: organizations that firms in the industry PAY
Buyers: organizations that PAY firms in the industry
Rivals: firms in same industry
Substitutes: stuff that could be alternative to industry‟s products
Potential Entrants : firms (current/potential) that could enter industry
Switching costs describes the “costs” that customers must bear when they try to switch from one product to another.
Porter 5 Forces
Industry structure determines long-term average profitability!
firm profitability depends to a great extent on structural (economic) forces often outside of managerial control
Common Pitfalls of 5 Forces
Using the firm as the level of analysis
Failing to define the industry clearly
Taking the perspective than an “attractive” industry means new entrants want to enter
Focusing on the symptom (“customers are price sensitive”) rather than the problem (“it‟s not a critical input for their
Ignoring changes
Ignoring the full range of substitutes
Giving equal weight to all forces
Steps to a 5 Force Analysis
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RSM392 Lecture Notes & Readings
2 | P a g e
1. Define the industry
2. Identify the players
3. Assess the strength of each force
4. “Sniff test”
Is the analysis in line with actual profitability?
Are more profitable players positioned vis-à-vis competitive forces?
5. Assess recent & future changes in each force
Are very price sensitive & have high bargaining
power they can squeeze profit out of industry
Ideal (low situation)
Low buyer power = higher prices (more value
Many buyers
Small buyers
Buyers can‟t backward integrate
Not many alternatives
Industry very important to the buyer
Buyer isn‟t important to the industry
Differentiated products
High switching costs (for buyers)
Factors to Consider:
Differentiation of inputs
Switching costs
Presence of substitute inputs
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases
Impact of inputs on cost or differentiation
Threat of forward integration
Are very price sensitive & have high bargaining
power they can squeeze profit out of industry
Low supplier power = low costs
(more value created)
Many suppliers
Small suppliers
Suppliers can‟t forward integrate
Many good alternatives
Supplier isn‟t important to the industry
Industry very important to supplier
Standardized products
Low switching costs (for industry)
Factors to Consider:
Buyer concentration
Buyer volume
Buyer switching costs
Buyer information
Ability to integrate backward
Substitute products
Price / total purchases
Product differences
Brand identity
Impact of quality / performance
Buyer profits
Threat of Substitutes
Threat of New Entrants
Close substitutes can reduce the value created
Lower the price that buyers will pay
Put a floor on the prices that suppliers will require
Level of threat = f(functional equivalence)
If substitutes @ lower cost, the product industry will
have to lower cost or increase value
Relative price performance of substitutes
Switching costs
Buyer propensity to substitute
High barriers to entry make the threat of new entrants LOW:
Economies of scale
High capital requirements
Cost disadvantages for new entrants
Low access to distribution channels
Favorable government policies for incumbent firms
Brand identity of incumbents
High threat of retaliation
desirability of entry is NOT SAME AS
ability to enter
key question is whether there are BARRIERS
to entry
Factors Affecting Entry
Economy of scale
o If exist high BTE
Capital requirements
o If high high BTE
Cost disadvantage for new entrants
o If exist high BTE
Accessible to distribution channels
o If difficult high BTE
Government policy
o If favorable to industry high BTE
Overall if BTE high = Threat is Low (profit stays in the
Factors to consider:
Economies of scale
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RSM392 Lecture Notes & Readings
3 | P a g e
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Government policy
Expected retaliation
Rivalry Among Existing Competitors
Intense rivalry can drive prices down (or force costs/quality up)
Speaks to the competitive intensity within an industry
Things that make rivalry low:
High differentiation
Few rivals (<6 as a gut check)
Different sizes of firms
Growing industry
Low exit barriers
High switching costs
Factor to Consider:
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Industry growth
Fixed costs / value added
Product differences
Brand identity
Buyer power + Supplier Power + Threat of Substitutes
determine how much value is created in an industry
Together, R and ToE determine the extent to which a firm in
the industry can capture the value created.
Lecture 3: Coke Vs. Pepsi
Coke & Pepsi have a history of excellent profits in the soft drink
concentrate industry in part because the industry structure has been
managed carefully.
Secret ingredients.
Locked-in Buyers
Lots of substitutes but advertising spend decreases their impact.
Competition is restrained.
High BTE
Bottlers are essential as a buffer against stronger buyer (i.e., Costco).
However, bottlers have been squeezed too much.
Take Away
their investments in brand image help create barriers to entry & increase power over buyers
they also manage their bottlers well and keep their power low
help choose positions within industries
o like Dr. Pepper does (avoiding direct competition with Coke & Pepsi)
If firms are not careful…they can wreck their industry structure!
o If Coke & Pepsi decided to compete on price rather than advertising, things could look different.
Lecture 4: Airbone
Illustrates the power of activity analysis and of analyzing relative costs
Demonstrates the sources of the company‟s narrow low-cost advantage, particularly the exploitation of FedEx and
UPS‟s inflexibilities.
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