SM_L2 Flashcards
(39 cards)
What is strategy according to Quinn (1982)?
Strategy:
- Marshals and allocates an organisation’s resources.
- Adapts to relative strengths and weaknesses.
- Responds to environmental changes and opponents’ moves.
“A well-formulated strategy helps to marshal and allocate the organization’s resources into a unique and viable posture, based on its relative internal strengths and weaknesses, anticipated changes in the environment, and contingent
moves by intelligent opponents.”
What are the three layers of the business environment?
- Macro-environment (analysed with PESTEL).
- Industry or sector (examined with Five Forces).
- Competition/Strategic Group Markets (firms with similar strategies).
Explain the PESTEL framework.
PESTEL covers external factors: global
- Political
- Economic
- Sociocultural
- Technological
- Environmental
- Legal
List Porter’s Five Forces.
- Threat of new entrants
- Intensity of rivalry among competitors
- Threat of substitutes
- Bargaining power of suppliers
- Bargaining power of buyers
Name two barriers to entry.
Name all
- Economies of scale
-
Product differentiation
(Other examples include capital requirements, switching costs, distribution channels, cost disadvantages, government policies.)
Economies of scale
Product differentiation
Capital requirements
Switching costs
Distribution channels
Cost disadvantage
Government policies
When is the bargaining power of suppliers high?
- More concentrated than the industry it sells to
- Not obliged to contend with other substitute products for sale to the industry
- Industry is not an important customer of the supplier group
- Suppliers’ products are important inputs to the buyers’ business
- Products are differentiated and/or there are high switching costs
- Suppliers can integrate forward into the industry
Bargaining power is the ability to influence the price and delivery conditions associated with the
products sold and produced by the firm
When is the bargaining power of buyers high?
- Purchases large volumes relative to total sales of incumbent firms
- Products purchased represent a significant share of buyer’s costs or spending
- Low profits
- Low switching costs
- Products are undifferentiated
- Buyers pose a credible threat of backward integration
- Product unimportant to the buyer’s own business
Bargaining power is the ability to influence the price and delivery conditions
associated with the products sold and produced by the firm
What is a substitute product?
- Different product meeting the same need.
- Limits price and profit of incumbent.
- Often from emerging technologies with low switching costs.
What influences the intensity of competition?
Name all (9)
- Number and balance of competitors.
- Slow industry growth.
- High exit barriers.
- Low differentiation and high fixed costs.
Numerous and equally balanced competitors
Slow industry growth
High exit barriers
High strategic stakes
Diversity of competitors
Lack of differentiation or switching costs
High fixed costs
Capacity increase in large increments
Product is perishable
Explain structure-conduct-performance (SCP) paradigm.
SCP connects:
- Industry structure → conditions for competition.
- Firm conduct → strategies and behaviour.
- Performance → firm and societal outcomes.
What are strategic groups?
- Firms in the same industry with similar strategies.
- Vary in price, image, and target.
- Mobility barriers may prevent moving between groups.
Summarise the industry vs. firm effects in performance.
- Industry Effects ≈ 20%
- Firm Effects ≈ 30–45%
-
Other Effects (e.g. corporate parent, year) ≈ 35–50%
Industry matters, but firm-specific strategies are crucial.
PESTEL in details
- Political
– Government pressures
– Subsidies & incentives
– Differences in countries, states - Economic
– Growth rates
– Interest rates
– Employment levels
– Currency exchange - Sociocultural
– Norms, culture, values
– Demographics
– Lifestyle changes - Technological
– Innovation
– Diffusion
– Research & development - Environmental
– Global warming
– Sustainability
– Pollution - Legal
– Court system
– Legislation
– Hiring laws
Effects on firms performance
Industry Effects: ~20%
Firm Effects: ~30–45%
Other Effects (corporate parent, year effects, unexplained variance): ~35–50%
What is the Structure-Conduct-Performance (SCP) paradigm in industrial organization?
The SCP paradigm is a model that explains how the structure of an industry influences firm conduct and performance. It examines the relationship between:
- Structure: Industry structure
- Conduct: Firm behavior
- Performance: Outcomes at both the firm and economy levels
It highlights when perfect competition may not occur.
What are the key components of the Structure-Conduct-Performance (SCP) paradigm in industry analysis?
The SCP paradigm includes:
- Industry Structure: Number of buyers/sellers, product differentiation, barriers to entry, cost structures, vertical integration.
- Firm Conduct: Pricing behavior, product strategy, advertising, R&D, investment in plants/equipment.
- Performance: Firm performance, societal productivity/efficiency, employment and economic progress.
What are the main industry structures along the competitive continuum?
Industry structures span a continuum from Perfect Competition to Monopoly. Key types include:
- Perfect Competition: Many firms, identical products, no pricing power.
- Monopolistic Competition: Many firms, differentiated products, some pricing power.
- Oligopoly: Few large firms, significant barriers to entry, interdependent pricing.
- Monopoly: Single firm, unique product, high pricing power, high entry barriers.
Switching cost
- Cost of employee training
- Cost of new ancillary (system) equipment
- Cost and time in qualifying the new suppliers
- Cost of product redesign
- Psychological costs
Switching cost represent the one-time costs facing the buyer when switching from the incumbent firm’s products and services to the new entrant’s
Barriers to entry: Economies of Scale
Cost advantages that incumbents enjoy due to larger scale of production. New entrants face higher per-unit costs unless they can match this scale.
Barriers to entry: Product Differentiation
Strong brand identity and customer loyalty protect incumbents. New entrants must invest heavily in marketing to win over loyal customers.
Barriers to entry: Capital Requirements
High upfront investments (e.g., in R&D, facilities) required to enter the market. Example: developing a new drug can cost over $2.8 billion.
Barriers to entry: Switching Costs
One-time costs buyers face when switching suppliers. Includes retraining staff, altering equipment, redesigning products, and psychological commitment.
Barriers to entry: Access to Distribution Channels
New entrants may struggle to secure distribution due to exclusivity, slotting fees, or incumbent retaliation (e.g., price cuts).
Barriers to entry: Cost Disadvantages Independent of Scale
Incumbents may benefit from proprietary tech, prime locations, or subsidies. New entrants face disadvantages regardless of their production volume.
