Midterm Study Guide
Core Knowledge of General Theory & Key Concepts (8 questions).
Strategy—designed to create long term and sustainable economic and competitive dominance It is a process to find a better or superior position—this could be from an already good position to a better one or from a poor position to a good one
Porter- Five Forces, Industry Attractiveness, PESTEL & CAGE Porter- Five Forces
∙ This tells us about internal behavior
∙ Arrows pointing to rivalries indicate how much pressure that factor can put on the industry—this can change intensity and even directions
∙ We use this to determine who can put the most pressure on an industry and what we can do to counteract it
∙ On what basis do you compete?
o Price We also discuss several other topics like What are the four megatrends that will change the world?
o Intellectual property
∙ When a substitute emerges into the market you have less power and the buyer has more power ∙ There’s a value proposition attached to the attractiveness of an industry
We also discuss several other topics like What is hyperglycemia?
∙ Attractiveness Tests
o Provide a set of filters to assess whether to enter an industry or buy a company o Easy to use, intuitive appeal
▪ How attractive are the customers?
▪ Will the customers stick with us?
▪ What are the buyer values?
▪ What factors indicate “attractiveness”?
▪ What is the relationship between attractiveness and industry structure?If you want to learn more check out What is confucianism?
∙ Helps us define how the industry behaves and how the company behaves in the industry ∙ Political factors
∙ Economic factors
∙ Social factors
∙ Technological factors
∙ Environmental factors
∙ Legislative factors We also discuss several other topics like How polymers are formed
Resources & Capabilities of the Firm
Factors of Customer Experience
∙ Resources and Capabilities of Firm
o Supply chain If you want to learn more check out What is the theoretical significance of the u.s. declaration of independence?
∙ External Factors
o Macroeconomic factors
Theory of Rivalry & Competition
How do we compete?
∙ Strategy is about creating, capturing, expanding, and defending. First you have to decide which you want to do
∙ What environment are you competing in?
∙ Where are you in the microenvironment?
∙ How do the macro and micro environments behave?
o What drives the industry?
o Identify the drivers of the industry
▪ External factors We also discuss several other topics like What is kinship?
∙ % change in GDP
∙ What’s the correlation of the industry to GDP?
∙ What’s the correlation of your company to GDP changes?
∙ What’s the impact of social media on your industry?
▪ Internal factors
∙ Value proposition
∙ Suppliers/supply chain management
▪ Understanding what drives your industry will tell you how to compete
Industry Analysis & Life Cycle
Industry Analysis Steps
∙ Define objectives
∙ Interrogate industry behavior
∙ Identify the leaders of the industry
∙ Identify business and environmental drivers of the industry
∙ Determine how the industry interacts with a macroeconomic environment
∙ Apply the attractiveness test
1. Birth—Creating, trying to make a better position for yourself. Will also have an element of defending because of the risk. Will probably use a transformational strategy
∙ People are entering the industry, others are exiting. If there’s more people entering than exiting, that’s an indication of attractiveness.
∙ Formation of barriers to entry
∙ Very turbulent, lots of uncertainty
∙ The birth stage grows in waves until the market coalesces and dominant strategies stimulate the growth
o Compaq computers built the first portable computer. The dominant
design in this case was to add a hinge
∙ When you jump from birth to growth, established players come into the market o 1981 IBM launched the PC, and that’s when it became a huge product
▪ Transactional, capturing market share, defending market share
∙ You can’t have growth unless you have a significant infrastructure—Tesla is struggling to grow because it doesn’t have strong infrastructure in states other than California
∙ No one is going to rush to build the infrastructure unless they think the dominant design has popped out
∙ Infrastructure barriers slow growth
∙ Fueled by clustering—when multiple industries support a primary design.
o When cars were invented, tires needed to be made, someone needed to
change the tires, gas stations came to exist
3. Maturity—Transformational, transactional.
∙ In this phase companies usually focus on economies of scale; driving the cost down to maintain or improve profitability
o Smart companies take a portion of those savings and invest in R+D to see
what’s in the birth and growth phase
∙ Sometimes pursue two strategies simultaneously—transformational within the company to make them more productive and
∙ Barriers to exit—may not be practical or may not be allowed by law
o Union labor, creditors, etc.
5. Death—a company can still be saved in the death phase but your options for strategy are very limited
∙ Situational strategies, defending, trying to find a better position
Value Chain Analysis (Basic stuff)
Vertical Integration (Basic stuff)
∙ Vertical integration can become a problem because if you aren’t optimizing your structure you have inherently high fixed costs
∙ We saw this in the US steel case
∙ Companies become vertically integrated by owning multiple factors of
∙ If you are vertically integrated, you can control price, costs, quality and quantity ∙ Often cannot control labor
Bargaining Powers (Basic stuff)
∙ If there are more substitutes, the consumer has more bargaining power because they can go to a competitor
∙ Jungle Fire elements
∙ Resource Allocation—knew what to allocate due to research analysis
∙ Capacity adaptation
∙ Uncertainty—could be minimized with more information but still existed
∙ Foreknowledge—we had a definite start, definite window of time, and the map ∙ Strategy behind it
∙ Recognize objectives, goals, purpose
∙ Form strategy
∙ Back to strategy
Case & Reading Knowledge (8 questions).
US Steel Industry
Steel Industry Case
∙ Five key questions of industry analysis
o How is the industry defined?
▪ We’re in the manufacturing industry—capital intensive
▪ Producing a commodity
∙ Commodities are abundant and the buyer has the power
▪ It’s resource intensive
▪ Carbon steel and stainless steel
∙ Stainless doesn’t rust, carbon will
o What boundaries define the industry?
▪ Integrated manufacturers—big steel mills
▪ Mini-mills—take steel that’s already been made, melt it and reconstitute it ∙ Residential construction
∙ Commercial construction
▪ Industry boundaries are often different than the market boundaries
o How does the industry behave and interact with ecology?
▪ Capital intensive—very expensive to run a steel plant
▪ Defense spending effects the steel industry—spend more on defense, more money goes into the steel industry
▪ Resources drive costs
▪ Buyer drives prices
▪ Boundaries (markets) drive behavior
▪ Have to watch your supply costs and production costs
▪ Vertical integration in this industry gives you a lot of control of the factors of production
o What drives industry behavior?
▪ Highly cyclical industry
▪ Macroeconomic events
▪ Clear demand
o How fast does the industry change?
∙ 1901-1917—creating the market, transformational
∙ 1919-1929—Expanding through military operations, opportunistic strategy o No foreign competition, intense domestic competition
∙ After the wars, soldiers bought motorcycles
o Defending against the economy, trying to survive
o No employment, no income, no consumption or wealth
o Expanding, wartime production
o Huge expansion
▪ WWII veterans
▪ Industrialization of the economy
▪ Lifestyle changes
o Defending against competition
o Japan comes in
o Germany starts selling
o IPO????AMF????loss of identity
o Defending, still declining
o Creating, Expanding
o 1986 EVO2 engine
o Innovation is creating the market
o Quality improves
Questions to ask
∙ What factors contributed to the decline of H-D?
o Cyclical industry
o Competition entering
o Bad quality products
o Image of the company
∙ How did H-D turn itself around?
o Focused on the image of the product and its lifestyle connotation
o Gathered loyal customers
o Drove resales through their image
o Relied on merchandise and style to help sell the lifestyle
∙ How did they go about changing operations?
o Visited Japan to understand how the Japanese were building motorcycles o Confronted reality realizing their company was inferior
o Hired Accenture who brought in Enterprise Resource Planning—a lot of the tech that Harley would use to automate its plants
WalMart (Both cases)
∙ Porter Model
∙ Mobility barrier early 1900’s
∙ Breaks off before the prestige (high price, high image) stores
∙ Built on discrimination
∙ Had to be white and affluent to shop at these stores
∙ Woolworth’s and Grant’s were the “every person” stores
∙ After Sears
∙ Catalogue is blind to social class, ethnicity, etc. so everyone can shop there ∙ Entrants
∙ Consolidators—Woolworth’s and W.T. Grant
∙ Sears—doesn’t consider pricing, looks at distribution and selection
∙ All stores are brick and mortar so Sears introduces the catalogue
∙ Allows Sears to circumvent the issue of the physical location
∙ Circumvent the pricing barriers by moving to a standard price
∙ Prices are standard across the country
∙ Sears becomes the first store with low price, higher image (still not great image) ∙ Sears creates a private label
∙ Open their own profit sharing in 1916—first time employees shared profits ∙ Consolidation of power—Sears consolidates the power by selling so many different categories, including insurance
∙ Had their own credit card so you could use their credit to buy their products ∙ 1945 Sears sells over a billion dollars
∙ 1970’s mom and pop stores are wiped out
∙ Kmart enters this space
∙ Sears attracts two other competitors
∙ Ward’s and Penny’s also start to compete on the catalogue level
∙ Kmart—enters the market in the 1970’s with low price, low image.
∙ Competes on price with a good selection
∙ Competes on economies of scale with huge volume
∙ Distribution was brick and mortar
∙ Introduces the term off-price
∙ Pricing off of and lower than the catalogue
∙ Blue plate special—whatever you had yesterday you mix together today ∙ Surplus food, loss leader, low price food you could buy anywhere
∙ At Kmart—blue light special
∙ Took a shopping cart with a blue light on it and put specific items on sale to drive volume
∙ Opened 271 stores in 1976
∙ Have a faster turnover than Sears
∙ Even though average price per item is cheaper, their sales make up for it so their sales per sq. foot is higher than Sears
∙ Kmart starts to put pressure on the low price, high image sector in the 1980’s ∙ Walmart—began opening up stores 7 times faster than Kmart
∙ Everyday Low Price (EDLP)—higher than discount and low , lower price than average and high
∙ Keep quality up with EDLP strategy
∙ Used military installations as the base for his customers
∙ Focuses on rural areas
∙ Their strategy was to go where the enemy wasn’t
∙ They created, then expanded
∙ Now they’re almost entirely defensive
∙ Costco is threatening
∙ Target—slightly higher image, slightly higher price
∙ Suppliers—the stores
∙ Basis of competition if you’re a store is through distribution and pricing with a factor of selection
∙ We have very low power in this market
∙ Only power is whether we can buy or not
∙ Use PESTEL to analyze China
∙ Still a communist country
∙ Very monolithic political system that does understand economics
∙ Creates a political system that invites foreign investment (because it can’t afford to build infrastructure itself)
∙ Jurisdictionally oriented—you pick where you want to go
∙ Economy has been in transition for about thirty years
∙ Largely illiterate and agrarian to more educated
∙ Outside of the city is still impoverished
∙ Wealth in the country comes from
∙ The cities
∙ Foreign investment
∙ Bending the currency value
∙ Culturally people were trained to want to shop at smaller stores
∙ Freshness was a concern—thought Walmart wouldn’t have fresh product ∙ Selection—preferred more local product vs international brand
∙ How do most people live?
∙ Chinese want an even lower price than in US
∙ Don’t buy in bulk like US does—like small parcels
∙ This is because the Chinese don’t have a lot of cars—have to be able to get everything home
∙ US wants a wide selection you can get everything at one shop, China likes specialty shops (one shop for each category focus)
∙ US is transaction oriented—we want speed and ease. China uses shopping as a social experience
∙ China allows price negotiation as a cultural tradition
∙ Walmart model—
∙ The Chinese experience doesn’t fit with the Walmart model
∙ Technical infrastructure
∙ Lack of roads
∙ Don’t have the same data communication analysis
∙ China has the most people using the internet of any country, but ranks 88th in the number of transactions occurring over the internet
∙ Favorable to business
∙ China is friendly toward foreign investment
∙ Communist government can nationalize the business any time they want which makes this risky
∙ Result—the Walmart business model doesn’t fit into the culture of the company
Walmart in India
∙ Does India have better infrastructure than China?
∙ Not really, has a lot of railroads but other than that infrastructure is still low ∙ Have a lot of people
∙ What did Walmart miss in India?
∙ Indians don’t have cars
∙ Purchasing power is lower than China
∙ Still have a caste system
∙ Poverty is higher
∙ Politics in India
∙ Lack of political awareness hurt Walmart
∙ Had to pay 100 million just to get the license to go into the market
∙ Each providence/state required this money
∙ Walmart was only looking at the number of people in the market. Felt invincible because of their volume and ignored other factors
∙ Need to understand the culture of a market before you enter it
∙ Walmart had a lack of due diligence
∙ Focused only on population