endterm. 53 good questions, nicely answered!

What are the limitations to Porter's industry analysis?

-Pays limited attention to factors that might affect demand. It accounts for the availability of and prices of substitute and complementary products but ignores changes in consumer income, tastes, and firm strategies for boosting demand, such as advertising.
-It focuses on a whole industry rather than on individual firms that may occupy unique positions that insulate them from some competitive forces
-The framework does not explicitly account for the role of the government, except when the government is a supplier or buyer.
-The five-forces analysis is qualitative.

Describe substitutes and complements from Porter's Industry Analysis.

Substitutes erode profits the same way as entrants by stealing business and intensifying internal rivalry. (Skype competing with cellular and landline phones

Complements boost the demand for the product in question, thereby enhancing profit opportunities for the industry.

Factors to consider when assessing substitutes and complements include:
a)Availability of Close Substitutes and/or Complements
b)Price-value Characteristics of Substitutes/Complements
c)Price elasticity of Industry Demand

What are some strategies to cope with the Five Forces?

1.Position yourselves to outperform the rivals by developing a cost advantage or a differentiation advantage.

2.Seek an industry segment where the five forces are less severe

3.Try to change the five forces by:
-Reducing internal rivalry by increasing switching costs
-By adopting entry deterring strategies
-Reducing supplier/buyer power through tapered vertical integration

What is the alternative approach to Porter's Five Forces?

Introduced the concept of Value Net as a counterpart to Porter’s five forces. Whereas Porter’s five forces mainly assesses threats to profits, a Value Net analysis assesses opportunities:

Examples of positive interactions:
A)Efforts by competitors to set technology standards that facilitate industry growth,
B)Efforts by competitors to promote favorable regulations or legislation
C)Cooperation among firms and their suppliers to improve product quality to boost demand
D)Cooperation among firms and their suppliers to improve productive efficiency
E)Firms cooperate with buyers/suppliers to improve inventory management

What is maximum willingness to pay?

perceived benefit which represents what the product is worth to a particular consumer.

When is consumer-surplus parity achieved?

when firms are offering a consumer the same amount of consumer surplus

When is economic value created and on what does economic profit depend?

Economic profit earned by a firm depends on the market conditions as well as the economic value created by the firm.

Economic value is created when a producer combines inputs such as labor, capital, raw materials and purchased components to make a product whose perceived benefit (B) exceeds the cost C incurred in making the product.

By what is the ability to create value affected by?

-changes in market demand
-changes in technology
-threats from other firms in the industry and from other industries

How can a firm create more economic value than the other firms in the industry?

a)It can configure its value chain differently

b)It can configure its value chain in the same way as its rivals, but performs activities more effectively than rivals do.

In order to do this, the firm must possess resources and capabilities that its competitors lack.

What are resources and capabilities?

Resources are firm-specific assets such as patents and trademarks, brand name and workers. They cannot easily be duplicated or acquired by other firms in well-functioning markets.

Capabilities are activities that a firm does especially well compared with other firms. They have several key common characteristics:
1.They are typically valuable across multiple products or markets
2.They are embedded in organizational routines.
3.They are tacit; that is, they are difficult to reduce to simple algorithms or procedure guides.

Describe the Benefit Advantage Strategy

A firm follows a strategy of benefit leadership when it creates more value than its competitors by offering products that have a higher B than its rivals.
This can be achieved in three different ways:
a)The benefit leader can achieve cost parity by making products with the same C but at a higher B than its rivals
b)The benefit leader might achieve cost proximity, which entails a C that is not too much higher than competitors.
c)A firm could offer substantially higher B and C

How can one extract profits from a Cost Advantage?

1.A cost leader that has benefit parity with its rivals can lower its price just below the unit cost of the firm with the next lowest unit cost. This makes it impossible for the higher-cost competitors to respond with price cuts of their own and thus allows the cost leader to capture the entire market.

How can one extract profits from a Benefit Advantage?

2.A benefit leader that has cost parity with its rivals can raise its price just below the sum of the following: 1) its unit cost plus 2) the additional benefit created relative to the competitor with the next highest B. To top the consumer surplus bid, a competitor would have to cut price below its unit cost, which would be unprofitable. At this price, then, the firm with the benefit advantage captures the entire market.

Describe the use of two other different strategies depending on the strategic positioning and price elasticity in each case.

pg 314

When is cost advantage strategy more profitable?

A cost advantage is likely to be more profitable than a benefit advantage when:
-The nature of the product limits opportunities for enhancing its perceived benefit (commodity products)
-Consumers are relatively price sensitive and will not pay much of a premium for enhanced product quality, performance, or image.
-The product is a search good

A benefit advantage is likely to be more profitable than a cost advantage when

-The consumer will pay a significant premium for attributes that enhance B
-Economies of scale or learning are significant, and firms are already exploiting them
-The product is an experience good

What does stuck in the middle mean?

Stuck in the middle is used to describe a firm that pursues elements of cost leadership and benefit leadership at the same time and in the process achieves neither of them.

What are the cost drivers?

-Related to firm, size, scope and cumulative experience
Economies of scale, scope, learning curve etc

-Independent of the firm size, scope, or cumulative experience
Input prices, location of activities, difference in wages, price of energy, economies of density
-Related to organization of the transactions
The way the vertical chain is organized. Agency costs etc.

What are the benefit drivers?

-Physical characteristics of the product itself
-The quantity and characteristics of the service or complementary goods the firm or its dealers offer for sale
-Characteristics associated with the Sale or Delivery of the Good
-Characteristics that shape consumers’ perceptions or expectations of the product’s performance or its cost of use
-The subjective image of the product

Strategic Positioning (where)

Broad Coverage Strategies: strategy that seeks to serve all customer groups in the market by offering a full line of related products.

Focus Strategies: offers a narrow set of product varieties or serves a narrow set of customers, or does both.
-Customer specialization
-Product specialization
-Geographic specialization

What are the threats to sustainability in Competitive and Monopolistically Competitive Markets?

Opportunities for earning profits based on favorable market conditions will quickly evaporate as new entrants flow into the market, increase the supply of output, and drive prices down where the economic profits are zero. If entry is free, any firm lacking some advantage conferring superior B-C will earn zero profits.

What is the Resource-Based Theory of the firm?

If all firms in a market have the same stocks of resources and capabilities, no strategy for value creation is available to one firm that would not also be available to all other firms in the market. ANY other firm could immediately replicate a strategy that confers advantage.

TO BE SUSTAINABLE, a competitive advantage must be defined by resources and capabilities that are scarce and imperfectly mobile.

What does it mean if a resource is imperfectly mobile? Cospecialized?

A firm that possesses a scarce resource can sustain its competitive advantage if that resource is imperfectly mobile. THIS MEANS that the resource is non-tradable or it would be less valuable to other users besides the firm that currently owns them.
Resources are cospecialized when they are more valuable when used together than when separated.

What is isolating mechanism?

Economic forces that limit the extent to which a competitive advantage can be duplicated or neutralized through the resource-creation activities of the firm.

What are the impediments to imitation?

1.Legal restrictions: patents, copyrights, and trademark (highly mobile assets)

2.Superior access to inputs or customers: obtain high-quality or high-productivity inputs on more favorable terms than its competitors through ownership or long-term exclusive contracts

3.Market Size and Scale Economies: Imitation may also be deterred when minimum efficient scale is large relative to the market demand and one firm has secured a large share of the market
4.Intangible Barriers to Imitation: Casual ambiguity; Dependence on Historical Circumstances; Social Complexity

What is an actual network of customers? What is a virtual one?

Actual network: consumers are physically linked and can communicate with other users in the network

Virtual Network: consumers are not physically linked. In this case the network effect arises from the use of complementary goods. (computer operating systems, video gaming and smart phones).

What is disruptive technology theory?

Disruptive technologies: products that offer much higher value-created than their predecessors, but not through incremental improvements, but with entirely new technologies that drastically lower C.

When do difficulties in the agency relationship arise?

1)The objective of principal and agent are different

Managers will want to:
– Enhance their personal wealth/status
– Limit their personal risk
– Boost their prospects for the next job

Owners will want maximum shareholder value

2)The actions taken by the agent or the information possessed by the agent are hard to observe

What are the problems with the performance base incentives?

Performance may be affected by random factors not under the agent’s control (ex: bad luck)
Performance measure may not capture all aspects of desired performance (example: teacher’s bonus)
Agents may focus on most promising activities which are included in the performance measure: ex Merrill Lynch to outperform Goldman Sachs

What are features of a good performance measure?

1.A performance measure which is less affected by random factors
2.A measure that reflects all the activities the firm wants undertaken
3.A performance measure that cannot be improved by actions the firms does not want undertaken.

What is organizational structure?

– how critical tasks are divided up
– how managers and employees make decisions in procedural sense
– how routines and information flows that support operations

How can simple tasks performed by a small groups of people be organized?

-Individually
-Self-Managed Teams
-Hierarchy of authority

Large firms require complex hierarchies in which the structure of the firm involves multiple groups and multiple levels of groupings which lead to the following problems:

1.Departmentalization:

Involves the partition of the organization into different groups and sets of groups. It may occur along several dimensions: tasks (or functions), inputs, outputs, geography, and time of work.

2.Coordination of activities: within and between subgroups to attain the firm’s objectives

Once groups have been identified and organized, the interrelated problems of coordination and control arise.
Coordination involves the flow of information to facilitate subunit decisions that are consistent with each other and with organizational objectives.
Control involves the location of decision-making and rule-making authority within a hierarchy.

How can control in a company be organized?

Centralization vs Decentralization
a) centralization: more decisions are made by senior managers
b) decentralization: decisions are made at lower levels, the firm becomes more decentralized. It is associated with diversification, so that as the variety of a firm’s business increases, decision making will naturally devolve to the firm’s divisions.

What are the types of organizational structure?

1.The unitary functional structure ( the U-form)
2.The multidivisional structure ( the M-form)
3.The matrix structure
4.The network structure

Describe the unitary functional structure/the u-form

1.The unitary functional structure

In this structure a single unit is responsible for each basic function within the firm.

The component groups or units in the functional structure are called departments. These departments are dependent on directions from central headquarters and probably could not exist outside the firm.
Firms organized this way tend to centralize their strategic decision making.
U-form promotes performance within the department but makes coordination across departments difficult
The unitary functional structure is suitable for stable conditions when operating efficiency is the prime consideration.

Describe the network structure

1.Network Approach
Network structure is designed around the worker rather than the task
Workers or worker groups contribute to multiple organizational tasks
Work groups are reconfigured when the tasks change
Networks of small autonomous firms can even approximate the behavior of larger firms, earning them the name “virtual firms”. Network structures and their component work groups can be organized into cross-cutting teams on the basis of task, geography, customer, or other bases. Their actual relationships are governed by the often-changing requirements of common tasks than by the formal lines of authority.

Describe the Japanese Keiretsu organizational form

: Japanese keiretsu The member companies own small portions of the shares in each other's companies, centered on a core bank; this system helps insulate each company from stock market fluctuations andtakeoverattempts, thus enabling long-term planning in innovative projects.

What is a modular organization?

“Modular organization” an alternative to network structure, involves relatively self-contained organizational units tied together through a technology standard.

What are the modes of task interdependence?

a)Reciprocal: when two or more workers or work groups depend on each other to do their work
b)Sequential: when one or more worker/group depends on the outcome of the others, but not vice versa
c)Pooled: when two or more positions are not directly dependent on each other but are associated through their independent contributions to the success of the firm.

What are the Implications of the Evolutionary Economics View?

-Strategy and structure can also be viewed as high level heuristics
-Strategy is a set of principles for managerial action
-Structure is a set of principles for coordination within the firm
-Current decision regarding strategy and structure will be constrained by past decisions
-Structure as decided in the past can affect strategy in the future (Strategy can follow structure)
-Managers are bound by routines and will make, if at all, minor changes to the essence of past decision making structures

What is the external context of a firm?

External context: concerns not only the business environment in which the firm operates, which we have discussed in detail throughout the book, but also legal, regulatory, political, and cultural environment in which the firm acts.

What is the internal context of a firm?

Internal context: concerns the political and cultural environment within a firm that affects how managers and employees behave. It describes the formal and informal mechanism that guide the actions of managers and workers as they act as agents for the firm.

Power and culture are two major aspects of the internal context.

What is the Resource Dependence View of power?

Individuals or firms can increase their power by reducing their dependence on others and increasing the dependence of others on them. (ex by means of relation-specific investments).

Resource dependence view also predicts that power will be accumulated by those who control critical resources and those whose skills are indispensable to the firm.

What are the effects of culture in a firm?

-Reduces monitoring costs by complementing formal control systems
-Shapes individual preferences to conform to corporate goals.
-Negotiation and bargaining costs are reduced.
-Cooperation achieved without the use of explicit means.

Describe the relationship between culture and intertia

When a firm’s strategy fits the environment, cultural norms can be an asset.
The downside of culture is that it can impede radical change.
When the firm has to adapt to survive in the face of rapid environmental change, culture can be a drag on performance.

What is the methodology for M&A analysis?

• Shareholder value analysis
– Effect of event on stock price movements
– Controlled for expected movements – which are calculated on the basis of CAPM or a market model (and the merging firms specific risk position vis-à-vis the controls)
– Under assumption that stock market is efficient
• Real value analysis
– Effect on key figures in annual accounts (profits; productivity; R&D expenditures)
– Effect on externally observable indicators (market share; registered patents)
– Controlled for ‘normal’ values (industry and size matched control groups; own history)

What is the Minimax Regret and Defence theory?

If A’s move of acquiring a firm is successful, A has gained a competitive advantage, and the rest of the market would have to recapture it. This leads to a high regret value of Y. If A’s move of acquiring a firm is unsuccessful, end the rest of the market follows, nobody has a competitive advantage, and the regret is shared, having a value of X<Y. Thus it is likely that the first merger will be imitated.

What is the Restructuring Carrousel of M&A?

• Phase 1: booming economy provides the necessary means for financing M&A (cash; stock appreciations; borrowing capacity)

• Phase 2: a random, eye-catching merger (or a few of these) ignites the game
• Phase 3: minimax-regret and defensive routines lead to bursts of merger activity
• Phase 4: the merger explosion levels off as a result of negative effects on players
• Phase 5: anorexia management sets in: PE comes into play (sell-offs, divestitures, demergers; lay-offs)
• Phase 6: the pool with targets is refilled

What are the conclusions on M&A?

M&A rationality must be grasped as a collective phenomenon

• Large mergers are not undertaken for the creation of economic wealth but rather because others are doing it too (backbone of Institutional Economics)

• They are strategic phenomena rather than economic phenomena, the result of strategic positioning games among large interdependent players

• Strategic games must be played at the risk of putting yourself at a competitive disadvantage, becoming the butt of the stock exchange, and/or losing your independence: it is a dominant strategy

What is the herding effect?

Herding effect: when decision makers ignore their own information about the best course of action and instead do what earlier decision makers or everyone else is doing.

Describe neo-classical economics

An approach to economics that relates supply and demand to an individual's rationality and his or her ability to maximize utility or profit.

• Human beings are rational and self-interested (‘opportunism’)

• Individuals maximize utility and firms maximize profits (‘constrained maximization’)

• People act independently (‘methodological individualism’) on the basis of either full or imperfect and relevant information, i.e. prices (+ acting opportunistically)

• Economic systems consist of atomistic (independent) decision units that choose among alternative uses depending on self-interest and price.

• Uses deductive reasoning: reason from a priori beliefs or propositions (let us suppose that)

Describe institutional economics

• Emphasizes importance of non-market factors (as social institutions) in influencing, or even conditioning, economic behavior and economic analysis, being subordinated to consideration of sociological factors, history, and institutional development

• Institutions are systems of established and prevalent social rules that structure social interactions

• Puts emphasis on habits, customs, path dependency, collective behaviour (‘rationality’)

• Uses inductive reasoning: reason from observed facts, introspection needed (let’s collect some data)

Endterm

53 important questions on Endterm