BUAD 497 Final Exam with Accurate
Solutions
What is strategy about? - ANS-Being different.
What are the three types of different positioning? - ANS-Variety based positioning
Need based positioning
Access based positioning
Variety-Based Positioning - ANS-Positioning can be based on producing a subset of an
industry's products or service.
Product/Service-based specialization
Ex. most industries
Need-Based Positioning - ANS-Serving most or all needs of a particular group of
customers.
Customer-based specialization
Ex. Saks vs. Macys
Access-Based Positioning - ANS-Positioning can be based on segmenting customers
who are accessible in different ways.
Channel-based specialization.
Ex. Fresh Direct in NYC
Why does strategy require trade-off? - ANS-1. Image confusion
2. Capacity constraint
3. Coordination difficulty
Examples of market punishment? - ANS-Movie genres, hollywood actors, diversified
companies
What is the positioning view of strategy (Porter, 1980)? - ANS-Strategy is the attempt to
achieve sustainable competitive advantage by creating distinction.
,- Creating a unique & valuable position by performing *different* activities.
- Making *trade-offs* - choosing what NOT to do.
- Creating *fit* among these activities.
- Competitive advantage grows out of the *entire* system of activities.
Why is operational effectiveness not strategy? - ANS-- Not sustainable.
- No distinction (be performing different activities).
- No trade-off.
Eisner (former CEO of Disney) and his strategy theory? - ANS-People will pay a
premium price for extraordinary entertainment. We have the necessary resources to
create extraordinary entertainment. Therefore, let's redeploy our resources in a different
way and offer something extraordinary to people.
What is competitive advantage? - ANS-The ability to create MORE economic value than
competitors.
- There must be something different about a firm's offering vis-a-vis a competitors'
offerings.
- If all firms' strategies were the same, no firm would have a competitive advantage.
How do you measure competitive advantage? - ANS-*Superior economic performance*
is viewed as evidence of competitive advantage.
- It's easy to see the evidence of competitive advantage.
- Accounting Measures: ROA, ROE, etc. that exceed industry averages.
- Economic Measures: market shares
Intended Strategies - ANS-The strategic management process leads managers to
*intended* strategies.
Emergent Stratgies - ANS-Adopted from intended strategies if conditions often change
or new information becomes available.
What else drives industry beyond Porter's 5 Forces? - ANS-1. Market Concentration
2. Intensity of Price Competition
Porter's 5 Competitive Forces that Shape Strategy - ANS-1. Bargaining Power of
Buyers
2. Bargaining Power of Suppliers
3. Threat of New Entrants
4. Threat of Substitutes
5. Rivalry Among Existing Competitors
,When is the Power of Buyers *HIGHEST*? - ANS-- Buyers are concentrated & buy in
high volumes.
- Product is undifferentiated.
- Buyers can backward integrate (in-source).
- Buyers know the cost structure.
- Product represents a large percentage of buyers' total costs.
- Product has little impact on quality of the buyers' final product.
When is the Power of Suppliers *HIGHEST*? - ANS-- Suppliers are highly
concentrated.
- Substitutes for their products are unavailable.
- Suppliers can forward integrate.
- Focal industry is small percentage of suppliers' business.
- Suppliers' product are highly differentiated.
- Switching between suppliers is difficult or costly.
When is the Threat of New Entrants *HIGHEST*? - ANS-- Economies of scale are low.
- Product is undifferentiated.
- Capital requirements are low.
- Customers have low switching costs and lack brand loyalty.
- Incumbents don't control distribution channels or sources of supplies.
- Incumbents lack proprietary knowledge or technology.
- No "network externalities."
- Government doesn't product incumbents through subsidies, or regulation or prices &
entry.
What are the TWO types of entry barriers? - ANS-1. Structural
2. Strategic
1. Structural Entry Barriers - ANS-Inherent natural advantages that incumbents have
simply by virtue of incumbency, and that do NOT require any ongoing action by
incumbents.
Tend to *increase* industry profits, because they keep entrants out at no additional cost.
2. Strategic Entry Barriers - ANS-Active entry-deterring behavior by incumbents (e.g.
preemptive capacity expansion or "limit pricing")
Tend to *reduce* industry profits, because they only keep entrants out by imposing
additional costs on incumbents (e.g. reduced margins from limit pricing, or increased
costs of excess capacity).
What is POWER about? - ANS-Resource dependence!
The party that has LESS resource dependence is MORE powerful.
, When is the Threat of Substitutes *HIGHEST*? - ANS-- Substitute produce/service is
superior (or at least catching up) in its price/performance relationship.
- Customers are highly price sensitive.
When is Rivalry Among Existing Competitors *HIGHEST*? - ANS-- Large number of
competitors in industry.
- Industry is stagnant or declining.
- Excess capacity available.
- Large percentage of costs are fixed.
- Exit barriers are high.
- High storage costs for product.
- Product is undifferentiated.
Zero-Sum - ANS-One firm's gain is another's loss.
Positive-Sum - ANS-Rivalry can increase industry profitability, when each competitor's
aims to serve the needs of different customer segments.
How else can direct competitors also cooperate? - ANS-- R&D Consortium
- Joint Lobbying
- Hotel Referral
What can you use the 5 Force's model for? - ANS-- Assess current and future
profitability of industries, market segments, & locations on value chain.
- Forecast future prices, costs, and profits when considering a market entry (or does not
exist yet) or exit.
- As a lens for interpreting news: How events will affect industry profitability?
- Positioning
- Industry Evolution
- Industry Transformation
What does Rivalry mean? - ANS-It means intensity of *price competition*, NOT non-
prive competition.
Why does rivalry mean intensity of price competition? - ANS-- The purpose of the 5
Force's model is to assess threats to industry profitability.
- Non-price competition intended to create *product differentiation,* which HELPS
industry profitability.
Differentiation - ANS-Products LESS perfect substitutes for each other.
Competition = less direct
Undifferentiated Commodities - ANS-Perfect Substitutes
Competition = more direct (price only)
Solutions
What is strategy about? - ANS-Being different.
What are the three types of different positioning? - ANS-Variety based positioning
Need based positioning
Access based positioning
Variety-Based Positioning - ANS-Positioning can be based on producing a subset of an
industry's products or service.
Product/Service-based specialization
Ex. most industries
Need-Based Positioning - ANS-Serving most or all needs of a particular group of
customers.
Customer-based specialization
Ex. Saks vs. Macys
Access-Based Positioning - ANS-Positioning can be based on segmenting customers
who are accessible in different ways.
Channel-based specialization.
Ex. Fresh Direct in NYC
Why does strategy require trade-off? - ANS-1. Image confusion
2. Capacity constraint
3. Coordination difficulty
Examples of market punishment? - ANS-Movie genres, hollywood actors, diversified
companies
What is the positioning view of strategy (Porter, 1980)? - ANS-Strategy is the attempt to
achieve sustainable competitive advantage by creating distinction.
,- Creating a unique & valuable position by performing *different* activities.
- Making *trade-offs* - choosing what NOT to do.
- Creating *fit* among these activities.
- Competitive advantage grows out of the *entire* system of activities.
Why is operational effectiveness not strategy? - ANS-- Not sustainable.
- No distinction (be performing different activities).
- No trade-off.
Eisner (former CEO of Disney) and his strategy theory? - ANS-People will pay a
premium price for extraordinary entertainment. We have the necessary resources to
create extraordinary entertainment. Therefore, let's redeploy our resources in a different
way and offer something extraordinary to people.
What is competitive advantage? - ANS-The ability to create MORE economic value than
competitors.
- There must be something different about a firm's offering vis-a-vis a competitors'
offerings.
- If all firms' strategies were the same, no firm would have a competitive advantage.
How do you measure competitive advantage? - ANS-*Superior economic performance*
is viewed as evidence of competitive advantage.
- It's easy to see the evidence of competitive advantage.
- Accounting Measures: ROA, ROE, etc. that exceed industry averages.
- Economic Measures: market shares
Intended Strategies - ANS-The strategic management process leads managers to
*intended* strategies.
Emergent Stratgies - ANS-Adopted from intended strategies if conditions often change
or new information becomes available.
What else drives industry beyond Porter's 5 Forces? - ANS-1. Market Concentration
2. Intensity of Price Competition
Porter's 5 Competitive Forces that Shape Strategy - ANS-1. Bargaining Power of
Buyers
2. Bargaining Power of Suppliers
3. Threat of New Entrants
4. Threat of Substitutes
5. Rivalry Among Existing Competitors
,When is the Power of Buyers *HIGHEST*? - ANS-- Buyers are concentrated & buy in
high volumes.
- Product is undifferentiated.
- Buyers can backward integrate (in-source).
- Buyers know the cost structure.
- Product represents a large percentage of buyers' total costs.
- Product has little impact on quality of the buyers' final product.
When is the Power of Suppliers *HIGHEST*? - ANS-- Suppliers are highly
concentrated.
- Substitutes for their products are unavailable.
- Suppliers can forward integrate.
- Focal industry is small percentage of suppliers' business.
- Suppliers' product are highly differentiated.
- Switching between suppliers is difficult or costly.
When is the Threat of New Entrants *HIGHEST*? - ANS-- Economies of scale are low.
- Product is undifferentiated.
- Capital requirements are low.
- Customers have low switching costs and lack brand loyalty.
- Incumbents don't control distribution channels or sources of supplies.
- Incumbents lack proprietary knowledge or technology.
- No "network externalities."
- Government doesn't product incumbents through subsidies, or regulation or prices &
entry.
What are the TWO types of entry barriers? - ANS-1. Structural
2. Strategic
1. Structural Entry Barriers - ANS-Inherent natural advantages that incumbents have
simply by virtue of incumbency, and that do NOT require any ongoing action by
incumbents.
Tend to *increase* industry profits, because they keep entrants out at no additional cost.
2. Strategic Entry Barriers - ANS-Active entry-deterring behavior by incumbents (e.g.
preemptive capacity expansion or "limit pricing")
Tend to *reduce* industry profits, because they only keep entrants out by imposing
additional costs on incumbents (e.g. reduced margins from limit pricing, or increased
costs of excess capacity).
What is POWER about? - ANS-Resource dependence!
The party that has LESS resource dependence is MORE powerful.
, When is the Threat of Substitutes *HIGHEST*? - ANS-- Substitute produce/service is
superior (or at least catching up) in its price/performance relationship.
- Customers are highly price sensitive.
When is Rivalry Among Existing Competitors *HIGHEST*? - ANS-- Large number of
competitors in industry.
- Industry is stagnant or declining.
- Excess capacity available.
- Large percentage of costs are fixed.
- Exit barriers are high.
- High storage costs for product.
- Product is undifferentiated.
Zero-Sum - ANS-One firm's gain is another's loss.
Positive-Sum - ANS-Rivalry can increase industry profitability, when each competitor's
aims to serve the needs of different customer segments.
How else can direct competitors also cooperate? - ANS-- R&D Consortium
- Joint Lobbying
- Hotel Referral
What can you use the 5 Force's model for? - ANS-- Assess current and future
profitability of industries, market segments, & locations on value chain.
- Forecast future prices, costs, and profits when considering a market entry (or does not
exist yet) or exit.
- As a lens for interpreting news: How events will affect industry profitability?
- Positioning
- Industry Evolution
- Industry Transformation
What does Rivalry mean? - ANS-It means intensity of *price competition*, NOT non-
prive competition.
Why does rivalry mean intensity of price competition? - ANS-- The purpose of the 5
Force's model is to assess threats to industry profitability.
- Non-price competition intended to create *product differentiation,* which HELPS
industry profitability.
Differentiation - ANS-Products LESS perfect substitutes for each other.
Competition = less direct
Undifferentiated Commodities - ANS-Perfect Substitutes
Competition = more direct (price only)
