Bus 195 Exam 1

Strategy Definition
Includes the ideas, decisions, and actions that enable a firm to succeed and sustain a sustainable competitive advantage. This includes a mission and a vision as well as strategic objectives
How do firms gain and sustain competitive advantage?
It’s the firm’s resources and capabilities that enable it to overcome the competitive forces in the industry. You need superior performance relative to your competition. Need to either be a low cost producer or have a high level of differentiation or a combination of both (VRI).
What is sustained competitive advantage?
Being a leader in either being a low cost producer or having a high level differentiation over a period of time..
Describe an example company from the book that achieved sustained competitive advantage?
Walmart – They have everyday low prices compared to their competition. They are able to be the low cost provider in the current market place. Although they do not have unique products or services, what does make them unique is the ability to have a wider selection than most of its competition.
What is strategic positioning?
Where a firm stands compared to its competition on price and differentiation.
What is the fundamental trade-off required for strategic positioning?
Cost Leadership vs. Product Differentiation.
Using two companies we’ve talked about in class and describe their strategic positioning vis a vis one another.
1. Walmart- Low prices, high breadth of products. They have a strategic position in the market of being the low cost provider. However, some people do not want to shop there because of the association with Walmart’s brand and treatment of employees.
2. Target – Higher prices, high breadth of products. Higher prices, but more aesthetically pleasing shopping experience and treat their employees better. Customers are willing to pay higher prices for the same items at Target because of the better customer experience at Target.
What is the firm’s Vision?
A goal that is “massively inspiring, overarching, and long-term”. Represents a destination that is driven by and evokes passion. Usually short, broad and not measurable. Tend not to change.
What is the firm’s Mission?
This encompasses both the purpose of the company as well as the basis of competition and competitive advantage. This is more specific and shows how the firm will compete and where they want to go in the future. Changes when competitive conditions change and new threats or opportunities arise.
What are the firms Strategic Objectives?
The most important of the three hierarchy goals. It talks about both financial and nonfinancial goals and you can usually find these objectives in the annual report or letter to shareholders from the CFO. They are used to operationalize the mission statement. Help to provide guidance onto the higher goals. Have a well defined time frame. Must be SMART (Specific, Measurable, Appropriate, Realistic, and Timely)
Understand the role that Vision, Mission, and Strategic Objectives play in the Strategic Coherence of the firm.
These all play a role together because you need to be on the same page from the top level Vision, which is longer term and less specific all the way down to the strategic objectives which are shorter term and more specific. If you want strategic coherence, you need to make sure people at all levels are on the same page and that vision, mission, and strategy are all in line.
What are the Primary Activities?
1. Inbound Logistics
2. Operations
3. Outbound Logistics
4. Marketing and Sales
5. Service
What are the Secondary Activities?
1. General Administration
2. Human Resource Management
3. Technology Development
4. Procurement
Inbound Logistics?
Receiving, storing, and distributing inputs.
Operations?
Transforming inputs into final product (machine, packaging etc.)
Outbound Logistics?
Collecting, storing, and distribution products to buyers
Marketing and Sales
Activities to induce buyers to make purchases
Service?
Actions to enhance or maintain value of the product (customer service)
General Administration?
Management, finance, planning, Legal, IS
HR Management?
Recruiting, hiring, training, compensation
Technology Development
Developing new knowledge applied to firm operations
Procurement
Purchase and store inputs as well as maintain PPE
Beer Example Value Chain Analysis:
– Inbound Logistics: Raw Materials (Water, Barley, Hops, Wheat, Yeast)
– Operations: Transport them into facility and Packaging
– Outbound Logistics: Distribute to buyers
– Marketing And Sales: Start Ad Campaign
– Service: Research And Development.
Resource-based view of the firm?
Perspective that firms’ competitive advantages are due to their endowment of strategic resources that are valuable, rare, and costly to imitate.
Understand the role that Resources and Capabilities play within the Resource Based View (RBV) of the firm.
It looked at the resources which is an internal analysis of the ability to produce goods with these resources in the company where the capabilities are and external analysis of the industry and its competitive environment. Goes beyond a simple SWOT analysis by integrating the internal and external perspectives. Good for seeing why competitors are more profitable than others. Helpful in developing strategies for individual businesses and diversified firms.

– Resources: Assets such as cash and buildings or reputation.

– Capabilities: Organizational and managerial skills necessary to deploy resources strategically.

Tangible Resources:
1. Financial
2. Physical
3. Technological
4. Organizational
1. Financial
Firms cash account and cash equivalents, firm’s capacity to raise equity, and the firms borrowing capacity.
2. Physical
Modern plant and facility, favorable manufacturing locations, state of the art machinery and equipment
3. Technological
Trade secrets, innovative production processes, patents, copyrights, and trademarks
4. Organizational
Effective strategic planning processes, excellent evaluations and control systems
Intangible Resources:
1. Human
2. Innovation and Creativity
3. Reputation
1. Human
experience and capabilities of employees, trust, managerial skills, firm specific practices and procedures
2. Innovation and Creativity
technical and scientific skills, innovation capabilities
3. Reputation
brand name, reputation with customers for quality and reliability, reputation with suppliers for fairness, non-zero-sum relationships.
Organizational Capabilities
Firm competencies or skills the firm employs to transfer inputs to outputs, capacity to combine tangible and intangible resources, using organizational processes to attain desired end.
Examples of Organizational Capabilities:
1. Outstanding Customer Services
2. Excellent Product Development Capabilities
3. Innovativeness of Products and Services
4. Ability to hire, motivate, and retain human capital.
What are Core Competencies?
A combination of capabilities and resources that allow a business to be competitive in the market place. They play the role of attaining competitive advantage such as logistics, procurement, merchandising, and human resources.
What role do the firm’s Resources and Capabilities play in the building of Core Competencies?
They help build it because they give companies the things they need (resources) in order for employees to carry out their objectives (capabilities).
Give examples of Core Competencies from the book or from our class discussions.
– Amazon: Large selection of online items and customer service
– Coke: Most recognizable brand name in the world
– Google: Search Algorithms
What is a Strategic Coherence Map?
Captures relationships between core competencies and resources/capabilities (supporting activities)
How is the Strategic Coherence Map different than a Value Chain?
A value chain comply shows the process of inputs to final products and how to get to the core competencies. It creates value where the company can capitalize on core competencies but the actual value chain just shows the process of creating value and where it is created. Coherence map shows how the company’s core competencies relate to each other.
What is the VRI (Valuable-Rare-Difficult to Imitate) Framework and what is it used for?
Resources alone do not sustain a competitive advantage. They must possess four attributes to maintain a sustainable advantage and have been appropriated by employees/managers.
Be familiar with the Implications of the VRI Framework summarized in Exhibit 3.6.
– Valuable: Neutralize threats and exploit opportunities
– Rare: Not many firms possess
– Difficult to Imitate: Physically unique, path dependency, causal ambiguity, social complexity
Be familiar with the Implications for Competitiveness summarized in Exhibit 3.7.
– Competitive Disadvantage: not valuable, rare, or difficult to imitate
– Competitive Parity: valuable but not rare and they are easy to imitate
– Temporary Competitive Advantage: valuable and rare but easy to imitate
– Sustainable Competitive Advantage: valuable, rare, and hard to imitate
From our Wal-Mart case and in-class discussion, describe the tangible and intangible resources and capabilities possessed by Wal-Mart.
– Tangibles: cash surplus and distribution centers
– Intangibles: technological processes, retail link, cross docking,
– Organizational capabilities: customer service and management transparency.
For each resource and capability, apply the VRI framework to assess Wal-Mart’s ability to leverage the resource for competitive advantage (go through the individual steps explicitly).
-Logistics: cross docking (valuable), barcodes (valuable)
– HR: payroll/sales (valuable)
– Procurement: COGS/SALES (valuable and not easy to imitate)
– Merchandising: Sales/SQFT (valuable and rare) little competition (VRI)
Measuring competitive advantage: Refer to the Wal-Mart notes in the section below for some of the basic financial ratios that can use to measure competitive advantage.
ROIC = OI/IC

OI = Revenue – COGS – Op Exp

IC = Operating Working Capital + Fixed Assets

OWC = CA – Cash – CL

ROIC = (Revenue – COGS – Op Exp) / (CA – Cash – CL + NFA)

If ROIC goes up others will want to join causes prices and margins to go down.

What are Generic Business Strategies?
Basic types of business level strategies based on breadth of target market (industrywide vs narrow market segment) and type of competitive advantage (low cost versus uniqueness).
Examples of Generic Strategies with the Value Chain (Exhibit 5.3 and 5.4)
These are the primary activities and support activities.
What are the potential pitfalls of Overall Cost Leadership?
– The strategy is imitated too easily.
– A lack of parity on differentiation
– Reduced flexibility
– Obsolescence on the basis of cost advantage
– Too much focus on one or a few value-chain activities
– Increase in the cost of the inputs on which the advantage is based.
What are the potential pitfalls of Differentiation?
– Uniqueness that is not valuable
– Too much differentiation
– The price premium is too high
– Differentiation is easily imitated
– Dilution of brand identification through product-line extensions
– Perceptions of differentiation may vary between buyers and sellers
What does it mean to choose a strategy of Overall Cost Leadership?
A firm’s generic strategy is based on appeal to the industrywide market using a competitive advantage based on low cost.
What is required to achieve Overall Cost Leadership?
– Aggressive construction of efficient-scale facilities
– Vigorous pursuit of cost reductions from experience
– Tight cost and overhead control
– Avoidance of marginal customer accounts.
– Cost minimization in all activities in the firm’s value chain
What does it mean to choose a strategy of Differentiation?
A firm’s generic strategy is based on creating differences in the firm’s product or service offered by creating something that is perceived industrywide as unique and valued by customers.
What are some forms of Differentiation?
– Prestige or Brand Image
– Technology
– Innovation
– Features
– Customer Service
– Dealer Network
What is required to achieve Differentiation?
Firms achieve and sustain advantages and attain above-average performance when their price premiums exceed the extra costs incurred in being unique because just premium prices would be eroded by a markedly inferior cost position.
What is a Focus Strategy?
A firm’s generic strategy based on appeal to a narrow market segment within an industry.
What is Cost Focus?
Exploits differences in cost behavior in some segments
What is Differentiation Focus?
Exploits the special needs of buyers in other segments
Be able to sketch and understand the basic economics behind Economies of Scale and Economies of Learning.
Economies of scale is the idea that there are decreases in cost per unit as absolute output per period increases. In other words, production costs are spread over the number of units produced, and the cost of a product per unit declines as the absolute volume increases. As learning increases, the economies of scale curve shifts downward, meaning that it costs less units of input compared to output.
What is the goal of a Combination Strategy?
A firm’s integration of various strategies to provide multiple types of value to customers. The benefits are additive, rather than involving only trade-offs.
Why is a Combination Strategy valuable?
It allows a firm to provide value in the form of differentiation and lower prices.
What are the potential pitfalls of the Combination Strategy?
– Firms that fail to attain both strategies may end up with neither and become “stuck in the middle” of the productivity frontier map.
– Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain.
– Miscalculating sources of revenue and profit tools in the firm’s industry.
Which types of Generic Strategies are typically more effective? (See Exhibit 5.2 for some data.)
Differentiation and Cost
What is the Productivity Frontier used for?
It allows the comparison of several firms among two spectrums (typically cost leadership and differentiation). The most successful firms usually lie in the middle of the curve as they are able to achieve successful combination strategies. On the curve is good as well, but companies inside or outside the curve usually aren’t as competitive.
Why do we conduct External Analysis?
To understand the structural underpinnings of competition within the industry and the root causes of industry profitability.
What is Scenario Analysis and What is it used for?
It’s a more in-depth approach to forecasting. It draws on a range of disciplines and interests, among them economies, psychology, sociology, and demographics.
What are the macro-level factors in the General Environment?
1. Demographic
2. Sociocultural
3. Political Legal
4. Technological
5. Economic
6. Global
1. Demographic?
Genetic and observable characteristics of a population, including the levels and growth of age, density, sex, race, ethnicity, education, geographic region, and income.
2. Sociocultural
The value, benefits, and lifestyles of society
3. Political Legal
How a society creates and exercises power, including rules, laws, and taxation policies
4. Technological
Innovation and state of knowledge in industrial arts, engineering, applied sciences, and pure science; and their interaction with society.
5. Economic
Characteristics of the economy, including national income and monetary conditions
6. Global
Influences from foreign countries, including foreign market opportunities, foreign-based competition, and expanded capital markets.
What are Porter’s Five Forces?
1. Threat of New Entrants
2. Bargaining Power of Buyers
3. Bargaining Power of Suppliers
4. Threat of Substitute Products or Services
5. Rivalry among competitors in the industry
1. Threat of New Entrants
Profits of the industry diminishing due to the entrance of new competitors.
2. Bargaining Power of Buyers
Buyers forcing down prices, demanding higher quality, and forcing competitors to compete against each other.
3. Bargaining Power of Suppliers
The threat that suppliers may either raise the prices or reduce the quality of purchased goods and services.
4. Threat of Substitute Products or Services
The threat of limiting the potential returns of an industry by placing a ceiling on the prices that firm in that industry can profitably charge without losing too many customers to substitute products.
5. Rivalry among competitors in the industry
The threat that customers will switch their business to competitors within the industry.
Threat of New Competitors RTE Industry:
– High Capital Requirements
– Strong Distribution Network Required
– Customers are loyal to existing brands
– Industry requires economies of scale
– Entry Barriers are high
Bargaining Power of Buyers RTE Industry
– Low dependency on distributors
– Large number of customers
– Limited Buyer Choice
Bargaining Power of Suppliers RTE Industry
– High competition among suppliers
– Volume is critical to suppliers
– Low Cost of Switching Suppliers
Threat of Substitute Products RTE Industry
– Low Switching costs
– Substantial Product Differentiation
– Limited number of substitutes
Intensity of Rivalry RTE Industry
– Relatively few competitors
– Large Industry size
– Capital Requirements are high
– Fast industry growth rate
Threat of New Competitors Concentrate Producer Industry:
– Well established brand names
– Have strong distribution systems
– Huge investments need to be made in market research and bottler relations
– Economies of Scale
Bargaining Power of Buyers Concentrate Producer Industry
– Bargaining Power of fountain is higher
– Low power of negotiation
– Industry products are standardized
– Buyers are fragmented
– Little Differentiation
– Distributor can influence end user’s purchase decisions.
Bargaining Power of Supppliers Concentrate Producer Industry
– Inputs: Artificial Sweetener, phosphoric and citric acid, natural flavors, caffeine
– Packaging
– Many suppliers available
– Buyers threaten for backward integration
– Very little differentiation.
Threat of Substitute Products Concentrate Producer Industry
– Extensive substitute products: Juice, Coffee, Tea, Milk, Energy Drinks
– Low switching costs
Intensity of Existing Rivalry Concentrate Producer Industry
– Highly concentrated industry
– Two main competitors: pepsi and coke
– Aggressive growth strategies
– High barriers to exit due to high fixed costs
– Slow market growth
– Little product differences
– Perishable Products
– Strategies Stakes are high
What are barriers to entry?
Created by the existence of high start-up costs or other obstacles that prevent new competitors from easily entering an industry.
What are the six most important forms of entry barriers? Why are they important? Give examples from the RTE case.
1. Economies of Scale
2. Product Differentiation
3. Capital Requirements
4. Switching Costs: Costs you face when switching buyers or suppliers
5. Access to distribution channels
6. Cost disadvantages independent of scale:
– Proprietary products
– Favorable access to raw materials
Under what conditions is it likely that Supplier Power will be high?
– Concentration relative to buyer industry is HIGH
– Availability of substitute products is LOW
– Importance of customer to the suppliers is LOW
– Differentiation of the supplier’s products and services is HIGH
– Switching costs of the buyer are HIGH
– Threat of forward integration by the supplier is HIGH
Under what conditions is it likely that Buyer Power will be high?
– Concentration of buyers relative to suppliers is HIGH
– Switching costs are LOW
– Product differentiation of suppliers is LOW
– Threat of backward integration by buyers is HIGH
– Extent of buyer’s profits is LOW
– Importance of the supplier’s input to quality of buyer’s final product is LOW
Under what conditions is it likely that Threat of Substitutes will be high?
– The differentiation of the substitute product is HIGH
– Rate of improvement in price – performance relationship of substitute product is HIGH
Under what conditions is it likely that rivalry will be high?
– Number of competitors is HIGH
– Industry growth rate is LOW
– Fixed costs are HIGH
– Storage costs are HIGH
– Product differentiation is LOW
– Switching costs are LOW
– Exit barriers are HIGH
– Strategic stakes are HIGH
Price Rivalry?
A firm engages in price competition by regularly offering products at as low a price as possible and accompanied by a minimum of services
Value Pricing?
In response, many companies in diverse industries are using this. This form aims to improve a product’s value – that is, the ratio of its benefits to its price related costs.
What is the Value Net and why is it important? (Exhibit 2.6 for chart)
Represents all the players in the game and analyzes how their interactions affect a firm’s ability to generate and appropriate value.
What are compliments?
Products or services that have an impact on the value of a firm’s products or services.
Strategic Group Maps?
Clusters of firms that share similar strategies. It’s important because rivalry tends to be greater among firms that are alike.
What are the primary Industry classifications?
1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly
1. Perfect Competition
– Many small firms
– Firms are price takers
– Commodity product
– Low entry barriers
2. Monopolistic Competition
– Many firms
– Some pricing power
– Differentiated product
– Medium Entry Barreirs
3. Oligopoly
– Few (large) firms
– Some Pricing Power
– Differentiated Product
– High entry barriers
4. Monopoly
– One firm
– Considerable Pricing power
– Unique Product
– Very high entry barriers
What are the main Industry Life Cycles?
1. Introduction
2. Growth
3. Maturity
4. Decline
Generic Strategies of the Introduction Stage?
Differentiation
Market Growth Rate of the Introduction Stage?
Low
Major Functional Areas of the Introduction Stage?
Research and Development
Overall Objective of the Introduction Stage?
Increase Market Awareness
Generic Strategies of the Growth Stage?
Differentiation
Market Growth Rate of the Growth Stage?
Very Large
Major Functional Areas of the Growth Stage?
Sales and marketing
Overall Objective of the Growth Stage?
Create Consumer Demand
Generic Strategies of the Maturity Stage?
– Differentiation
– Overall Cost Leadership
Market Growth Rate of the Maturity Stage?
Low to Moderate
Major Functional Areas of the Maturity Stage?
Production
Overall Objective of the Maturity Stage?
Defend Market Share and Extend Product Life Cycle
Generic Strategies of the Decline Stage?
– Overall Cost Leadership
– Focus
Market Growth Rate of the Decline Stage?
Negative
Major Functional Areas of the Decline Stage?
General Management and Finance
Overall Objective of the Decline Stage?
Consolidate, Maintain, Harvest, or Exit
What are Wal-Mart’s Strategic core competencies?
– Dealing directly with manufacturers
– Scan N’ Pay: Suppliers would maintain ownership of their items until they were sold at Wal-Mart
– Cross-Docking: Transferred Merchandise directly from Inbound trucks to store-bound trucks without storing goods in distribution centers
– Own Distribution
– Store set-up: Cheap Set-up
– Strategic Distribution Centers: Each distribution center received several hundred truckloads of merchandise daily and served approximately 150 stores within an average radius of 150
– Bulk Buying
– Price Match
What are Wal-Mart’s Tech core competencies?
– EDI (Electronic Data Interacharge): Used for communication with suppliers. Included forecasting, planning, replenishment, and shopping applicants.
– RFID (Radio Frequency Identification): Tags that were applied to product cases at the point of manufacture were supposed to reduce the need for unloading to check products as well as the scope for “shrinkage” (proliferate). Test results indicated that the use of RFID tags could unlock supply chain cost savings of 6%.
– UPC Scanners: Cut credit card authorization times down. Eventually they launched a satellite network to cut authorization times to less than 3 seconds
What are the Key Primary Activities of Walmart?
– Strategic logistics
– Little National Advertising
– Greeters for customers
What are the Key Support Activities of Walmart?
– Little regional management
– Tech development with IT improvements
– “Associate” is the name of employees
– Pressured Suppliers
What are Walmart’s Tangible resources?
– Raise equity since so big (Financial)
– Distribution Centers (Physical)
– Patented Logo (Tech)
– Frugality/Simplicity (Org)
What are Walmart’s Intangible resources?
– Everyday low prices (reputation)
– Ideas for tech systems (innovations)
– Regional VPs and trust in mgmt (HR)
What are Walmart’s Capabilities?
– Cross Docking
– Product Assortment
Walmart ‘Valuable’ segment of VRI?
– IT: enables efficiency and effectiveness and helps handle the bulk purchases and a lot of customers quicker.
Walmart ‘Rare’ segment of VRI?
– Everyday low prices
– UPC credit cards (Satellite Potential)
– Price match
Walmart ‘Imitation’ segment of VRI?
– Large stores and targets suburbs more.
– Supply chain power
Were Wal-Mart’s competitive advantages sustainable at the end of the case?
ROIC above 15% which is good. Losing in sales but still maintaining position.
What was Wal-Mart’s key metric for overall store performance? (Answer: Sales-per-square foot.) Drawing on the idea of Economies of Scale, describe why sales-per-square-foot is an important measure. (In your answer, make sure you clearly define what is meant by Economies of Scale.)
Important because the more sales-per square foot, the less your costs are, in an economies-of-scale type of way. Walmart sold more hard goods than soft goods to accomplish that. Sales-per-square foot helped to determine labor productivity. Achieving high sales-per-square foot was a product offering a wide variety of products at consistently low prices.
Be prepared to calculate return-on-sales measures and interpret them as metrics of firm performance.
Net income/Sales (or Revenue). It is a measurement to show how much profit a company makes per dollar of sales. We want this to be high!
Describe Wal-Mart’s distribution system and discuss whether it provided the company with a competitive advantage. What was Wal-Mart’s key measure for the overall performance of its supply chain? (Answer: Inventory turnover.) Be prepared to calculate inventory turnover. What does inventory turnover tell us? Do we want a high or a low inventory turnover? Are there cases where a high inventory turnover can be bad?
Wal-Mart used strategic logistics such as cross-docking and perfectly located distribution centers. These resources freed up costs that would have been allocated to inventory, therefore enabling Wal-Mart to price products even lower. Quote from passage: “In 2003, distribution costs accounted for an estimated 2-3% of revenues for Wal-Mart compared with 4-5% for other retailers”. RETAIL LINK (inventory data for suppliers)

INVENTORY TURNOVER = SALES/INVENTORY.
A high inventory turnover often indicates strong sales with efficient inventory costs. Low turnover indicates excess inventory with weak sales. Walmart was better than K-Mart and Target in this category. A case where high inventory is bad: it could mean the firm is not managing its buying as well as it might and is having difficulty in administering its inventory.

What does a COGS/Sales ratio tell us? (Hint: It tells us the inventory value of those goods a business sold during the period.) Do we want a high or a low COGS/Sales ratio? If Wal-Mart exerted such pressure on its suppliers, why might its COGS/Sales ratio have been consistently higher than its competitors?
Ideally, we want a low COGS/Sales ratio, indicating the company is having high margins after COGS and therefore higher ROIC or ROE. Wal-mart has as little costs as possible, so one might think they have the best ratio (lowest ratio). Instead, Wal-Mart charges much less for their products, so they do not have the lowest COGS/Sales ratio. To make up for that smaller margin, Wal-mart sells in volume.
Understand Wal-Mart’s key components of its working capital position: inventory, accounts receivable, and accounts payable.
– Inventory – Wal-Mart has freed up inventory costs, so ROIC is bigger
– Accounts Receivable – they only get paid for what they sold and no more (lost, damaged goods aren’t their problem)
– Accounts Payable – Scan ‘N Pay allowed their accounts payable term to be delayed until purchase. Now Wal-Mart has that money to pay for Accounts Payable right away. More valuable in time value of money sense.
Describe key aspects of Wal-Mart’s merchandising and marketing strategies. What is a key measure that we have discussed in class of evaluating a marketing strategy? (Answer: Advertising-to-sales.) Be prepared to calculate marketing-to-sales ratio. What does this measure tell us? Do we want a high or a low ratio? What would Economies of Scale look like as marketing-to-sales ratio over time? (Answer: Increasing ratio.)
• Key aspects: Product Assortment, Pricing, Other Marketing
– Product Assortment: mix of nationally branded and private labels – looked at very detailed sales data of impulse buying, exclusivity, and ease of in-store display – tailored product assortment by local demographics
– Pricing: Everyday low prices, rollback pricing,
– Other Marketing: community involvement/charities and in-store mktg events
• Advertising-to-sales ratio: ADVERTISING EXPENSES/SALES REVENUE
• The advertising-to-sales ratio is designed to show whether the resources a firm spends on an advertising campaign helped to generate new sales. You want a low ratio indicating efficient advertising. (higher sales, lower mktg)
• econ to scale: the ratio would increase… something about how bigger companies need to advertise more than a smaller company to increase its market share by a % point…I think that is right, given his answer ^^^ “increasing ratio”
Describe how regional economies of scale was a competitive advantage for Wal-Mart.
• Walmart made sure that one distribution center could maintain stores within a 150 mile radius; outside of that radius another distribution center would be built to maintain that area
• nothing around them so there is no competition
Coke Core Competencies?
– International Presence
– Brand Image
– Consolidated Bottling Service
– Restaurant Customer Base.
Pepsi Core Competencies?
– Diversified Portfolio
– Restaurant chains
– Snack Chains
– Brand image
Coke Key activities?
– Selling soft drinks/beverages
Coke Resources?
– Global Infrastructure of Factories/Bottlers
– Terrific Brand Image
– Good Supplier Relations
Coke Capabilities?
– Global Powerhouse for the distribution and production of beverages
Pepsi Key activities?
– Selling Soft Drinks/Beverages
– Fast-food chains
– Snack Items
Pepsi Resources?
– Global reach of Products
– Good Supplier Relations
Pepsi Capabilities?
– Global Powerhouse for the distribution and production of beverages
– Fast-food and Snack Items
How is the bottling industry different from the concentrate producer industry?
It is much more expensive. To produce a single case is much cheaper for the concentrate than the bottler. The COGS is much higher for bottlers making the gross profit a much higher % of new sales for concentrate.
Be prepared to discuss Porter’s Five Forces as they pertain to the concentrate producer industry.
Look at Coke Case Homework
In particular, what are the main barriers to entry in the concentrate producer industry?
1. Brand Recognition/Switching Costs: Coke and Pepsi are so well known and loved that it’s hard for consumers to switch away from these brands
2. Economies Of Scale: Have to be able to spread out your costs of production otherwise you will have to price your product higher than Coke and Pepsi, and lose sales.
3. Saturated Market: Health risks, not lots of shelf-space, not much room to grow in the US.
Why are economies of scale in marketing important in this industry?
By spreading the cost of advertising over a greater range of output in media markets it allows more exposure for products. With so many options and such a competitive rivalry their brand image needs to extremely present and at a cheap price.
How do Coke and Pepsi compete against each other?
The two are the most competitive in the U.S in the Soft Drink industry. However they are expanding globally into the unsaturated market. They compete heavily to supply for restaurants specifically fast-food chains. Because coke doesn’t have as much as a diversified portfolio there isn’t much competition between the two in snacks and actual food chains.
What has been happening to prices in the industry?
From the late 80’s to the early 2000’s we saw a steady decrease in retail price for pop. However in more recent years the price has begun to increase slightly.
How does the rivalry between Coke and Pepsi resemble the Prisoner’s Dilemma in game theory?
In the prisoners dilemma both rationally want to betray one another to get the biggest reward. However by not acting/ betraying the other they can still get a pretty good reward. Coke and Pepsi do not want to betray each other and go for an all-out war. Coke recognizes that Pepsi has a more diversified portfolio and will probably win in that segment and Pepsi recognizes Coke’s international brand image is too powerful. By giving each other space they can both continue to be very successful in their specific segments and function at a reasonable rate. Betraying the other could result in a huge loss for them in the industry.
What is the economic Nash equilibrium of this game?
Nash equilibrium in this case is that both coke and Pepsi could differ their individual company strategies however doing so would almost surely make the other react and hurt themselves. For example, both companies make a certain amount of profit each year by producing a certain amount of beverages. If Coke decided to double the amount produced it could lessen its price per bottle, saturate the market more and make a higher profit. However, Pepsi having viewed this would almost surely respond by also doubling its production. In this case the market would be too saturated and the profits would actually be cut to below what they would have been if neither company had changed its strategy.
Do Coke and Pepsi operate at the Nash equilibrium? Why or why not?
They operate at Nash equilibrium because yes they could change their strategy and try to take over the entire industry single handedly, but doing so would create backlash from the other and result in a diminished return. It is not worth trying to conquer some of the others share of the market. Coke and Pepsi have optimized their own outcome based on the others expected decisions that would occur if they did something new.
What are the core competencies for branded cereal manufacturers?
Large size allowed them to:
– Operate large R&D budgets
– Buy shelf space
– Large staffs for ECR initiative
– High ad spending
– Coupons
– Price control
– Co-Branded Cereal
What are the core competencies for private-labelled cereal manufacturers?
– Low price
– No need to advertise or differentiate
– Offer retailers better margins
– Produce cereals for specific stores
What are the primary activities of the branded cereals?
– Production
– Bagging
– Distribution of cereal to distribution centers to be picked up by supermarkets
What are the support activities of the branded cereals?
– Managing inventory and distribution to stores
– Advertising and marketing/promotions
– Customer Service
– R&D
– Other food products within the company.
What are the resources of the branded cereals?
– Large plants for cereal and bagging
– Regional distribution centers as hub where supermarkets go to pick up product
– Longtime experienced cereal executives
– Large marketing staffs
– R&D
What are the capabilities of the branded cereals?
5 fundamental cereal production methods:
– Bagging
– Economies of scale
– ECR scanner data to manage inventory
– Co-branded
– Coupons
What is the Four-Firm Concentration Ratio (CR4)?
Percentage market share in an industry held by the four largest firms within that industry. For the RTE industry, it was 84%.
What does the CR4 measure?
Measures market share in the industry held by the four largest firms in the industry.
Why is the CR4 an important measure for strategic analysis?
The concentration of an industry measures the competitiveness of the industry and how much pricing power the firms within the industry have.
From our case discussion on RTE, why did we say it was important to look at Kellogg’s financial results, as opposed to General Mills or Philip Morris>
Because it is as close to a pure-play cereal manufacturer while others are diversified conglomerates.
From our case discussion on RTE (see Exhibit 7), we examined Net Income as a percentage of Sales from 1991 to 1993; we saw that Net Income declined significantly from 1991 to 1992 and then increased significantly from 1992 to 1993; what is going on here?
Accounting changes, operationally nothing differed in those years. (Look at operating results rather than income)
What should we focus on when calculating measures of competitive advantage?
Kellogg had an accounting change in 1992 that reduced its Net Income; always focus on the core operating results when looking at competitive advantage
Draw a diagram depicting Economies of Scale, making sure to label the axes correctly.
– Axes are Costs on y-axis and Output on x-axis
– Average cost is the curve name
Explain why Economies of Scale is a barrier-to-entry.
Because firms that have it have a competitive advantage because they are able to lower their costs by producing more and smaller firms do not have that luxury to produce more and must accept producing at a higher cost.
On the diagram, explain what happens when Economies of Scale increase. On the diagram, explain what can happen due to learning effects?
When economies of scale increase, firms have lower and lower per unit costs as production increases. However, as show in the diagram over time it is possible to reach diseconomies of scale where the per unit costs begin to rise as production increases. Learning effects are one way that contributes to economies of scales and falling per unit costs. This occurs because workers become more familiar with the process and they learn to become more efficient, thus helping lower costs.
Describe how a firm can have Economies of Scale in advertising?
It is cheaper to advertise on a mass level than to advertise on a more local, customer specific basis
How would we calculate Economies of Scale from Advertising?
You could calculate these cost savings per customer and how effective each form of advertising was at reaching the customer and at what cost.
Describe how a firm can have Economies of Scale in distribution?
Through cross-docking where the more products you are able to fit on the truck, the larger number of trucks operating at once saves time and money on a per unit basis of getting the products to the market.
How do we calculate Economies of Scale from distribution?
Based on the cost of getting goods to the market through the opposing distribution networks and then compare the costs/savings per unit.
Describe other barriers-to-entry from RTE case.
– Strong rivalry among competitors as they compete for the same customers with very similar products
– High amount of substitute products because there is a lot of different cereals
– Other breakfast foods to compete with
– Buyers have a high amount of pricing power and easily can switch from one brand to another based solely on price.
Does the RTE industry have high or low barriers-to-entry? Use examples from the case to support your answer (Hint: Think about marginal efficient scale and costs of entry.)
High, although the initial startup costs are relatively low for the equipment, there is already a high industry concentration and it would be hard to compete with their large advertising budgets.
In the case, is the share of private label brands increasing or decreasing? If it is increasing, how are they overcoming the industry’s barriers-to-entry?
Increasing because they are competing on price. Private labels do not try to differentiate.