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St.Josephs College of Engineering

Department of MBA
Strategic Management
Assignment questions (Unit II)

Part A
1.
2.
3.
4.
5.
6.
7.
8.

What is environment scanning?

What is low cost strategy?
Explain differentiation strategy
What factor determines nations competitive position?
Define globalization and its distinctive stage
Define core competency
What are the building blocks of distinctive competence?
What are the factors that determine competitive advantage according to
Michel porter?

Part B
1. Explain in detail Porters five force model in the business
2. Define organizational life cycle. How can a corporation keep from sliding on to
the decline stage of the organizational life cycle
3. Define globalization. Explain distinct stages of globalization. What are choices
of global entry mode?
4. Explain cost leadership strategy and differentiation strategy in detail

Part A answers are available in the question bank

Part B
Assignment questions answers
1. Explain in detail Porters five force model in the business
Porters five force analysis is a powerful tool that helps the managers to think
strategically, explains as to how strategic choices will be affected by the forces
of industry competition and also about how their choices affect the five forces
and change conditions in the industry. It is to be noted that in the five forces
model, one competitive force often affects the others, so that all forces need to
be considered when performing industry analysis.

A single generic strategy is not always best because within the same product
customers often seek multi-dimensional satisfactions such as a combination of

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quality, style, convenience, and price.

Industrys profit potential depends on five forces. They are: (1) Intensity of
competitive rivalry with in industry (i.e., rivalry among competing sellers (2) The
market attempts of companies in other industries, to win customers to their own
substitute products (3) The potential entry of new competitors,(4) the bargaining
power and leverage exercisable by suppliers of key raw material and
components, and (5)The bargaining power and leverage exercisable by buyers of
the product

1. Intensity of rivalry within industry. This depends on: Number of firms

and market share, State of growth of industry, Fixed or storage cost,
Indivisibility of capacity enhancement, Product standardization and switching
cost, Strategic stake and exit barrier, Diverse competitors and switching
costs, Fragmented or consolidation, Expected retaliation from competitors.

2. Risk of entry by potential competitors: Government policy, Economics

of scale, Cost advantages and independence of scale, Product differentiation,
Monopoly elements, Capital requirements, Brand loyalty and Customers
switching cost

3. Threat of substitutes: Weather alternatively priced substitute is

available, How satisfactory the substitutes are in terms of quality,
performance and other relevant attributes with which buyers can switch to
substitutes

4. Bargaining power of buyers: The volume of purchase relative to the

total sale of the sellers, the importance of standardization or differentiation of
the product, switching costs, Profitability of the buyers, Potential of
integration by the buyer, Importance of the industrys product with respect to
the quality of buyers product or services and Extent of buyer information.

5. Bargaining power of suppliers: Extension of concentration and

domination in the supplier industry, Importance of the product to the buyer,
Importance of buyer to the supplier, Extent of substitute of the product,
Switching cost, Extent of differentiation or standardization of the product and
Potential forward integration by supplier

2. Define organizational life cycle. How can a corporation keep from

sliding on to the decline stage of the organizational life cycle
Organizational life cycle or otherwise called as Industry life cycle analysis is a
tool for analyzing the effect of industry evolution on competitive forces in the
industry life cycle, which identifies five sequential states in the evolution of the
industry that lead to five distinct kinds of environment

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They are embryonic, growth, shakeout, mature and decline Explanations
in the Embryonic stage

1. An embryonic stage is just beginning to develop(example DVD in 2000).

Growth at this stage is slow because of the factors like(1)Buyers unfamiliarity
with the product(2)High price charging due to missing of economic
scale(3)Poorly developed distribution channel. Once the demand for
industrys product begins to take off, the industry develops the
characteristics of growth industry. In the growth industry, first time demand is
expanding rapidly as many new customers enter in to the market. When
industry grows consumers becomes familiar with the product, prices fall due
to experience curve and scale of economics(example cellular telecom
industry). Though potential competitors are high, being high growth industry
this can be absorbed(Bharathi-Airtel)
2. Growth stage. Once the demand for industrys product begins to take off,
the industry develops the characteristics of growth industry. In the growth
industry, first time demand is expanding rapidly as many new customers
enter in to the market. When industry grows consumers becomes familiar
with the product, prices fall due to experience curve and scale of
economics(example cellular telecom industry). Though potential competitors
are high, being high growth industry this can be absorbed(Bharathi-Airtel)

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3. Shake out environment. In the shake out stage, demand approaches
saturation levels, most of the demand is limited to replacement because
there are few potential first time buyers left(example DVD and Cell). In the
shake out stage rivalry becomes intense, as demand is no longer growing,
there is emergence of excess production capacity
4. Maturity stage environment. During mature stage the market is totally
saturated, demand is limited to replacement demand, and growth is slow or
zero. What growth there comes from population expansion that brings new
customers in to the market or an increase in replacement demand (Example
breakfast cereal industry and pharmaceutical industry). As industry enters
maturity, barriers to entry increases and the threat of entry in to potential
competitors decreases. As growth slows during the shakeout, companies no
longer maintain historic growth rates, growth rates merely holding on their
market share. Competition for market share develops driving down prices.
Often the result is price war( cell). Firms focus on customization and brand
loyalty
5. Declining stage environment. In the decline stage, growth becomes
negative for a variety of reasons, including technological substitution, (VCR to
DVD),(air travel from rail travel) social changes (Health consciousness,
hitting tobacco firms) demographics (declining birth rate, hurting baby and
child products) and International competition-competitive low cost products
from China. The main problem in the declining industry is falling demand,
rivalry among established companies. Depending upon the speed of decline,
and exit barriers, competitive pressure can become intense in the shake out
stage.

3. Define globalization. Explain distinct stages of globalization. What

are choices of global entry mode?

Globalization is a transnationalisation of world economy and developed by

corporate strategy. Globalization is attitude of mind of mind. It is a mindset
which views entire world as a single market so that corporate strategy is
based on dynamics of business environment. Globalization pass through four
distinct stages: Domestic business (Hindustan times), International business
(NIIT), Multinational business (Ford), Global business (Nestle). If we want to
globalize the business you need do value creation activity.

Value Creation of a firm.

Profit determined by: The amount of value customers place on firms goods or
services (V) Firms cost of production (C). Consumer surplus occurs when price
charged by a firm on a good or service is less than value placed on it by a
customer. Value creation = V-C. Two basic strategies to create value and attain
competitive advantage according to Michael Porter: Low cost and
Differentiation strategy.
1. Advantages of Global Expansion. Location economies, Cost economies
from experience effects, Leveraging core competencies, Leveraging subsidiary
skills and Profitability is constrained by product customization and the
imperative of localization.
2.

Location Economies. Realized by performing a value creation activity in an

optimal location anywhere around the globe, often arise due to differences in
factor costs, which can lower costs of value to enable low cost strategy
and/or, help in differentiation of products from competitors, and create
different stages of value chain which can be dispersed to various locations .
This will lead to perceived value is maximized or costs of value creation are
minimized. However Complications arise due to transportation costs, trade
barriers, political and economic risks and management difficulties.

3. Experienced effect The systematic reduction in production costs that occurs

over the life of a product which was first observed in aircraft industry where
unit costs reduced by 80% each time output was doubled, caused due to
learning effects and economies of scale
4. Learning effects. Cost savings that come from learning by doing, enhances
increased worker productivity and management efficiency. Learning effect is

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significant in cases of technologically complex task, as there is a lot to be
learned, However learning effect ceases, after two or three years and decline
after this point comes from economies of scale.
5. Economies of scale. The firm that moves down the experience curve most
rapidly has a cost advantage over its competitors; as such action can be taken
over sources which reduce fixed costs by spreading it over a large volume.
This will be due to the ability of large firms employ increasingly specialized
equipment or personnel
6. Leveraging core competencies. Core competence is the skills within the
firm that competitors cannot easily match or imitate and this would earn
greater returns by transferring these skills and/or unique product offerings to
foreign markets that lack them. Examples: Consumer marketing skills of U.S.
firms allowed them to dominate European consumer product market in 1960s
and 70s.
7. Leveraging subsidiary skills. Value created by identifying firm skills and
applying them to its global network of operations, actions are to be initiated in
the case of industries of standardized, commodity type product that serve
universal needs, meaningful differentiation on non-price factors is difficult.
Major competitors are based in low-cost locations as such consumers are more
powerful and face low switching costs. Examples: bulk chemicals, petroleum,
steel, personal computers
8. Pressures for Local Responsiveness. Differences in consumer tastes &
preferences: Example: North American families like pickup trucks while in
Europe it is viewed as a utility vehicle for firms. Differences in
infrastructure & traditional practices: consumer electrical system in
North America is based on 110 volts; in Europe on 240 volts. Differences in
distribution channels: Germany has a few retailers dominating the food
market, while in Italy it is fragmented. Host-Government demands: Health
care system differences between countries require pharmaceutical firms to
change operating procedures. As such there are four basic strategies to enter
in the international environment: 1. International strategy 2. Multi domestic
strategy, 3. Global strategy and Transnational strategy
4. Explain cost leadership strategy and differentiation strategy in detail

The primary determinant of a firm's profitability is the attractiveness of the

industry in which it operates. The important secondary determinant is its
position within that industry. An industry may have below-average
profitability; a firm that is optimally positioned can generate superior returns.
A firm positions itself by leveraging its strengths.

Michael Porter has identified that a firm's strengths ultimately fall into one of
two headings: Cost leadership and Differentiation. By applying these
strengths in either a broad or narrow scope, three generic strategies result:
cost leadership, differentiation, and focus.

A firm positions itself by leveraging its strengths in the following manner as

given below:

These strategies are applied at the business unit level. They are called generic
strategies because they are not firm or industry dependent.
Cost Leadership Strategy

Generic strategy calls for being the low cost producer in an industry for a
given level of quality. The firm sells its products either at average industry
prices to earn a profit higher than that of rivals, or below the average
industry prices to gain market share. In the event of a price war, the firm can
maintain some profitability while the competitors suffer losses. Even without
a price war, as the industry matures and prices decline, the firms that can
produce more cheaply will remain profitable for a longer period of time. The
cost leadership strategy usually targets a broad market.

Vertical Integration

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Some of the ways that firms acquire cost advantages are by (1) improving
process efficiencies,(2) gaining unique access to a large source of lower cost
materials,(3) making optimal outsourcing and vertical integration decisions,
or avoiding some costs altogether. If competing firms are unable to lower
their costs by a similar amount, the firm may be able to sustain a competitive
advantage based on cost leadership.

Cost leadership and internal strength

If a company succeeds on cost leadership, it has an internal strength of:

Access to the capital required making a significant investment in production

assets; this investment represents a barrier to entry that many firms may not
overcome. Skill in designing products for efficient manufacturing, for
example, having a small component count to shorten the assembly process.
High level of expertise in manufacturing process engineering. Efficient
distribution channels.

Risks in Low cost strategy

For example, other firms may be able to lower their costs as well. As
technology improves, the competition may be able to leapfrog the production
capabilities, thus eliminating the competitive advantage. Additionally, several
firms following a focus strategy and targeting various narrow markets may be
able to achieve an even lower cost within their segments and as a group gain
significant market share.

Differentiation Strategy

A differentiation strategy calls for the development of a product or service

that offers unique attributes that are valued by customers and that
customers perceive to be better than or different from the products of the
competition. The value added by the uniqueness of the product may allow
the firm to charge a premium price for it. The firm hopes that the higher price
will more than cover the extra costs incurred in offering the unique product.
Because of the product's unique attributes, if suppliers increase their prices
the firm may be able to pass along the costs to its customers who cannot find
substitute products easily.

Success in the differentiation strategy through internal strengthfactors

Access to leading scientific research.

Highly skilled and creative product development team.

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Strong sales team with the ability to successfully communicate the perceived
strengths of the product.

Corporate reputation for quality and innovation.

Focus Strategy

The focus strategy concentrates on a narrow segment and within that

segment attempts to achieve either a cost advantage or differentiation. The
premise is that the needs of the group can be better serviced by focusing
entirely on it. A firm using a focus strategy often enjoys a high degree of
customer loyalty, and this entrenched loyalty discourages other firms from
competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have
lower volumes and therefore less bargaining power with their suppliers.
However, firms pursuing a differentiation-focused strategy may be able to
pass higher costs on to customers since close substitute products do not
exist.

Firms that succeed in a focus strategy are able to tailor a broad range of
product development strengths to a relatively narrow market segment that
they know very well. Some risks of focus strategies include imitation and
changes in the target segments. Furthermore, it may be fairly easy for a
broad-market cost leader to adapt its product in order to compete directly.
Finally, other focusers may be able to carve out sub-segments that they can
serve even better.

Compatibility of Generic strategy

Michael Porter identified that to be successful over the long-term, a firm must
select only one of these three generic strategies. Otherwise, with more than
one single generic strategy the firm will be "stuck in the middle" and will not
achieve a competitive advantage. Firms that are able to succeed at multiple
strategies often do so by creating separate business units for each strategy.
By separating the strategies into different units having different policies and
even different cultures, a corporation is less likely to become "stuck in the
middle."

A single generic strategy is not always best because within the same product
customers often seek multi-dimensional satisfactions such as a combination
of quality, style, convenience, and price.

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