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23 Cards in this Set
- Front
- Back
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The success of a firm’s organisation and strategy depends on the characteristics of:
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The firm.
The market. The environment. |
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The boundaries of the firm:
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What should the firm do?
How large should it be? And what businesses should it be in? |
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The market and competitive analysis:
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What is the nature of the market in which the firm competes and the nature of competitive interactions among firms in those markets?
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The environment and competitive advantage:
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How should the firm position itself to compete? What should be the basis of its competitive advantage? How should it adjust over time?
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the firm:
The boundaries of the firm represent the firm’s activities: |
Horizontal:
What part of the market will the firm serve? Vertical: Given the market, which activities will the firm do itself and what part will be outsourced to other firms? Geographical: On which geographical markets does the firm focus? |
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In practice:
Horizontal boundaries of Shell? |
• Oil & Gasoline • Natural Gas • Chemicals • Renewable energy
Why does the organisation and strategy of Shell focus on these particular products and markets? |
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In practice:
Vertical boundaries of Shell? |
Exploration of new oil sources
Drilling and extraction activities Transport and storage Distribution to the consumer Why has Shell integrated the whole vertical chain within the company? |
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The market of the firm is defined by the degree of substitution between the products of different firms.
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Strategic choice of a firm affects the performance of another firm.
Similar performance characteristics. Similar occasion for use. Sold in the same geographical area. |
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Competitive interaction (including):
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Strategic commitment.
What happens with the market when firms take long term strategic decisions? Entry and exit. What happens with the market when a firm enters or exits? |
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enviroment in practice:
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(Macro-)environment Shell?
Natural environmental policy. Exchange rates. Public opinion (Nigeria). R&D (new exploration techniques). Spatial diversity: differences in institutional settings and governmental interference. Given the firm, the market and the environment, how can Shell position itself to create and sustain competitive advantage? |
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practical strategies of shell to have competitive advantage:
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Cost position:
Reduce staff (2000 persons year-end 2011). Repositioning: Exit part of retail activities (35% current activities). Exit refinery capacity (15% current activities). Benefit position: Focus on most profitable projects. Focus op growth potential (25 - 27 billion US$ per annum): Additional investments in chemical activities. Investments in oil and natural gas resources. How does Shell create competitive advantage with these particular savings and investments? |
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what are the three different set of strategies?
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Porter three generic strategies:
-focus -differentiation -overall cost-leadership |
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Economies of scale :
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occur when the average cost declines when volume increases.
Firms with scale advantages, have higher average costs than marginal costs. They have to be aware that the average cost can increase when capacity reaches its limit (diseconomies of scale). |
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Minimum efficient scale?
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Firms have to find the smallest volume for which average cost is lowest
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four reasons for economies of scale:
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1. Indivisibilities and spreading of fixed costs; Spreading of product-specific fixed costs and capital intensive versus labor intensive production.
2. Increased productivity of variable inputs; ‘The Division of Labor Is Limited by the Extent of the Market’ (Adam Smith): specialization leads to reduced average cost if the market is large enough to allow specialization. 3. Inventory; Small inventory can lead to products that are sold out. Optimal inventory is larger for a large firm, but is smaller as % of total sales. Therefore, the cost of inventory is relatively smaller for large firms 4. ‘Cube-square rule’; If we double the volume of a container, the surface area less than doubles. Important for breweries, tanks, vessels, pipes, etc. |
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how to measure econmies of scale?
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with the output elasticity (MC/AC)
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difference between economies of scale and diseconomies of scale?
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If MC/AC<1, then economies of scale,
if MC/AC>1, then diseconomies of scale. |
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Economies of scope :
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occur when the cost of the joint production of different goods is lower than the cost when producing the goods separately. So, in other words: TC( Q1,Q2 ) < TC( Q1,0 ) + TC( 0,Q2 ).
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Experience advantages ?
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yields that the cost per unit of production decreases if volume increases. So, a new firm with low cost of input can have higher cost than existing firm with high cost of input. If there are significant experience effects, new firms with lower cost than incumbent firms must run short term losses. Therefore, governments give financial support to new (loss making) firms using the argument ‘infant industry argument’.
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Network advantages
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yields that the demand for a good increases if more people use the good. That’s why the liberalization of the phone market must ensure that other firms have access to the network and that the abuse of monopoly is punishable.
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Following Porter’s 5-forces model horizontal boundaries depend on
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• Internal rivalry; Competition for market share, relevant to market and related to cost structure.
• Potential entrants; Entry barriers, structural (discussed above) and strategic (differentiation). • Threat of substitutes; Determining (cross-)price-elasticity and strategic patenting. |
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Horizontal competition
Threat of substitutes how to measure? |
Price elasticity (%Δ demand for good X/%Δ price of good X)
Diesel has low price elasticity cross-price elasticity: (%Δ demand for X/%Δ price of good Y) LPG is possible substitute for diesel But price LPG is correlated with price of diesel Cross-price elasticity is low So LPG is not really substitute for diesel (what about bio fuels?). Strategic patenting (sleeping patents) E.g., Romanoff caviar |
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Shortcomings of Porter’s 5-forces model
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Role of demand is limited
Strategic decisions such as widespread and long-lasting advertising have an impact on demand and horizontal boundaries. Porter’s model is primarily an analysis of industry analysis rather than an analysis for a particular firm. Emphasis is on the competition between firms while recent trend is towards cooperation between firms (‘co-opetition’) ‘Meso approach’ No explicit role for the government ‘Macro approach’ |
