USN:
PES INSTITUTE OF TECHNOLOGY – BANGALORE SOUTH CAMPUS
Hosur Road (1Km before Electronic City), Bangalore -560100
INTERNAL TEST # 2
Answer key for Strategic Management – 12MBA31
Course: MBA Semester III
Faculty: Ravi urs
Date: 29/09/2014
Time Allowed: 90 Minutes
Max. Marks: 50 (Fifty Marks)
Time: 8.30 AM – 10 AM
Note: Answer all the Questions.
1 (a) State any three benefits of bench marking.
It helps organizations to improve their operational efficiency through comparison with the best in any industry
It can be done for any activity in the value chain of an organization
It helps organizations to take ideas from best practices followed in other industries
(b) When does differentiation strategy work best and what are its pitfalls?
Differentiation strategy works best when:
a. There are many ways to differentiate the product or service and many
buyers perceive these differences as having value
b. Buyer needs and users are drivers. The more diverse buyer
preferences are, the more room firms have to pursue different
approaches to differentiate.
c. Few rival firms are following similar differentiation approach. Each of
the companies are pursuing their own differentiation path with less
overlapping.
d. Technological change is fast-paced and competition revolves around
rapidly evolving product features. Frequent introductions of nextversion products help maintain buyer interest and provide space for
companies to pursue separate differentiating paths.
Pitfalls of differential strategy are:
a. No guarantee that differentiation will produce a meaningful competitive
advantage
b. Buyers may see little value in the unique attributes or capabilities of a
product
c. Competitors can copy the differentiating features
d. It is very time consuming to come up with genuine differentiators which
(3 marks)
(7 marks)
would be difficult to copy
e. Adding features that do not reduce the buyer's cost or enhance a
buyer's well-being, as perceived by the buyer
f. Over differentiating so that the product quality or service level exceeds
buyer's needs
g. Trying to charge too high a premium. It may give an opportunity for
buyers to switch to a lower cost product.
Not striving to fill the real gaps in quality or performance or service of the rival
firms. Tiny difference between product offerings may not be important for the
buyers.
(c) Explain Porter’s Five Force Model. Use the model to analyze the fast food industry.
According to Porter’s model the state of competition in an industry is a
composite of competitive pressures operating in five areas of the over all
market.
1. Competitive pressures associated with the market
maneuvering and jockeying for buyer patronage that goes on
among rival sellers in the industry
2. Competitive pressures associated with the threat of new
entrants into the market
3. Competitive pressures coming from the attempts of
companies in other industries to win buyers over to their own
substitute products
4. Competitive pressures stemming from supplier bargaining
power and supplier-seller collaboration
5. Competitive pressures stemming from buyer bargaining
power and seller-buyer collaboration
(10 marks)
The rivalry among competing sellers

It is the strongest of all the competitive forces.

A market is a battlefield where it is expected that rival sellers
will employ whatever resources they have to improve their
market positions and performance.

When one firm makes a strategic move that produces good
results, its rivals often respond with offensive or defensive
countermoves, shifting their strategic emphasis from one
combination of product attributes, marketing tactics and
competitive capabilities to another

Rivalry among competing sellers intensifies the more
frequently and more aggressively that industry members
undertake fresh actions to boost their market standing and
performance against the rivals

Rivalry is usually stronger in slow-growing markets and
weaker in fast growing markets

Rivalry intensifies as the number of competitors increases
and as competitors become more equal in size and capability

Rivalry is usually weaker in industries comprised of so many
rivals that the impact of any one company's actions is spread
thinly across all industry members; likewise, it is often weak
when there are fewer than five competitors

Rivalry increases as the products of rival sellers become
more standardized

Rivalry increases as it becomes less costly for buyers to
switch brands

Rivalry is more intense when industry conditions tempt
competitors to use price cuts or other competitive weapons to
boost unit volume

A powerful, successful competitive strategy employed by one
company greatly intensifies the competitive pressures on its
rivals to develop effective strategic responses or be relegated
to also-ran status
The potential entry of new competitors

One of the important factors that affect the strength of the
competitive threat of a potential entry in a particular industry
is the number of candidates who enter and resources at their
disposal

The strongest competitive pressures associated with
potential entry is often from the existing industry members
entering market segments or geographies where currently
they do not have a market share. They possess the
resources, competencies and competitive capabilities to
overcome the challenges of entering a new market segment
or geography

The second factor that affect the likely candidates is the entry
barriers

Some of the entry barriers are:
o The presence of sizable economics of scale in
production or other areas of operation
o Cost and resource disadvantages not to size. Like
learning curve, patents, partnerships, cheap raw
materials, proprietary technology, low fixed cost
o Brand preference and customer loyalty
o Capital requirements
o Access to distribution channels
o Regulatory policies
o Tariffs and international trade restrictions
Substitute products

There is competitive pressure when products from other industries
are looked upon as substitute products by the customers

Competitive pressure from substitutes are weaker when:
o Good substitutes are not readily available or don't exist
o Substitutes are higher priced relative to the performance they
deliver
o End users have high costs in switching to substitutes

Competitive pressure from substitutes are stronger when:
o Good substitutes are readily available
o Substitutes are attractively priced
o Substitutes have comparable or better performance features
o End users have low costs in switching to substitutes
o End users grow more comfortable with using substitutes
Competitive pressures stemming from supplier bargaining power and
supplier-seller collaboration

When major suppliers determine terms and conditions of
supply in an industry then they exert competitive pressure on
rival sellers

Supplier bargaining power is stronger when:
o Industry members incur high costs in switching their
purchases to alternative suppliers
o Needed inputs are in short supply
o A supplier has a differentiated input that enhances the
quality or performance of sellers products or is a
valuable or critical part of sellers' production process
o There are only a few suppliers of a particular input
o Some suppliers threaten to integrate forward into the
business of industry members and perhaps become a
powerful rival

Supplier bargaining power is weaker when:
o The item being supplied is a commodity that is readily
available from many suppliers at the going market
price
o Seller switching costs to alternative suppliers are low
o Good substitute inputs exist or new ones emerge
o There is a surge in the availability of supplies
o Industry members account for a big fraction of
suppliers' total sales and continued high volume
purchase are important to the well-being of suppliers
o Industry members are a threat to integrate backward
into the business of suppliers and to self-manufacture
their own requirements
o Seller collaboration or partnering with selected
suppliers provides attractive win-win opportunities
Competitive pressures stemming from buyer bargaining power and
seller-buyer collaboration
1) Large retailers have considerable negotiating leverage in
purchasing products from manufactures because of
manufacturer's need for broad retail exposure and the most
appealing shelf locations
2) The buyers have a bargaining power in the following
circumstances:
o If buyers' cost of switching to competing brands or
substitutes are relatively low.
o If the number of buyers is small or if a customer is
particularly important to seller.
o If buyer demand is weak and sellers are scrambling to
secure additional sales of their products
o If buyers are well informed about sellers' products,
prices and costs.
o If buyers pose a credible threat of integrating
backward into the business of sellers.
o If buyers have discretion in whether and when they
purchase the product
Porter’s model as applied to Fast Food Industry
1) The rivalry among competing sellers

Tough competition seen among players for building brands

Price and offerings are the factors on which the competition is
based

The MNCs and the local companies compete

Local companies offer local variety of food at competitive prices

MNCs offer specialized foods
2) The potential entry of new competitors

The threats of new entrants is very high

There is very little entry barriers except for realty space

It is common to see a lot of new entrants closing shop at high
frequency
3) Competitive pressures from the sellers of substitute products

The read side eateries offer food at competitive prices

Fruit juice sellers are positioning their products as substitutes for
fast food

Packaged foods are substitutes for fast foods

Ready to eat foods are substitutes for fast foods

Easy to prepare foods are another substitute for fast foods
4) Competitive pressures stemming from supplier bargaining power
and supplier-seller collaboration

Since there are no ingredients which are too important as supplies.
There is not much bargaining power for sellers
5) Competitive pressures stemming from buyer bargaining power and
seller-buyer collaboration

The buyers are becoming more knowledgeable about fast foods
and are more open to healthy foods

The buyers are becoming conscious of some of the ill effects of fast
foods
Health consciousness of the buyers is increasing
2 (a) What are Key Success Factors for an industry?
An industry's Critical Success Factors are those competitive factors that most effect industry members' ability
to prosper in the market place.
They can be - the strategy, product attributes, resources, competencies, competitive capabilities and market
achievements
(b) In what situations does a low-cost strategy work best?
Low-cost strategy works best when:
a. Price competition among rival sellers is especially vigorous
b. The products of rival sellers are essentially identical and supplies are
readily available from any of several eager sellers
c. There are few ways to achieve product differentiation that have value to
(3 marks)
(7 marks)
buyers
d. Most buyers use the product in the same ways
e. Buyers incur low costs in switching their purchases from one seller to
another.
f. Buyers are large and have significant power to bargain down prices
g. Industry newcomers use introductory low prices to attract buyers and
build a customer base
(c) Explain the concept of a company’s value chain.
A company's value chain consists of the linked set of value-creating
activities the company performs internally. It involves all activities from raw
materials processing to end user servicing .
It consists of two broad categories of activities
a) Primary activities that are foremost in creating value for customers
E.g. Procurement of components, manufacturing of cars,
distribution of cars
b) Support activities that facilitate and enhance the performance of the
primary activities
E.g. Good servicing, home pick up and delivery during service
for cars, advertisement to appeal to the potential buyers
It includes a profit margin, a mark up over the cost of performing the valuecreating activities. Assigning the company's operating costs and assets to
each individual activity in the chain provides cost estimate and capital
requirements.
Manner in which one activity is done can affect the costs of performing
other activities. Cost of each activity contributes to whether the company's
overall cost position relative to rivals is favorable or unfavorable. The tasks
of value chain analysis and benchmarking are to develop the data for
comparing a company's costs activity against the costs of key rivals and to
learn which internal activities are a source of cost advantage or
disadvantage.
Accurately assessing a company's competitiveness in end-use markets
(10 marks)
require that company managers understand the entire value chain system
for delivering a product or service to end users, not just the company's own
value chain. Suppliers value chain are relevant because suppliers perform
activities and incur cost in creating and delivering the purchased inputs
used in a company's own value chain. Forward channels are relevant
because the costs and margins of a company's distribution allies are part
of the price the end user pays and the activities that distribution allies
perform effect the end user's satisfaction.
3
Case Study - (Compulsory)
By focusing on the values of traditional British, top-down, sports car motoring, the Morgen Motor Car
Company has successfully found a way to differentiate itself from all competitors. Once competing with the
respected British marques of MG, Triumph, Austin-Healey, Jaguar and Aston Martin, the Morgan is now the
sole occupant of a small, but durable and favorable niche. Founded in 1919 by Henry FS Morgan, the
company continues to use the same factory in England’s west midlands to produce automobiles seemingly
unchanged from those produced before World War II. Although Morgans have state-of-the-art engines with
fuel injection, electronic ignition and pollution control devices, the basic front-end suspension design has
remained relatively unchanged since the company founder built the first Morgan by hand in 1908. Although
the chasis is based on a simple steel frame, the body is still constructed on a hand-built wooden frame of
specially aged ash wood. The Morgan’s hand-cut body panel must be fitted by hand on to the car.
The company makes three models, ranging in price from $ 35,000 to $ 50,000. The company has no longterm debt and enjoys steady growth in sales and profits. Sports cars with reputations comparable to that of
Morgan sell for $ 150,000 and up. For the person wanting a personalized car, the Morgan is available in
35,000 hand painted colors. The company employs just enough skilled workers to build ten cars a week for
an annual capacity of fewer than 500 cars. Because the company receives about 600 to 800 new orders
each year, the current waiting list for a new Morgan is about 5000 cars – about 10 years production! The
firm’s response to a rapidly changing automobile industry seems perfectly tuned to staying in its favorable
niche. According to Charles Morgan, grandson of the founder, “We believe the Morgan policy of gradual and
carefully considered change will enable us to maintain the car’s qualities and unique appeal, and there by
ensure its survival for the foreseeable future.”
Questions:
1. What is the type of competitive advantage Morgan enjoys? How?
(3 marks)




Morgan is now the sole occupant of a small, but durable and favorable niche
Founded in 1919
Automobiles seemingly unchanged from those produced before World War II
The basic front-end suspension design has remained relatively unchanged since the company
founder built the first Morgan by hand in 1908
The car had qualities and unique appeal
2. What core competencies of Morgan can be deduced from the above case?
 Morgans have state-of-the-art engines with fuel injection, electronic ignition and pollution control
devices (Technical superiority)
 The body is still constructed on a hand-built wooden frame of specially aged ash wood
(Differentiation)
Sports cars with reputations comparable to that of Morgan sell for $ 150,000 and up. For the person
wanting a personalized car, the Morgan is available in 35,000 hand painted colors (Low cost in the
niche)
3. Do you perceive any risk for Morgan’s business in future, say in the next 10 years? How can
they prevent it?


The Morgan’s hand-cut body panel must be fitted by hand on to the car (Difficult to get talented people)
The company employs just enough skilled workers to build ten cars a week for an annual capacity of
fewer than 500 cars. Because the company receives about 600 to 800 new orders each year, the current
waiting list for a new Morgan is about 5000 cars – about 10 years production! (Very long waiting
period)
Staying in its favorable niche (which may get eroded due to waiting period)
(3 marks)
(4 marks)