Reading 39: The Five Competitive Forces that Shape Strategy- style, reduce, center, technology, 2011

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Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 39: The Five Competitive Forces that Shape Strategy

LOS d: Indicate why eliminating rivals is a risky strategy.

 

 

Strawline, Inc. has purchased a new production technology and plans to reduce prices with the goal of driving smaller, low-tech competitors out of the market. According to Porter’s model, which of the following is most likely?

A) Driving small competitors from the market will attract the attention of government regulators, risking anti-trust legal action.

B) Smaller competitors will join together to improve their market size and strength.

C) Driving small competitors out of the market may attract the attention of larger, stronger competitors who can adopt the same new technology.

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Driving small competitors out of the market is risky because it may attract the attention of larger, stronger competitors who will enter the market using the same new technology.

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Karla Hanover, CEO of Marshall Computers, is gloating during a board meeting. “It’s been a wonderful year, people. First, we received a tax break from the state that allows us to reduce our manufacturing costs. Second, we drove our longtime competitor, Roseland Technology, out of business. Third, we patented a new processor 30% faster than those of our rivals.”

Which of the three victories Hanover cited is least likely to give the firm a lasting advantage over its competitors?

A) The demise of a competitor.

B) The new, faster processor.

C) The tax break.

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Government action and technological advancements don’t generally have a lasting effect on an industry. However, such company-specific factors as a state tax break and a patented new technology can strengthen one company at the expense of others. However, the elimination of a rival could result in new competitors entering the market. As such, it is least likely to provide a lasting competitive advantage.

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Martin Kemp, owner of a fast-growing food distributor with one of the state’s largest truck fleets, wants to buy up most of its smaller trucking rivals in an effort to increase its scale and efficiency, thus fattening profit margins. Two of Kemp’s advisers warn that the strategy could backfire.

Bart Able says: “If you clear out the competition and increase profit margins, the business could draw the attention of larger companies that have so far stayed out of this region.”

Andrea Baker says: “If you raise prices on truck shipping, more customers will opt to ship in their food by train.”

Both Able and Baker conclude that Kemp’s acquisition strategy could actually end up reducing profit margins. Which arguments are valid?

A) Only Baker’s.

B) Only Able’s.

C) Both Able’s and Baker’s.

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Both Able and Baker offer legitimate reasons why an acquisition strategy might not result in sustainable margin improvement. Both may turn out to be wrong, but their arguments have merit.