ENT 450: ENTREPRENEURIAL STRATEGY
This exam is to be completed individually. You may use your notes, the book and online resources as reference but you are to do your own work and not collaborate with any other member of the class. Please use an 11 point font with 1 inch margins for your paper. Use separate headings for key topics so that the paper has logical organization. When you submit your exam, please use the following naming convention: ENT 450_Last Name_Exam.
1. Explain the concept of the value system. (10) Explain porter’s five forces in the context of the value system. For instance, you would briefly define each force (10) and then explain the impact of each force on the value system and thus, industry attractiveness (10). Make sure you include how you would use this analysis to determine the industry position a company could seek to maintain (10).
Value System as A Concept
The value system is a large set of activities that are necessary in creating value for the end user, regardless of who performs those activities. All the players involved in the value system and each one demands value for doing their part. This includes a company’s suppliers or distribution channels, or both. The value system shows that each activity requires not only a cost but also a step that adds some increment of value to the finished product or service. In thinking about your own value chain, it is important to see how your activities have points of connection with those of your supplies, channels, and customers. The value system focuses on the drivers of industry profitability.
All the value chains in the value system are affected by competition and the structure of a company’s industry. Both factors also shape each company’s strategy and value proposition. The objective of a firm within an industry is to find out what makes them the most value in profits and adopt a strategy to achieve this. The value system is the way to order company activities to realize this value.
Porters Five Forces in Context to Value System
Porters five forces is a model/tool for analyzing how competitive a business is. PPF or Porter’s five forces refers to the bargaining power of suppliers, bargaining power of buyers, the threat of substitutes, threat of new entrants, and rivalry among existing competitors. PFF tells how an industry works and how the industry creates and shares value. How PFF relates to the value system is it is used as a framework to understand what drives the profitability of an industry.
The bargaining power of suppliers refers to how much suppliers can control or influence prices. Most industries rely on select few suppliers to provide materials for products. In the value system, suppliers demand value by charging a price. By having strong suppliers, they can use their leverage to negotiate and charge high prices or make favorable terms. In this instance, the industry will lose profitability because the suppliers are capturing more value for themselves.
Threats of substitutes refer to products/services that meet the same basic need as another product in a different way. Substitutes can place a cap on the profitability of an industry. Substitutes are hard to anticipate because they are not necessarily rivals, but alternatives. “Coinstar’s Redbox-the kiosk that dispenses movie rentals for just $1-has become a tangible threat to Hollywood’s ability to sell movie DVD’s for twenty to forty times that price” (Margretta 2012). In this example, Redbox offers a price performance trade-off that is better relatively to the industry. Also, this is an example of low switching costs. Low switching costs are a way to gain ground in an industry with a lot of substitutes because they provide an easy way for customers to move to an alternative.
Threats of new entrants refer to barriers that protect an industry form new firms seeking to enter and add unnecessary capacity and take up market share. This hinders the industries profitability in two big ways. The first is that it caps the prices because if an industry has high prices many companies will seek to enter from the cash attractiveness. The second is high costs of operation. This raises the bar for new entrants and causes them to spend a lot to be able to compete with other established firms in an industry. The main impact of the threat of new entrants is capital investment. Are firms willing to pay the standard amount to enter into new markets and industries? It varies, but a high capital industry like pharmaceuticals is unlikely to have a high level of threats from new entrants.
The bargaining power of buyers vary similar to the power of suppliers. In PFF, powerful buyers will use their influence on prices and drive them down. Buyers can also demand more value into products and services. Both of these examples the industry profitability will decrease because customers will possess more value for themselves. In the buyer value chain. In the value system, the bargaining power of buyers is based on price sensitivity. If the price is sensitive, then buyers are likely to use their influence to leverage.
Last but not least in the PFF model is the rivalry among existing competitors. Rivalry among existing competitors decreases profitably the more intense it is. For example, if two companies are both selling smartphones, they will each need to gain an advantage over the other. If one company lowers their price, then this is giving away value to the customers and losing so of its own despite high production costs. ?
2. Explain the concept of the value chain (10). Explain how a company is able to obtain and sustain a competitive advantage through the activities in the value chain (10). This will require you define competitive advantage in your answer (10). Include in your answer the concepts of fit (10) and continuity (10) and the roles they play in achieving and sustaining competitive advantage (10).
The value chain is all the activities a company performs in creating, producing, marketing, and delivering its goods or services. The value chain outlines the process of products as they move through activities that generate value. This system starts with initial development and goes all the way to the sales and services. The value chain is the basis for understanding a firm’s competitive advantage, because all costs come from the value chain activities in addition to differentiation that comes from the value chain as well. The Value Chain is an analysis that focuses on the differences in activities. Within the value chain is fit, which is the way the activities in the chain interact with each other, and continuity the gauging of the activities in the value chain through time.
Competitive advantage is a condition or attribute that allows a business to possess some sort of superiority or favorability over another. When a company has a competitive advantage over rivals it means they have a greater value, or more specifically higher profits, and this can only be done in two ways. Competitive advantage is realized with better performance due to higher prices, lower costs, or both.
The activities in the value chain allow companies to obtain and sustain a competitive advantage because that value chain gives clear insight and narrow focus. “The value chain is a powerful tool for disaggregating a company into its strategically relevant activities in order to focus on the sources of competitive advantage, that is, the specific activities that result in higher prices or lower costs…” (Margretta 2012). By looking at the activities a company is doing, decisions and analysis can be made to achieve one or both factors to increase competitive advantage.
The activity difference in value is created by the difference in business activities. In operations competitive advantage can be accomplished in two ways; a company can have superior activities, or they can perform different activities.
In performing the same activities, this route causes a firm to execute in a similar way of competitors, but better. The value created here come from meeting the same needs at a lower cost. The advantage can only be at the cost, but this is hard to sustain for a company over time. The competition is based on being the best and competing through execution.
In performing different activities this means that the value created must cater to or meet different needs or the same needs at a lower cost. The advantage given by being different is sustainably higher prices and or lower costs. The way this method competes is through being unique and having the better strategy.
Fit refers to how the activities in the value chain are related to each other. In relation to the value chain, fit is how each activity in the value chain links together. A company can operate more efficiently and possess a competitive advantage if the marketing, IT, manufacturing, all flow together in the same direction. By using fit it makes a strategy more sustainable by raising barriers to imitation.
Fit is identified in three different ways. The first type of fit is referred to as basic consistency. This is where each activity lined up with a firm’s value proposition and incrementally adds to the company’s value. An example of this type of fit is Amazon. Amazon is a company that values and relies on speed. With one click buying, two-day shipping with its own delivery vehicles, instant customer services, the company has its value chain activities coordinated for speed. In this example, the competitive advantage lies in the fact that each activity increases to the overall value proposition.
The second type of fit is when activities are complementary or reinforcing of each other, i.e. synergy. Going back to the Amazon example, the website contains a high number of products that are diverse which in terms leads to a high amount of traffic from diverse people and places. The Amazon Kindle devices allow users to be constantly showed the Amazon marketplace with products, in addition to new retail locations. All of these things work together to give Amazon an advantage where the value of each activity is increased by the other.
The third type of fit is substitution. Substitution is when the performance of one activity can replace another. An example of this can be found in McDonald’s electronic kiosks. By having electronic menus for customers to order food this eliminates the need and cost of cashiers. Also, by having the customers input their own order instead of telling someone else there is little room for an order to be made incorrectly, which means less excess food being made or wasted. The competitive advantage here is that multiple activities are replaced or done more efficiently by one factor.
Continuity refers to the stability of a company’s value proposition. A company’s value proposition is a feature, service, or method of innovation that makes a product appealing to customers. Continuity measures how this value of a firm is doing over time. The value chain is the activities that will increase a company’s value and in term allow it to have a competitive advantage. Continuity is the gauging or measurement of the activities to see is this value in activities being realized.
How Continuity Enhances Competitive Advantage
Continuity helps external factors such as suppliers and channels contribute to a company’s competitive advantage. A business has hundreds, thousands, and maybe millions of activities that occur internally and externally. All of these activities need to flow together to help a firm create value to create and maintain a competitive advantage. Through this continuity helps enhance competitive advantage in three ways.
First is by developing a company’s identity and building a brand, reputation, and enhancing relationships with customers. In Understanding Michael Porter, it gives an example of In-N-Out Burger keeping their menu and ingredients the same since 1948. By valuing what makes customers happy and maintaining a loyal customer base the company can have an advantage over larger chains with no personal connection to customers.
Another example of continuity enhancing competitive advantage is through clusters. Clusters are geographic locations that cater to a specific industry. In tech, it’s Silicon Valley, or in entertainment, it’s New York or Los Angeles. Through clusters suppliers, distribution channels, and other external factors contribute to a company’s competitive advantage. Clusters affected competitiveness because the production of a business’s products is influenced by the presence of similar firms, and institutions around it. If a company is located in a cluster then they are surrounded by suppliers and infrastructure that can cater to them and in term allow them to be more efficient.
Lastly, continuity helps enhance the improvements for individual activities within an organization that help to build and maintain its strategy. “Continuity increases the odds that people throughout the organization will understand the company’s strategy…the more they get it, the more likely they are to make decisions that reinforce and extend the strategy” (Margretta 2012). An example of this is Google’s 20 percent policy. This is a policy where Google employees are given twenty percent of their time as employees to working on their own personal projects. Through this initiative, many employees have developed things such as Gmail, Google Maps, and many more notable services the company is known for. By using this twenty percent initiative, the company helps employers realize the company’s vision innovation and creativity, while also helping to produce services that further help the company enhance its strategy for high growth and innovative products.
Margretta, J. (2012). Understanding Michael Porter: The Essential Guide to Competition and Strategy. Boston, MA: Harvard Business School Publishing.