Question 3:
When two incompatible technologies compete in the marketplace, one usually becomes the dominant standard and the other fades away. Using the notion of network effects, discuss the reasons why such a winner-take-all market emerges. If you were the inventor of a new social networking website called FriendSpace, what would be two strategies if you would adopt to get network effects working in your favor and against the market leader, Facebook?
Facebook is currently the market leader in social networking. It has enjoyed the lead due to network effect being in its favor. Facebook has a large number of users’ .The customers have gained a sense of trust investing in facebook since it has strong staying power. In the first place, the user has to lose the kind of friends he had I the prior network. Therefore, users are not easy to invest in a network which may not take long in the market. A user is also encouraged by the enormous levels of exchange he/she can get when using facebook. A user primary need of joining any social network is getting to know new people and at the same time be able to converse with friends. Facebook provides this since it’s widely used hence users find a wide variety of needs. It has also been able to create complimentary benefits as third party products are able to be accessed by the user. While in facebook, the user can be able to access other services such as youtube and emails without any difficulty. As an inventor of new networking website, Friend Space, I know it won’t be easy task competing with the market leader. In order for the market effect to work in my favor, I will come up with High levels of technology that can overcome the value of the technology used by facebook. This will be a key way of reversing the perceived stability of facebook and overcome the exchange benefits the existing user base has offered. Secondly, I will develop a proper establishment of a dominant standard. This will encourage coming up of new Ideas and innovations to the standard. In this case, I will be at a better position of gaining more users hence overcoming Facebook.
QUESTION 1: Some industries (e.g., airlines) are characterized by lower average profitability of incumbent firms than other industries (e.g., pharmaceuticals). Discuss using the five forces model why an airline firm is likely to be generating a lower ROIC than a pharmaceuticals firm. Suggest a way in which the airline firm can counter each of the strong industry forces.
ROIC is the product of Net operating profit tax margin and Return on Invested capital turn over. Pharmaceutical industry is better positioned in terms of generation of return on invested capital more than companies in Airline industry.
- Threat of entry: the desire of other firms to get into the industries comes up with increased levels of completion since the new firm would like to gain market share and can do this through imposing pressure on prices. Lowering of prices will therefore have a negative impact on the levels of ROIC gained. The company should come up with ideas of providing better and quality services such that even in case other firms lower their prices, they still retain their customers due to their levels of services.
- Threat of substitute services: Unlike the pharmaceuticals, a airline company is faced by substitute services. This limits the levels of profit a firm can gain by placing a ceiling on prices. This in turn affects the levels of ROIC. The firm should be creative and innovative in coming up with new services in order to compete favorably in the market.
- Bargaining power of Buyers: In an airline industry, powerful buyers exist. These are the firms that can ask for a large service at once. They can demand for better quality services or even a lower price. These customers are not easy to avoid since they are the ones who has power over the firm’s existence. They can pressure price reduction using their influence. This affects firms expected profitability levels hence affecting the ROIC in a negative way. The firm should find a way of getting to these customers discuss and bring up ideas of even signing a contract before rendering its services.
- Powerful Suppliers: These can be the major suppliers of different body parts of the aircraft. They can dictate prices of their product at a higher levels hence increasing company’s expenses. These in turn will have a negative effect on the ROIC. The same way in which the case of powerful buyers should be adopted in this case.
- Rivalry among existing firms: Airline industries have many participant firms. They all compete for customers using different forms. This can be through offer of price discounts and offer of different and improved services. All these will have an effect on the levels of profitability hence ROIC is lowered. Improving its services Is a key strategy in this case.
QUESTION 2: KIA Motors is currently adopting a cost-leadership strategy in the automobile industry by offering several reasonably-priced models. Discuss three reasons why a purely low price strategy is risky and that it should consider building some differentiation into its products. Also, suggest and explain three approaches
that the company could try to build more differentiation without impacting operational costs significantly
Low pricing strategy is a risky in that:
- The consumers will begin questioning the quality of the product. As for the automobile industry, there is a perception the consumers hold that the more expensive the machine, the better its quality is. It may therefore scare away potential buyers. The firm should therefore introduce quality products at the available and reasonable pricing.
- A certain class is locked out: Some of the consumers may feel out of place as they associate themselves with a certain kind of product which suits their kind of lifestyle. For example, posh luxurious cars are known to be owned by rich people. The firm should try coming up with products that carter for different social class of people.
- Effect on the profitability of the business: The firm may gain profit at first but this may go down with time. Customers may opt for better quality products hence reducing firm’s level of sales. The firms should aim at increasing its customer base more at the early stages. Carrying out customer awareness through advertisements.
QUESTION 4: The furniture manufacturer, IKEA, has a core competency in offering attractively designed furniture at low prices. It achieves this through its product designs (which are also easy to assemble) and aesthetic store displays. Mention five valuable resources (both tangible and intangible) that IKEA possesses discussing how each is important in developing the core competency. Also, give three reasons why IKEA""?s core competency may be difficult to imitate for potential competitors, say, Wal-mart or Target, that already sell some furniture through their stores and websites.
- Availability of modern technology: The Company is at par with the ever changing consumer needs as they communicate effectively with them from all over the world using the internet.
- Active and competent human resource. They have knowledgeable personnel to execute the proper designs
- Good management. The company has a proper human resource management system which makes it succeed.
- Good capital. The kind of machines the firm uses is efficient for the assigned duties.
- Proper advertisement. The firm has been able to create consumer awareness of new products. They have also gained a good customer relation as the customers have continuously gained trust in them.
QUESTION 6: Sticksoft Corp., an established cement manufacturer wants to diversify into the hotels business because it has available cash reserves and its managers want to counter emerging threats due to a downturn in the cement market. Evaluate the relatedness of this proposed diversification to its existing business. Can you identify a better business for Sticksoft to diversify into? Considering potential synergies, discuss why you think this is a good idea. Finally, if Sticksoft choses not to diversify, how can it help its shareholders manage the risks in the cement business?
It will be a difficult task for Sticksoft Corporation to venture into hotel businesses. Hotel business is a totally different line of business from the one the firm had earlier been known for. Investing in Hotel business is not advisable as they are not related to the prior business in anyway. Despite the fall in the cement businesses, the firm still has a name to having dealt with product used in the construction sector. I would suggest that the firm invests in Steel smelting industry where it makes products such as iron sheets. These will be a lucrative investment since it is has some relation with the previous investment of Cement business. Both deal with construction equipment. In case the firm chooses not to diversify, it has to reorganize its management, advertisement strategy and customer relation so that the risk of the firm dying is managed by the shareholders.
References:
Smith, T. J. (2012). Pricing strategy: Setting price levels, managing price discounts, & establishing price structures. Mason, Oh: South-Western Cengage Learning.
Hill, L. D., & Bender, K. L. (1995). Developing the regulatory environment for competitive agricultural markets. Washington, DC: World bank
Haslett, W. V. (2010). Risk management: Foundations for a changing financial world. Hoboken, N.J: John Wiley & Sons.
Simon, H. (1989). Price management. Amsterdam, The Netherlands: North Holland.
Hanna, D. P. (1988). Designing organizations for high performance. Reading, Mass. ; Don Mills, Ont: Addison-Wesley
