1. what is a business model and how do business models differ from business-level strategies?
– A business model, which describes what a firm does to create, deliver, and capture value for stakeholders, is part of a firm’s business-level strategy. In essence, a business model is a framework for how the firm will use processes to create, deliver, capture value, while BLS is the path the firm will follow to gain a competitive advantage by exploiting its core competencies in a specific product market. There are many types of business models including the franchise, freemium, subscription, and peer-to-peer models. Firms may pair each type of business model with any one of the 5 generics BLS as the firm seeks to compete successfully against rivals.
2. what are the difference among the cost leadership differentiation strategy, focus strategy and integrated cost leadership / differentiation business level strategies?
– Cost Leadership: Broad Target & Lowest Cost
Differentiation: Broad Target & Distinctiveness
Focused Cost Leadership: Narrow Target & Lowest Cost
Focused Differentiation: Narrow Target & Distinctiveness
Integrated Cost Leadership/Differentiation: Simultaneously low cost & differentiation
3.how can firms use each of the business-level strategies to position themselves favorably relative to the five forces of competition
Competitors hesitate to compete on price
Buyers – low prices shifts power back to firm
Suppliers – can absorb cost increases and make very large purchases
New Entrants – frightened off by need to be on such a large scale
Substitutes – can lower prices in order to maintain positions
Competitors – brand loyalty
Buyers – less sensitive to price increases
Suppliers – higher margins to absorb increases from suppliers
New Entrants – new products must be at least equal to performance of proven products
Substitutes – brand loyalty reduces switching brands
4. As explained in this chapter’s Opening Case, Amazon purchased Whole Foods. How will this transaction affect Aldi as it seeks to expand its presence in the United States? What competitive actions might Aldi take in response to Amazon’s purchase of Whole Foods?
– Aldi has high competition throughout the United States. They have created competitive rivalry in the retail grocers’ industry by selling brand-label products and more brand options for each product category. This is able to keep packaging, transportation, and employee expenses keep costs low. Aldi also limits their selection to make it easier and faster for customer shopping experience.
5. In a competitive rivalry sense, explain the actions (strategic and/or tactical) you believe Walmart and Costco will take to respond to Aldi’s intentions to have 2,500 U.S. stores by 2020.
I believe that Walmart and Costco should find other ways to differentiate from Aldi. They should keep low prices and improve their customer service. Another option would be for Walmart and Costco to reduce their profit offerings. Having less brands can be better for only one specific company, but it will reduce waste. Usually, since customers have so much brands to choose from, some brand are more preferred than other and the other food products end up going to waste.
6. What are the different level of diversification firms can pursue by using different corporate-level strategies?
There are three different levels of diversification, that firms may pursue by using different corporate-level strategies.
1) Low level diversification strategy: This includes single and dominant level business strategies. In such business strategies companies generate their maximum revenue from their core business areas. Companies that follow single- or dominant-business strategies have low levels of diversification. More than 95% of the revenues come from single business unit in single level business strategy, whereas, between 70% to 95% of the revenues come from single business unit in dominant level business strategies. The example of the company using such kind of strategies is Frito Lay
2) Moderate to high level diversification: This includes moderate to high level diversification strategies. This is the strategy where most of the companies use related diversification strategy for their business. All the businesses in these cases are linked to each other.
A diversified company is one that earns at least 30% of its revenues from sources outside of the dominant business and whose units are linked to each other by the sharing of resources, and by product, technological, and distribution linkages. Moderately Diversified companies also earn at least 30% of their revenues from the dominant business and all business units share product, technological, and distribution linkages. The example of the company that uses this kind of a strategy is GE
3) Very high level diversification: This is the scenario where companies use unrelated diversification strategy for their business purposes. Companies that generally use such strategy are known as conglomerates.
Unrelated diversified companies generate at least 30% of their total revenues from the dominant business but there are few linkages between key value-creating activities. Unrelated-diversified companies do not share resources. Conglomerates (companies following unrelated diversification strategies) dominate the private sector economy in several countries such as Latin America, South Korea and India while US has more highly diversified companies. The example of this kind of strategy is Samsung.
Advantages of diversifying their operations :
1) To increase the value of a company: This is one of the major reasons why a company may choose to diversify its operations. Diversifying its business will lead to the company creating an edge over rest of its competitors which lead to sustainability of the business.
2) To decrease the risk for a company: The main motive behind this is to reduce the competition and operational risks that an organization may encounter.
3) To neutralize another company’s strengths: This is very important as neutralizing competitor’s strengths will prove to be a major achievement for the business. This will highly contribute to the profitability and growth of the organization.
7. What are the two ways to obtain financial economies when using an unrelated diversification strategy?
– The first method is to make efficient allocations of the internal capital, which will help mitigate risk. Capital can be allocated in various ways like through debt and shares, etc. the holders of such debt or shares will put efforts to enhance the value of their investments by taking interests in other businesses with high growth and profitability prospects.
The second method is restructuring the already acquired assets. The restructuring entails purchasing another company, restructuring it for efficiency and profitability, and then reselling for a profit.
8. What motives might encourage managers to overdiversify their firm?
Increased compensation: Through over diversification the company may generate more and more revenue which will enable them to increase the compensation level of their employees resulting in better employee satisfaction and increased level of motivation. All such factors will enhance the performance of the overall organization and increase the competitiveness of the firm.
Reduction of managerial risks: If the firm gets over diversified, it eventually reduces the managerial risks involved. This happens because the risk gets divided among all the businesses that form a group for diversification. It has another added benefit that with over diversification they get to explore more and more markets. This leads to more and more ideas fro businesses coming in.