Mekelle University Collage of Business and Economics Department of Management Assignment Group # 2. Submission Date: May 28, 2011

MEKELLE UNIVERSITY
COLLAGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
Assignment
Group # 2.
Submission date: May 28, 2011
Question # 1
The profitability of an industry is determined by the systematic influences of
the industry’s structure. Porter’s five forces framework identifies five
structural variables: intensity of competition, threat of new entrants, threat
of substitutes as well as bargaining power of suppliers and buyers. (5%)
1a. Explain how economies of scale and experience might constitute barriers
for companies entering an industry.
1b. Discuss the possible limitations of economies of scale and experience as
entry barriers in the case of new technology introduction.
1c. Using an example of a professional service firm, explain the dynamics of
bargaining power of suppliers and buyers in the industry. Explain and justify
your example.
A more recent theory in strategic management is the resource-based view of
the firm developed by Wernerfelt (1984), Rumelt (1984), Barney (1991) and
others. (5%)
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1d. Explain the difference in explanation of profitability of Porter’s five forces
and the resource-based view. How does this affect the firm?
Porter’s five forces model strongly emphasizes entry barriers. In the
resource-based view of the firm, resource position barriers take an important
role. (5%)
1e. How are resource position barriers and entry barriers related? Give an
example of a resource position barrier that also represents an entry barrier.
Teece et al. (1997) contrast models of industry structure with resources
based theories and develop a new theory of dynamic capabilities. (5%)
1f What implications for strategic choices such as entry strategies, timing
and diversification does the dynamic capabilities theory have? Which
underlying factors explain these implications?
A further theoretical development has been the knowledge-based view of the
firm.
1g According to this theory, why do firms differ? What implications does this
have for firm boundaries?
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MEKELLE UNIVERSITY
Assignment
Submission date: May 28, 2011
Group # 1.
Innovation is an important topic in strategic management. It can include
products, services, processes and organizational aspects and has the
potential to change an entire industry. One aspect of innovation could be
understood as changes in the sources of product differentiation.
2a Name and briefly explain three sources of product differentiation.
Innovation can lead to major shifts in technical performance. Foster (1986)
explain such discontinuities with an S-curve. (10%)
2b Explain the S-curve in a few sentences using a graph.
2c What implications does the S-curve phenomenon have for a company’s
technology strategy?
Chesbrough (2003) coined the term open innovation. Many companies follow
an open innovation strategy to deal with technological uncertainty. Out of
the two basic concepts of innovation of open and closed innovation evolved
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three models of innovation. We will first turn to the two basic concepts.
(10%)
2d Explain the main differences between open and closed innovation.
In von Hippel and von Krogh (2003) there are three models of innovation.
2e How do the models of private and collective innovation differ?
2f What are the characteristics of the third model that the authors propose?
MEKELLE UNIVERSITY
Assignment
Submission date: June 02, 2011
Group # 4
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1. Phuket
Phuket is a leading Asian automobile manufacturer with its headquarters in Phuket.
The company uses production facilities in Malaysia.
Phuket is looking to establish itself in Europe and has chosen Switzerland as a test
market. Phuket intends to set up an import company in Switzerland to build up and
manage a network of motor dealers. Although Phuket is aware that there are not many
capable dealers who are not already contracted to other manufacturers or to importers,
it seems that many of these, representing a range of different car brands, may be
unhappy with their current contract positions. This is because the car manufacturers
have been taking advantage of their solid market positions and strong brands to dictate
strict conditions in their contracts, affecting such features as showroom arrangements,
service performance, sales of demonstration vehicles, and stock requirements. Dealers
regard this behaviour as unfair, and Phuket thus sees an opportunity to praise some of
these motor dealers away from competitors. With friendly contracts and attractive
financial conditions the company hopes to acquire capable dealers with good locations
or alternatively establishes a number of new dealerships of its own.
In terms of its finance and staffing, the new import company will be set up in a similar
way to competitor companies, using Honda, in particular, as a benchmark.
In the initial phase the following two models will be introduced:
• Phuket Saloon: 4 or 5 door (booted rear or fastback), 1.3 liter 4 cylinder engine with
75 hp or 1.5 liter 4 cylinder engine with 90 hp; average consumption 5.5 liters per 100
km, 6.2 liters for the larger engine; small car category, similar to VW Polo,
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Ford Fiesta, or Mitsubishi Colt
• Phuket Persona: 4 or 5 door (booted rear or fastback), 1.5 liter 4 cylinder engine with
km, 6.8 liters for the larger engine (these are low values for this category of car); lower
mid-size car, similar to Opel Astra, Ford Escort, VW Golf
For both models standard features are generous, and include ABS, double front
airbags, and air conditioning. The retail price will be lower than for comparable low
priced vehicles from South Korea.
2 The automobile market
2.1 The international automobile market
The automobile industry seems to have overcome the crisis that reached its climax in
1993. In 1994 growth in production and distribution was achieved in practically all
markets. Experts assume that this positive trend will continue. But the markets in the
different continents will develop differently, for reasons which are apparent. New trading
areas, above all in Southeast Asia, and Latin America, are gaining in importance.
But even in traditionally important markets as Western Europe, North America, and
Japan, the figures are likely to be encouraging. One study has concluded that demand
will rise by about 30% to almost 43 million vehicles per year until the end of the
millennium. Europe will be part of this trend, with a yearly growth rate of 6%.
2.2 The automobile market in Switzerland
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With 450 vehicles per thousand of population, Switzerland has the highest rate of car
ownership in Europe. In the seventies and eighties the market was volatile, with
Japanese producers challenging their European and American competitors with lower
prices and more standard features. Today it is the ambitious South Koreans, like
Hyundai, who are driving competition in the market.
The turnover from new car sales is 7.6 billion Swiss francs in 1994. This represents
around 266,000 new cars. Figure 2.1 shows the market shares of the most important
car brands in Switzerland.
Last year also saw a growth in used car sales. Over 643,000 cars changed hands
representing a turnover of 6 billion francs. Of these, 380,000 were sold by motor dealers
and 263,000 were direct sales by individual car owners. In recent years the demand has
been mainly for lower priced vehicles, costing up to around 15,000 francs. Used
vehicles priced above 25,000 francs were difficult to sell.
Opel 18.2% Peugeot 6.4% Audi 4.2%

VW 13.6% Fiat 5.3% Mazda 4.0%
Ford 9.0% BMW 4.6% Citroën 3.2%
Renault 9.0% Nissan 4.3% Chrysler 3.0%
Toyota 8.8% Subaru 4.2% Honda 2. 3%
Figure 2.1: Market share of the most important car brands for sales for
new cars in Switzerland
The area of Switzerland and Liechtenstein has 11,834 motor dealers, of which 6,648
represent one or more brands. Most of these dealers have grown from one-man
companies: some have now become extremely large dealerships. However, the majority
of these garages have only 18 employees or fewer.
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Garages make on average 75% of their turnover on new cars, but with service and
repairs 75% of their profit.
For basic garage businesses, with service and repairs plus used car sales, a future
without new car sales does not look encouraging. Turnover in these areas remained at
the same level as in the previous year. However, in the last four years workshop
capacity use has been falling: in 1990 it was 83%, by 1994 it had fallen to only 74%.
The main factors for this trend are longer intervals for service and exhaust checks, the
increasing renouncement of the owner for service checks and a smaller susceptibility to
repairs. It should be noted too that the repair and maintenance of many types of car
now requires special software: this means that only authorised dealers can carry out
this work.
Industry experts estimate that there are some 500 to 1000 garages too many, and that
these will fall victim to the structural changes in the coming years. Importers are
beginning to reorganise and tighten their dealer networks: only financially sound
dealerships in strong locations are likely to survive.
In the Swiss market too, the forecasts for new vehicle sales for 1995 are upbeat.
The number of registered vehicles is expected to rise to between 270,000 and
280,000. But this short-term growth cannot hide the fact that the Swiss market is
nearing saturation. Increasingly it appears that new cars are bought only to replace
existing ones.
People’s need for individual mobility will continue, and the functioning of the economy
will continue to depend on the use of both passenger and utility vehicles. However, the
future of the automobile will increasingly be affected by changes in the environment:
pressure will continue to grow for manufacturers to reduce petrol consumption and
harmful emissions.
3 The distribution structure of the Swiss automobile market
3.1 Overview of the distribution system
As private vehicles have not been mass-produced in Switzerland since 1975, earlier
import restrictions intended to protect the home industry no longer apply, and the
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Swiss market is open to all manufacturers. Like Phuket, many other manufacturers have
used Switzerland as a test market.
Almost all new cars are imported by specialised import companies. Where these are not
subsidiaries of the manufacturers, they have contracts with manufacturers guaranteeing
the exclusive right to distribute the brand in Switzerland and Liechtenstein.
The manufacturer undertakes not to deliver vehicles to any other Swiss business
partner.
The Swiss industry has a traditional three-level structure: importer, regional dealership
and local dealer. Originally these three levels were quite separate and independent,
both legally and economically. However, recently importers have followed a policy of
forward integration, setting up their own dealers in good locations. Increasingly, too, the
importers control the strategic decision-making, while at the same time leaving the
dealers to bear the entrepreneurial risks.
3.2 Importers
There are basically two kinds of Import Company:
• Wholly-owned subsidiaries of the manufacturer, tied to the parent company brand:
Honda, Mercedes Benz, GM, Ford, BMW, and Renault are imported by such
subsidiaries.
• Legally and financially independent import companies working with one or more
manufacturers. The manufacturer guarantees the company exclusive distribution for the
Swiss market. Unlike the first type of importer, these companies are not committed to
purchasing any specified number of vehicles, though they are required to promote
sales. Important companies of this type include AMAG, the Emil
Frey Group and the Hugo Erb Group
3.3 The dealer networks
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The importers are free to determine how the vehicles are distributed and thus to set up
their own networks of dealers. The traditional network consists of regional dealers ("A"-
dealers) and local dealers ("B"-dealers). With over-capacity amongst garages, the
importers do not find it necessary to offer especially advantageous conditions or to try to
persuade dealers to change brands. A large majority of the dealers have no choice:
they need the authorized dealer status for their brand.
a) The regional dealerships, or "A"-dealers, have contracts with the importers which
give them responsibility for a clearly delimited regional market. Within these areas
they are responsible for serving and supplying the local dealers, can sell directly to
end-users (intra-brand competition with their own dealers), and must offer trouble
free customer service. There is a limited amount of competition between the various
regional dealerships representing the same brand. Despite the clear borderlines, in
practice ‘passive’ selling (no advertising or acquisitions) outside this area cannot be
avoided. Often the importers will not allow dealers to represent more than one
brand. Exceptions can be made if the brands are not in competition with each other,
because they target different market segments, or if the importer himself represents
more than one brand.
b) Local dealers, or "B"-dealers, represent the lowest level in the distribution system.
These are small garages which carry out maintenance and repairs, and represent one
or two brands. Local dealers have no regional protection and have to engage in intra-
brand competition, both with the regional dealership, and with other local dealers.
In addition there are a large number of independent garages which do not represent
brands, and whose turnover comes mainly from repairs and used car sales.
If a brand has a low market share, or if a brand’s market share is falling, the decision to
change brand allegiance, or to deal with more than one brand, can be a survival
decision for a dealer. But for "A"-dealers especially, it is an expensive undertaking. A
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large proportion of the dealer’s investment will have been brand-specific and will have to
be written off (special tools, stock of spare parts, visual and corporate identity).
3.4 Cooperation between importers, regional dealers and local

dealers
Usually the importers require the dealers to take over the visual identity of the
manufacturer.
National advertising is provided by the importers, regional advertising by the regional
dealers ("A"-dealers) responsible for the area, and local advertising in partnership
between the regional and local dealers. In 1993 the automobile industry as a whole
spent 253 billion francs on advertising in Switzerland.
Some importers impose demands on dealers in terms of the product range; others leave
this to the dealers. As far as stocks are concerned, the importers usually require the
dealers to hold a certain number of new vehicles and demonstration vehicles in stock,
and also impose requirements in terms of spare parts.
Usually the manufacturers and importers together determine the prices. The most
important criteria are cost, elasticity of demand, and the behaviour of the competitors.
In Switzerland prices are relatively high because price elasticity is weak and
government requirements are relatively demanding. The importers price lists represent
maximum prices. To offer lower prices and compete with each other, the dealers have
to give up some of their margin. With high inter-brand and intra-brand competition,
garages will offer up to 10% off list prices for a new car. With margins between
13% and 18%, dealers are unable to do better than this.
The importers take an active interest in making sure that dealers’ personnel participate
regularly in training.
Regional dealers are sometimes given the freedom to develop their own distribution
networks, choosing their own local dealers; otherwise the importer stipulates the local
dealers.
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For efficient trouble-free business administration and information exchange importers
generally recommend their computer networks to the dealers, and often require them to
provide certain information.
3.5 The end user

Cars have developed from luxury vehicles to items of practical utility, and more recently
have become lifestyle products. At the same time consumers have become more
demanding. Even for small and mid-size cars, customers today expect high
performance and comfort: low-priced basic models find fewer and fewer buyers. For this
reason it is more and more frequent for a car to be manufactured only after an order has
been placed.
Brand loyalty is very high in the automobile industry. Garages estimate it at 70% to
80%.
End users have become more and more dependent on the services provided by
specialist dealers; other garages increasingly lack the infrastructure and the know-how
to deliver the same services
4 Tasks
• State the network of the future competitive advantages. (group 4)
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MEKELLE UNIVERSITY
Assignment
Group # 6
2. Phuket
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VW 13.6% Fiat 5.3% Mazda 4.0%
this work.
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existing ones.
harmful emissions.
partner.
3.2 Importers
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subsidiaries.

b) The regional dealerships, or "A"-dealers, have contracts with the importers which
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dealers
manufacturer.
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dealers.
3.5 The end user

been placed.
80%.
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4 Tasks
a) Carry out an industry segment analysis for the industry market of the cheap
automobiles. (group 6)
MEKELLE UNIVERSITY
Assignment
Group # 3 and 5
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3. Phuket
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VW 13.6% Fiat 5.3% Mazda 4.0%
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this work.
existing ones.
harmful emissions.
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partner.
3.2 Importers
subsidiaries.
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c) The regional dealerships, or "A"-dealers, have contracts with the importers which
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dealers
manufacturer.
dealers.
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3.5 The end user

been placed.
80%.
4 Tasks
b) Select the future generic business strategy and identify the industry segment(s) and
the customer group(s) which will form the primary target. (group 3 &5)
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Mekelle University Collage of Business and Economics Department of Management Assignment Group # 2. Submission Date: May 28, 2011

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Mekelle University Collage of Business and Economics Department of Management Assignment Group # 2. Submission Date: May 28, 2011

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MEKELLE UNIVERSITY

COLLAGE OF BUSINESS AND ECONOMICS

The profitability of an industry is determined by the systematic influences of

the industry’s structure. Porter’s five forces framework identifies five

structural variables: intensity of competition, threat of new entrants, threat

of substitutes as well as bargaining power of suppliers and buyers. (5%)

for companies entering an industry.

1b. Discuss the possible limitations of economies of scale and experience as

entry barriers in the case of new technology introduction.

1c. Using an example of a professional service firm, explain the dynamics of

A more recent theory in strategic management is the resource-based view of

Porter’s five forces model strongly emphasizes entry barriers. In the

resource-based view of the firm, resource position barriers take an important

example of a resource position barrier that also represents an entry barrier.

Teece et al. (1997) contrast models of industry structure with resources

based theories and develop a new theory of dynamic capabilities. (5%)

1f What implications for strategic choices such as entry strategies, timing

and diversification does the dynamic capabilities theory have? Which

underlying factors explain these implications?

A further theoretical development has been the knowledge-based view of the

have for firm boundaries?

Innovation is an important topic in strategic management. It can include

products, services, processes and organizational aspects and has the

potential to change an entire industry. One aspect of innovation could be

understood as changes in the sources of product differentiation.

2a Name and briefly explain three sources of product differentiation.

Innovation can lead to major shifts in technical performance. Foster (1986)

explain such discontinuities with an S-curve. (10%)

2b Explain the S-curve in a few sentences using a graph.

2c What implications does the S-curve phenomenon have for a company’s

an open innovation strategy to deal with technological uncertainty. Out of

2d Explain the main differences between open and closed innovation.

2e How do the models of private and collective innovation differ?

Submission date: June 02, 2011

Phuket is a leading Asian automobile manufacturer with its headquarters in Phuket.

The company uses production facilities in Malaysia.

market. Phuket intends to set up an import company in Switzerland to build up and

strict conditions in their contracts, affecting such features as showroom arrangements,

service performance, sales of demonstration vehicles, and stock requirements. Dealers

or alternatively establishes a number of new dealerships of its own.

way to competitor companies, using Honda, in particular, as a benchmark.

In the initial phase the following two models will be introduced:

mid-size car, similar to Opel Astra, Ford Escort, VW Golf

priced vehicles from South Korea.

2 The automobile market

2.1 The international automobile market

2.2 The automobile market in Switzerland

Hyundai, who are driving competition in the market.

car brands in Switzerland.

vehicles priced above 25,000 francs were difficult to sell.

Opel 18.2% Peugeot 6.4% Audi 4.2%

new cars in Switzerland

3.3 The dealer networks

3.4 Cooperation between importers, regional dealers and local

3.5 The end user

• State the network of the future competitive advantages. (group 4)

Submission date: June 02, 2011

Phuket is a leading Asian automobile manufacturer with its headquarters in Phuket.

The company uses production facilities in Malaysia.

market. Phuket intends to set up an import company in Switzerland to build up and

strict conditions in their contracts, affecting such features as showroom arrangements,

service performance, sales of demonstration vehicles, and stock requirements. Dealers