2.
1 Your former college roommate calls you and asks to borrow $10,000 so that he can open a
pizza restaurant in his hometown. In justifying his request, he argues that there must be
significant demand for pizza and other fast food in his hometown because there are lots of such
restaurants already there, and three or four new ones are opening each month. He also argues
that demand for convenience food will continue to increase, and he points to the large number of
firms that now sell frozen dinners in grocery stores. What are the risks involved in choosing to
lend him money?
→ Providing financial assistance to a roommate for the establishment of a pizza restaurant
encompasses several critical risks. The primary risk pertains to market saturation, as the
existence of numerous pizza and fast-food establishments suggests a highly competitive
environment. The mere fact that additional restaurants are emerging does not ensure an increase
in consumer demand; rather, the existing customer base might be dispersed among an excessive
number of competitors, thereby diminishing the likelihood of success for a new venture. A
secondary risk involves execution: although your roommate may hold a positive outlook
regarding the business opportunity, operating a restaurant necessitates managerial, operational,
and financial expertise that he may currently lack. Furthermore, his belief that the popularity of
frozen dinners signifies a growing demand for fast food could be erroneous, as consumers
might opt for less expensive and more convenient alternatives instead of patronizing a new
establishment. Lastly, the financial risk is considerable—should the restaurant fail, there exists
the potential to forfeit personal savings and negatively impact your interpersonal relationship.
Consequently, providing the funds without a comprehensive business strategy and evidence of
competence would be exceedingly precarious.
2.2 Companies sometimes believe that managerial knowhow can be a barrier to entry against
potential rivals. This knowhow need not be trade secrets or intellectual property; the collective
body of knowledge, spearheaded by strong leaders, forms a well of creative and operational
prowess. Firms sometimes believe this gives them significant advantages and dissuades new firms
from entering the industry. Discuss.
→ Managerial skills can actually act as an important barrier to entry because it includes
knowledge, experience, and techniques that are often difficult to duplicate over a relatively fast
time period. Sound leadership along with an educated work force engenders an organizational
culture that is friendly to efficiency, product innovation, and customer loyalty. For example, an
established firm that perfected supply-chain processing or created unique service patterns might
run smoother operations relative to an entrant and thus make it difficult for rival businesses to
compete. However, the barrier is not necessarily indefinspaceable. Secrets may spread as
employees move over to competitor businesses, and many best practices become universal
throughout the industry. Moreover, technological improvements may erode the uniqueness of
certain managerial techniques. Overall, although manager skills are an invaluable strategic
asset, their effectiveness as a barrier requires constant enhancement and protection using
training, incentives, and constant innovation.
2.3 Government policies can have a significant impact on the average profitability of firms in an
industry. Government, however, is not included as a potential threat. Should the model be
expanded to include government? Why or why not?
→ In fact, it is crucial to extend the model to include government as a variable risk, since policies
issued by the government may dramatically affect the business environment of enterprises.
Regulations, licensing requirements, taxation, protectionism, financial incentives, and labor
laws may all significantly impact profit margins. For instance, tougher food hygiene rules may
increase the cost of doing business for restaurants, while subsidies granted in favor of certain
regions may create unfair benefits for certain competitors. Omission of the government as an
explanatory variable may lead to an incomplete strategic analysis, since political and legal
changes are capable of changing industry conditions virtually overnight. Even if certain
schemas argue that government belongs to the broad macro-environment, explicitly defining it
as a threat would raise awareness of direct effects among businesses and help managers best
prepare for sudden changes.
2.4 Managers often focus an inordinate amount of time on their customers and rivals, and many
seldom keep abreast of international affairs. Even when they do, it is often a cursory appreciation
of events. Should managers pay more attention to global politics?
→ Definitely, managers must focus more on global politics, particularly in the modern
interconnected world. Political changes forge trade policies, tariffs, and exchange rates, all of
which impact cost and access to markets. A political volte-face may upset supply chains, cause
shortages, or render certain markets inaccessible. For instance, a trade war might drive up the
cost of imported items, while a fresh trade agreement may provide potential in an overseas
marketplace. In addition, international politics impact consumer perception and even the
reputation of a firm if linked with certain nations or regimes. True, managers have no direct
control over politics, but it is better to be knowledgeable so that one may forecast scenarios,
spread risk, and react sharply when an unexpected event unfolds. Hence, keeping track of
international matters is no longer an option but a must in deciding strategically.
2.5 In the S-C-P model, rivalry is discussed as a “threat from competition among existing
companies,” “threat from new competition,” and “threat from superior or lower-cost substitute
products.” Distinguish and discuss these aspects of rivalry for a firm.
→ The S-C-P model emphasizes rivalry in three key forms, each of which differently impacts a
firm. Existing firm rivalry is direct competition between existing firms in the industry, usually
embodied in price wars, advertisements wars, or constant product development. Existing firm
rivalry decreases profitability and makes survival hard if competition is overly aggressive. In
the second type, the threat of new rivalry, new entrants enter the marketplace and steal away
customers. With low entry barriers, such as low capital needs or weak brand loyalty, there are
continual new entrant threats, lowering prices and raising rivalry. The third type of rivalry is the
substitute product threat, with other goods or services meeting the very same customer need. An
example would be frozen dinners or meal kits as an alternative to restaurant eating. Substitutes
put an upper limit on prices since customers will shift promptly if there are substitutes that are
less expensive or convenient. These three types of rivalry collectively illuminate why
corporations need to constantly differentiate their product offerings, innovate, and contain cost
increases in order to safeguard profitability and long-term survival.
