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What is strategy?
- Strategy is the long term direction of an organisation
- -it integrates major plans and commitments into a cohesive whole.
- -Marshalls and allocates limited resources in light of unique strengths and weaknesses, opportunities and threats
- - Deals with potential acts and responses of intelligent opposition.
what are the 5 steps of the strategy planning process?
- 1. corporate missions and goals
- 2. Analyze the external competitive environment to identify opportunities and threats.
- 3. Analyze internal to identitfy strengths and weaknesses.
- 4. Select Strategies that - build on strengths and correct weaknesses in order to take advantage of external opportunities and counter external threats. These strategies should be consistent with the mission and goals of the organisation.
- 5. Implement the strategy/strategies.
Distinctive competencies shape the functional level strategies that a company can pursue. Managers, through their choices related to functional-level strategies can build resources and capabilities that enhance a company's distinctive competencies. Also, note that a company's ability to attain superior efficiency, quality innovation and customer responsiveness will determine if its product offering is differentiated from that of rivals and if it has a low cost structure.
- Customer Responsiveness
The roots of competitive advantage
resources and capabilities with distinctive competencies shape functional strategies which then determine the strategy (low cost or differentiation)
what are threats
elements in the external environment that could endanger the integrity and profitability of the company's business.
what is an industry?
an industry can be defined as a group of companies offering products or services that are close substitutes for each other - that is,products or services that satisfy the same basic customer needs.
- external analysis begins by identifying the industry within which a company competes. To do this, managers must start by looking at the basic customer needs their company is serving - that is, they must take a customer-oriented view of their business rather than a product -oriented view. An industry is the supply side of a market, and companies within the industry are the suppliers. Customers are the demand side of a market, and are the buyers of the industry's products. The basic customer needs that are served by a market define an industry's boundary.
- Failure to appropriately identify boundaries can actually cause the business to lose out on market share i.e. Coke - water and orange juice market.
industry and sector
an important distinction should be made between an industry and a sector. A sectors is a group of closely related industries. eg. computer component industry, computer hardware industries and computer software industry.
industry and market segments
it is important to recognize the difference between an industry and the market segments within that industry. Market segments are distinct groups of customers within a market that can be differentiated from each other on the basis of their individual attributes and specific demands. companies acknowledge these segments by creating products to appeal to different segments (eg light beer vs regular or desktop vs laptop computers).
Changing industry boundaries
- Industry boundaries may change over time as customer needs evolve, or as emerging new technologies enable companies in unrelated industries to satisfy established customer needs in new ways.
- examples of change of boundaries would be the soft drink market (coca cola and the bottled water and fruit based soft drinks competition or mobile phone and computer operators direct competition due to the smartphone.
Tools that mangers can use to perform industry analsis
- competitive forces model
- strategic group analysis
- industry life-cycle analysis.
Competitive Forces Model
PCP -- not recognised by porter
- 1. the risk of entry by potential competitors
- 2. the intensity of rivalry among established companies within an industry
- 3. the bargaining power of buyers
- 4. the bargaining power of suppliers
- 5. The closeness of substitutes to an industry's products
- 6 - porter did not recognise this one - power of complement providers
- Porter argued that as the forces grow stronger they limit the ability of established companies to raise prices and earn greater profits.
- A strong competitive force can be regarded as a threat because it depresses profits. A weak competitive force can be viewed as an opportunity as it allows a company to earn greater profits. The strength of the forces may change overtime as industry conditions change. Managers face the task of recognizing how changes in the forces give rise to new opportunities and threats, and formulating appropriate strategic responses. In addition, it is possible for a company, through its choice of strategy, to alter the strength of one or more of the forces to its advantage.
Risk of entry by potential competitors
- Potential competitors are companies that are not currently competing in an industry bu have the capability to do so if they choose (e.g. cable tv risk to phone companies as digital technologies have allowed cable companies to offer telephone service over same cables).
- A high risk of entry by potential competitors represents a threat to the profitability of established companies.
- US Airline industry has been high for past 2 decades with Virgin america and jet blue helping to drive down prices and profits in the industry.
- If the risk of new entry is low, established companies can take advantage of this opportunity to raise prices and earn greater returns.
- The risk of entry by potential competitors is a function of the height of barriers to entry. The greater the costs potential competitors must bear to enter an industry, the greater the barriers to entry, and the weaker this competitive force.
- Important barriers to entry include:
- Economies of scale: reduction of unit costs attributed to a larger output (cost savings achieved by mass production - high risk to the company as they must be able to build large production facilities to accomodate.
- Brand loyalty: Preference of consumers for the products of established company.
- absolute cost advantages: a cost advantage that is enjoyed by incumbents in an industry and that new entrants cannot expect to match - e.g. superior production costs, control of particular inputs required and access to cheaper funds - results in a weaker threat of entry.
- customer switching costs: costs consumers must bare from switching from existing company to new entrant e.g. switching from a computer operating system to another that does not support existing complementary products - deters people from switching.
- Government regulation: government regulation can prohibit companies from entering a market - deregulation can lower the barriers to entry and cause more competition.
Rivalry among established companies
- Rivalry refers to the competitive struggle between companies within an industry in order to gain market share from each other. The competitive struggle can be fought using price, product design, advertising and promotional spending, direct selling efforts and after-sales service and support.
- Intense rivalry implies lower prices or more spending on non-price competitive strategies, or both. Because intense rivalry lowers prices and raises costs, it squeezes profits out of an industry.
- The intensity of rivalry among established competitors is largely a function of:
- Industry competitive structure: number and size distribution of companies in it.Industry structures vary but usually the more fragmented an industry the more chance of a price war which depresses industry profits and is considered a threat rather than an opportunity.
- Industry demand: The level of industry demand is the second determinant of the intensity of rivalry among established companies. Growing demand from new customers or additional purchases by existing customers tend to moderate competition by providing greater scope for companies to compete for customers. growing demand reduces rivalry and declining demand increases. Declining demand is a major threat.
- Cost Conditions: In industries where fixed costs are high, profitability tends to be highly leveraged to sales volume, and the desire to grow volume can spark intense rivalry. cost cutting creates intense rivalry and is often done by companies struggling to pay fixed costs.
- Exit barriers: economic, strategic and emotional factors preventing a company from exiting an industry. e.g. air delivery system - guarantee to deliver to major cities means that they cannot stop delivering to cities with weak demand - employees have ownership in company stock and are financially dependent as well as being first movers leaving them emotionally tied to the industry.
Bargaining power of Buyers
- An industry's buyers may be the individual customers who consume its products or the companies that distribute an industry's product to end-users (e.g. retailers and wholesalers).
- The bargaining power of buyers refers to the ability of buyers to bargain down prices charged by companies in the industry, or to raise the costs of companies in the industry by demanding better product quality and service. By lowering prices and raising costs, powerful buyers can squeeze profits out of an industry. Weak buyers bargaining power means companies can raise costs and lower quality.
- Buyers are most powerful when:
- there are lots of small companies and relatively few buyers
- Buyers purchase in large quantities (bargain for price reductions)
- Supply industry depends on buyers for large percentage of total order.
- Switching costs are low so buyers can pit supplying companies against each other to force down prices.
- When it is economically feasibile for buyers to purchase an input from several companies at once so buyers can pit companies.
- Buyers can threaten to enter the industry and independently produce the product thus supplying their own needs.
- automobile component supply industry is an industry in which buyers have strong bargaining power. auto makers can threaten to make the component themselves to drive down prices.
- Changing industry conditions can allow buyers to gain power over suppliers of and demand lower prices (e.g. hospitals and suppliers of pharmaceuticals).
Bargaining power of suppliers
- The bargaining power of suppliers refers to the ability of suppliers to raise input prices, or to raise the costs of the industry in other ways - eg. providing poor quality inputs or poor service.
- Powerful suppliers squeeze profits out of an industry by raising the costs of companies n the industry. Powerful suppliers are a threat. Suppliers are most powerful when:
- The product that suppliers sell has few substitutes and is vital to the companies in an industry.
- The profitability of suppliers is not significantly affected by the purchases of companies in a particular industry - industry is not an important customer to the suppliers.
- Companies in an industry would experience significant switching costs if they moved to the product of a different supplier because a particular supplier's products are unique of different - company depends on supplier.
- Supplier threatens to enter customers industry and use inputs to produce a product that would compete directly.
- Companies in the industry cannot threaten to enter their suppliers' industry and make their own inputs as a tactic for lowering the price of inputs.
- powerful supplier - intel supplies 85% of chips used in PCS - can purchase from AMD but still must turn to Intel for bulk of supply as competitors cannot match scale and efficiency. Powerful bargaining position can charge higher prices.
The products of different businesses or industries can satisfy similar customer needs e.g. coffee industry compete indirectly with those in tea and soft drink industries as they all serve customers with needs for nonalcoholic drinks. If price of product rises too high then consumers may switch to lower priced substitutes. If there are no close substitutes to products then companies can raise the prices e.g. micro-process companies like intel and AMD.
sixth force - complementors (GROVE)
Complementors are companies that sell products that add value to the products of companies in an industry because, when used together, the use of the combined products better satisfies customer demands e.g. software applications to the PC industry. When the number of complementors is increasing and producing attractive complementary products, demand increases and profits in the industry can broaden opportunities for creating value. If compementors are weak, and are not producing attractive complementary products that can become a threat.
The systematic analysis of forces in the industry environment using porters framework is a powerful tool that helps managers to think strategically. It is important to recognize that one competitive force often affects others and all forces need to be considered when performing industry analysis.
Strategic Groups Within Industries
- Companies in an industry often differ significantly from one another with regard to the way they strategically position their products in the market. Factors such as the distribution channels they use, the market segments they serve, the quality of their products, technological leadership, customer service, pricing policy etc affect product position.
- Within most industries it is possible to observe groups of companies in which each company follows a business model that is similar to that pursued by other companies in the group,but different from the business model followed by companies in other groups. These different groups of companies are known as strategic groups.
- E.g pharmaceutical industry - proprietary group operate on high risk high reward and spend money on R&D and development of new high profile drugs. risky - 1 out of 5 pass clinical trials (20%) - charge high price for patented drugs.
- Generic drug strategic group -focus on manufacture of generic drugs where patents have expired. produce low cost copies of drugs developed by propriety companies. They have low R&D spending, production efficiency and focus on low-price. Pursuing low risk-low return strategy.
- Implications of strategic groups: companies pursuing similar models - viewed as substitutes for each other. closest competitors are those in their strategic group. E.g low cost companies compete with each other not high cost companies. If one gains market share then it could cause another to go bankrupt eg. kmart from walmart and target growth. - porters is different on each strategic group because of their strategy. while bargaining power of buyers is low for propriatry drug manufacturers and they can charge high prices, it is high for generic due to substitues, therefore prices are lower.
- The role of mobility barriers: some strategic groups are more desirable than others because competitive forces open up greater opportunities and present fewer threats. Mobility barriers are within-industry factors that inhibit the movement of companies between strategic groups. They include barriers to enter and exit from existing group e.g. forest labs moving from generic pharm to proprietary would be high because they do not invest in R&D and building would be expensive.
- Over time,companies in different groups develop different cost structures, skills and competencies hat allow them different pricing options and choices. A company contemplating entry into another strategic group must evaluate if it has the the ability to imitate and outperform competitors in that group.
- It is important to determin the sources of similarities and fifference among companies n an industry to understand the nature of competition in an industry. This analysis often reveals new opportunities to compete in an industry by developing new products to better meet the needs of customers. It can also revel emerging threats that can be effectively countered by changing competitive strategy.
Industry lifestyle analysis
- Changes that take place in an industry over time are an important determinant of the competitive forces of the industry (and opportunities and threats)There are 5 industry environments:
- Embryonic: industry just beginning to develop - growth is slow because of unfamiliarity and prices are high due to inability of company to reap any type of economy of scale and poorly developed distribution channels. Barriers to entry can be quite high and established companies are protected. can be creation of one companies innovation such as Intel, Xerox, Hoover, Fedex and Google. (can capitalize on lack of rivalry and build strong hold on market)
- Growth Industries: Once demand for the product begins to increase. new customers enter the market once they become familiar with the product. Prices fall because they can have economy of scale and distribution channels. at the beginning of growth threat from potential competitors is higher. New entrants can be absorbed into the industry so rivalry is low still. Strategically aware companies prepare for intense competition of coming industry shakeout.
- Industry Shakeout: Rate of growth slows and rivalry becomes intense. Companies are accustomed to rapid growth and are still operating to accommodate but demand is no longer growing and are left with excess capacity. To use capacity companies often cut prices which can result in a price war which drives inefficient companies into bankruptcy and deters an new entrants.
- Mature Industries: after shakeout market is saturated and demand is generally replacement demand and growth is low or zero. As the industry enters maturity barriers to entry increase and threat of entry from potential competitors decreases. Competition for market share develops = price wars. Has happened in airline and PC industries. Companies focus on minimizing cost and building brand loyalty (e.g. frequent flyer) most companies have consolidated and become oligopolies eg. beer industry, breakfast cereal and pharmaceutical industries (office supplies too) most companies try not to enter into price wars but is threatened by price wars when companies are fighting to maintain revenue in face of declining demand. periodic price wars are seen in airline industry.
- Declining Industry: Eventually most industries decline and growth becomes negative (technological substitution - air travel instead of rail, social - greater health consciousness impacting tobacco, Demographic - declining birthrate damaging market for baby and child products, international competition - low cost foreign competition - steel. Rival usually increases and with that comes the threat of severe price competition.
A third task of industry analysis is to identify the opportunities and threats that are characteristic to different kinds of industry environments in order to develop an effective business model and competitive strategy. Managers tailor strategys to changing industry conditions and recognize the crucial points in an industry's development.
Limitations of models for industry analysis:
- Life cycle issues: life cycle model is a generalization. Lifecycles do not always follow the pattern illustrated in text. in some cases growth is so rapid that embryonic stage is skipped while other industries fail to pass embryonic stage. Industry growth can be revitalized after long periods of decline through innovation or social change e.g. health boom brought bike industry back to life. Time span of stages can vary significantly from industry to industry. Other industries skip mature and go straight to decline (e.g vacuum tubes replaced by transistors) Others go through several shakeouts before entering full maturity e.g. currently with telecommunications industry.
- Innovation and change: Competition can be viewed as a process driven by innovation. successful innovation can transform the nature of industry competition. recently, innovation has resulted in reduction of fixed costs of production consequently reducing barriers to entry and allowing new, smaller enterprises to compete with large orgs. Punctuated equilibrium happens with innovation where a stable industry is hit with rapid change before settling down again. Usually industry becomes more fragmented. happened to steel industry due to innovation (electric arc furnace). can become more consolidated, but that is less common than fragmentation. Innovation seems to encourage fragmentation. During a period of rapid change when industry structure is being revolutionized by innovation, value typically migrates to business models based on new positioning strategies. Because the competitive forces and strategic group models are static, they cannot adequately capture what occurs during periods of rapid change in the industry environment when value is migrating.
- Company differences: another crizicism of industry models is that they overemphasize the importance of industry stracuture as determinant of company performance and underemphasize the importance of variations or differences among companies within an industry or a strategic group. Studies suggest that a companies resources and capabilities are far more important determinants of its profitability than the industry or strategic group of which the company is a member. Companies perform against the norm in different industries showing that the models are imperfect predictors of enterprise profitiability. A company will not be profitable just because it is in an attractive industry or strategic group.
macroenvironment - direct impact on all forces in competitive forces model
- Macroeconomic forces:
- 4 most important: growth rate of economy, interest rates, currency rates and inflation rates.
- Global forces: barriers to international trade and investment have tumbled and more and more countries have enjoyed sustained economic growth. International barriers have lowered and companies are moving into foreign markets that were previously unavailable to them, but those markets are moving into domestic competition making the global market place more competitive (more opps and threats).
- Technological forces: Technology has accelerated and can make established products obsolete overnight and create new product possibilities - both creative and destructive - opp and threat. Can rapidly reshape industry structure. E.g. internet lowered barriers to entry into news industry - advertisers have more options and can bargain down prices.
- Demographic forces: changes in age, gender, sex, ethnic origin, race etc. currently most industrialized nations are experiencing the aging of their populations as a consequence of falling birth and death rates and aging of baby boom gen. as pop ages ops for organizations that cater to older people are increasing.
- Social Forces: changing social mores and values - eg trend toward greater health consciousness. companies that have done well have recognised this shift early e.g. miller brewing company - miller lite. bad for tobacco industry.
- Political and Legal Forces: strong trend towards deregulation has seen massive fare wars and turmoil in the airline and telecommunication industries.
Internal analysis - identifying strengths and weaknesses of the company.
coupled with external analysis gives managers the information to choose business model and strategies that will enable a sustained competitive advantage.
Roots of competitive advantage
a company has a competitive advantage over its rivals when its profitability is greater than the average profitability of all companies in its industry. If it does it for a number of years it is sustained (e.g. walmart and Strabucks)
Firm specific strengths that allow a company to differentiate its products and/or achieve substantially lower costs to achieve a competitive advantage. e.g. starbucks management, higher employee productivity, lower costs. Made up of resources (assets of a company - e.g. tangible - land, buildings etc, intangible - reputation, intellectual property e.g patents.) and capabilities - company's skills at coordinating skills and putting them to productive use e.g. rules, routines, procedures.
for a company to possess a distinctive competency it must:
- have either:
- 1. a firm specific and valuable resources and capabilities(skills) to use it
- 2. firm specific capability to manage resources
- If they have both it is strongest.
distinctive competencies can shape strategies which can build and create distinctive competencies.
- four factors help a company to build and sustain CA - Superior:
- Efficiency: (production - less inputs to get the output is more efficient). most common is employee efficiency e.g. starbucks placing most used syrups at front to decrease coffee making time.
- Quality: when excellence is built into a product consumers must pay more for it. quality reliability is when a product consistently performs the function it was designed for e.g. toyota cars - prepared to pay more for reliability. quality can be of service and of goods e.g. reliability of trains to run to schedule
- Innovation: can be either product or process innovation. product innovation involves development of products that are new to the world or have superior attributes to existing products. process innovation is the development of a new process for producing products and delivering to customers eg. toyota lean production system 0 just in time inventory systems and self managing teams - staples applied supermarket business model to retail office supplies. MOST IMPORTANT BUILDING BLOCK OF COMPETITIVE ADVANTAGE
- Customer responsiveness: time that it takes for a good to be delivered or a service to be performed. Customer responsiveness important to customers and willing to pay a premium for it.
balanced score card
- used to measure the business in different perspectives:
- internal business (operations)
- Innovation and learning
tests of competitive advantage - RBV
value chain analysis (internal analysis)
combine with strategic cost analysis and benchmarking
why companies fail
- icarus paradox (become so successful they forget about the competition)
- prior strategic commitments
business level strategies
- Porters generic
- Cost leadership: protected by competition by price , purchase in large quantities increase bargaining power, however competitors may imitate cost structure and cost reductions may effect demand.
- Differentiation: create value to customers and can charge a premium price, however, it is hard to maintain the difference in customers eyes, it is subject to imitation, if they are patents or first movers then eventually that runs out.
- Focus: focused either low cost or differentiation. It is focused on just a particular section of the market. Only having a small customer base means that fixed costs can be high and they would be competing with those in the differentiation strategy. Niche can disappear due to technology changes.
- Broad differentiation: focus on cost leadership and differentiation. They create a product that enables high profitability. With the profits they are able to reinvest in new technology to weaken competitors.
the process of designing products to satisfy customers; needs
customer groups and market segmentation
deciding what products to offer to which customer groups.
- the way a company decides to group customers based on important differences in their needs to gain CA. Three approaches:
- No market segmentation: targeted at average customer - CA achieved through low price customer responsiveness at minimum.
- High Market segmentation: customer responsiveness is high. CA through differentiation
- Focused market segmentation: product is offered to one or a few market segments. customer response in these markets is high. ca is found through focus on low price or differentiation.
generic business level strategy
a strategy that gives a company a specific form of competitive position and advantage vis-a-vis its rivals that results in above average profitability.
a business model that pursues strategies that work to lower its cost structure so it can make and sell products at a lower cost that its competitors. (ie Walmart)
Focused cost leadership
- a business model based on using cost leadership to compete for customer by offering low-priced products to only one of a few market segments
- ryan air first low cost leader in europe - dublin and london but able to rapidly expand.
pursues business level strategies that allow it to create a unique product that customers perceive as different distinct in some important way. - must make sure that the cost of the distinction does not take away profits.
- price leadership
- nonprice competeition
- market penetration (increase market share)
- product development
- market development
- product proliferation (many products and market segments)Nike
- Capacity control