Layers of the business environment
Scanning the environment, 3 levels:
o PESTEL political, economic, social, technological factors
– Industry (customers, suppliers and competitors)
o Five forces
o Cycles of competition
– Competitors and markets
o Strategic groups
o Market segments
o Critical Success factors
The macro and competitor analysis of industry are essential as well, but are relatively more self-explanatory.
Industry: Porterâs five forces
1. SUPPLIER POWER analysis of the determinants of relative power between the producers in an industry and their suppliers is precisely analogous of the relationship between producers and the buyers.
o Concentration of suppliers
o Switching costs
o Threat of forward integration
2. THREAT OF ENTRY
– If an industry earns a return on capital in excess of its costs of capital, it will act as a magnet to firms outside the industry.
– Sources of barriers to entry:
– Capital requirements
– Economies of scale: how many products to sell for break-even?
– Absolute cost advantage: result from the acquisition of low-cost sources of raw materials.
-Product differentiation: brand recognition or loyalty
– Access to distribution channels
– Legal/regulatory barriers: licenses
– Retaliation: expectation as to possible retaliation by established firms.
– Example: increased health awareness in US leads to increasing demand on fruitjuices and smoothies.
– Industries protected by high entry barriers tend to earn above-average rates of profit
– Barrier to entry: in most industries, new entrants cannot enter on equal terms with those of established firms. Usually measured as the unit cost disadvantage faced by would-be entrants.
3. BUYER POWER
– The firm in an industry compete in two types of markets.
– Input market: purchase raw materials, components and financial and labor service.
– Output market: sell their goods and services to customers.
– Buyerâs price sensitivity ï the extent to which buyers are sensitive to the prices charged by the firms in an industry depends on 4 mainfactors.
1. The greater the importance of an item as a proportion of total cost, the more sensitive buyers will be about the price they pay
2. The less differentiated the products of the supplying industry, the more willing the buyer is to switch suppliers on the basis of price
3. The more intense the competition among buyers, the greater their eagerness for price reductions from their sellers
4. The more critical an industryâs product to the quality of the buyerâs product or service, the less sensitive are buyers to the prices they are charged.
– Relative bargaining power ï the refusal to deal with the other party. Depends on the credibility and effectiveness.
1. Size and concentration
2. Buyerâs information
3. Ability to integrate vertically
– the price that consumers are willing to pay for a product depends, in part, on the availability of substitute products.
– SUBSTITUTE COMPETITION
– Buyerâs propensity to substitute
– Relative prices and performances of substitutes
– Example: newspapers, travel agencies and telecommunications providers have all suffered severe competition from internet-based substitutes. (same product by a different process)
5. INDUSTRY RIVALRY
– rivalry between established competitors. Competition among the firms within the industry. Six factors:
-1Concentration: refers to the number and size distribution of firms competing with a market.
-2 Concentration ratio: the combined market share of the leading producers
– 3Diversity of competitors: the extent to which a group of firms can avoid price competition in favour of collusive pricing practices depends on how similar they are in their origins, objectives, costs and strategies.
– 4Product differentiation: the more similar the offerings among rival firms, the more willing are the costumers to switch between them and the greater is the inducement for firms to cut prices to boost sales.
– 5Excess capacity and exit barriers: balance between demand and capacity.
– 6Barriers to exit: costs associated with capacity leaving an industry.
– Cost conditions: scale economies and the ratio of fixed to variable.
– Cost structure: where fixed costs are high relative to variable costs, firms will take on marginal business at any price that covers variable costs.
Applying five forces analysis:
– Forecasting industry profitability
o If we can forecast changes in industry structure we can predict likely impact on competition and profitability
– Strategic planning
o Once we know which structural features of the industry support profitability and which depress profitability, we can choose a favorable positioning within the industry
Porters view of strategy:
– (1) Strategy as fit
– (2) There are barriers to competition
– (1+2) Strategy is a process of identifying and occupying superior positions (the firm effect) in attractive industries (the industry effect)
– This requires analytical skills
1 – Despite the vast number of external influences that
affect every business enterprise, our focus is the firmâs industry environment which we analyze
in order to evaluate the industryâs profit potential and to identify the sources of competitive
2 – The centerpiece of the approach is Porterâs five forces of competition framework, which
links the structure of an industry to the competitive intensity within it and to the profitability
that it realizes. The Porter framework offers a simple yet powerful organizing framework for
identifying the relevant features of an industryâs structure and predicting their implications for
3 – The primary application for the Porter five forces framework is in predicting how changes
in an industryâs structure are likely to affect its profitability.
A key issue is identifying the industry within which a firm competes and recognizing
its boundaries. By employing the principles of substitutability and relevance, we can delineate
meaningful industry boundaries.
4 – The industry analysis allows to make a first approach at identifying the sources of
competitive advantage through recognizing key success factors in an industry.
Chapter 4 ï Further topics in industry and competitive analysis
Book page 81-102, slides week 1
Arguing about a missing force in Porterâs model
Complements ï ï economic theory depict two types of relationship between different products: substitutes and complements. While the presence of substitutes decreases the value of a product, complements increase its value: without ink cartridge for example, my printer has very little value to me. Other examples are the value of a car depending on the availability of gasoline or insurance and repair services. The value of a razor depends on the supply of blades and shaving foam. So, the suppliers of complements create value for the industry and can exercise bargaining power.
Intense and rapid competitive moves, in which competitors move quickly to build advantages and erode the advantages of their rivals. (a general feature of industries today) If a industry is hypercompetitive, their structures are likely to be less stable than in the past. Superior profitability will tend to be transitory, and the only route to sustained superior performance is through continually recreating and renewing competitive advantage.
the essence of strategic competition is the interaction among players. This theory allows us to model the competitive interaction of the five forces analysis. (in five forces only a little insight in competition) The model offers two contributions to strategic management.
o It permits the framing of strategic decisions. Game theory provides a structure, a set of concepts and a terminology that allows us to describe and understand a competitive situation.
o It can predict the outcome of competitive situations and identify optimal strategic choices.
o Five aspects of strategic behavior through which a firm can improve its competitive outcomes:
ï,§ï Coorperation ï ï its ability to encompass both competition and coorperation. (co-opetition: competitive/cooperative duality of business relationships)
ï,§ï Deterrence ï ï one way of changing a gameâs equilibrium. (afschrikken)
ï,§ï Commitment ï ï for deterrence to be effective if must be credible, which mean being backed by commitment. âbinding in an organization to a future course of actionsâ
ï,§ï Changing the structure of the game ï ï creative strategies can change the structure of the competitive game.
ï,§ï Signaling ï ï the selective communication of information to competitors designed to influence their perceptions and hence provoke or surpress certain types of reaction.
Game theory is usefull because it can help us understand business situations. It provides us a set of tools that allows us to structure our view of competitive interaction.
– Competitor analysis
In highly concentrated industries, the dominant feature of a companyâs competitive environment is likely to be the behavior of its closest rivals. How can information help competitors to predict their behavior?
o Competitive intelligence ï ï involves the systematic collection and analysis of information about rivals. For incoming decision making.
o A framework for predicting competitor behavior:
ï,§ï Competitorâs current strategy
ï,§ï Competitorâs objectives
ï,§ï Competitorâs assumptions about the industry
ï,§ï Competitorâs resources and capabilities
Competitors and markets
For a more detailed analysis of competition focus on markets that are drawn more narrowly in terms of both products and geography. This process if disaggregating industries into specific markets = segmentation. Purpose is to identify attractive segments, select strategies for different segments and determine how many segments to serve. 5 stages:
1. Identify key segmentation variables
2. Construct a segmentation matrix
3. Analyze segment attractiveness
4. Identify the segments key success factors
5. Select segment scope
Identifiying Key success factors
– How do customer choose?
– What do we need to survive the competition?
What resources and capabilities do we need to deliver these Key success factors ï
A strategic group is a group of firms in an industry that follow the same or similar strategies
It is the group of firms in an industry following the same or a similar strategy along the strategic dimensions. These dimensions might include: product range, geographical breadth, choice of distribution channel, level of product quality, degree of vertical integration, choice of technology etc.
– Identifying principal strategic variables which distinguish firms
– Position each firm in relation to these variables
– Identify clusters
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