A management assignment
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490_F2F_Session3notes.pptProfessor Ranfeng Qiu
Strategic Management
Class 3
MGMT 490
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Professor Ranfeng Qiu
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Professor Ranfeng Qiu
Review of last class
The general environment
7 segment
Value chain
The value “wedge”
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Five Forces model
A firm’s industry environment
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Studying this chapter should provide you with
the strategic management knowledge needed to:
Learning Objectives
Explain the importance of analyzing and understanding the firm’s external environment.
Define and describe the industry environment.
Identify the five competitive forces and explain how they determine an industry’s profitability potential.
Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them.
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Professor Ranfeng Qiu
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Professor Ranfeng Qiu
Industry Environment Analysis
- Industry Defined
A group of firms producing products that are close substitutes.
Firms use a rich mix of different
competitive strategies to pursue above-average returns when competing in a particular industry.
An industry’s structural characteristics influence a firm’s choice of strategies
- Industry concentration
- Economies of scale
- Switching costs
- Economies of experience
- Learning curve
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Industry Concentration the function of the number of firms and their respective shares of the total production in a market.
others
others
Industry Concentration
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Economies of Scale
- Economies of scale - Fixed costs/unit fall as volume grows
- If a firm can’t capture x share of the market -
X
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Fixed costs:
- Do not change with volume
- Rent, salaries, depreciation, etc
Marginal (variable) costs:
- incurred for each unit, VC/unit is fixed at all levels of output
- Costs of goods sold (raw materials and others)
Professor Ranfeng Qiu
Switching Costs
Switching costs - the one-time costs customers incur when they buy from a different supplier.
What costs?
What should sellers do?
Buyer
Potential supplier
Current supplier
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Economies of Experience
- First mover advantage
- How do late movers respond?
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Questions?
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- A profit pool entails the total profits earned in an industry at all points along the value chain.
- Firms must first calculate profit pools in their industry, and ask
- “who gets what proportion of total value and why?”
Inter-industry analysis
Profitability differences across selected industries
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Professor Ranfeng Qiu
Vertical Integration
A player is backward integrated when it competes in the industry of its suppliers.
A player is forward integrated when it competes in the industry of its buyers.
Vertical integration – forward and backward integration
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Moreover, we should understand the dynamism of these players in the market. vertical integration includes both forward and backward integration.
On the one hand, suppliers can become competitors by integrating forward.
On the other hand, buyers or customers can become competitors by integrating backward.
An example of vertical integration and its economic sense
Professor Ranfeng Qiu
The economic sense of vertical integration:
greater efficiency in the focal business
lower the power of buyers
lower the power of suppliers
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For example, Pepsi company is buying metal cans from metal can suppliers and selling soda to fast food chain. If Pepsi is able to make its own cans and enter the fast food industry to sell soda it becomes more powerful. The vertical integration leads to greater efficiency in the focal business. It lowers the power of buyers and also lowers the power of suppliers.
Industry Environment
- The set of factors directly influencing a firm and its competitive actions and competitive responses
Threat of new entrants
Power of suppliers
Power of buyers
Threat of product substitutes
Intensity of rivalry among competitors
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The Five Forces
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Figure 2.2 The Five Forces of Competition Model
The Five Forces Analysis
- The stronger a force, the more value it captures from the total value pie, and the less it leaves for the other players.
Professor Ranfeng Qiu
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Threat of New Entrants:
Barriers to Entry
- Economies of scale
- Product differentiation
- Capital requirements
- Switching costs
- Access to distribution channels
- Cost disadvantages independent of scale
- Government policy
- Expected retaliation
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Barriers to Entry
- Economies of Scale
Marginal improvements in efficiency that a firm experiences as it incrementally increases its size
- Factors (advantages and disadvantages) related to large- and small-scale entry
Flexibility in pricing and market share
Costs related to scale economies
Competitor retaliation
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Barriers to Entry (cont’d)
- Product Differentiation
Unique products
Customer loyalty
Products at competitive prices
- Capital Requirements
Physical facilities
Inventories
Marketing activities
Availability of capital
Professor Ranfeng Qiu
- Switching Costs
One-time costs customers incur buying from a different supplier
New equipment
Retraining employees
Psychic costs of ending a relationship
- Distribution Channel Access
Stocking or shelf space
Price breaks
Cooperative advertising allowances
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- Cost Disadvantages Independent of Scale
Proprietary product technology
Favorable access to
raw materials
Desirable locations
- Government policy
Licensing and permit requirements
Deregulation of industries
- Expected retaliation
Responses by existing competitors may depend on a firm’s present stake in the industry (available business options)
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Barriers to Entry (cont’d)
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Bargaining Power of Suppliers
- Supplier power increases when:
Suppliers are large and few in number.
Suitable substitute products are not available.
Individual buyers are not large customers of suppliers and there are many of them.
Suppliers’ goods are critical to the buyers’ marketplace success.
Suppliers’ products create high switching costs.
Suppliers pose a threat to integrate forward into buyers’ industry.
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Bargaining Power of Buyers
- Buyer power increases when:
Buyers are large and few in number.
Buyers purchase a large portion of an industry’s total output.
Buyers’ purchases are a significant portion of a supplier’s annual revenues.
Buyers’ switching costs are low.
Buyers can pose threat to integrate backward into the sellers’ industry.
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Threat of Substitute Products
- The threat of substitute products increases when:
Buyers face few switching costs.
The substitute product’s price is lower.
Substitute product’s quality and performance are equal to or greater than the existing product.
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Online brokerage
Other communications
Radio, TV, website
Newspaper
Full service
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Intensity of Rivalry Among Competitors
- Industry rivalry increases when:
There are numerous or equally balanced competitors.
Industry growth slows or declines.
There are high fixed costs or high storage costs.
There is a lack of differentiation opportunities or low switching costs.
When the strategic stakes are high.
When high exit barriers prevent competitors from leaving the industry.
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Low entry barriers
Interpreting Industry Analyses
Suppliers and buyers have strong positions
Strong threats from substitute products
Intense rivalry among competitors
(Low profit potential)
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Unattractive
Industry
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Interpreting Industry Analyses (cont’d)
High entry barriers
Suppliers and buyers have weak positions
Few threats from substitute products
Moderate rivalry among competitors
(High profit potential)
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Attractive
Industry
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The inter industry analysis case (cont.)
Consumer goods post -Walmart
Now, can we explain why “consumer goods” lost their advantage when Walmart and other major retailers (Target, Costco, etc.) came into the market?
“Sneakers” industry
Consumer goods pre-Walmart
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Suppliers
The focal industry
Buyers
Suppliers
The focal industry
Buyers
Suppliers
The focal industry
Buyers
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In this figure, we see the value pools of three business sectors and the distribution of value/profits among different players. In the “sneakers” industry, we are able to see that the focal firm “sneakers” (i.e. Nike & Adidas) are able to capture more value compared with their suppliers (materials and manufacturers) and buyers (retailers) given their high power in the market. Another question then is why “consumer goods” (Proctor & Gamble, Rubbermaid, etc.) lost their advantage when Walmart and other major retailers (Target, Costco, etc.) came into the market? It is not difficult to answer the question – Walmart and other major retailers are “powerful”. The follow up question is what factors make Walmart/Target/Costco so powerful?
Figure 2.2 The Five Forces of Competition Model
- Profitability - attractiveness
- Threats and opportunities
- A direct effect on the firm’s strategic actions
A business tool to analyze the industry environment
Professor Ranfeng Qiu
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Complementors
- Complementors
The network of companies that sell complementary products or services or are compatible with the focal firm’s own product or service.
If a complementor’s product or service adds value to the sale of the focal firm’s product or service, it is likely to create value for the focal firm.
However, if a complementor’s product or service is in a market into which the focal firm intends to expand, the complementor can represent a formidable competitor.
Professor Ranfeng Qiu
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