competitive strategy
Alku_1301
HI60062c.ppsx
Lecture 2c: External Environment
Part C
HI6006 Competitive Strategy
Learning Objectives in this week
Understand a firm’s external environment and be able to analyse it
Differentiate between the general environment and the industry environment
Apply an External Analysis to any industry
An industry is a group of firms that produce similar products or offer similar services that are close substitutes.
Compared with the general environment, the industry environment has a more direct effect on a firm’s:
Strategic competitiveness
Ability to earn above-average returns
Industry Environment Analysis
The Five Forces Model
The Five Forces Model (Porter)
An analytical tool used to help firms understand the attractiveness of an industry as measured by its profitability potential
Assumes that an industry’s profitability is a function of interactions among the five forces
Suppliers, buyers, rivalry, product substitutes and potential new entrants to the industry.
Five Industry Forces
Usefulness of the 5 Forces Industry Analysis Model
Historically, firms concentrated only on direct competitors
Focusing on wider industry members highlights potential opportunities and competitors
e.g. Suppliers can integrate forward, or buyers integrate backward and become competitors
Five forces analysis helps firms understand the profitability potential of the industry in which they compete
1. Industry Rivalry
Within and among the existing layers in an industry, there is considerable rivalry as they compete for customers, to improve productivity, brand recognition, market share etc.
It is important to know one’s relative place in the industry, e.g. relative size, market share, consumer trust, ……………………
(consider some more measures of ‘relative place’)
Strategies to adopt if industry rivalry is rife: price war, improved service, innovation and differentiation
2. Threat of New Entrants
High entry barriers tend to increase the returns for existing firms in a industry and may allow some firms to dominate the industry
Strategies to combat this:
Industry incumbents will try to maintain high entry barriers in order to discourage potential competitors from entering the industry, such as:
Economies of scale, Product differentiation, Capital requirements, Switching costs, Access to distribution channels, Cost disadvantages independent of scale, Government policy.
Consider industries where the above-mentioned strategies are practiced.
How do they retaliate when a new entrant enters their industry?
3. Power of Suppliers
Suppliers to an industry have relative power when:
their inputs are critical to our success
they are few in number
some are very large and may have a monopoly or oligopoly
no substitute products are available
the firms in this industry are not the most significant customers for these suppliers
Supplier power increases when:
suppliers create high switching costs
suppliers could potentially integrate forward into our industry.
4. Bargaining Power of Buyers
Buyers hold bargaining power when:
they hold a high relative market share
they make up a high percentage of a player’s annual sales
they could easily boycott us by switching to another industry’s products, as our buyers’ switching costs have remained low
the products of our industry are undifferentiated (standardized)
our buyers could potentially integrate backwards into our industry
5. Threat of Substitute Products
Advances in technology often lead to substitute products becoming available (e.g. plastic, digital photography, 3D printing, dental veneers ………)
The threat of substitute products is high if:
our industry has neglected to create switching costs
substitute products are offered at lower prices
substitute product’s quality and performance are equal to or greater than the existing product
Strategy to combat the threat of substitute products: an industry typified by innovation and a differentiated product base
The Industry is Unattractive if:
Intense rivalry amongst existing players
Strong bargaining power rests with Suppliers
Strong bargaining power rests with Buyers
Imminent threat of Substitute Products
Low barriers-to-entry for new competitors
The Industry is Attractive if:
Low or moderate rivalry among existing players
Supply and/or Buyer power is low
No existing or foreseen threats of substitute products
Switching costs are high
Case Analysis
Read the Case – looking to identify (highlight) key strategic issues
Decide which Strategy Model or theoretical concepts are relevant to this case
Use the model as your ‘template’ to summarise the key issues identified in the case
Form a picture of how this company (case) applies the strategy model or theoretical concepts
Evaluate how well the company (case) has applied Strategy Theory
Case Analysis – Otis [Case 12, p533]
Consider how external forces have shaped the elevator industry since first invented in1852
Do a PESTEL analysis of the elevator industry currently
Apply the 5 Forces model to this industry, based on the facts of the case
Tutorial Activities in small groups
Examine the mini-case regarding German luxury cars (p57) in the light of the 5 Forces model
Apply a PESTEL analysis to BMW, Mercedes Benz or Audi (note: the same opportunities and threats will apply to each of them)
3. Which elements (see slide 6) of the General Environment are significant to the future of the German luxury car industry.
