strategic management and theory

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Porters Five Forces Model

The Five (5) Forces Model explains how an industry competes

-Rivalry among established firms

-Risk of threat of new entrants

-Bargaining power of buyers

-Threat of substitute products

-Bargaining power of suppliers

Strategic Management

The Five Forces Model- New Entrants

Threat of new entrants is affected by:

Barriers to entry
Brand loyalty
Absolute cost advantages
Economies of scale
Switching costs
Government regulation

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The Five Forces Model-Established Firms

Rivalry among established firms is affected by:

Concentration of rivalry
Industry growth and demand
Product or service differentiation
Ratio of fixed costs to variable costs
High exit barriers
Diversity of competitors
High strategic stakes

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The Five Forces Model-Power of Buyers

The bargaining power of buyers (is high when)

Few buyers, high purchase
Single buyer, large account
Many small or weak sellers
Standardised item
When suppliers need us to maintain their economies of scale
Buyers buy from multiple source

Strategic Management

The Five Forces Model- Power of Suppliers

Bargaining power of suppliers (is high when)

We need them
There are only a few suppliers
When they have high product differentiation
When they have lots of buyers are who weak
When we need them as part of a broader, interconnected supply chain

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A Sixth Force: Customer Loyalty

Customer loyalty

Same strategic managers argue that customer loyalty can change the Five Forces because customers who are loyal can defy the forces and lift the firm to success

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Strategic Groups

A set of firms emphasising similar strategic dimensions to use a similar strategy
This means that firms may partner to create a “strategic group” to take advantage of opportunities or address threats or shortages in their industry
Example: Airlines (OneWorld alliance)

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Competitor Analysis Components

Future Objectives
Current strategy
Assumptions
Capabilities

Competitor’s Response

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Types of Business Level Strategy

Cost Leadership (cost, broad target)
Differentiation (unique, broad target)
Focused cost leadership (cost, narrow target)
Focussed differentiation (unique, narrow target)

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Risks of Cost Leadership

Process may become obsolete because of competitor innovation
Too much focus on cost reduction versus perceptions
Imitation can occur

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Risks of Differentiation Strategy

Price difference may be too high for customers
Differentiation may become less “value for money” over time
Narrowing of the perception of differentiation

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Integrated Cost Leadership/Differentiation Strategy

It is possible to integrate the two strategies for different products or markets for the firm

Strategic Management

A Model of Competitive Rivalry

Drivers of competitive behaviour, lead to
Competitor analysis, leads to
Action and response, leads to
Outcomes of inter-firm rivalry, leads to
Feedback, leads to
Ability for action and response, leads to
Outcomes (second cycle)

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Competitor Analysis

Market Commonality
Resource Similarity

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Drivers of Competitive Actions and Responses

Awareness
Motivation
Ability
Resource dissimilarity

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Competitive Rivalry

Likelihood of competitor attack depends on:

First mover incentives
Organisational size
Quality (performance, features, flexibility, durability, aesthetics, service, convenience, accuracy, timeliness)

Strategic Management

Likelihood of Response

Type of competitive action
Actor’s reputation
Market dependence (by the firm)

Strategic Management