Notesale: Turn your study into money

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Environmental Analysis
In order to move into a unique position so as to achieve competitive advantage it is
important to examine external conditions associated with an organisation
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In order to do so it is important to the Macro environment and the
industry environment
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We can distinguish two main models used to examine the external
environment of a firm
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Five forces of Porter (2008)
In essence, the job of the strategist is to understand and cope with competition
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Yet competition for
profits goes beyond established industry rivals to include four other competitive forces
as well: customers, suppliers, potential entrants, and substitute products
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As different from one another as industries might appear on the surface, the underlying
drivers of profitability are the same
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Porter (2008) identifies five forces: Threat of new entrants,
intra-industry rivalry, threat of substitute products, power of buyers and power of
suppliers
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Particularly when new entrants are diversifying from other markets, they can use
existing capabilities to shake up competition
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The threat of entry, therefore, influences the profit potential of an industry
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If entry barriers are low, the threat of entry is high and industry profitability is
moderated
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Supply-side economies of scale
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2
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These benefits arise in industries where a buyer’s
willingness to pay for a company’s product increases with the number of other
buyers who also utilize the company
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3
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The need to invest large financial resources in order
to compete can deter new entrants
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such as up-front advertising or research and development
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Access to distribution channels
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5
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Government policy can hinder or aid new entry
directly
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Or may
also make entry easier through subsidies, for example
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Microsoft for
example, has contributed to the loss of profitability among personal computer makers
by raising prices on operating systems
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A supplier group is powerful if:
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•
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The supplier group does not depend heavily on the industry for its revenues
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Industry participants face switching costs in changing suppliers
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There is no substitute for what the supplier group provides
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The supplier group can credibly threaten to integrate for- ward into the
industry
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The power of buyers
Powerful customers can capture more value by forcing down prices, demanding better
quality or more service, and generally playing industry participants off against one
another, all at the expense of industry profitability
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The industry’s products are standardized or undifferentiated
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Buyers face few switching costs in changing vendors
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For example, producers of soft drinks and beer have long
controlled the power of packaging manufacturers by threatening to make
packaging materials themselves
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For
example, Plastic is a substitute for aluminium or E-mail is a substitute for express mail
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Substitute products
or services limit an industry’s profit potential by placing a ceiling on prices
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Substitutes not only limit profits in normal times, they also reduce the bonanza an
industry can reap in good times
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The
better the relative value of the substitute, the tighter is the lid on an industry’s
profit potential
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The buyer’s cost of switching to the substitute is low
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Strategists should be particularly alert to changes in other industries that may make
them attractive substitutes when they were not before
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Intra-Industry rivalry
Rivalry among existing competitors takes many familiar forms, including price
discounting, new product introductions, advertising campaigns, and service
improvements
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The degree to which
rivalry drives down an industry’s profit potential depends, first, on the intensity with
which companies compete and, second, on the basis on which they compete
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Industry growth is slow
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Exit barriers are high
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Rivals are highly committed to the business and have aspirations for leadership,
especially if they have goals that go beyond economic performance in the
particular industry
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Price
competition also makes customers to pay less attention to product features and service
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Also, rivalry focused
on such dimensions can improve value relative to substitutes or raise the barriers facing
new entrants
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The five forces reveal why industry profitability is what it is
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They
help to understand Where does the company stand versus buyers, suppliers, entrants,
rivals, and substitutes and they also provide a baseline for sizing
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The heuristic is that the
stronger the collective impact of the five forces, the lower the combined profitability of
industry participants
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Strong competitive forces are regarded
as threats as they will depress profits, while weak competitive forces are regarded as
opportunities as they allow the potential for more profits
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Brandenburger and
Nalebuff (1995) believed that Porter didn’t consider dynamic environments
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They explain that to every action, there is a reaction
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Many people focus on their own position
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Managers can profit by using the insights
from the game theory to design a game that is right for their companies
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Successful business strategy is about actively shaping the game you play, not
just playing the game you find
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Cooperate to create a larger
pie and then compete in terms of how it is shared
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But not always
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Looking for win win strategies has
several advantages
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Second, because others may offer less resistance to win win moves
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And finally, imitation of a win win move is beneficial, not harmful
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It means looking for win-win
as well as win-lose opportunities
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The card helped GM to get prospective Ford buyers, for example
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The program
thus, gives Ford some breathing room to raise its prices
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The result therefore is a win-win scenario
between GM and Ford
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The game of business is all about
creating and capturing value
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Interactions take place among two dimensions
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The Value Net reveals two fundamental symmetries
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Understanding
those symmetries can help managers to come up with new strategies for changing the
game
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Drawing the Value Net for your business is therefore the first step toward changing the
game
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According to the game
theory, there are five: players, added values, rules, tactics and scope (PARTS)
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• The Players are the customers, suppliers, substitutors and complementors
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Therefore, it is smart to change who is playing the game
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It is possible to raise
your added value and to lower the added value of the other players
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It is possible to take advantage of the rules of
the game
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• The scope describes the boundaries of the game that can be expanded or
shrunk
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PARTS helps managers not only to think out of the box but also PARTS
provides the tools to enable them to do so

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