Chapter 2 Flashcards
Where did Michael Porter present hi framework of bus analysis?
In a series of articles and his text Competitive Advantage 1985
What are the 2 frameworks by Porter that combines 2 levels of analysis at the industry level?
5-forces model/ industry structure analysis
Value-chain analysis
What is the 5 forces model?
Concerned with evaluating the industry you are currently operating in or wish to enter
What is value chain analysis?
How firms need to manage interventions in their value chain to secure cost/differentiation advantage
Why do firms need strategy?
eBecause in a highly competitive environment many firms find it easy to enter the market and compete w similar products. Thus, price structures are unstable - where excess profit might be competed away. Due to monopolistic advantage
What was Porter concerned with?
Needs for firms within their industry to achieve above-average profitability
How about firms in perfect competition?
Economists believe that firms will earn a normal profit. Here, avg revenue per unit equates to avg unit cost - breakeven position is maintained
What does 5 forces model do?
Designed to assess the nature of the industry environment - where can firms position themselves to achieve profit adv
What does value chain do?
Helps manager assess the degree to which their firm can intervene in the value chain to obtain a low-cost w above avg. profit/differentiation advantage w above market price.
What did Porter consider “industry structure analysis” to be?
It described the underlying economics of the business
What does Porter’s framework of analysis used to classify?
To classify the reaction of a business to its’ suppliers, competitors and distribution network
2 details that 5 forces model allows?
The framework becomes check list against which the mangers can generally position its’ business against the industry
Then can be used to describe the competitive forces giving rise to the shape of the industry structure
What did Porter say a Strategist should do?
“to influence that environment in the company’s favour they must learn what makes the environment tick”
2 main things 5 forces model tells us?
Where you sit in the industry?
Nature of relative powers in the industry
E.g of supplier relationship?
Suppliers of new cars are known to exert strong control over dealership margins as they can restrict price and volume
E.g of 5 forces model user?
GSK and patents
What are the 5 forces?
Suppliers- concentration, info of selling price
Customers - volume, sub. products, concentration
Exiting rivalry in industry - product diff, corporate stakes, industry growth, concentration, exit barriers
Threat of new entrants- entry barriers, capital, identity, access to distr.
Substitutes - buyers willingness, price
2 examples of supplier relation?
When threat entry is high price is lower than when entry barriers are high
Changes in tech may offer a substitute that displaces sales income of a business thus, putting pressure on profits
supermarkets have strong buying power so.?
exerted on supply chain especially on farm prices and incomes
2 strategic choices porter has given after establishing yourself w the 5 forces?
To sustain competitive advantage relative to its’ competitors -
1. Become a low cost leader
2. Differentiate - oligopoly/monopoly
Usually at this stage of strategic choice can’t do both
How do firms choose between the 2 main strategies?
Through bus anal. done in practice firms w a product portfolio where some are differentiated and some are price competitors
Porter classifies the 2 generic strategies into 4 categories?
look in notes
What is the industry analysis of low cost leadership?
identified market leadership can only be sustained where output is sold at the lowest cost
What should an orgs strategy be to be a low cost leader?
One of seeking to produce product/service at lowest cost within the industry sector
What did Porter say about low cost producers?
“A low cost producer must find and exploit all sources of cost advantage”
To do this exploitation - Firm must obtain benefits of economies of scale across all areas of business - given that there will profitability.
4 non price factors that differentiation involves?
Quality, design, after sales service, presentation.
Define differentiation?
Involves non price factors identified from the demand side industry structure analysis.
Very niche market where adv is taken from a certain segment of market rather than overall competitive advantage.
What did Porter say about Value chain analysis?
1985: Company is profitable when the value it creates exceeds cost of performing the value chain functions
2 ways Porter described to achieve value higher than cost?
- Lower cost than competitors
- A value chain function in such a way that premium price can be charged because the product/service is differentiated from competitors
What did Porter say about business analysis and strategic choice?
Business analysis informs strategic choice between generic strategies: Orgs. that choose generic strategy sensitive to industry structure analysis - increases chances of securing competitive advantage
What is Value chain analysis?
Describes how a series of sequential activities adds value to inputs
Process of value chain analysis?
- Inbound raw materials flow through internal operations
- Distributed
- Marketed
- Provided w after sale service
What is value chain used for?
As at a each age human, tech, and financial resources are applied - it adds cost/value to product.
Value chain is used to determine where value cost is being added within the operation sequence
- can use value identification to compare w competitors
What does the value chain digram illustrate?
How value enhancement (increased margin) is achieved both via
- Efficient ,management of resources across supply chain (suppliers and distributors)
- Internal business functions
2 other ways value chain can also be looked at?
Physical terms - product and materials from left to right to become final products
Financial term - Income/finance moving from right to left
How can info from value chain be best used strategically?
Becomes useful strategic knowledge when info is used to adjust flow and use of resources to meet benchmark cost reduction targets
4 new techniques introduced from the 70s to 80s?
SWOT
BCG Matrix
PEST analysis
What were the 4 new forms aim?
Context of which the industry offers threats and opportunities and aim is to seize opportunities and avoid strategic pitfalls
What is SWOT?
An analysis of company’s internal strength and weaknesses and the external side of org -threats and opportunities
What is PEST?
tick box checklist approach - evaluates impact of the following in an org’s environment: Political, Socio-cultural, Economical and Technological
E.g political stability, investment cost, employment and wages
Uses these variables to make a hierarchy of which is most important - but order changes overtime
BCG Matrix (Boston Consulting Group)?
2 x 2 matrix concerned with classifying an org’s product portfolio.
4 types of products in BCG?
Cash Neutral:
Star product - High growth and market share (Invest more money because still growing ) may turn into cow
Dog - Coming to end of its product lifecycle, volume of consumer decreasing despite discounts
Cash generator:
Cash Cow - Lion’s share w lowest product costs - gives surplus to invest in star products or new product development
Cash user:
Problem child: Suffering from much competition, volume growth is starting to decline and discounting is spoiling margin
Why is star product cash neutral?
Assumed that there are other products generating more cash than this start product is eating
What are business analysis models used for ?
Helping management make strategically informed business decisions to improve competitiveness.
Business analysis needs to be sensitive to:
Nature of firm’s industry and competitors
What should businesses do in order to reduce cost or recover?
Org must continuously analyse: 1. Take out cost from product to increase profit - make cash cow 2. Exploit market opportunity from: internal and external resources
Management must see strategic business opportunities from?
Domestic and international markets
To meet business opportunities..?
firms need to secure market expansion
Must utilise resources to reduce costs or increase differentiation action of aspects of firm
What does Porter concentrate on strategy as..?
industry selection and market positioning to promote cost reduction
cost recovery
What does the resource based view of strategy emphasise?
individuality of firms can exploit their unique capabilities to formulate a strategy that takes advantage of these capabilities
E.g GSK deploys their resources in a way that capitalises their unique capabilities
What does Porter say about industry selection?
Firms should choose an industry where competition is less intensive and exploit advantage of an oligopolistic and monopolistic position in market thus earn above avg industry profits
If domestic market conditions are bad?
move overseas for globalisation
strategic moves must generate ..?
Financial results
What is Globalisation?
concerned with how firms compete in international markets to win or lose against other international firms
What is financialisation?
helps us understand that analysis and strategic moves need to understand the operation of capital markets and how this impacts on competition
History of globalisation?
began in the 1980s because:
- exporting overseas
- investing in overseas production/retail/assembly
- increasing volume and share of their sale revenue
during globalisation what did Ohmae notice?
between the triad nations North America, Europe and Asia-Pacific nationally based firms became most exposed to external competitive forces
What did management theorists believe would happen to nationally based firm due to global competition?
- Globalisation would increase competition between nation states
- Nationally based firms would be demanded due to competitive edge
- Once exposed to external threats of more efficient competitors nationally based from would need to - improve performance or go out of business
When did the debate of these management theorists establish?
When Japanese firms like Toyota Sony and Cannon displaced many domestic companies in US and Europe
What did Hirst and Thompson find?
1996 - found that American multi nationals were selling most most of their products in the home market and not overseas.
E.g Caterpillar Inc - 80% of output sold in US
What was theocratical problem with Globalisation?
New entrants could steal market share form native firm thus damaging home based products
What did Porter and Hamel & Prahalad (1985) argue?
Firms must benchmark themselves w their global competitors to adopt world class best practice, resist competition and make profit; improve where they are weak : Consultancy benchmark studies provided firms w a checklist of factors they should be attending to based on an analysis of competitors
What else affects globalisation competition according to theorists?
not only nature of product market and org of firms but exchange rates and working hours as well.
E.g Japanese Favourable Yen to $ rate till 1985 and longer working hours increased their competitiveness
Williams and Froud thoughts on Japanese working hrs and currency?
These factors are beyond control of firms and managers within USA and Europe
What did the shift from globalisation to financialisation in the 1990s bring?
Less weight in product market competition in shaping international business strategy and more on international level global capital markets
What do asset management industry do?
manages shares on behalf of investors:
to maximise ROCE on their companies by increasing dividend and increase capital gain from share capital that the shareholders own
How is the shift to financialisation affected the company’s reports and accounts?
last 5 years more common for managers to declare inter accounts “pursue value-maximising investments”, “release value for shareholder or “generate value for shareholder”
What effect does financialisation have on the arena of competition?
Competition within a financialised framework is now located in the capital market because - firms compete on loyalty to attract and maintain assets manager/shareholder to:
increase profit, dividend yield, ROCE
