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.