Competitive Environment/Five Forces Flashcards
Competitive Advantage
Competitive advantage concerns the factors that enable one firm to outperform its competitors and to provide competitive strength (Shaw, 2007) It’s at the heart of a firm’s performance in competitive markets (Porter, 1985). Includes: -Distinctive resources and capabilities -Strategic position -The first to enter a new market -Market power, creating barriers to entry -Innovation
Market/Industry Analysis (Evans et al., 2003)
-For understanding the nature of customers and their needs -Identify new markets where core competencies may be exploited -Identify threats from existing and potential competitors -Help an organisation understand the markets from which it obtains its resources Competitor Analysis: Aims to establish the nature of the competition in the industry and the competitive position of the business in relation to its products and resource markets.
Porter’s Five Forces (Porter, 1980)
- Threat of new entrants 2. Power of buyers/customers 3. Power of suppliers 4. Threat of substitute products 5. Intensity of rivalry between competitors in the sector
Five Forces theory
-Increased competition in an industry leads to a drop in the available customers for each competitor and a drop in prices. -Profit-maximising firms seek a position in the industry where competitive threats can be minimised and opportunities maximised. -Understanding the forces help managers develop strategies. Failure to = competitors may succeed. Success = earn good incomes even if not all the 5 forces are strong. -Forces must be analysed and focused on. -Analysis must continually occur at the SBU level -Forces are interchangeable -Complex organisations can have different sets of competitors/threats
- Threat of new entrants
Depends on number and level of entry barriers: -Economies of scale and scope: cutting costs while growing as a business -Capital costs of entry: the lower the cost of investment, the greater the threat -Distribution channels: product from the manufacture to the customer -Product differentiation: may be imposed by loyalty programs -Price and advertising: price/advertising wars -Legislation + regulatory policies: licensing, air routes etc -Monopolies and resistance: one company dominates an industry
- Power of buyers
-Greater the buyer power, the lower the price. Bulk purchasing = more buyer power -Many suppliers = intense competition = more buyer power -Little product differentiation = more buyer power = more choice -Greater the buyer’s knowledge = more buyer power -When a supplier relies on a buyer for a large percentage of their sales -Bargaining power
- Power of suppliers
-Monopoly = increase supplier power -Product is essential for the buyer = increase supplier power -Small number of suppliers = increase supplier power -Small purchases = increase supplier power -Switching suppliers is costly and difficult = increase supplier power
- Threat of substitute products
-Substitute meets the same needs, eg Cross Channel train/ferry/plane -Technological advances, eg video conferencing -Low switching costs, competitor products lower prices
- Intensity of rivalry between competitors in the sector
-Regularly monitor price changes and match significant moves immediately -Examine changes in rivals -Attempt new initiatives -Watch investments in new operations -Poach key employees
Strong Competitive Rivalry
-Profits can drop amongst competitors/rivals -Many competitors = intense rivalry -High fixed costs = rivalry intense as price cutting becomes a way of offsetting costs and filling capacity -Competition is great in mature markets with slow growth than in markets with strong growth -Little brand loyalty = more competition -Products are very different = less competition -New entrants = increase competition -Government regulation may affect competition, eg ASAs -Exit costs are high
Principle of competition
-If one firm launches a competitive strategy, the others follow suit -Weapons = price, quality, customer service, warranties, guarantees, adverts, innovation
Limitations of the Five Forces
-Not all competitors are threats, some collaborate and partner up -Five Force strength differ from industry to business -Strong brands are less vulnerable to buyer power than weaker brands
Strategic Group Analysis (Evans et al., 2003)
Consists of organisations possessing similar competencies, serving customer needs in the same market segment and producing products or services of similar quality. Allows businesses to: -Compare their performance with that of their closest competitors -Benchmark the performance of their organisation against that of primary competitors Vertical Integration: Buy a supplier/buyers of product Horizontal Integration: Buy a rival
Competitor Analysis
Examine: -Mission and objectives -Past record of leadership and performance -Current activities + capability of the future -Quality and performance of current products and services -Current strategies and pricing -Reliability -Flexibility
Coping with the Five Forces
Objectives is to create a strategy that will: -Insulate the company from competitive forces -Influence the industry’s competitive rules in the company’s favour -Provide a strong position from which to play the game of competition -Help create sustainable competitive advantage
