Lecture 2 Flashcards
environmental analysis allow us to understand…
the business environment which is an essential part of the Strategic Management Process (SWOT)
What does the SWOT process help us do?
- Uncovers opportunities and threats
- Provides information about the nature of competition
- Reveals options for collaboration
- Helps us design more effective strategies
Give an example of environmental analysis for a macro environment
PESTEL Analysis (political, economic, social. Technological, environmental & legal)
Combining PESTEL with scenario planning causes…
a level of uncertainty such as what technologies are going to take off and which are not, multiple outcomes such as it is looking at the plausible alternatives.
In the industry environment, Mason & PhD student Joe Bains created…
Structure Conduct Performance paradigm
Structure Conduct Performance paradigm is..
The structures to industry such as the barriers to entry, advertising intensity which all impacts the conduct for those firms within the industry and thus having an impact on the performance
Michael Porter’s five forces are..
- Threat of new entry
- Threat of substitute
- Power of buyers
- Power of suppliers
- Increasing the threat of rivalry (the core)
Five threats of new entry
- Product differentiation
- Capital requirements
- Cost disadvantages independent of size
- Access to distribution channels – not having networks
- Government policy’s – may help or deter new entries within an industry; certain licenses
Threat of Substitute Products is..
a subsite in an industry product such as a bakery shop being a substitute to Tesco
Threat of substitute products include..
- Substitutes are products or services that offer a similar benefit to an industry’s products or services, but by a different process
- Substitute can place a ceiling on the prices firms in an industry can charge before a consumer switches due to prices
- Switching costs, can be psychological costs such as from glasses to laser eye surgery
- Threat of obsolescence in some cases – example mechanical watch industry
Power of Buyers
Five indicators of threat of buyers in an industry
- Number of buyers is small; restrictions can be placed by governments
- products sold to buyers are undifferentiated
- The supplies they purchase are a significant part of final costs
- Buyers are not earning significant profits
- Buyers threaten backwards vertical integration
Vertical integration is…
joining up stages of the production chain, if you vertical integrate forward this is closer to the end consumer and if you vertically integrate backwards then this is closer towards the raw material supply.
Power of Suppliers
Five indicators of threat of suppliers in an industry
- they are few in number
- they have differentiated products, e.g. intel microprocessor
- they are not threatened by substitution
- they threaten forward vertical integration e.g. granite vs Corian (has the same look as granite)
- firms are not important customers
Increasing the Threat of Rivalry (The Core)
- Large number of competing firms
- Competing firms are similar in size and influence
- Slow industry growth
- Lack of product differentiation
- Productive capacity added in large increments
The stronger the five forces…
the less attractive the industry is
An unattractive industry includes
- Vigorous rivalry
- Low entry barriers
- High competition from substitutes
- Suppliers and customers have considerable bargaining power
An attractive industry includes
- Suppliers and customers have weak bargaining power
- No good substitutes
- High barriers blocking further entry
- Rivalry is limited
How do you forecast the industry profitability?
- Examine how the industry’s current profitability is a consequence of the present structure
- Identify the trends that are changing the industry’s structure – which forces are changing over time
- Identify how these structural changes will affect the five forces and the resulting profitability of the industry
Strategies to alter industry structure
o Consolidation by acquisitions, mergers, joint ventures and alliances
o Differentiate to reduce threat of substitution
o Increase switching costs – might be contractually or loyalty programmes
o Create barriers to entry – e.g. having skills such as ACCA
o Remove barriers to exit
o Reduce supplier dependence – can we use more standardised parts
An example of consolidation, mergers, joint ventures and alliances is…
a small independent booksellers have very little bargaining power thus benefiting publishers. Then the rise of internet giants such as Amazon which have changed the structure. This caused publishers to join to create one of the largest publishing industries because they needed to ensure that they have greater bargaining power when negotiating with large companies such as Amazon.
The Five Forces criticisms
- Bias of economic over politics
- Less effective in unstable industries
- Can be seen as a static framework
- Difficulty in defining the industry
- Fails to take account of co-operation (collaboration)
