Lecture 4 - Context of Strategy - Strategic Purpose: The external macro and micro Environment Flashcards
The highest level layer is
The macro environment
The macro environment consists of
Broad environmental factors that impact to a greater or lesser extent on all organisations
What is the next layer after the macro environment?
Industry/sector
What is an industry/sector made up of?
Organisations producing the same sorts of products and services
Competitors and markets are…
…the most immediate layer surrounding organisations
The concept of strategic groups helps to…
…identify different kinds of competitors
What are Porter’s 5 forces that identify industry attractiveness in terms of competition?
- Threat of entry
- Power of suppliers
- Power of buyers
- Threat of substitutes
- Rivalry amongst existing competitors
The threat of entry puts a…
…cap on profit potential of industry
When the threat of entry is high, incumbents must:
Hold down their prices
or
Boost investment to deter new competitors
The threat of entry in an industry depends on…
…height of entry barriers present and reaction entrants can expect from incumbents
What are the 7 main sources of barriers to entry?
- Supply-side economies of scale
- Demand-side benefits of scale
- Customer switching costs
- Capital requirements
- Incumbency advantages independent of size
- Unequal access to distribution channels
- Restrictive government policy
Buyers are powerful if…
…they have negotiating leverage relative to industry participants
…especially if they are price sensitive, using their clout primarily to pressure price reductions.
Buyer power is likely to be high when:
- Purchase a large part of suppliers’ output (big customer
- Buyers are concentrated
- Buyers have low switching costs
- Buyers can supply their own inputs (backward vertical integration
Powerful suppliers capture more of the value for themselves by:
- charging higher prices
- limiting quality or services
- shifting costs to industry participants.
Suppliers’ power is likely to be high when:
- Suppliers are concentrated (few of them)
- Provide specialist/rare service
- Switching costs are high (disruptive & expensive)
- Suppliers can integrate forwards (e.g. low cost airlines have cut out the use of travel agents)
Substitutes
Products or services that offer a similar benefit to an industry’s products or services, but by a different process…(e.g. trains are substitute for cars)
Substitutes take different forms:
- New products which are better, cheaper…
- Changing needs which means the product is no longer needed.
- Competitors’ product is NOT necessarily a substitute
Customers will switch to substitute products if:
- The price/performance ratio of the substitute is superior (e.g. aluminium maybe more expensive than steel but it is more cost efficient for some car parts)
- The substitute benefits from an innovation that improves satisfaction
Rivalry is increased when:
- Competitors are of roughly equal size
- Competitors are aggressive in seeking leadership
- Market is mature or declining
- High fixed costs
- Exit barriers are high
- Low level of differentiation
Competitive rivals
Organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market (not substitutes).
Advantages of the Five Forces Framework
- Identifies the attractiveness of industries.
- Good starting point for identifying the right strategies to compete in an industry.
- Easy to apply to all organisations, pubic and private.
Rivalry is especially destructive to profitability if…
…it gravitates solely to price because price competition transfers profits directly from an industry to its customers.
Disadvantages of the Five Forces Framework
- Difficulty to define the ‘right’ industry level
- Industry boundaries are not easily distinguishable – ‘convergent industries’.
- The forces may have a different impact on different organisations (e.g. large firms can deal with barriers to entry more easily than small firms).
- Does not recognize complementary products - coopetition
- Does not tell you how to get to competitive advantage
3 Critiques against Five Forces Framework:
Co-operation critique
Dynamism critique
Complexity critique
Co-operation critique
Assumes a competitive environment where a company can only succeed at the expense of others
Dynamism critique
Uses static analysis of the industry and ignores trends
Complexity critique
Industries may not be homogeneous
(luxury vs budget hotel)
Customer heterogeneity is ignored
Customers too can differ significantly and be part of different sections of the market - market segments
Strategic groups
Organisations within an industry or sector with similar strategic characteristics
Value innovation critique (Kim and Mauborgne, 2005)
Porter looked at competitive markets (i.e., red oceans)
Uncontested new blue ocean markets might be more attractive:
- Challenging acceptance assumptions about industry definitions,
- Looking across existing industries boundaries or the strategic groups, redefine buyers, etc.
Porter looked at competitive markets (i.e., red oceans)
Uncontested new blue ocean markets might be more attractive:
- Challenging acceptance assumptions about industry definitions,
- Looking across existing industries boundaries or the strategic groups, redefine buyers, etc.
Value innovation critique (Kim and Mauborgne, 2005)
Market segment
Group of customers who have similar needs that are different from customer needs in other parts of the market
Competition within strategic groups
Is stronger than between groups
Mobility barriers prevent…
Organisations moving from one strategic group to another (e.g. economies of scale and RD)
Characteristics for identifying strategic groups
Scope of activities
Resource commitment
Advantages of strategic groups
Understanding immediate - direct competition.
Analysis of mobility barriers - can be used to increase the profitability of an industry.
Analysis of strategic opportunities – attractive ‘strategic spaces’ within an industry.
White spaces (under-occupied) vs. black holes (impossible to exploit)
