Week 2 Flashcards
Three Key Strategic Considerations
- What business activities is the firm engaged in?
– Industry membership(s)
- How does the firm attempt to compete with other industry members?
– Competitive strategy
- How does the firm attempt to add value by operating in multiple business areas?
– Corporate strategy
Porter’s 5 Forces Framework
What are the 5 forces
- Rivalry among existing firms
- Threat of new entrants
- Threat of substitute products
- Bargaining power of buyers
- Bargaining power of suppliers
Porter’s 5 Forces Framework
These 5 forces can be further divided into
– Forces affecting the degree of actual and potential competition in the industry
– Forces affecting the bargaining power of buyers and suppliers within the industry
A company’s ‘moat’
A company’s immunity to competition, and thus its predicted ability to sustain higher growth, higher profit margins etc in the future.
Describe wide moat firms
have unique skills or assets allowing them to stay ahead of competition and earn above average profits for many years
Returns exceed cost of capital
Competitive Force 1: Rivalry Among Existing Firms
Higher degrees of competition among existing firms
– Push prices towards the marginal cost of production (i.e. down)
– Differentiation is important e.g. perceived product quality
Competitive Force 1: Rivalry Among Existing Firms
What determines intensity of competition within an industry?
– Industry growth rate
– Concentration and balance of competing firms
– Level of differentiation and switching costs
– Scale/Learning economies and ratio of fixed to variable costs
– Excess capacity and exit barriers.
Competitive Force 1: Rivalry Among Existing Firms
How Industry Growth Rate can influence competition among firms
If industry is stagnant
if industry is stagnant, competition will be fierce, as existing firms fight for ‘slice of the same pie’
Competitive Force 1: Rivalry Among Existing Firms
How Industry Growth Rate can influence competition among firms
If industry is growing rapidly
If industry is growing rapidly, there is room for each firm to increase sales, so normally less price pressure.
Competitive Force 1: Rivalry Among Existing Firms
How Concentration and Balance of Competitors can influence competition among firms
– How many firms in industry?
– Are there a couple of really big players?
• If a small number of firms hold considerable market share, competition may be less severe (or may have less severe implications for profit margins)
Competitive Force 1: Rivalry Among Existing Firms
Product Differentiation Determine intensity of competition?
if products sold are almost identical >>>>higher competition
– If products sold differ in actual or perceived quality, the extent to which a competitor’s product is a potential substitute for your product decreases
Competitive Force 1: Rivalry Among Existing Firms
Switching Costs Determine intensity of competition?
what is Switching costs
costs imposed on the customer if the customer changes suppliers
Competitive Force 1: Rivalry Among Existing Firms
Switching Costs Determine intensity of competition?
Low switching costs
Low switching costs increase competition
Competitive Force 1: Rivalry Among Existing Firms
Switching Costs Determine intensity of competition?
High switching costs
High switching costs decrease competition
• E.g. Payroll outsourcing firms
– Expensive for customer to have to set up their own payroll department
• Microsoft
Competitive Force 1: Rivalry Among Existing Firms
Scale/Learning Economies and Cost Structure Determine intensity of competition?
Economies of Scale exist where
Economies of Scale exist where the average cost per unit of production declines as output increases
Competitive Force 1: Rivalry Among Existing Firms
Scale/Learning Economies and Cost Structure Determine intensity of competition?
If scale economies are very important in an industry,
there will be high competition among existing firms, because changes in market share will have a larger relative effect on profit margins
Competitive Force 1: Rivalry Among Existing Firms
Scale/Learning Economies and Cost Structure Determine intensity of competition?
Scale economies also sometimes
impose barriers to entry, which affects the level of competition from newcomers
Competitive Force 1: Rivalry Among Existing Firms
Excess Capacity and Exit Barriers:Determine intensity of competition?
– If competitors have excess production
If competitors have excess production capacity, they may have incentive to expand output and sell at a price just above incremental cost, driving prices down
Competitive Force 1: Rivalry Among Existing Firms
Excess Capacity and Exit Barriers:Determine intensity of competition?
Exit barriers also increase competition
and include the existence of specialised assets:
• Assets for which the next best use is relatively low (e.g. Machinery specialised to the manufacture of a particular product). These assets will not be worth much on the open market if their current mode of use becomes economically unattractive.
Competitive Force 2: Threat of New Entrants
The ease with which a new (or outside) firm can enter an industry will affect the profitability of firms already operating in the industry.
Competitive Force 2: Threat of New Entrants
Factors affecting the barriers to entry include
– Economies of scale
– First mover advantage
– Relationships with suppliers and customers
– Legal barriers.
Competitive Force 2: Threat of New Entrants
Factors affecting the barriers to entry include
Economies of Scale
If economies of scale are high:
- a new competitor, operating at low volume will struggle to be profitable
- To achieve minimum optimal scale, competitors need to access to lots of $$$$ of finance, which may be hard to obtain from external sources (e.g. banks, equity investors)
Competitive Force 2: Threat of New Entrants
Factors affecting the barriers to entry include
Economies of Scale
If economies of scale are high:
- a new competitor, operating at low volume will struggle to be profitable
- To achieve minimum optimal scale, competitors need to access to lots of $$$$ of finance, which may be hard to obtain from external sources (e.g. banks, equity investors)
Competitive Force 2: Threat of New Entrants
Factors affecting the barriers to entry include
Economies of Scale normally have 2 effects
1) Greater economies of scale normally increase competition among firms already in an industry
2) Greater economies of scale normally decrease the threat of entry of new firms to an industry
Greater number of existing competitors usually causes 1) to dominate, and vice versa.
Competitive Force 2: Threat of New Entrants
First Mover Advantage
Successful first movers may discourage competition
• being the first to bring a specific product or service to market.
enables a company to establish strong brand recognition and customer loyalty before other entrants to the market arise. Another advantage is the additional time a first mover business has to perfect or improve its product or service.
– Advantage is higher when switching costs are high (high cost for customers to switch brands)
• E.g. Computer operating systems
Competitive force 2 Threat of New Entrants contd.
• Relationships with Suppliers and Customers
suppliers?
Access to distribution channels (shelf space)
arrangements with retailers
Competitive force 2 Threat of New Entrants contd.
• Relationships with Suppliers and Customers
Access to necessary inputs
requirements for highly skilled labour, specialised materials may deter entry, because those inputs may be very difficult or costly for an outsider to acquire
Competitive force 2 Threat of New Entrants contd.
Legal Barriers
Regulation may directly impair ability of potential competitors to enter
Competitive Force 3: Threat of Substitute Products
Referring to the threat of products which satisfy a similar consumer demand E.g. Laptop computers v smart phones v tablets • Considerable overlap in functionality
Competitive Force 3: Threat of Substitute Products
The degree to which substitute products or services exist
affects the industry’s bargaining power with suppliers and customers, and ultimately profitability, depends upon:
– the relative price and performance of competing products or services
– the willingness of customers to accept substitutes/ to switch
Competitive Force 4:Bargaining Power of Buyers
Buyer bargaining power can exert downward pressure on prices
Competitive Force 4:Bargaining Power of Buyers
Factors that can affect this bargaining power are
- Switching cost
- Differentiation
– Buyer price sensitivity to product or service
– How many buyers are there, volume of buyers
• If your firm’s only product is an electronic component only useable in Apple computers, there will be v. strong downward price pressure.
Competitive Force 5:Bargaining Power of Suppliers
Suppliers have bargaining power when there are few substitutes and/or few suppliers relative to the number of customers demanding a product or service.
- Ownership of telecommunications infrastructure
- Suppliers with control of scarce natural resources
Competitive Strategy Analysis
Competitive strategy: Cost leadership
supply same product at lower cost
economies of scale and scope, simpler product design, efficient production, lower input cost, low cost distribution, tight cost control system
Competitive Strategy Analysis
Competitive strategy: Differenctiation
supply unique product at cost less than price premium customers are willing to pay
superior quality, customer service, investment in brand image, investment in r&d control system focus on creativity and innovation
The likelihood of achieving and sustaining competitive advantage must be evaluated.
• Factors to evaluate include:
- Resources and capabilities available to implement strategies
- Whether the firm’s activities, infrastructure, and other operating elements consistent with its competitive strategy.
The likelihood of achieving and sustaining competitive advantage must be evaluated.
• Factors to evaluate include:
Resources & Capabilities Needed
Cost-leader
– Sustained access to finance
– Engineering and human process mgmt skills – Low-cost distribution system
The likelihood of achieving and sustaining competitive advantage must be evaluated.
• Factors to evaluate include:
Resources & Capabilities Needed
Differentiated Firm
– Marketing Skills/Awareness
– Access to finance to fund investment in Brand Name
– Product engineering skills
– Reputation for quality or leadership
Corporate Strategy
The Downside of Combination
More expensive to control the firm’s operations as the range of different activities increases
• Inefficiencies associated with monitoring diverse activities are a type of ‘bureaucratic cost’
Corporate Strategy
Benefits of Combination
Vertical integration
– more efficient to produce own factor inputs
– May provide more reliable supply chain where timing of supply is crucial
Corporate Strategy
Benefits of Combination
Intangibles
• Intangibles may be valuable to numerous business lines
– Brand names
– Proprietary knowledge relevant to a number of products
– Economies of scope across production of different goods
