Business Strategy & Analysis Week 2

MPM703 Business Strategy & Analysis
Week 2
Managerial Challenges:
How do you, as a manager, describe the nature and dynamics of
competition in an industry where a firm (where you work/lead) is
doing business?
How do you, as a manager, explain the effects of competition using a
practical theory or framework?
How do you, as a manager, enable your firm to respond proactively
to competitive forces in order to sustain your firm’s performance?
1
Outline
Defining industry competition
The five forces framework
Competition Profiling
Three generic strategies
2
Unit Learning Outcomes (ULOs)
Upon completion of this unit, successful students can:
ULO 1: Analyse systematically the internal an external business environments of a firm to inform
managerial and business decisions
ULO2: Apply appropriate theories, concepts, and analytical tools in strategy
development, implementation and evaluation across diverse business contexts
ULO3: Recommend relevant and sustainable strategic business decisions
in addressing various business issues
ULO4: Contribute to building a cohesive and productive team with effective business skills
GLO1: Discipline-specific
knowledge and capabilities (
in
Strategic Management
)
Deakin’s Graduate Learning
Outcomes GLOs
GLO2: Communication
GLO5: Problem solving
ULO5: Communicate effectively, in oral or written form, the results of
managerial analysis of various business issues and relevant recommendations
3
GLO7: Team work
The Strategy Tripod: Three Leading Perspectives on Strategy
4
INDUSTRY FORCES
INSTITUTIONAL
FORCES

ORGANISATIONAL
CAPABILITIES

STRATEGIES
OF FIRMS
PERFORMANCE
OUTCOMES
Source: Peng, M., Sun, S., and Chen, H. 2009, The institution-based view as a third leg for a strategy
tripod, Academy of Management Perspectives, August, pp. 63-81
Our focus
this week!

Defining Industry Competition
Industry:
A group of firms producing products (goods and/or services) that are similar
to each other
Market
is a group of customers for specific products or services that are essentially
the same (e.g. the market for luxury cars in Germany)
Sector
is a broad industry group (or a group of markets) especially in the public
sector (e.g. the health sector).
5
INDUSTRIES AND MARKETS
Banking Industry
(Financial sector)
(Commonwealth Bank,
Westpac, NAB, ANZ, St
George, etc
.)
MARKETS (buyers) for
– personal financial services
(YOU!)
– business or corporate
financial services
Industry analysis – analysis of strategic conduct and performance of industry players (firms), the
major forces/trends shaping an industry, and the critical factors that define success and failure of
firms within an industry
Market analysis – analysis of market characteristics (e.g. consumer tastes and preferences), size,
growth rate, profitability, trends, attractiveness, key success factors
6
How do we know that an industry is competitive or
not?
How do we assess an industry in terms of its attractiveness
(e.g. for starting a new business, expanding, maintaining or
closing down an existing business)?
7
Defining Industry Competition
Theories of industry competition
Perfect competition (rarely observed)
Industrial organization (IO) economics model
Industry structure determines strategy and firm performance (SCP model)
Original goal-help regulators minimize firm’s excess profits
Strategists use the IO model to try to earn excess profits
8
The Industrial Organisation (I/O) Paradigm
9
10
11
Five Forces Framework
The Five Forces Framework
“Translated” and extended from the SCP model in 1980 by Michael Porter
A key proposition:
The focal firm’s performance critically depends on the degree of competitiveness of the
five forces within an industry
The stronger and more competitive these forces are, the less likely the focal firm is able
to earn above-average return, and vice versa
12
Michael Porter’s Five Forces Model
Idea in brief:
To sustain long-term profitability, a
firm must respond strategically to
competition. To compete, a firm
pays attention to its
current rivals.
But in scanning the competitive
arena, the firm realises that there
are other forces
beyond its direct
competitors that shape and impact
on the
nature and intensity of
rivalry (or competition)
in its given
industry.
As Porter explains in this update of his revolutionary 1979 HBR article, four
additional competitive forces can hurt your prospective profits because they
drive the
intensity of rivalry or competition of current players:
1. Savvy customers or buyers can force down prices by playing you and
your rivals against one another.
2. Powerful suppliers may constrain your profits if they charge higher
prices.
3. Aspiring entrants or new players, armed with new capacity and hungry
for market share, can challenge your existing position in the industry.
4. Substitute offerings can lure customers away from your products or
services.
13
Michael Porter’s Five Forces Model
The strongest competitive force or forces
determine the profitability of an industry
and become the most important variable
to strategy formulation.
Porter’s Five Forces is a model of industry
competition. It is a tool used to analyse
the competitive environment and its longterm attractiveness given the five key
forces that affect a firm’s strategy and
profitability.
14
Michael Porter’s Five Forces Model
Competitive Rivalry among Current Players:
Competitive rivalry is a measure of the extent of competition
among existing firms. Intense rivalry can limit profits and lead
to competitive moves including price cutting, increased
advertising expenditures, or spending on service/product
improvements and innovation. Forms include: price wars,
innovations in product, price, place, promotions, people (5Ps)
Intense competition exists if/when:
many competitors (of equal size and power)
few quality differences (about the same 5Ps)
industry growth is slow – jockeying for position/profits
exit barriers are too high
customer loyalty is low – can easily switch from one firm
to another
15
Michael Porter’s Five Forces Model
Threat of New Entrants:
The extent to which new firms (entrants) can enter the industry easily and
become players who will then compete against the current rivals or competitors
in that industry.
New entrants to an industry bring new capacity and a desire to gain market
share that puts pressure on prices, costs, and the rate of investment necessary
to compete.
This threat of new entrants is a function of the barriers to entry: factors that
make it difficult for potential entrants to join the industry and compete against
current players.
High barriers to entry if/when:
current players enjoy economies of scale
large capital is required to set up a new business
customer switching costs are too high
product is highly differentiated
current players have competitive capabilities and cost/technology advantages
of current players
access to distribution channels (captured by current players) is limited
restrictive government policy
there is high retaliatory power of current players
16
Michael Porter’s Five Forces Model
Bargaining Power of Suppliers:
This refers to the extent of power and influence of suppliers to the current players in the industry
on the actual price of the product sold in a given industry (by controlling the cost, access, and
availability of inputs to production).
Suppliers are most powerful when companies are dependent on them and cannot switch suppliers
because of high costs or lack of alternative sources.
Powerful suppliers capture more of the value for themselves by charging higher prices, limiting
quality or services, or shifting costs to industry participants.
High or strong bargaining power of suppliers if/when:
very few suppliers (highly concentrated relative to the current rivals/players)
suppliers provide highly-differentiated and unique product or service (no
substitute)
the suppliers serve many industries and the focal industry is not a main source
of their revenue
current players/rivals face switching costs when changing suppliers
suppliers may threaten forward integration
17
Michael Porter’s Five Forces Model
Bargaining Power of Buyers (Customers)
This refers to the extent of power and influence of the buyers or customers of the current players
or rivals in an industry on the actual price and quantity of the products sold in a given industry.
Powerful customers— the flip side of powerful suppliers—can capture more value by forcing down
prices, demanding better quality or more service (thereby driving up costs), and generally playing
industry participants off against one another, all at the expense of industry profitability.
Buyers are powerful if they have negotiating leverage relative to industry current players,
especially if they are price sensitive, using their clout primarily to pressure price reductions.
High or strong bargaining power of buyers or customers if/when:
very few buyers (and they buy in bulk/large quantities) relative to size of
current rivals/players in industry
products are standardised or un-differentiated (easy to switch products)
buyers are price sensitive (hence shop around to find better deal)
there is a threat of backward integration (e.g. a business firm-buyer who sets
up own farm for its raw materials or input to its production)
18
Michael Porter’s Five Forces Model
Threat of substitutes
This refers to the presence of other products or services that may serve as substitutes for the products
and services marketed by the current players or rivals in a given industry.
A substitute performs the same or a similar function as an industry’s product by a different means.
Videoconferencing is a substitute for travel. Plastic is a substitute for aluminium. E-mail is a substitute for
express mail.
For example, firms X, Y and Z are current rivals – selling plastic drinking straws. The intensity of their
competition is affected by the presence of other companies or firms who may sell aluminium or bamboo
straws being substitutes for plastic straws!
High or intense threat of substitutes if/when:
it offers an attractive price-performance trade-off to the industry’s product. The better the relative value of the
substitute, the tighter is the lid on an industry’s profit potential
switching costs are low (customers need not pay more for the substitute) (generic vs. branded drugs)
increasingly critical buyers/customers (consumer activism, ‘enlightened customers’)
19
Michael Porter’s Five Forces Model
Main argument:
Competition among current rivals/players is
intense if:
Threat of new entry is high (low barriers to
entry)
Suppliers are powerful
Buyers or customers are powerful
There are many available substitutes
20
Michael Porter’s Five Forces Model
Lessons:
“By understanding how the five competitive
forces influence profitability in your industry,
you can develop a strategy for enhancing your
company’s long-term profits”
Which industry is profitable? Attractive?
Which industry to exit?
Which force/forces need strategic attention?
How can a firm position to exploit the weak
force/s in an industry?
How can the firm respond to strong forces?
21
Five Forces Framework:
Lessons from the Five Forces Framework
Not all industries are equal in terms of their potential profitability
The task for strategists is to assess the opportunities (O) and threats (T) underlying
each competitive force affecting an industry, and then estimate the likely profit
potential of the industry
The challenge is to stake out a position that is strong and defensible relative to the five
forces
22
Five Forces Framework:
Lessons from the Five Forces Framework
Which industries/markets to enter or leave – it helps identify the attractiveness of
industries.
What influence can be exerted? Identifies strategies that can influence the impact of
the five forces. E.g. building barriers to entry by becoming more vertically integrated.
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.
23
Five forces analysis: Complementary Information – Type of industry
Industry structure also depends on the nature of competition among current players.
24
Five forces analysis: Complementary Information – Stage in the industry life cycle
25
Ilustration: Type of industry – Supermarkets in Australia
Would you consider this industry, ‘supermarkets and grocery stores’:
Monopolistic industry?
Oligopolistic/Duopolistic?
Hypercompetitive industry?
Perfectly competitive industry?
26
Type of Industry: Duopoly/Oligopoly
Market share of
leading
supermarkets in
Australia
Source: IBISWorld
2019
2–27
Wesfarmers
Ltd
30%
Woolworths
Ltd
40%
Aldi
5%
Others
25%

Supermarket and grocery stores in Australia: Duopoly/Oligopoly
Power of rivals over both suppliers and buyers
Profitable industry
Highly competitive (price & advertising wars are not uncommon)
Rivals as barriers to entry by themselves
2–28
Supermarket and grocery stores in Australia: Mature stage of the ILC
Growing but slowly
Standard products (basic commodities; fast moving consumer goods)
Product and brand rationalisation
Established technology and processes
Total market acceptance of products/brands
Number of players have stabilised
29
Is there a tool that we can use in our analysis of competitors in a given industry?
30
Competitive Profile Matrix (CPM)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a
sample firm’s strategic positions
Critical
success factors include internal and external issues
31
An Example of Competitive Profile Matrix
32
Now that we know the critical PESTEL factors
and key industry forces at play,
how can a firm respond to these external
environmental factors?
33
Table 2.4
Three Generic Competitive Strategies

PRODUCT DIFFERENTIATION MARKET SEGMENTATION KEY FUNCTIONAL AREAS
Cost Leadership
Differentiation
Focus
Low (mainly by price)
High (mainly by uniqueness)
Extremely high
Low (mass market)
High (many market segments)
Low (one of a few segments)
Manufacturing, services, and
logistics
R&D, marketing, and sales
R&D, marketing, and sales

34
35
36
Three Generic Strategies: Cost Leadership
Cost leadership
Firm‘s theory about how to compete successfully centers on low costs and low prices
Offer better value to customers
Target average customers for mass market – little differentiation
Key functional areas are manufacturing and materials management
High volume, low margin approach
Defense against five forces
Relentless drive to cut costs might compromise value that customers desire
37
Three Generic Strategies: Differentiation
Differentiation:
Deliver products that customers perceive to be valuable and different
Target customers in smaller, well-defined segments who are willing to pay premium prices
Low volume, high margin approach
Must have unique attributes (actual or perceived) – quality, sophistication, prestige, or luxury
Challenge – identify attributes that are valued by customers in each market segment
Key functional areas are research and development (source of innovation), marketing/sales, and
after-sale services
38
Three Generic Strategies:Differentiation (cont’d)
Defense against five forces
Drawbacks
Difficult to sustain differentiation in the long run
Relentless efforts of competitors to duplicate differentiation
39
Three Generic Strategies:Focus Strategy
Focus Strategy:
Serving the needs of a particular segment or niche of an industry such as a geographical
market, type of customer, or product line
A specialized differentiator has a smaller, narrower, and sharper focus than a large differentiator
A specialized cost leader deals with a narrower segment compared with the traditional cost leader
Focusing may be successful when a firm possesses intimate knowledge about a particular
segment
40
Three Generic Strategies: Lessons from the Three Generic Strategies
The essence of the three strategic choices:
Whether to perform activities differently or to perform different activities relative to competitors
There are two fundamental strategic dimensions: cost and differentiation
The key is to choose one dimension and execute on it consistently
According to Porter, firms that are “stuck in the middle” either have no strategy or are drifting
strategically
However, this point is debatable
41
Three Generic Strategies and the Five Forces in an Industry
42
Summary
Industry and competition analyses
Porter’s generic strategies
Frameworks, tools, and techniques to make sense of
external business environments (domestic or global)
43
The “Strategy Tripod”
Three Leading Perspectives on Strategy
44
INDUSTRY FORCES
INSTITUTIONAL
FORCES

ORGANISATIONAL
CAPABILITIES

STRATEGIES
OF FIRMS
PERFORMANCE
OUTCOMES
Source: Peng, M., Sun, S., and Chen, H. 2009, The institution-based view as a third leg for a strategy
tripod, Academy of Management Perspectives, August, pp. 63-81
Our focus
this week!

Unit Learning Outcomes (ULOs)
Upon completion of this unit, successful students can:
ULO 1: Analyse systematically the internal an external business environments of a firm to inform
managerial and business decisions
ULO2: Apply appropriate theories, concepts, and analytical tools in strategy
development, implementation and evaluation across diverse business contexts
ULO3: Recommend relevant and sustainable strategic business decisions
in addressing various business issues
ULO4: Contribute to building a cohesive and productive team with effective business skills
GLO1: Discipline-specific
knowledge and capabilities (
in
Strategic Management
)
Deakin’s Graduate Learning
Outcomes GLOs
GLO2: Communication
GLO5: Problem solving
ULO5: Communicate effectively, in oral or written form, the results of
managerial analysis of various business issues and relevant recommendations
45
GLO7: Team work