Strategy & Organization Notes

What are the 5 Competitive Forces

• Threat of New Entrants

• Threat of Subtitute Products or Services

• Bargaining Power of Suppliers

• Bargaining Power of Buyers

Zero-Sum Competition

Companies getting into a price war, and the only real winner is the consumer since prices go down.

Positive-Sum Competition

Companies competing on different attributes and features that is actually relevant to particular groups of customers.

#1 purpose of strategy?

Alignment within the company

Value Chain Activities

The steps a company takes to create and sell a product or service, from conception to end use.

Value Chain Activities General Steps

Production, marketing, packaging, distribution

Fundamental Characteristics of the External Context

The factors that are relevant to firm performance at a given point in time.

Two major components of the external environment

Macro Environment & Industry Environment

Macro Environment

Political, economic, social, technical, environmental, & legal issues that confront the firm.

PESTEL Analysis

Tool for assessing the political, economic, socioculture, technological, environmental, and legal context in which a firm operates.

Examples of political factors

Stability of political environment, government policies, trade treaties, trade blocks.

Examples of economic factors

Inflation rates, interest rates, tariffs, exhcange rates, growth of local & foreign national economies.

Examples of socioculture factors

Local languages, dominant relgiioins, leisure time, age & lifespan demographics, attitude toward consumerism, environmentalism, roles of men & women

Examples of technological factors

Technology enabling products & services to be made more cheaply, more innovation, affect distribution?

Examples of environmental factors

Waste management practices, recyclable/biodagradable packaging.

Examples of legal factors

Reflect the laws & regulations relevant to the region or organization, how well established is the rule of law, how easily/quickly laws & regulations could change.

Cost of regulatory compliance

Following laws & regulations set by the government.

Globalization

Evolution of distinct geographic product markets into a state of globally independent product markets.

4 categories that reveal whether an industry has globalized or is in the process of globalization

Markets, Costs, Governments, & Competition

Features in a Market that favor globalization for a firm

Similar markets in different regions, globalized distribution channels, similar market approaches are transferable across geographic markets.

Features in Cost that favor globalization for a firm

Extremely high fixed costs, abillity to move manufacturing operations to locations outside of home country to somehwere with lower wages, improvement in logistics & transportation capabilities within companies.

Features in Government that favor globalization for a firm

Favorable trade policies, regulating tech standards.

Features in Competition favoring globalization for a firm

Globalize simply because competitors are doing it.

Industry Environment

Groupings of firms that seem more similar in certain ways than other members of the larger industry.

Perfect Competition

Numerous sellers and buyers (no monopolies), perfect information, reletively the same products offered by different firms, no barriers to entry or exit.

Industry Analysis (3 points)

Helps managers determine the nature of the competition, possible source of imperfect competition in the industry, and the possiblity of the firm earning above normal returns.

Imperfect Competition

Few competitors, numerous suppliers and buyers, asymmetric information, different products, and barriers that make entry into an industry difficult.

Result of Imperfect Competition

A firm could have an inherent advantage and above-normal returns are possible.

I/O Economics

The study of how firms operate in a market.

Key Success Factor (KSF)

Key asset or required skill that all firms in an industry must possess in order to be a viable competitor (dictated by industry characteristics).

Industry

A firm or group of firms that produce or sell the same or similar products to the same market.

Monopoly

Only one seller in the market (one firm industry).

Duopoly or Oligopoly

Market is dominated by 2 or a few large firms (ex. soft drinks)

“Concentrated” market

Small number of companies control a large portion of industry’s sales or output (affects the intensity of competition in an industry).

Fragmented Industry

No Clear Leader

Concentration Ratio

Represents the combined revenues of the largest industry participants as a ratio of total industries.

How is Concentration Ratio Represented?

C4, C8, C20, C50 based on the number of firms treated as the industry’s largest.

Are Fragmented or Concentrated Markets more competitive?

Fragmented

Are fragmented or concentrated markets harder to enter?

Concentrated

Five-Forces Model

Framework for evaluating industry structure

Rivalry

Intensity of competition within in an industry (affected by number of firms & how similar those firms are).

When is price competition increased?

Competitors are same size & power, industry is a key business for the major firms in that industry (ex. cereal for food industry), slow growing industries, low product switching cost (low brand loyalty).

When is price competition reduced?

Product seems unique (high brand loyalty)

Exit Barriers

Barriers that impose a high cost on the abandonment of a market or product (tends to increase rivalry & competition).

Threat of New Entry

Degree to which new competitors can enter an industry & intensify rivalry.

Barier to Entry

Condition under which it is harder to join or compete in an industry

Contributers to Barriers of Entry

Strong brands, proprietary (owned by company) tech, restricted access to investment capital or distribution channels, difficulty in getting the resources necessary to compete in an industry.

Result of high barriers to entry

Lower competition ( & limitng supply)

Supplier Power

Degree to which firms in the supply industry are able to dictate terms to contracts & therefore get some of the profit that would otherwise be available to competitors in the industry.

When are suppliers powerful?

When they control prices, delivery lead times, minimum orders, post purchase services,payment terms, concentrated suppliers, control a scarce input, are bigger then their customers, and when firms in the industry face high switching costs when changing suppliers.

Forward integration

When it’s possible for a supplier to manufacture finished products rather than just sell components to manufacturers (ex. Coke started bottling their own drinks instead of selling concentrate to a bottler).

Buyer Power

Degree to which firms in the buying industry are able to dictate terms on purchase agreements that extract some of the profit that would otherwise go to competitors in the industry. (mirror image of supplier power).

When does a buyer have high power?

When their purchases represent a significant portion of the seller’s sales, lots of options to buy from & easy to compare them.

Backward Integration

Buyers could move backwards and produce their own supplies & move backward into a supplier’s industry.

Threat of Substitutes

Degre to which products of one industry can satisfy the same demand as those of another (no substitues = higher consumer prices).

Complimentors

Players who provide complementary rather than competing products & services.

Complimentor

Any factor that enhances the attractiveness for suppliers to offer favorable terms or encourages buyers to purchase products at higher prices than it would absent the complimentor.

Examples of complimentors

A car manufacturer and a tire company, a gaming console and game developers, or an airline and a hotel chain, Microsoft and Intel

Five Forces Purpose vs. Complimentors Purpose

Five forces typically work to decrease industry profitability, strong complimentors increase demand & profit.

Goals of a good strategy (hint 5 forces)

Minimuize buyer power, offset supplier power, avoid excessive rivalry, raise the barriers to entry, & reduce the threat of substitution

Resources

All inputs used to create products & services

Capabilities

Skill at using resources

Example of resources

Raw materials, labor, money

Examples of Capabilities

Marketing, Innovation, logisitics, training

Competitive Advantage

When one firm enjoys an advantage over other firms in its industry, above-average performance is possible.

Tangible Resources (def & example)

Concrete, quanitfiable (factory, labor, money)

Intangible Resources (def & examples)

Immaterial, hard to quantify (knowledge, reputation, culture)

“V” in VRINE Model

Valuable

“R” in VRINE Model

Rare

“IN” in VRINE Model

Inimitable & Non-Substitutable

“E” in VRINE Model

Exploitable

Value Chain Analysis vs. VRINE Model

Value Chain Analysis focuses on activities vs. VRINE Model focuses on resources & capabilities

Primary Activities Definition

Activities that are involved with a product’s physical creation, its sale and distrubtion to buyers, and its service after the sale

How is the value added for primary activities

left to right

Support Activities

Not part of the primary logistics involved but they assist primary activities

What are the primary activities categories

Inbound logistics (raw materials, Operations (production), Outbound Logistics (dsitribution), Marketing & Sales, Service (customer support)

What are the support activities

Firm infrastructure, Human Resource Management, Technology Development, Procurement

Key to competitve advantage in Value Chain Analysis

Finding better or different ways to develop/perform the same activities as rivals.

Outsourcing

Activity performed for a company by people other than its full-time employees.

Distinctive Competence (capability)

Capability that sets a firm apart from other firms: something that a firm can do which competitors cannot.

Core Competence (capability)

Capability which is central to a firm’s main business operations and which allow it to generate new products and services

Causual Abimiguity

Condition whereby the difficulty of identifying or understanding a resource or capability makes it valuable, rare, inimitable

Dynamic Capabilities

A firm’s ability to modify, reconfigure,and upgrade resources and capabilities in order to strategically respond to or generate environmental changes.

Asset Turnover

Measures the firm’s efficiency at generating revenue

Profit Margin

Measures the firm’s ability to garner higher prices to generate the revenues

Formula for Firm Profitability

ROA = net profit margin x asset turnover