P3 Business Analysis

2 A1. The need for, and purpose of, strategic business analysis A2. Environmental issues affecting the strategic position of an organisation A3. Competitive forces affecting an organisation A4. Marketing and the value of goods and services A5. The internal resources, capabilities and competences of an organisation Section A: Strategic position Designed to give you the knowledge and application of:

3  Discuss the significance of industry, sector and convergence.  Evaluate the sources of competition in an industry or sector using Porter’s five forces framework.  Assess the contribution of the lifecycle model.  Analyse the influence of strategic groups and market segmentation. A3: Competitive forces affecting an organisation Learning Outcomes

4 Industry, sector and convergence Convergence: where previously separate industries begin to overlap in terms of activities, technologies, products and customers. Johnson, Scholes and Whittington Industry Sector common production techniques similar products common method of generating profits sub-part of market / industry similar characteristics Benefits  increases similarities and decreases differences  cost benefits for customers Industry convergence: when two or more companies which belong to traditionally separate industries come together to provide related services Reasons  Demand led: book publisher into DVD market  Supplier led: hotel into car hire services  Stronger substitutes: phone service provider into wireless services  Complementary goods: printers into cameras

5 Porter’s five forces model Competitive rivalry Threat of new entrants Threat of substitutes Bargaining power of suppliers Bargaining power of buyers  helps identify sources of competition in an industry / sector  helps companies understand how profitable the industry is and what the company can do to mitigate negative forces and therefore improve profitability  should be used at the level of SBU rather than the organisation as a whole  SBU = part of entity for which there is a distinct market for goods / services  5 forces are not independent of each other – one force can trigger changes in the other

6 Threat of new entrants Depends on the extent to which there are barriers to entry such as:  Economies of scale  The capital requirement of entry  Access to supply or distribution channels  Supplier and customer loyalty  Cost disadvantages independent of scale  Expected retaliation  Government regulation  Differentiation Factors that need to be overcome by new entrants in order for them to compete successfully The existence of such barriers should be considered as merely a delay in entry and NOT a permanent stop to the potential entrant Continued …

7 Threat of substitutes Alternative product Threats of substitutes is higher in the case of  Product-for-product substitution  Substitution of need  Generic substitution Competitive rivalry Rivals = Entities with similar products / services in the same customer group Competitive rivalry is higher in the case of  Equally balanced competitors  Slow rate of market growth (mature market)  Lack of differentiation  High fixed costs in industry  High exit barriers Continued …

8 Bargaining power of buyers and suppliers Bargaining power of buyers is higher when:  concentration of buyers  switching costs between suppliers is low  buyers have potential for backward integration  buyers are well informed  buyers’ quality expectations are not high Bargaining power of suppliers is higher when:  concentration of suppliers  switching costs between suppliers are high  supplier has potential for forward integration  customers are fragmented so that they have little bargaining power  brand is powerful

9 Porter’s Generic Strategies Model In order to achieve a competitive advantage Porter suggests two main choices: 1.Cost leadership 2.Differentiation 1. Cost leadership strategy “We sell cheaper products” “We can compete with every industry player” “We earn the highest per unit profit” How can we achieve cost leadership?  mass production - achieve economies of scale  use technology – decrease labour costs  minimise raw material and overhead costs - develop automated product designs  constantly seek to achieve productivity and efficiency Continued …

10 2. Differentiator strategy “We sell unique (different) products” “We can charge a premium which customers are ready to pay as reward for added value ”  Image differentiation: market the product as having a different image(e.g. different colour, size packaging, etc.)  Support differentiation: sell something to support the product(e.g. 0% finance, 24 hour free delivery, etc)  Quality differentiation: product features will make it better as the product will perform with greater initial reliability, long-term durability and superior performance  Design differentiation: design the product differently from the design currently dominating the market(e.g. new computer software such as Google Chrome, etc) Continued …

11 3. Focus strategy  Cost focus: maintain lowered costs by selecting a particular market niche and concentrating on a limited range of products and small geographical area  Differentiation focus: select a particular niche and concentrate on competing in that niche on the basis of differentiation, e.g. luxury goods. “We cater to a particular market niche, i.e. a specific type of customer or a specific geographical area” Continued …

12 OVERALL COST LEADERSHIP DIFFERENTIATION Cost focus Differentiation focus FOCUS Competitive scope Broad target (industry-wide) Narrow target (particular segment only) Lower cost Differentiation (uniqueness perceived by customer) Competitive advantage

13 Combining Porter’s Generic Strategies Model with Porter’s Five Forces Model ForceHow to mitigate this forceGeneric strategies Potential entrants Build barriers to deter new entrants  Cost leadership: economies of scale and lowest unit cost  Differentiation: powerful brands and customer loyalty Buyer power  Customer loyalty and contracts  Increase your customer base  High quality (differentiation) Give buyers value for money through:  low prices (cost leadership) Substitutes Make your product:  unique  difficult to substitute  Innovate  Patents (differentiation) Supplier power  Create your own pool of suppliers  Spread your raw material sources Easier switching between suppliers, therefore reducing their bargaining power (Cost differentiation) Competitive rivalry Win over your market rivals  Cost leadership: win price war  Differentiation: the more unique your product is, the less competitors switch to alternate products

14 Lifecycle model Decline stage (D)Development stage (I) Growth stage (G) Shakeout stage (S) Maturity stage (M) IGSMD ProductsBasicImprovingStreamlinedStandardised Quality deteriorated Buyers Few & unaware Curious Variety to choose from Brand loyalty Reduced purchases CompetitorsNegligible Fight for market share Weaker players forced out Aim to maintain share Declining market size; players exit industry

15 Strategic groups Strategic group: organisations within an industry with similar characteristics, following similar strategies or competing on similar bases. Johnson, Scholes and Whittington Uses of strategic groups  identify direct competition  intensified negotiating power due to common interests  easier to recognise opportunities, threats and rivals Diversity Geographic coverage Distribution channels Extent of branding Coverage of market Basis for identifying strategic groups Strategic customer: the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased. Johnson, Scholes and Whittington

16 Market segmentation Market segment: group of customers who have similar needs that are different from customers in other parts of the market. Johnson, Scholes and Whittington Market segmentation: dividing the market into market segments such as: Demographic BehaviouralisticGeographic Psychographic Why should we segment markets?  understand and satisfy customer needs better  identify and market appropriate segments accordingly  target marketing Ideal market segment homogeneoussignificantmeasurable accessible sustainable

17 Recap  Discuss the significance of industry, sector and convergence.  Evaluate the sources of competition in an industry or sector using Porter’s five forces framework.  Assess the contribution of the lifecycle model.  Analyse the influence of strategic groups and market segmentation.