2. Describe the way a firm competes within its industry
Outline how various forces in the external environment impact the attractiveness of an industry
Describe how a firm’s internal environment impacts its strategic approach
Perform a SWOT analysis of a firm by describing its internal strengths and weaknesses and defining the opportunities and threats that it faces in the marketplace
Describe how a firm can generate competitive advantage through one of the generic strategies: cost leadership, differentiation, or focus
Describe a firm’s value chain
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3. Figure 5.1 - Three Components of Strategy
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4. Three Generic Strategic Approaches
Low-cost strategy
Differentiation strategy
Focused strategy
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5. How the External Environment Impacts Industry Attractiveness
Firms are affected by a common set of external forces that determine attractiveness and profit potential
An effective strategy aligns a firm’s competitive advantage with the opportunities presented in the external environment
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6. Figure 5.5 - Porter’s 5-Forces Model
Source: Michael E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review, January Copyright © 2008 by the President and Fellows of Harvard College; All rights reserved. Reprinted by permission of HBS Publishing.
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7. Threat of New Entrants
New entrants increase rivalry and reduce profits
Barriers to entry:Obstacles a firm may face while trying to enter a market or an industry
Sources
Supply-side economies of scale
Demand-side benefits of scale
Customer switching costs
Capital requirements due to scale of entry
Incumbency advantages independent of size
Unequal access to distribution channels
Restrictive government policy and regulations
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8. Bargaining Power of Suppliers
Suppliers provide a firm with essential inputs in the manufacturing or production process
Supplier power occur when:
There are no substitutes for the supplier’s products
The supplier limits production
The supplier does not consider the industry as one of its major customers
First-mover advantage: Competitive advantage that occurs when a firm is first to offer desirable products or services that secure customer loyalty
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9. Characteristics of a Powerful Supplier Group
A supplier will tend to be powerful when:
Its industry is more concentrated than the industry it sells to (i.e., there are fewer suppliers than buyers)
Its buyers face switching costs in changing suppliers
No substitutes exist for what the supplier provides
It can threaten to integrate forward into the buyers industry
It does not depend heavily on the buyer’s industry for a large portion of its sales
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10. Threat of Substitutes Substitutes
Can be a competitor’s product or some other product that satisfies the same consumer need
Limit an industry’s profit potential by placing a ceiling on the prices that firms in an industry can charge
Are sometimes not immediately obvious
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11. The pressure that a supplier or buyer can exert on a company
Bargaining Power
The pressure that a supplier or buyer can exert on a company
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12. Bargaining Power of Customers
A customer group tends to be powerful when:
The group is concentrated or purchases in large volumes relative to the supplier
The supplier industry’s products that the customer group is purchasing are undifferentiated
The group faces few switching costs in changing vendors/suppliers
The customer group could potentially integrate backwards to produce the supplier industry’s product
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13. Rivalry Among Existing Competitors
Industry rivalry is most intense when:
Industry products or services lack differentiation or switching costs
Fixed costs are high, and marginal costs are low
There is overcapacity, or capacity must be expanded in large increments
The industry’s product is perishable or highly cyclical
Rival competitors are numerous or are roughly equal in size and power
Industry growth is slow
Exit barriers are high
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14. Figure 5.7 - Five Forces Impact on Industry Profitability
Source: Adapted from Michael E. Porter, “Understanding Industry Structure,” Harvard Business School Note No , rev. August 13, 2007 (Boston, MA: HBS Publishing, 2006), pp. 3–4.
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15. How a Firm’s Internal Environment Impacts Strategy
Tangible resources
Resource-based view of the firm: A theory that a firm can develop a competitive advantage through the collection and harvesting of resources
Human resources
Intangible resources
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16. SWOT Analysis
A tool that allows managers to take a snapshot of their firm’s internal strengths and weaknesses as well as the opportunities and threats that are evident in the external environment
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17. Figure SWOT Analysis
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18. SWOT Analysis Key questions for a SWOT analysis Strategic flexibility
What core internal capabilities set us apart from the competition?
What capabilities do we need to develop?
Key questions for a SWOT analysis
What is our unique selling proposition or core competitive advantage?
In what ways is the external context changing?
In what internal areas are we vulnerable?
What opportunities or threats do these changes present?
Strategic flexibility
The capability to identify and react to changes in the
external environment and to mobilize internal resources to deal with those changes
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19. Competitive Advantage and Value
The effect of the firm’s ability to create value for its customers that exceeds the cost of producing the product or service
Competitive advantage
The amount consumers are willing to pay for a product
or service. It comes from offering a lower price than that of competitors or providing a unique product whose benefits outweigh a higher potential cost
Value
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20. Figure 5.9 - Three Generic Strategies
Source: Adapted from Michael E. Porter, “The Five Competitive Forces That Shape Strategy,” Harvard Business Review, January 2008
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21. Generic Strategies Cost leadership Economies of scale Differentiation
A strategy that aims to provide a product or service at as low a price as possible to a broad audience
Cost leadership
Cost savings achieved when the volume of a product produced by a firm enables it to reduce per unit costs
Economies of scale
A strategy in which a firm seeks to be unique in its industry along a dimension or a group of dimensions that are valued by consumers
Differentiation
A strategy in which a company “focuses” its sales efforts on a specific geographical region, a specific group of purchasers, or a specific product type
Focus
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22. Stuck in the Middle Strategy
Engaging in numerous strategies without mastering any one particular strategy to achieve sustained competitive advantage
Profitable in the short run, but more focused competitors will be more successful in the long run
Happens to those firms that pursue revenue for revenue sake, causing them to lose focus and become less efficient
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23. Table 5.2 - Combining Generic Strategies with the 5-Forces Model
Source: Based on data from Arthur A. Thompson, Jr. and A. J. Strickland III, Strategy Formulation and Implementation: Tasks of the General Manager, 5th edition (Homewood, IL: Irwin, 1992), pp. 106–112.
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24. The Firm as a Value Chain
A systematic way of examining all of the activities a firm performs and determining how they interact to form a source of competitive advantage
Value chain analysis
The activities involved in the physical creation of the product and its sale and transfer to the buyer
Primary activities
Activities that provide the support necessary for the primary activities to occur
Support activities
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25. Figure 5.13 - The Basic Value Chain
Source: Adapted from Adelaide Wilcox King, Sally W. Fowler, and Carl P. Zeithaml, “Managing Organizational Competencies for Competitive Advantage: The Middle-Management Edge,” Academy of Management Executive, Vol. 15, No. 2, 2001, pp. 96–97.
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26. Table 5.3 - Primary Activities
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York, NY: The Free Press, 1985).
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27. Table 5.4 - Support Activities
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York, NY: The Free Press, 1985).
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28. Value Systems
Analyzing the firm’s overall value system helps managers:
Understand how to use the firm’s resources and capabilities to develop core competencies to generate value for customers better than its competitors
Compare the firm’s value chain with its competitors’ value chains to improve its value-creating activities
View the firm’s value chain as part of the larger system that includes the value chain of suppliers and distribution channel
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29. KEY TERMS
Bargaining power Barriers to entry Cost leadership Differentiation Economies of scale First-mover advantage Focus
Primary activities Resource-based view of the firm Strategic flexibility Support activities SWOT analysis Value Value chain analysis
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