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Strategic Management

Strategic Management. The Components of a Company’s Macro-environment. What are the Industry’s Dominant Economic Traits?. Market size and growth rate Number of rivals Scope of competitive rivalry Buyer needs and requirements Degree of product differentiation Product innovation

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Strategic Management

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  1. Strategic Management Strategic Management-IV

  2. The Components of a Company’s Macro-environment Strategic Management-IV

  3. What are the Industry’sDominant Economic Traits? • Market size and growth rate • Number of rivals • Scope of competitive rivalry • Buyer needs and requirements • Degree of product differentiation • Product innovation • Supply/demand conditions • Pace of technological change • Vertical integration • Economies of scale • Learning and experience curve effects Strategic Management-IV

  4. Learning/Experience Effects • Learning/experience effects exist when a company’s unit costs decline as its cumulative production volume increases because of • Accumulating production know-how • Growing mastery of the technology • The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume Strategic Management-IV

  5. What Kinds of CompetitiveForces Are Industry Members Facing? • Objectives are to identify • Main sources of competitive forces • Strength of these forces • Key analytical tool • Five Forces Modelof Competition Strategic Management-IV

  6. The Five Forces Model of Competition Strategic Management-IV

  7. Analyzing the Five Competitive Forces: How to Do It Step 1:Identify the specific competitivepressures associated with each ofthe five forces Step 2:Evaluate the strength of eachcompetitive force -- fierce, strong,moderate to normal, or weak? Step 3:Determine whether the collectivestrength of the five competitive forcesis conducive to earning attractive profits Strategic Management-IV

  8. Competitive Pressures Among Rival Sellers • Usually the strongest of the five forces • Key factor in determining strength of rivalry • How aggressively are rivals using various weapons of competition to improve their market positions and performance? • Competitive rivalry is a combativecontest involving • Offensive actions • Defensive countermoves Strategic Management-IV

  9. Weapons for Competing and Factors Affecting Strength of Rivalry Strategic Management-IV

  10. Lower prices More or different performance features Better product performance Higher quality Stronger brand image and appeal Wider selection of models and styles Bigger/better dealer network Low interest rate financing Higher levels of advertising Stronger product innovation capabilities Better customer service Stronger capabilities to provide buyers with custom-made products What Are the TypicalWeapons for Competing? Strategic Management-IV

  11. What Causes Rivalry to be Stronger? • Competitors are active in making fresh moves to improve market standing and business performance • Slow market growth • Number of rivals increases and rivals are ofequal size and competitive capability • Buyer costs to switch brands are low • Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume • A successful strategic move carries a big payoff • Diversity of rivals increases in terms of visions, objectives, strategies, resources, and countries of origin • Outsiders acquire weak firms in the industry and use their resources to transform new firms into major market contenders Strategic Management-IV

  12. What Causes Rivalry to be Weaker? • Industry rivals move only infrequently or in a non-aggressive manner to draw sales from rivals • Rapid market growth • Products of rivals are stronglydifferentiated and customer loyalty is high • Buyer costs to switch brands are high • There are fewer than 5 rivals or there are numerous rivals so any one firm’s actions has minimal impact on rivals’ business Strategic Management-IV

  13. Competitive PressuresAssociated With Potential Entry • Seriousness of threat depends on • Size of pool of entry candidatesand available resources • Barriers to entry • Reaction of existing firms • Evaluating threat of entry involves assessing • How formidable entry barriers are for each type of potential entrant and • Attractiveness of growth and profit prospects Strategic Management-IV

  14. Factors Affecting Threat of Entry Strategic Management-IV

  15. Common Barriers to Entry • Sizable economies of scale • Cost and resource disadvantages independent of size • Brand preferences and customer loyalty • Capital requirements and/or otherspecialized resource requirements • Access to distribution channels • Regulatory policies • Tariffs and international trade restrictions • Ability of industry incumbents to launch vigorous initiatives to block a newcomer’s entry Strategic Management-IV

  16. When Is the Threat of Entry Stronger? • There’s a sizable pool of entry candidates • Entry barriers are low • Industry growth is rapid and profit potential is high • Incumbents are unwilling or unable to contest a newcomer’s entry efforts • When existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence Strategic Management-IV

  17. When Is the Threat of Entry Weaker? • There’s only a small pool of entry candidates • Entry barriers are high • Existing competitors are struggling to earn good profits • Industry’s outlook is risky • Industry growth is slow or stagnant • Industry members will strongly contestefforts of new entrants to gain a market foothold Strategic Management-IV

  18. Competitive Pressures from Substitute Products Concept Substitutes matter when customers are attracted to the products of firms in other industries Examples • Sugar vs. artificial sweeteners • Eyeglasses and contact lensvs. laser surgery • Newspapers vs. TV vs. Internet Strategic Management-IV

  19. How to Tell Whether SubstituteProducts Are a Strong Force • Whether substitutes are readilyavailable and attractively priced • Whether buyers view substitutesas being comparable or better • How much it costs end usersto switch to substitutes Strategic Management-IV

  20. Fig. 3.6: Factors Affecting Competition From Substitute Products Strategic Management-IV

  21. When Is the CompetitionFrom Substitutes Stronger? • There are many good substitutes readily available • Substitutes are attractively priced • The higher the quality and performance of substitutes • The lower the end user’s switching costs • End users grow more comfortable with using substitutes Strategic Management-IV

  22. Competitive Pressures From Suppliersand Supplier-Seller Collaboration • Whether supplier-seller relationships represent aweak or strong competitive force depends on • Whether suppliers can exercisesufficient bargaining leverage toinfluence terms of supply in their favor • Nature and extent of supplier-sellercollaboration in the industry Strategic Management-IV

  23. Factors Affecting Bargaining Power of Suppliers Strategic Management-IV

  24. When Is the BargainingPower of Suppliers Stronger? • Industry members incur high costs in switching their purchases to alternative suppliers • Needed inputs are in short supply • Supplier provides a differentiated inputthat enhances the quality of performanceof sellers’ products or is a valuable partof sellers’ production process • There are only a few suppliers of a specific input • Some suppliers threaten to integrate forward Strategic Management-IV

  25. When Is the Bargaining Power of Suppliers Weaker? • Item being supplied is a commodity • Seller switching costs to alternative suppliers are low • Good substitutes exist or new ones emerge • Surge in availability of supplies occurs • Industry members account for a bigfraction of suppliers’ total sales • Industry members threaten to integrate backward • Seller collaboration with selected suppliers provides attractive win-win opportunities Strategic Management-IV

  26. Competitive Pressures: Collaboration Between Sellers and Suppliers • Sellers are forging strategic partnershipswith select suppliers to • Reduce inventory and logistics costs • Speed availability of next-generationcomponents • Enhance quality of parts being supplied • Squeeze out cost savings for both parties • Competitive advantage potential may accrue to sellers doing the best job of managing supply-chain relationships Strategic Management-IV

  27. Competitive Pressures From Buyersand Seller-Buyer Collaboration • Whether seller-buyer relationships represent aweak or strong competitive force depends on • Whether buyers have sufficient bargainingleverage to influence terms of sale in their favor • Extent and competitive importance ofseller-buyer strategic partnershipsin the industry Strategic Management-IV

  28. Factors Affecting Bargaining Power of Buyers Strategic Management-IV

  29. When Is the BargainingPower of Buyers Stronger? • Buyer switching costs to competing brands or substitutes are low • Buyers are large and can demand concessions • Large-volume purchases by buyers are important to sellers • Buyer demand is weak or declining • Only a few buyers exists • Identity of buyer adds prestigeto seller’s list of customers • Quantity and quality of informationavailable to buyers improves • Buyers have ability to postpone purchases until later • Buyers threaten to integrate backward Strategic Management-IV

  30. When Is the BargainingPower of Buyers Weaker? • Buyers purchase item infrequently or in small quantities • Buyer switching costs to competing brands are high • Surge in buyer demand creates a “sellers’ market” • Seller’s brand reputation is important to buyer • A specific seller’s product delivers qualityor performance that is very important to buyer • Buyer collaboration with selected sellers provides attractive win-win opportunities Strategic Management-IV

  31. Competitive Pressures: CollaborationBetween Sellers and Buyers • Partnerships are an increasingly important competitive element in business-to-business relationships • Collaboration may result inmutual benefits regarding • Just-in-time deliveries • Order processing • Electronic invoice payments • Data sharing • Competitive advantage potential may accrue to sellers doing the best job of managing seller-buyer partnerships Strategic Management-IV

  32. For Discussion: Your Opinion Explain why low switching costs and weakly differentiated products tend to give buyers a high degree of bargaining power. Strategic Management-IV

  33. Strategic Implications ofthe Five Competitive Forces • Competitive environment is unattractive fromthe standpoint of earning good profits when • Rivalry is vigorous • Entry barriers are lowand entry is likely • Competition from substitutes is strong • Suppliers and customers haveconsiderable bargaining power Strategic Management-IV

  34. Strategic Implications ofthe Five Competitive Forces • Competitive environment is ideal froma profit-making standpoint when • Rivalry is moderate • Entry barriers are highand no firm is likely to enter • Good substitutesdo not exist • Suppliers and customers arein a weak bargaining position Strategic Management-IV

  35. Coping With theFive Competitive Forces • Objective is to craft a strategy to • Insulate firm fromcompetitive pressures • Initiate actions to producesustainable competitive advantage • Allow firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines thebusiness model for the industry Strategic Management-IV

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