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Learning Outcomes
Review of Porters 5 Forces Model and its link to Porters generic strategy Describe and evaluate Porters generic strategy Resource-based framework for analysis
Michael Porter
An industrys profit potential
is largely determined by the intensity of competitive rivalry within that industry.
According to Porter, businesses can use the model to identify how to position itself to take advantage of opportunities and overcome threats
Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy
Expected Retaliation
Supplier industry is dominated by a few firms Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Staging advertising battles Increasing consumer warranties or service Making new product introductions
Summary
As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive.
How to configure the value chain to support the strategy? (Use the value chain analysis framework)
Generic Strategy
According to Porter, competitive advantage, and thus higher profits will result either from: Differentiation of products (distinctive, more product features) and selling them at a premium price, OR Producing products at a lower price than competitors
Strategic Scope
Narrow
Cost focus
Differentiation focus
NOTE: If 2 or more competitors choose the same box, competition will increase
Strategic Scope
Narrow
Cost focus
Differentiation focus
NOTE: If 2 or more competitors choose the same box, competition will increase
Higher profits resulting from charging prices below that of competitors, because unit costs are lower Increase market share and sales by reducing the price below that charged by competitors (assuming price elasticity of demand) Ability to enter new markets by charging lower prices Is a barrier to entry for competitors trying to enter the industry
Analysis of the value chain identifies where cost savings can be made in the various parts and links
With a cost leadership strategy, the value chain must be organized to:
Reduce per unit costs by copying, rather than original design, using cheaper resources, producing basic products, reducing labor costs and increasing labor productivity Achieve economies of scale by high-volume sales Using high-volume purchasing to get discounts Locating where costs are low
Strategic Scope
Narrow
Cost focus
Differentiation focus
NOTE: If 2 or more competitors choose the same box, competition will increase
Analysis of the value chain identifies in what parts of the chain and through which links superior products can be created and customer perception may be changed
With differentiation strategy, the value chain must be organized to: Create products that are superior to competitors products in design, technology, performance, etc. Offer superior after-sales service Have superior distribution channels Create a strong brand name Create distinctive or superior packaging
Focus strategy targets a segment of the product market, rather than the whole market or many markets Segment is determined by the bases for segmentation, i.e., geographic, psychographic, demographic, behavioral characteristics Within the segment, either cost leadership or differentiation strategy is used
Strategic Scope
Narrow
Cost focus
Differentiation focus
NOTE: If 2 or more competitors choose the same box, competition will increase
Cost leadership Differentiation Ryan Air, McDonalds, Walmart BMW Cost focus Differentiation focus Ferrari, Rolls Royce
Strategic Scope
Narrow
Hybrid Strategy
Based on the idea that a strategy can be successful by using a mix of differentiation, price and cost leadership Example: Toyota
Resource-based Framework
Complicated and comprehensive analysis Analysis of 5 inter-related areas:
Resource-based Framework
Competitive Rivalry Company Industry Buyer Power Resource Markets Product Markets New Markets Organizations Products
Supplier Power
Organization
Threat of Substitutes
Substitutes
Strategic groups the group of competitors representing an organizations closest competitors Example: a group of branded clothes including Polo (Ralph Lauren), Tommy Hilfiger, and Izod (Lacoste), among others, may be a strategic group, even though there are other lower quality brands that are technically competitors Example 2: Rolex, Tag Heuer, Tissot may be part of a strategic group that does not include Swatch, Timex, Seiko, even though they are all watchmakers
Customer needs and satisfaction Unmet customer needs Market segments and profitability Number of competitors to the market and relative market share Number of customers and their purchasing power Access to distribution channels Ease of entry Potential for competence leveraging Need for new competence building
Resource markets: where organizations obtain finance, human resources, human resources, physical resources, technological resources Analysis focuses on:
Resource requirements Number of actual and potential suppliers Size of suppliers Potential collaboration with suppliers (cooperation) Access by competitors to suppliers Nature of the resource and availability of substitutes
Potential threats Other industries in which the organization may be able to leverage their competences New markets