The secret of success in competition lies often not so much in the use of one's own strength but in the

exploitation of the other side's weaknesses.

MGT612 Strategic Management

Session-VII

RAJESH VERMA
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LEARNING OBJECTIVES

1 2 3

Understand the importance of the external context for strategy and firm performance

Identify the major features of an industry and the forces that affect industry profitability
Understand the dynamic characteristics of the external context

COMPONENTS OF THE GENERAL ENVIRONMENT

Economic

Demographic

Sociocultural Industry Environment

Competitive Environment Political/ Legal

Global

Technological

THE EXTERNAL ENVIRONMENT OF THE ORGANIZATION

Macro Environment Political, Economic, Sociocultural, Technological, Environmental, Legal Industry Environment Strategic Group

The Organization

FORMS OF COMETITION

Generic Competition
Form Competition

Industry Competition
Brand Competition

INDUSTRY FRAGMENTATION AND CONCENTRATION

Monopoly

Duopoly

Fragmented

KEY QUESTION TO ASK

What macro environmental conditions will have a material effect on our ability to implement our strategy successfully?

What is our firms industry?

How stable are these characteristics?

What are the characteristics of the industry?

EXTERNAL CONTEXT OF STRATEGY

An internal analysis is
Internal

Strengths Weaknesses Capabilities Relationships Etc.

just half of what is needed to build strategy

The SWOT and more

complicated frameworks help us understand the full picture

THE COLA WARS (TIMELINE)

Coca-Cola Coca-Cola invented 1886 1950 1960 Beat Coke Pepsi Generation Pepsi

1970
Kick Pepsi's can Diet Coke New Coke 1980

Pepsi Challenge
Foster entrepreneurial spirit of Pepsis people

1990

Repair Coke and restore Stock price Diversify product line

2000

Diversify beyond soft-drinks

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FIVE-FORCES ANALYSIS

1. The five forces are environmental forces that impact on a

companys ability to compete in a given market.

2. The purpose of five-forces analysis is to diagnose the

principal competitive pressures in a market and assess how strong and important each one is.

PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of Threat of New New Entrants Entrants

THREAT OF NEW ENTRANTS

Economies of Scale

Barriers to Entry

Product Differentiation
Capital Requirements Switching Costs Access to Distribution Channels Government Policy Expected Retaliation

PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

BARGAINING POWER OF SUPPLIERS

Suppliers are likely to be powerful if: Supplier industry is dominated by a few firms

Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality

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

Suppliers products are differentiated

Suppliers products have high switching costs

Supplier poses credible threat of forward integration

SUPPLIER POWER

Diamond supply Percent

Diamond Retailers

Others

50
When firms in the supply industry can dictate terms, they can extract greater profits

DeBeers

50

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PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

BARGAINING POWER OF BUYERS

Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality

Buyers compete with the supplying industry by:

* Bargaining down prices * Forcing higher quality * Playing firms off of each other

Buyer has full information

BUYER POWER
Industry A Suppliers Buyers Industry B Suppliers Buyers

ILLUSTRATIVE

Profits

Profits

In industries characterized with many suppliers and few buyers, buyers often capture a greater share of profits

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PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

THREAT OF SUBSTITUTE PRODUCTS

Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products

Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery

THREAT OF SUBSTITUTES
Soft drinks Movie rentals
Block buster Coke Pepsi

Hollywood video

Bottled water

Cable TV

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CAUSES OF RIVARLY
Barriers to Entry Barriers to Exit In addition to entry and exit barriers, many factors drive rivalry

History of price wars

Level of fixed costs Industry
concentration

Market growth
Strong brands Proprietary technology Start-up costs Etc.,

Few other opportunities Sunk investments Etc.,

Etc.

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PORTERS FIVE FORCES MODEL OF COMPETITION

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

RIVALRY AMONG EXISTING COMPETITORS

Intense rivalry often plays out in the following ways:

Jockeying for strategic position Using price competition

Staging advertising battles

Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may be costly to smaller competitors

RIVALRY AMONG EXISTING COMPETITORS

Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs Lack of differentiation or switching costs Diverse competitors High strategic stakes High exit barriers

IMPACT OF COMPLEMENTOR
Complementor: Any factor that makes it more attractive for suppliers to supply an industry on favorable terms or that makes it more attractive for buyers to purchase products or services from an industry at prices higher than it would pay on absence the complementor Three Examples Hot dogs + Buns Music + MP3 player Delta plane orders + American Airlines plane orders
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More sales

More attractive offering

Lower costs from Boeing

THANK YOU

RAJESH VERMA
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