semester 1 session 3a the five forces model and
TRANSCRIPT
Management and Planning SEMESTER 1 September 2009
C:\Allwork\geoff\Modules\M&P\M&P session 3a five forces model and competetive strategies.doc Geoff Leese
Semester 1
Session 3a
The five forces model and competitive
strategies
Objectives
• To be able to describe and apply Porter’s five forces model of competitive pressures.
• To be able to describe and use Porter’s generic competitive
strategies
Before next week! These are all likely to be tested in coursework and in the examination.
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The Five Forces model and competitive strategies
Geoff Leese September 2005 revised September 2006, July 2007, August 2008,
August 2009.
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Porter’s five forces model
Rivalry with competitors
Potential Entrants to market
Substitutes
BuyersSuppliers
Bargaining Power Bargaining Power
Threat of substitutes
Threat of entry
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Threat of entrynMore likely when
Economies of scale are possibleCapital requirements of entry are lowEasy access to distribution channelsNo dominant “player”Little expected retaliationLittle government/legislative interventionLow levels of differentiation
n Important issuesWhat barriers exist?What is our position?
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Buyer power
nMore likely whenHigh concentration of buyersLarge number of small suppliersLittle risk/low cost of switchingAlternative sources of supply
– Low differentiation– High levels of competition
High risk of backward integration
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Supplier power
nMore likely whenHigh concentration of suppliersCost of switching suppliers is highRisk of switching suppliers is highSupplier has powerful brand Supplier dominates marketHigh risk of forward integration
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Threat of substitutes
nProduct for ProductPost replaced by fax replaced by email
nSubstitution of needBetter quality castings reduces need for machine tools
nGeneric substitutionHoliday or a new TV?
nDo without!
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Competitive rivalry (1)
nRivalry between competing organisations
n Issues –What is it based on?Increasing or decreasing?How is it affecting us?What can we do about it?
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Competitive Rivalry(2)n Balance of rivalry
Lots of small, balanced competitors?Market domination?
nMarket growth ratesProduct life cycle?
nGlobal markets?nHigh fixed costsnHigh cost of extra capacityn Level of differentiationnHigh exit barriersn Easy acquisition
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Collaboration and competition
nCollaboration between buyer and sellerInput and output!
nCollaboration to increase buying powerNISA, SPAR, SURF?
nCollaboration to avoid substitution or prevent entry
Collaborative R&D, marketing boardsnCollaboration to gain entry
Honda/Rover?
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Key issues
nWhat are the key forces at work in our competitive environment?
n Are there underlying forces (SLEPT analysis?) contributing to this?
n Is it likely that these forces will change? If so how and why?
nHow do our competitors stand?nHow do WE stand?nWhat can be done to influence these forces?
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Critical (Key) Success Factors
nCSFs are aspects of strategy where you must provide better value and beat the competition
nCompetences needed in activities which underpin each critical success factor
n Performance standards for these determine how competitive advantage will be achieved
nAdvantage lost by competitor performance & CSFs changing
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Identifying Critical Success Factors
nThese are for an IndustrynOhmae gives 3 areas to consider, the 3
Cs
nCustomer issuesnThe competitionnThe business (or Corporation)
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Customers
nWho are they now & potentiallyn Segments in the marketnWhy do they buy from whoevernGeneral issues
priceservicereliability + qualitytech specbrands
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Competition
nWho & who has market dominance & why
nMarket factors and intensitynResource comparisonsnGeneral issues
Cost and price comparisonsQuality and serviceLogistics
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The Business
nWhat do our competitors actually deliver to customers
nWhat is our biggest cost areanGeneral issues
Low cost, labour costs, economy of scaleOutput and qualityPeople - skills, relationshipsInnovation and technology
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Competitor Analysis
nWho are your competitorsnWhere are theynHow manynWhat do they compete onnWhat market share do they haven Is the market segmentednHow strongly do they competenAre there any alliances
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Strategic alternatives
nGrowth and expansionnAcquisitionn IntegrationnDivestment
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Competitive strategies
nPorter’s generic strategiesCost leadershipBroad-market differentiationFocus CostFocus differentiation
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Cost leadership (1)
nLow level of differentiationnAim for average customern Introduce improvements only when
customers demands themnPricing strategies
Sell at industry average, improve profitsSell at below average, improve market share
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Cost leadership(2)
nNeeds these strengthsAccess to capital required for significant investment in process technologyAbility to design products/services that have low production costsExclusive access to low cost materials/componentsEfficient distribution channels
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Cost leadership(3)
nAdvantagesCost advantage can protect from new entrantsPricing at industry average allows price-cutting if necessary
nRisksTechnology may be leapfrogged or copiedRisk from a number of focussed cost leading enterprises
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Differentiation(1)nPerceived quality is the key!
Whether real or not.Intrinsic qualities of the productPre/post sales service
nAllows premium pricing
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Differentiation(2)
nTypical strengths requiredAccess to leading edge R&DHighly skilled and creative product developmentStrong sales teamCorporate reputation for quality and innovation
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Differentiation(3)n Advantages
Price increases from powerful suppliers can be passed on to buyersBrand loyalty protects from substitutionBrand loyalty protects against market entryBuyers’ cost of switching may be high
nRisksImitation is a possible threat“Novelty” value short-livedLimits to price elasticityCustomer tastes may change
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Focused strategies (1)
nFocuses on a narrow market segment (niche market) and attempts to obtain competitive advantage on a cost or differentiation basis.
nOften generates fierce customer loyaltynConcentrate on core competences
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Focused strategies(2)
nAdvantagesPower of buyers – often sole source of supplyBrand loyalty helps protect against substitution or market entryEasier to stay close to customer and respond quickly to changes in need
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Focused Strategy (3)
nRisksLow purchasing quantities hands power to suppliersLow production volume brings high unit costsChange in consumer taste means that niche markets disappearMay be easy for cost leaders/big differentiators to adapt their products to compete
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Stuck in the middle?
nPorter argues long term interests are best served by picking a strategy and sticking to it.
nHow does one then cope with mixed consumer needs, quality and price for example?
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Summary
nFive forces modelnPorter’s generic strategies
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Further reading
nThe Cambridge University view – follow the link!
nMore explanation – follow the link!nBennett chapter 3nJohnson and Scholes chapters 3 and 6
Management and Planning SEMESTER 1 September 2009
C:\Allwork\geoff\Modules\M&P\M&P session 3a tutorial - Five forces and competetive strategies.doc Geoff Leese
Session 3a
The five forces model and competitive
strategies Tutorial questions
• Using the five forces model, describe and analyse the competitive pressures in the environment of your own firm.
• Using Porter’s generic strategies, suggest a strategy that may
help you to deal with these competitive pressures.
• Be prepared to discuss your solutions during next week’s tutorial session.
Management and Planning SEMESTER 1 September 2009
C:\Allwork\geoff\Modules\M&P\M&P session 3b header - Management and environmental audit.doc Geoff Leese
Semester 1
Session 3b
Management and Environmental Audit
Objectives
• Management audit o To be able to describe
The Seven-S model Value Chain Analysis Organisational Network Analysis
o And use them in a given scenario.
• Environmental Scanning o To be able to describe
PEST (STEP, SLEPT) analysis Competitor analysis
o And use them in a given scenario
• SWOT analysis o To be able to describe SWOT analysis and combine the
above into a SWOT analysis document
These are all likely to be tested in coursework and in the examination.
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Management Audit and Environmental Analysis
Geoff Leese October 2005 Revised September 2006, July 2007, August 2008,
August 2009.
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SWOT analysis
nStrengthsnWeaknessesnOpportunitiesnThreats
Internal (Management audit)
External (Environmental Scanning)
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Management auditnThe 7-S modelnValue chain analysisnNetwork analysis
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McKinsey’s 7-S Framework
nStrategynStructurenSystemsnShared ValuesnStaffnSkillsnStyle
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an approach to organising
n aid to building a cohesive strategyn all equally importantn 7 interdependent variablesn change one, impacts othersn use this to evaluate strategy developmentsn soft is harder to measuren good for capturing importance of the links
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Value chain analysis (Porter)
nViews the organisation as a chain of value-creating activities.
nMust create sufficient value to exceed their cost thus generating profit (or at least not generating loss!)
nPrimary and support value chain activities
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Primary value chain activitiesInbound logistics Operations
Outbound logistics
Sales and marketing
Service
Any or all of these can be important in a given scenario – sometimes defining them is not so simple!
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Support value chain activities
nProcurementnTechnology developmentnHuman Resource Managementn Infrastucture management
Legal, financial, QA, estates and buildings etc
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Value chain analysis
n Identify the activities and process flowsn Identify linkages between activitiesn Identify ways to optimise the value chain
Outsourcing?Involving the customer?
– On-line booking– Self-assembly furniture
Involving suppliers?
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Organisational network analysis
nSocial network analysis applied to organisations
nMaps “nodes” (people, groups, functions) and the interactions between them (relationships or flows)
nMeasures “centrality” of nodes (their importance) using mathematical criteria
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Some ONA criteria
nDegrees (number of direct connections)nBetweenness (nodes that connect
other nodes )nCloseness (short paths to many nodes)
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An ONA diagram
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Environmental scanning(1)
nMacro environmentPEST,SLEPT,STEP
nMicro-environmentCompetitors, suppliers, distributors, customers
nMethodsAd-hoc (usually in response to crisis!)Regular scheduledContinuous
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Macroenvironmental scanning
nPEST (STEP, SLEPT) analysisPolitical (includes legal!)EconomicSocial (includes “Green”)Technological
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Political factors
nTaxationnEmployment/Health and Safety lawnRegulation/deregulationnTrade restrictions and tariffs (or lack of
them!)nPolitical stability
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Economic factors
nConnected to political onesnEconomic cyclenGrowth or recession?n Interest ratesn Inflation ratesnExchange rates
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Social factors
nDemographynAge distributionnGeographical distributionnCultural normsn“How we live”
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Technology factors
nRate of technological changenAutomationnTechnology incentivesnEmerging technologiesnLevels of R&D activity
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Microenvironmental scanning
nCompetitor analysisCompetitor arrayCompetitor profiling
nConsumer analysis (market research)nProduct innovations
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Competitor array example
Should we include ourselves?
Key Industry Success Factors Weighting Competitor
1 rating Competitor 1 weighted
Competitor 2 rating
Competitor 2 weighted
1 - Extensive distribution .4 6 2.4 3 1.2
2 –Customer focus .3 4 1.2 5 1.5
3 - Economies of scale .2 3 .6 3 .6
4 - Product innovation .1 7 .7 4 .4
Totals 1.0 20 4.9 18 3.7
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The SWOT matrix
Opportunities Threats Strengths S-O strategies S-T
strategies Weaknesses W-O
strategies W-T strategies
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SWOT Strategiesn Strength-Opportunity
Make use of strengths to grasp opportunities that fit them
n Strength-ThreatIdentify ways to use strengths to minimise external threats
nWeakness-OpportunityOvercome weaknesses to pursue opportunities
nWeakness-ThreatPrevent weaknesses from encouraging threats
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Summary
n SWOT analysisAssess and analyse strengths and weaknesses
– Seven S – Value chain– Organisational network analysis
Assess and analyse opportunities and threats– PEST analysis– Competitor analysis– Market research
Devise strategies based on all four
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Further reading
nBennett Chapter 5nJohnson and Scholes chapters 3 and 4nFor ONA –
http://www.orgnet.com/sna.htmlnGeneral strategic management stuff
http://www.geocities.com/WallStreet/District/6592/
Management and Planning SEMESTER 1 September 2009
C:\Allwork\geoff\Modules\M&P\M&P session 3b tutorial - Managemenyt and environmental audit.doc Geoff Leese
Session 3b
Management and environmental audit
Tutorial questions
• Conduct a “quick and dirty” environmental scanning exercise for your own organisation, using o STEP analysis o a competitor array.
• Conduct a “quick and dirty” management audit using one from
o The seven-S model o Value chain analysis o ONA
• Suggest at least two strategies based on the above analysis and
categorise them.
• Be prepared to discuss your solutions during next week’s tutorial session.