STRATEGIC MANAGEMENT

STRATEGIC MANAGEMENT : 

STRATEGIC MANAGEMENT INDUSTRY ANALYSIS

WHY ANALYSE OF STRUCTURE OF INDUSTRY : 

WHY ANALYSE OF STRUCTURE OF INDUSTRY Understand context of firm decisions so firms can make decisions which are building block of strategy formulation Essential to making effective decisions about entry, exit, expansion, product positioning, cost reduction, … It helps identify potentially attractive/unattractive arenas for growth. Understanding the current “rules of the game” in the industry is a precondition for eventually changing them. To outperform in industry, you need to understand its structural conditions and the key competitive forces that operate in it now (and to forecast future conditions).

Michael Porter’s “Five Forces” model : 

Michael Porter’s “Five Forces” model

Forces driving Industry competition : 

Forces driving Industry competition Threat of New Entrants Rivalry Among Existing Firms Threat of Substitute Products / Services Bargaining Power of Buyers Bargaining Power of Suppliers

Threat of New Entrants : 

Threat of New Entrants New entrants to an industry typically bring to it new capacity, a desire to gain market share , & substantial resources that’s why a threat to an established corporation Threat of entry depends on the presence of entry barriers An entry barrier is an obstruction that makes it difficult for a company to enter an industry

Entry Barriers : 

Entry Barriers Economies of Scale: Learning or Experience Effect: Cost Disadvantage Independent of Size Brand benefits Capital Requirements Switching Costs Access to Distribution Channel Government policies

Rivalry Among Existing Firms : 

Rivalry Among Existing Firms In most industries , corporations are mutually dependent. A competitive move by one firm can be expected to have a noticeable effect on its competitors & thus may cause retaliation or counter efforts

Reasons of intense rivalry : 

Reasons of intense rivalry Number of competitors Rate of Industry Growth Product / service characteristics Amount of fixed costs Capacity Height of exist barriers Diversity of rivals

Threat of Substitutes : 

Threat of Substitutes Competitive pressure from substitutes arise from three factors: whether the substitutes available are attractively priced; whether buyers view substitutes available as satisfactory in terms of their quality and performance; how easily buyers can switch to substitutes. E.g. Tea & Coffee

Bargaining Power of Buyers : 

Bargaining Power of Buyers Buyers affect an industry through ability to force down prices ,bargain for higher quality & more services Bargaining power of buyers is high when buyer purchases a large proportion Changing suppliers costs very little E.g. office supplies

Slide 12: 

Undifferentiated or Standard Supplies e g Motorists can choose among many petrol retail outlets Customer's Price Sensitivity E.g. groceries stores have very small margins Accurate Information about the Cost Structure of Suppliers Credible threat of Backward Integration by Buyers E.g. Newspaper chain could make its own paper

Bargaining Power of Suppliers : 

Bargaining Power of Suppliers Depends on the Suppliers' decisions on prices, quality of goods and services other terms and conditions of delivery and payments have significant impact on the profit trends of an industry.

Factors affecting Suppliers bargaining power : 

Factors affecting Suppliers bargaining power Supplier dominated by few companies ,but sells to many E.g. Petroleum industry Importance of the Supplier's Product to Buyers E.g.: Word Processing software Substitutes are not available E.g. Electricity High Switching Costs for Buyers Credible Threat of Forward Integration by Suppliers E.g. Microprocessor producer Intel can make PC’s

LIMITATIONS : 

LIMITATIONS Qualitative more than quantitative Little attention to factors that might affect demand ,availability and price of substitutes and complements (strategies to boost demand, demographics, etc…) Most factors in Five Forces are about sharing the Potential Industry Earnings(PIE) No explicit account of role of government Industry is the unit of analysis -- not individual companies. Does not address how a firm can affect the ‘forces’ to its advantage

Strategies for Coping with the 5 Forces : 

Strategies for Coping with the 5 Forces A five-forces analysis identifies the threats to industry profits that all firms in the industry must cope with. There are Several ways such as 1Firms may position themselves to outperform their rivals, by developing a cost or differentiation advantage that somewhat insulates them from the five forces. Firms may identify an industry segment in which the five forces are less severe. Firms may try to change the five forces