CIM011J4lecture5

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CIMA Management Accounting - Business Strategy Lecture 5 The Global Competitive Environment

Learning Outcomes: 

Learning Outcomes Be able to carry out an analysis using Porter’s five forces model Appreciate the meaning and causes of globalisation Understand the issues of international trade and trading groups Appreciate the nature of Porter’s competitive advantage of nations and the diamond of competitive advantage Be able to conduct a competitor analysis At the end of this session you will:

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New Entrants Suppliers Substitutes Industry Competitors Intensity of Rivalry Michael Porter’s Five Forces Buyers

Five Forces Analysis (1): 

Five Forces Analysis (1) The threat of entry ... Dependent on barriers to entry such as: Economies of scale Capital requirements of entry Access to distribution channels Cost advantages independent of size (e.g. the “experience curve”) Expected retaliation Legislation or government action Product differentiation Switching costs

Five Forces Analysis (2): 

Five Forces Analysis (2) Buyer power is likely to be high when: There is a small concentration of buyers There are many small operators in the supplying industry There are alternative sources of supply Components or materials are a high percentage of cost to the buyer leading to “shopping around” Switching costs are low There is a threat of backward integration

Determinants of Buyer Power (continued): 

Determinants of Buyer Power (continued) The buyer’s purchases are large in relation to the total sales of the supplier The buyer has superior information about the industry The product is undifferentiated The quality of the component purchased is not particularly important to the product The buyer’s profits are low

Five Forces Analysis (3): 

Five Forces Analysis (3) Supplier power is high when: There is a concentration of suppliers Switching costs are high The supplier brand is powerful (differentiation) Integration forward by the supplier is possible Customers are fragmented and bargaining power low There are no substitute products The buyer’s volume of purchases is small compared to the supplier’s total sales The impact of the supplier’s inputs on cost or differentiation is high from the buyer’s perspective

Five Forces Analysis (4): 

Five Forces Analysis (4) Threat of substitutes Substitutes take different forms: Product substitution Substitution of need Generic substitution Doing without

Five Forces Analysis (5): 

Five Forces Analysis (5) Competitive Rivalry is high when: There is slow market growth There are high fixed costs in an industry Switching is easy Output capacity needs to be increased There is uncertainty about competitors Success is a prime strategic objective Markets are undifferentiated There are high exit barriers

The Five Forces - Other Issues: 

The Five Forces - Other Issues The impact of IT Affects all parts of the model Criticism of the model Relies on static picture of the competition Overemphasises the importance of the wider environment Government seen as passive

Globalisation: 

Globalisation Key drivers: Financial factors Country/continent alliances Legal factors Stock markets Protectionist measures disappearing However: Depends on the industry Unlikely to be global market for labour Depends on the market refers to the belief that the world is becoming a single market -

The Nature of International Business: 

The Nature of International Business Involves all the basic tools and concepts from business management Additional requirements because of International business deals: Foreign languages and cultures Foreign currency transactions Higher level of risk (political and economic)

Do Global Companies Exist?: 

“there are several global products (mainly fast moving consumer goods (fmcg) brands such as Coca-Cola and Marlboro cigarettes) and some global markets (particularly financial markets, many of which effectively trade 24 hours a day around the world) but as yet, no truly global companies” (Keith Ward) Do Global Companies Exist?

Arguments Against the Global or Boundary-Less Corporation?: 

Arguments Against the Global or Boundary-Less Corporation? Workforce Ownership and control restricted Top management rarely multinational Tax reasons R&D Concentration on home market when capital restricted Profits must go somewhere!

Regional Trading Blocks: 

Regional Trading Blocks EU – European Union of 25 States NAFTA – USA, Canada and Mexico Mercosur – Argentina, Brazil, Paraguay and Uruguay Other regional trade agreements exist between nations, but economic integration has not progressed far outside Europe and the Americas

Implications of Regional Economic Groupings: 

Implications of Regional Economic Groupings Mutual interdependence among nations Business decisions relate to (at least) several countries Economic and political bargaining power Tariffs set on reciprocal basis In longer term, changes in international patterns of trade

The World Trade Organisation(WTO): 

The World Trade Organisation (WTO) WTO replaced GATT in 1995 and acts as a forum for negotiation rates and removal of trade barriers Membership of 147 countries accounting for over 97% of world trade WTO decisions are binding on members, and rulings not obeyed result in penalties being imposed Conducts ‘rounds’ of business trade negotiations: DOHA Round issues covered - investment, competition policy and environment

The European Union : 

The European Union Removal of physical barriers Harmonisation of technical standards Public work contracts Telecommunications – more competition Provision of financial services Rationalisation of transport services

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Free movement of capital Recognition of professional qualifications Coordinated stance towards consumer protection Common currency widely adopted (Euro), though not without its disadvantages

Harmonisation Difficulties: 

Harmonisation Difficulties Company taxation Indirect taxation (VAT) Differences in prosperity Differences in workforce skills Infrastructure

Activity: 

Activity What advantages and disadvantages could you foresee about opening an outlet/factory/office in the following locations: Russia China The Middle East France USA

Competitive Advantage of Nations - Porter: 

Competitive Advantage of Nations - Porter Why does a nation become the home base for successful international competitors in an industry? Why are firms based in a particular nation able to create and sustain competitive advantage against the world's best competitors in a particular field? Why is one nation often the home for so many of an industry's world leaders?

Competitive Advantage of aNation's Industries: 

Competitive Advantage of a Nation's Industries Factor conditions (basic vs. advanced) Demand conditions Related and supporting industries Firm strategy, structure and rivalry Determined by the following factors and relationships between them:

The Diamond of CompetitiveAdvantage: 

The Diamond of Competitive Advantage

Clusters: 

Clusters Vertical (buyer-supplier) Horizontal (common customers, technology, skills) E.g. UK financial services is clustered in London Government policy and chance Machinery that produces the goods Finished goods Related services Inputs, supplies

How Does a Firm Succeed with No National Competitive Advantage?: 

How Does a Firm Succeed with No National Competitive Advantage? Compete in the most challenging market Spread R&D to countries with an established R&D base, or an industry cluster Invest heavily in innovation Invest in human resources, both firm and industry Look for new technologies Collaborate with foreign countries Supply overseas companies Source components from overseas Pressure for better conditions for the 'diamond' to develop

Competitor Analysis: 

Competitor Analysis Involves ‘the identification and quantification of the relative strengths and weaknesses (compared with competitors or potential competitors), which could be of significance in the development of a successful competitive strategy’ Purpose - try and predict what competitors might do, and what they cannot do (i.e. what constraints govern their behaviour)

Types of Competitor: 

Types of Competitor Brand competitor – e.g. Nike and Adidas Industry competitor – e.g. Amazon and Waterstones Generic competitor – e.g. Toiletries and CDs Form competitor – e.g. Coach and Train

Analysing Competitors: 

Analysing Competitors Competitors’ goals Assumptions competitors hold about the industry Current and potential strategy and situation Core capability

Competitor Responses: 

Competitor Responses Does not respond (laid back) Responds aggressively (the tiger) Reacts to threats in some markets, but not in all (the selective approach) Cannot predict response (stochastic)

Competitors – Other Issues: 

Competitors – Other Issues Competitive significance – more intense when the following are similar: Technology used Management skills Distribution channels Products offered Geographic area covered Exit and entrance barriers

E-Commerce: 

E-Commerce The use of electronic techniques, including the Internet, to sell products and services Types B2B – business to business B2C – business to consumer, e.g. Dell, Tesco home delivery, Easyjet C2C – consumer to consumer, e.g. online auctions

E-Commerce: 

E-Commerce Advantages Reduction in costs and therefore prices Shifts power from sellers to buyers Speed, range and accessibility Challenges traditional business models Give greater access to smaller companies Creates new networks, intermediaries and business partnerships

E-Commerce: 

E-Commerce Disadvantages Security issues Glorified catalogue Lacks the social experience of shopping Purely e-businesses have struggled to make a profit Needs to fit with existing systems unless start up company Complex legal issues

Developing an E-Commerce Strategy: 

Developing an E-Commerce Strategy Points to consider Will electronic sales reduce sales elsewhere or increase overall sales? Is the website appropriate? What budget should be set for website development, advertising etc.? Is the organisational infrastructure sufficient to support e-commerce?