Business Strategy Overview 2024/2025

Business Strategy

• This presentation covers business strategy, focusing on industry and sector analysis, competitive forces, and Porter's Five Forces. The presentation's date is 2024/2025 and appears attributed to Sandra Ramos.

The Strategic Position (Industry and Sector Analysis)

• Industries are groups of companies producing similar products or services.
• Sectors are often synonymous with industries, but the specific categories are not fully elaborated.
• Markets are groups of customers purchasing similar products or services. The automotive industry, as an example, features markets in Europe, North America, and Asia.
• Macro-environmental factors influence industry opportunities and threats. These general factors manifest in the immediate environment of specific sectors. An example is the smartphone industry impacting Samsung.

The Competitive Forces

• Industries vary significantly in attractiveness. Attractiveness is essentially measured by profitability potential.
• A key driver of profitability is the competitive landscape, supplier potency, and buyer strength, factors frequently differing across industries.
• This presentation leverages Porter's Five Forces to analyze competitive intensity.

Porter's Five Forces

• Porter's Five Forces (Michael Porter) helps examine industry attractiveness. It is relevant for all organizations, not just profit-driven ones.
• Critical in public and non-profit organizations to understand supplier power and competitive rivalry within the same market.
• The framework includes;
  • Threat of new entrants;
  • Bargaining power of suppliers;
  • Bargaining power of buyers;
  • Competitive rivalry;
  • Threat of substitute products or services

Competitive Rivalry

• Five factors shape the intensity of rivalry within an industry:
  • Competitor concentration and balance: Numerous, roughly equal competitors pose a high risk of intensive rivalry, often involving aggressive price cutting strategies. Conversely, industries with one or two dominant players may exhibit less intense competition.
  • Industry growth rate: Robust growth allows companies to expand without necessarily impacting rivals. In declining markets, competing for limited growth often results in intense competitive pressures.
  • High fixed costs: Industries with substantial capital investments (for example, equipment) tend towards intense rivalry because companies seek to spread their costs through volume - often inducing price wars.
  • High exit barriers: When leaving an industry is difficult, companies are more likely to remain and fight for market share, exacerbating competition, especially if excess capacity exists.
  • Low differentiation: Commodity-like products are easily substitutable. Competition is mainly on price when industries lack product differentiation.

The Threat of Entry

• Entry barriers influence competitive intensity.
  • Scale and experience: Economies of scale (lower unit costs as production increases) can create significant entry hurdles. High capital investments and experience curves (cumulative knowledge, increasing efficiency) are also pivotal entry barriers.
  • Access to supply or distribution channels: Access to essential supply chains or distribution networks hinders newcomers from easily gaining market entry.
  • Expected retaliation: Incumbents' known, or anticipated, responses (like price wars) act as deterrents to new entrants.
  • Legislation or government action: These actions include barriers like government regulations, patent protection (or lack thereof), or direct regulatory control.
  • Incumbent advantages: Existing companies often hold cost or quality advantages, such as proprietary technology or existing customer bases.

The Threat of Substitutes

• Substitutes are products or services from different industries yet offering similar benefits.
  • Price/performance ratio: Substitutes may have different prices but are still a threat (e.g., aluminum vs steel) if they still offer comparable benefits to consumers (lightness, resistance to corrosion, etc.).
  • Extra-industry effects: Substitutes often come from outside the existing industry, and these need separate analysis.

The Power of Buyers

• Buyer power depends on the capacity of the consumers to negotiate prices or demand product improvements.
  • Concentrated buyers: When a few large customers control a substantial portion of sales, suppliers face great buyer power.
  • Low switching costs: Customers readily shifting between suppliers empower buyers.
  • Buyer competition threat: If buyers manufacture their own products or can readily access comparable products or services, they hold considerable power.
  • Low buyer profits/impact on quality: When customers are under financial pressure or where the purchased product has little influence on buyer's quality, buyers are incentivized to aggressively negotiate prices.

The Power of Suppliers

• Supplier power is measured by their ability to influence the organisation.
  • Concentrated suppliers: When few suppliers dominate, they have significant power over buyers.
  • High switching costs: Difficulties in switching suppliers bolster supplier power.
  • Supplier competition threat: Suppliers capable of entering the customer's industry can wield significant power.
  • Differentiated products: Highly differentiated inputs reduce the threat of substitutions and enhance suppliers' negotiation positions.

Complementor and Network Effects

• Complementors enhance business attractiveness for customers and suppliers, often through enhanced product value:
  • Demand side: When customers perceive value in combining products or services, one organization benefits another enhancing overall attractiveness.
• Supply side: Supply-side complementors enhance attractiveness when better supplies increase value to another organization.
• Network effects: A product or service's value increases with the number of users. In essence, additional users typically boost the value proposition.

Defining the Industry

• The presentation emphasizes that industries should be defined appropriately and may be analyzed at various levels (e.g., geographically, by product type, and by specifics within the marketplace).
• Industries are often within a larger value chain or system and should be analyzed accordingly.
• Competitive forces within a specific sector or segment often differ.

Implications of the Competitive Five Forces

• This section uses Porter's Five Forces to make strategic decisions regarding market entry/exit, how to modify the forces, and to understand competitors' reactions, ensuring a competitive advantage with appropriate strategies.