Business Strategy PDF

BUSINESS STRATEGY Sandra RAMOS 2024/2025 THE STRATEGIC POSITION INDUSTRY AND SECTOR ANALYSIS THE COMPETITIVE FORCES INTRODUCTION Broad macro-environment influences opportunities and threats. The impact of these general factors tends to surface in the immediate env...

BUSINESS STRATEGY Sandra RAMOS 2024/2025 THE STRATEGIC POSITION INDUSTRY AND SECTOR ANALYSIS THE COMPETITIVE FORCES INTRODUCTION Broad macro-environment influences opportunities and threats. The impact of these general factors tends to surface in the immediate environment of the specific industry or sector. Example: Samsung Smartphone industry. Competitors' strategies, customer’s needs and the supply of phone components. 4 INTRODUCTION Industry: A group of firms producing products and services that are essentially the same. Often described as ‘sectors’. Example: Automobile Industry. Market: A group of customers for specific products or services that are essentially the same (e.g. a particular geographical market). Example: Automobile industry has three main markets: Europe, North America and Asia. 5 THE THREE MAIN TOPICS 6 THE COMPETITIVE FORCES Industries vary widely in terms of their attractiveness. Competitive advantage -> ultimately measured by its ability to generate profit (for a company) or to capture the resources necessary for its existence (for a non-market organisation). A key determinant of profitability is the extent of competition and the strength of buyers and suppliers, and this varies between industries. 7 PORTER’S FIVE FORCES Porter’s Five Forces (Michael Porter) -> Helps to analyse an industry and identify the attractiveness of it. It is relevant to most organisations and provides an useful starting point for strategic analysis even where profit criteria may not apply: Public sector: important to understand how powerful suppliers can push up costs. Non-profit sector: important to avoid excessive rivalry within the same market. 8 PORTER’S FIVE FORCES 10 COMPETITIVE RIVALRY At the centre of the framework is the rivalry between existing players – incumbents – in an industry. The more competitive rivalry there is, the worse it is for incumbents. Competitive rivals: organisations aiming at the same customer groups and with similar products and services (i.e. not substitutes). E.g. Air France – British Airways = Rivals Air France – SNCF = Substitutes 11 COMPETITIVE RIVALRY Five factors tend to define the extent of rivalry in an industry or market: 1. Competitor concentration and balance: Numerous competitors OR of roughly equal size or power = danger of intensely rivalrous behaviours as competitors attempt to gain dominance over others (E.g. Aggressive price cuts). Less rivalrous tend to have one or two dominant organisations, with the smaller player reluctant to challenge the larges ones directly (E.g. Niche). 12 COMPETITIVE RIVALRY 2. Industry growth rate: In situations of strong growth = an organisation can grow with the market. In situations of low growth or decline = any growth is likely to be at the expense of a rival and meet with fierce resistance. Low-growth markets are therefore often associated with price competition and low profitability. 13 COMPETITIVE RIVALRY 3. High fixed costs: Industries with high fixed costs = tend to be high rivalrous (due to high investments in capital equipment or initial research). E.g. Companies will seek to spread their costs (i.e. reduce unit costs) by increasing their volumes -> they typically cut their prices, prompting competitors to do the same and thereby triggering price wars in which everyone in the industry suffers. If extra capacity can only be added in large increments, the competitor making such an addition is likely to create short-term over- capacity in the industry, leading to increased competition to use capacity. 14 COMPETITIVE RIVALRY 4. High exit barriers: High barriers to exit (closure or disinvestment) = tends to increase rivalry (mainly in declining industries). Excess capacity persists and consequently incumbents fight to maintain market share. Exit barriers might be high due: high redundancy costs, high investments in specific assets. 15 COMPETITIVE RIVALRY 5. Low differentiation: Commodity market, where products or services are poorly differentiated, rivalry is increased, because there is little to stop customers switching between competitors and the only way to compete is on price. 16 THE THREAT OF ENTRY How easy it is to enter the industry influences the degree of competition. The greater the threat of entry, the worse it is for incumbents in an industry. An attractive industry has high barriers to entry to reduce the threat of new competitors. Barriers to entry: factors that need to be overcome by new entrants if they are to compete in an industry. 17 THE THREAT OF ENTRY Five important entry barriers are: 1. Scale and experience: Economies of scale: Corresponds to a reduction in the unit cost of goods or services, linked to an increase in the number of units produced. Result from a better spread of fixed costs over a greater number of units produced. Once incumbents have reached large-scale production, it will be very expensive for new entrants to match them and until they reach a similar volume they will have higher unit costs. 18 THE THREAT OF ENTRY 1. Scale and experience: High capital investment requirements. Experience curve: give incumbents a cost advantage because they have learnt how to do things more efficiently than an inexperienced new entrant could possibly do. Network effects: buyers value being in a ‘network’ of a large number of other customers. 19 THE THREAT OF ENTRY 2. Access to supply or distribution channels: Through direct ownership (vertical integration) or through customer and supplier loyalty. In some industries this barrier has been overcome by new entrants who have bypassed retail distributors and sold directly to consumer through e-commerce. 20 THE THREAT OF ENTRY 3. Expected retaliation: Retaliation can take the form of a price war or a marketing blitz. Just the knowledge that incumbents are prepared to retaliate is often sufficiently discouraging to act as a barrier. 4. Legislation or government action: Legal restraints on new entry vary from patent protection, to regulation of markets, to direct government action. 21 THE THREAT OF ENTRY 5. Incumbery advantages: Incumbents may have cost or quality advantages not available to entrants including access to proprietary technology, raw material sources and geographical locations or an established brand identity. 22 THE THREAT OF SUBSTITUTES Substitutes: products or services that offer the same or similar benefit to an industry’s products or services, but have a different nature. E.g.: Aluminium -> Steel Tablet -> Computer Airplane -> Train Managers often focus on their competitors in their own industry, and neglect the threat of substitutes. 23 THE THREAT OF SUBSTITUTES Substitutes can reduce demand for a particular type of product as customers switch to alternatives. However, there does not have to be much actual switching for the substitute threat to have an effect. The simple risk of substitution puts a cap on the prices that can be charged in an industry. 24 THE THREAT OF SUBSTITUTES 1. The price/performance ratio: a 2. Extra-industry effects: Substitutes substitute is still an effective come from outside the incumbents’ threat even if more expensive, industry and should not be confused as long as it offers performance with competitors’ threats from within advantage that customers value. the industry. E.g.: aluminium is more expensive than steel, but its relative lightness and its resistance to corrosion gives it an advantage. 25 THE POWER OF BUYERS Buyers: organisation’s immediate customers, not necessarily the ultimate consumers. If buyers are powerful they can demand low prices or costly product or service improvements. 26 THE POWER OF BUYERS Buyer power is likely to be high when some of the following four conditions prevail: 1. Concentrated buyers: where a few large customers account for the majority of sales, buyer power is increased. 2. Low switching costs: where buyers can easily switch between one supplier and another, they have a strong negotiating position and can squeeze suppliers who are desperate for their business. 27 THE POWER OF BUYERS 3. Buyer competition threat: If the buyer has the capability to supply itself, or if it has the possibility of acquiring such a capability, it tends to be powerful. Backward vertical integration: moving back to sources of supply, and might occur if satisfactory prices or quality from suppliers cannot be obtained. 28 THE POWER OF BUYERS 4. Low buyer profits and impact on quality: Two additional factors can make buyer’s price sensitive and thus increase their threat: A. If the buyer group is unprofitable and pressured to reduce purchasing costs; B. If the quality of the buyer’s product or services is little affected by the purchased product. 29 THE POWER OF BUYERS It important to distinguish buyers from ultimate consumers: Example - L’Oréal or Danone: The buyers are the supermarket groups, not the consumers. It is often useful therefore to distinguish ‘strategic customers’, powerful buyers (such as the retailers) towards whom the strategy should be primarily orientated. In the public sector, the strategic customer is typically the provider of funds, rather than the consumer of services; For a pharmaceutical company, the strategic customer is the hospital, medical doctors, not the patient. 30 THE POWER OF SUPPLIERS Suppliers: those who supply the organisation with what it needs to produce the product or service. Supplier power is likely to be high where there are: 1. Concentrated suppliers: Where just a few producers dominate supply, suppliers have more power over buyers. E.g.: The iron ore industry is now concentrated in the hands of three main producers, leaving the steel companies, still relatively fragmented, in a weak negotiating position for this essential raw material. 31 THE POWER OF SUPPLIERS 2. High switching costs: If it is expensive or disruptive to move from one supplier to another, then the buyer becomes relatively dependent and correspondingly weak. E.g.: Microsoft. 3. Supplier competition threat: Suppliers have increased power where they are able to enter the industry themselves or cut out buyers who are acting as intermediaries. Forward Vertical Integration: moving up closer to the ultimate consumer. E.g.: Airlines -> Online Booking. 32 THE POWER OF SUPPLIERS 4. Differentiated products: When the products or services are highly differentiated, suppliers will be more powerful. If there is no or few substitutes for the input the supplier group will be more powerful. E.g.: Pilots’ unions in the airline industry. 33 COMPLEMENTORS AND NETWORK EFFECTS An organisation is your complementor if it enhances your business attractiveness to customers or suppliers. On the demand side: On the supply side: if customers value a product or service another organisation is a more when they also have the other complementor with respect to organisation’s product there is a suppliers if it is more attractive for a complementarity with respect to supplier to deliver when it also customers. supplies the other organisation. E.g.: App providers. E.g. Boeing. 34 COMPLEMENTORS AND NETWORK EFFECTS While Porter’s Five Forces sees organisations as battling against each other for share of industry value, complementors may cooperate to increase the total value available. Opportunities for cooperation can be seen through a value net: a map of organisations in a business environment demonstrating opportunities for value-creating cooperation as well as competition. 35 THE VALUE NET 36 COMPLEMENTORS AND NETWORK EFFECTS Network effects: when one customer of a product or service, in a certain industry, has a positive effect on the value of that product for other customers. The more customers use the product, the better for everyone in the network. (E.g.: Ebay, LeBonCoin, Vinted). Network effects can make an industry structurally attractive: High barriers to entry, low intensity of rivalry and power over buyers as entrants and rivals can’t compete with other companies’ larger networks and buyers become locked into them. 37 COMPLEMENTORS AND NETWORK EFFECTS In some industries complementors and network effects work in tandem. E.g.: Smartphone and tablet industries; Video Gaming (Nintendo); Computer operating systems (Microsoft). Strategic lock-in: users become dependent on a supplier and are unable to use another supplier without substantial switching costs (linked to concept of path-dependency). E.g.: Apple’s iTunes store. 38 DEFINING THE INDUSTRY It is must not be defined too broadly or narrowly. An entrepreneur considers starting a taxi business in Stockholm, he/she defines: ‘the personal transportation industry’ = too broad. ‘the minicab industry in central Stockholm’ = too narrow. The first definition would include such a wide variety of actors that the analysis would become meaningless, while the second risks excluding important competitors (e.g. taxi firms from the suburbs). 39 DEFINING THE INDUSTRY Different industries often operate in different parts of a value chain or value system. The iron ore industry (including companies like Vale, Rio Tinto and BHP Billiton) delivers to the steel manufacturing industry (including companies like Mittal Steel and Tata Steel) that in turn deliver to a wide variety of industries such as automobiles and construction. These three stages in the broader value chain or system should be analysed separately. 40 DEFINING THE INDUSTRY Most industries can be analysed at different levels = different geographies, markets and even different product or service segments within them. The airline industry has different geographical markets (Europe, China and so on) and it also has different service segments within each market (e.g. leisure, business and freight). 41 DEFINING THE INDUSTRY The competitive forces are likely to be different for each of these markets and segments, with distinct buyers, suppliers and barriers, etc. Michael Porter suggests that you are likely dealing with distinct industries if there are differences between them in more than one force, or where differences in any force are large. 42 IMPLICATIONS OF THE COMPETITIVE FIVE FORCES Determine whether the industry is a good one to compete in or not. Determine to what extent there are strategic positions where an individual organisation can defend itself against strong competition forces, can exploit weak ones or can influence forces in its favour. 43 IMPLICATIONS OF THE COMPETITIVE FIVE FORCES When each of the five forces has been evaluated, the next step is thus to understand the implications of these: 1. Which industries to enter (or leave)? 2. How can the five forces be managed? 3. How are competitors affected differently? 44 HANDBOOK Johnson, G., Whittington, R., Scholes, K., Angwin, D., & Regner, P. (2017). Exploring Strategy - Text and Cases (11th ed.). Pearson Education. 45