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Business-Level Strategy and the Industry Environment. Strategy and Technology. Strategy in the Global Environment. Corporate Performance, Governance, and Business Ethics. Staples in Airborne Express: The Underdog. Google in Home Video Game Industry, Tom Tom: New Competition Everywhere. Alarm Ringing: Nokia in Figure 2. Changing Industry Boundaries may be necessary over time as customer needs evolve, or as emerging new technologies enable companies in unrelated industries to satisfy established customer needs in new ways.
Competitive Forces Model Once boundaries of an industry have been identified, managers face the task of analyzing competitive forces within the industry environment in order to identify opportunities and threats.
Potential competitors are companies that are currently not competing in the industry but have the capability to do so if they choose.
Established companies already operating in an industry often attempt to discourage potential competitors from entering the industry because as more companies enter, it becomes more difficult for established companies to protect their share of the market and generate profits. A high risk of entry by potential competitors represents a threat to the profitability of established companies.
If the risk of new entry is low, established companies can take advantage of this opportunity, raise prices, and earn greater returns.
The risk of entry by potential competitors is a function of the height of barriers to entry or factors that make it costly for companies to enter an industry. The greater the costs potential competitors must bear to enter an industry, the greater the barriers to entry, and the weaker this competitive force. High entry barriers may keep potential competitors out of an industry even when industry profits are high. Important barriers to entry include: 1. Economies of scale arise when unit costs fall as a firm expands its output.
Sources of economies include 1 cost reduction gained through mass-producing a standardized output; 2 discounts on bulk downloads of raw material inputs and component parts; 3 the advantages gained by spreading fixed production costs over a large production volume; and 4 the cost savings associated with distributing marketing and advertising costs over a large volume of output.
strategic management theory and cases pdf files
Brand loyalty exists when consumers have a preference for the products of established companies. A company can create brand loyalty by continuously advertising its brandname products and company name, patent protection of its products, product innovation achieved through company research and development programs, an emphasis on high quality products, and exceptional after-sales service.
Significant brand loyalty makes it difficult for new entrants to take market share away from established companies. Absolute cost advantages arise from three main sources: 1 superior production operations and processes due to accumulated experience, patents, or trade secrets; 2 control of particular inputs required for production, such as labor, materials, equipment, or management skills that are limited in their supply; and 3 access to cheaper funds because existing companies represent lower risks than new entrants.
When switching costs are high, customers can be locked in to the product offerings of established companies, even if new entrants offer better products. Government regulations creating barriers to entry significantly reduce the level of competition. Strategy in Action 2.
Both companies have historically spent large sums of money on advertising and promotion, which has created significant brand loyalty and made it very difficult for prospective new competitors to enter the industry and take market share away from these two giants.
When new competitors do try and enter, both companies have shown themselves capable of responding by cutting prices, forcing the new entrant to curtail expansion plans. However, in the early s the Cott Corporation, then a small Canadian bottling company, worked out a strategy for entering the soft drink market.
The company used a deal with RC Cola to enter the cola segment of the soft drink market. Cott next introduced a private label brand for a Canadian retailer. Both of these offerings took share from Coke and Pepsi. Cott then decided to try and convince other retailers to carry private label cola.
Cott spent almost nothing on advertising and promotion.
These cost savings were passed onto retailers in the form of lower prices. For their part, the retailers found that they could significantly undercut the price of Coke and Pepsi colas, and still make better profit margins on private label brands than on branded colas.
Despite the savings, many retailers were leery of offending Coke and Pepsi and declined to offer a private label. Cott was able to establish a relationship with Walmart as it was entering the grocery market.
Table of Contents of Strategic Management Theory an Integrated Approach 10th Edition Book
Cott soon added other flavors to its offering, such as a lemon lime soda that would compete with Seven Up and Sprite. Moreover, pressured by Walmart, by the late s other U. The losers in this process were Coca-Cola and Pepsi Cola, who were now facing the steady erosion of their brand loyalty and market share as consumers increasingly came to recognize the high quality and low price of private label sodas. Teaching Note: As this case illustrates, entry barriers can be effective in discouraging new entrants; however, they can be circumvented.
Cott was able to enter a much closed industry through a combination of its own efforts and the changes brought to the industry environment by the advent of Walmart. You can use this case in a classroom discussion to identify entry barriers in other industries. Another approach to classroom discussion is to ask students to consider the lessons that other industries might learn from Cott.
What did Cott do to lower entry barriers, and how could those tactics be used in another context?
Rivalry refers to the competitive struggle between companies within an industry in order to gain market share from each other. The intensity of rivalry among established companies within an industry is largely a function of four factors: 1 industry competitive structure, 2 demand conditions, 3 cost conditions, and 4 the height of exit barriers in the industry.
Industry Competitive Structure refers to the number and size distribution of companies in it. Industry structures vary, and different structures have different implications for the intensity of rivalry.
For example, a fragmented industry consists of a large number of small or medium-sized companies. These characteristics tend to result in boom-and-bust cycles, with a flood of new entrants, excess capacity, and price wars, leading to low industry profits and exit from the industry. The consequence can be price wars like those the airline industry has experienced.
Thus interdependence is a major threat. This threat can be reduced when tacit price-leadership agreements exist within the industry and when companies are successful in emphasizing nonprice competition.
Industry Demand is the second determinant of the intensity of rivalry among established companies.
Conditions also determine the intensity of rivalry among established companies. Growing demand moderates competition by providing room for expansion. Declining demand results in more competition as companies fight to maintain revenues and market share. Cost Conditions are another determinant of rivalry between firms. High fixed costs lead to a focus on volume of sales in order to cover these costs.
This focus on volume can spark intense rivalry if demand is weakening and too many firms are involved in providing the same products. This situation will prompt firms in the industry to lower prices in order to capture sufficient sales to cover costs. Then the industry structure changed. Huge discounters began to promote cheaper private brands, just as bagels or muffins replaced cereal as the preferred breakfast food. Under pressure, the big manufacturers began a price war, ending the tacit price collusion that had kept the industry stable and profitable.
Although profit margins were slashed in half, the big three continued to lose market share to private brands.
What was once a desirable industry is now exactly like most others—competitive, unstable, and far less profitable. Teaching Note: This case illustrates the sad outcomes that result when industry competitors react to increased pressure by breaking off tacit price collusion.
You should be sure to emphasize to students the difference between tacit price collusion, which is indirect and therefore legal, and price fixing, which is overt and therefore illegal. Again, the message here is that a well-run industry, with sustained high profitability and stability for all competitors, fell victim to powerful external forces.
For example, if students suggest a one-sided price increase, ask them if competitors would be likely to follow suit.
Exit Barriers are economic, strategic, and emotional factors that prevent companies from leaving an industry. If exit barriers are high, companies become locked into an unprofitable industry where overall demand is static or declining. The result is often excess productive capacity, leading to even more intense rivalry and price competition as companies cut prices attempting to obtain the customer orders needed to use their idle capacity and cover their fixed costs.
Common exit barriers include: a investments in specialized assets b high fixed costs of exit such as severance pay c emotional attachments to an industry d economic dependence on a single industry e the need to maintain expensive assets in order to compete effectively in that industry f bankruptcy relations C. The bargaining power of downloaders refers to the ability of downloaders to bargain down prices charged by companies in the industry, or to raise the costs of companies in the industry by demanding better product quality and service.
Powerful downloaders, therefore, should be viewed as a threat. downloaders are most powerful in the following circumstances: 1. Suppliers are organizations that provide inputs into the industry, such as materials, services, and labor which may be individuals, organizations such as labor unions, or companies that supply contract labor.
The bargaining power of suppliers refers to the ability of suppliers to raise input prices, or to raise the costs of the industry in other ways—for example, by providing poor-quality inputs or poor service.
Suppliers are a threat when they are able to force up the price the company must pay for inputs or to reduce the quality of goods supplied. The ability of suppliers to make demands on a company depends on their power relative to that of the company. Suppliers are most powerful in these situations: 1. The existence of close substitutes is a strong competitive threat because this limits the price that companies in one industry can charge for their product, which also limits industry profitability.
A Sixth Force: Complementors, often ignored, refers to companies that sell products that add value to complement the products of companies in an industry because, when used together, the use of the combined products better satisfies customer demands When the number of complementors is increasing and producing attractive complementary products, demand increases and profits in the industry can broaden opportunities for creating value.
If complementors are weak, and are not producing attractive complementary products, they can become a threat, slowing industry growth and limiting profitability. Summary: The systematic analysis of forces in the industry environment using the Porter framework is a powerful tool that helps managers to think strategically.
Strategic Groups Within Industries Companies in an industry often differ significantly from one another with regard to the way they strategically position their products in the market. Factors such as the distribution channels they use, the market segments they serve, the quality of their products, technological leadership, customer service, pricing policy, advertising policy, and promotions affect product position.
There are numerous competitors, indicating low barriers to entry.
Key components are readily available. Assembly is easy, requiring little capital equipment or technical skills. The products are largely undifferentiated which further limits prices. Demand has been cyclical and slowing in recent years. All of this indicates that the industry is an unattractive one. Teaching Note: This case describes the industry environment for the personal computer industry. It provides a good opportunity to quiz the students on the five forces.
Implications of Strategic Groups are numerous for the identification of opportunities and threats within an industry. Because all companies in a strategic group are pursuing a similar business model, consumers tend to view the products of such enterprises as direct substitutes for each other.
Different strategic groups can have a different relationships to each of the competitive forces. Each strategic group may face a difference set of opportunities and threats. The Role of Mobility Barriers follows that some strategic groups are more desirable than others because competitive forces open up greater opportunities and present fewer threats for those groups.
Mobility barriers are within-industry factors that inhibit movement of companies between strategic groups.
Industry Life-Cycle Analysis Changes that take place in an industry over time are an important determinant of the strength of the competitive forces in the industry and of the nature of opportunities and threats. The similarities and differences between companies in an industry often become more pronounced over time, and its strategic group structure frequently changes.
The strength and nature of each of the competitive forces also change as an industry evolves, particularly the two forces of risk of entry by potential competitors and rivalry among existing firms. Embryonic Industries refer to an industry just beginning to develop. An embryonic industry is one that is just beginning to develop. Barriers to entry at this stage tend to be based on access to key technological know-how, rather than cost economies or brand loyalty.
Rivalry in embryonic industries is based on educating customers, opening up distribution channels, and perfecting the design of the product. Growth Industries is one where demand begins to increase. Typically, demand takes off when consumers become familiar with the product, prices fall with the attainment of economies of scale, and distribution channels develop.
Rapid growth in demand enables companies to expand their revenues and profits without taking market share away from competitors. Industry Shakeout occurs when the rate of growth slows, and the industry enters the shakeout stage. In the shakeout stage, demand approaches saturation levels: most of the demand is limited to replacement because few potential first-time downloaders remain. As an industry enters the shakeout stage, rivalry between companies becomes intense, with excess productive capacity and severe price discounting.
Many firms exit the industry at this point. Mature Industries are where the shakeout stage ends. The market is totally saturated, growth is very low or near zero, and demand is limited to replacement demand. The growth that remains comes from population expansion, bringing new customers into the market or increasing replacement demand.
Intense competition for market share can develop, driving down prices. Declining Industries occur when growth becomes negative for a variety of reasons, including technological substitution, social changes, demographics, and international competition..
The degree of rivalry among established companies usually increases and depending on the speed of the decline and the height of exit barriers, competitive pressures can become as fierce as in the shakeout stage. Summary: A third task of industry analysis is to identify the opportunities and threats that are characteristic of different kinds of industry environments in order to develop an effective business model and competitive strategy. Limitations of Models for Industry Analysis A. Life-Cycle Issues and life-cycle models constitute very useful ways of thinking about and analyzing the nature of competition within an industry.
However, these models have limitations. It does not mean the models are useless. It does mean, however, that managers must be aware of the limitations as they apply these models to their firms. Over time, innovation in many industries leads to new products, processes, or strategies that can be very successful and transform the nature of competition within an industry.
Strategic Management: Theory: An Integrated Approach, 11th Edition
Porter describes a model of punctuated equilibrium, in which an innovation triggers a period of turbulence, followed by a period of stability. This theory asserts that the five forces model is not a good predictor of the changes that take place in the short time just after an important innovation, but it is useful in the longer periods of stability that follow the turbulence.
Company Differences are often overlooked as typical industry models overemphasize the importance of industry structure as a determinant of company performance, whereas, variations or differences among companies within an industry or a strategic group should be the emphasis. The Macroenvironment The macroenvironment refers to the broader economic, technological, demographic, social, and political environment within which an industry is embedded. Macroeconomic forces include changes in the growth rate of the economy, interest rates, currency exchange rates, and inflation rates; these are all major determinants of the overall level of demand.
Adverse changes in any of these can threaten profitability in an industry, whereas positive changes tend to increase profitability.
Global forces include globalization of production and markets. Industry boundaries no longer stop at national borders and competitors can come from other national markets, increasing rivalry. Globalization can also provide opportunities for new markets for national firms.
Technological forces are characterized by an accelerated pace of innovation and change. Technological change can make established products obsolete overnight, but at the same time, it can create new products and processes.
Thus technological change is both an opportunity and a threat; it is creative and destructive. Demographic forces consist of any trends related to population, such as the aging of the U. Changing E. Social forces consist of changes in societal preferences and values. New social movements also create opportunities and threats. For example, the impact of the trend toward greater health consciousness has been a boon to the fitness equipment and organic foods industries, while it has hurt the beef and cigarette industries.
Political and legal forces are shaped by changing laws and regulations. Factors such as deregulation, insurance reform, and even the political party makeup of Congress can create opportunities and threats for companies in many industries. Teaching Note: Ethical Dilemma While discussion could enter into whether or not moral objections should influence analysis and recommendations, the real question should focus on whether or not casinos will be a complement to the industry.
Will casinos bring value to the customers? Will casinos generate demand for the hotel industry?Algebra 2 Pre-Test Please do not write on this test. Although some of the five forces are favorable in this case—low power of downloaders, lack of substitutes—others are extremely negative, such as the very high barriers to entry and the intense rivalry. Finished level 1 Logo Quiz? We discuss in these examen de acls from different topics like acls pretest answers , acls self assessment test.
For a reference, when you remove the note, user can remove several notes at Education for Sustainable Development ESD [ edit ] Education for Sustainable Development ESD is defined as education that encourages changes in knowledge , skills, values and attitudes to enable a more sustainable and equitable society.
International regulation is also decreasing, raising competitive intensity for multinational firms. Different strategic groups can have a different relationships to each of the competitive forces.
Find Test Answers Search for test and quiz questions and answers. Threat of substitute products: Substitutes for the steel industry include aluminum, plastics, and composites.
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