STRATEGIC MANAGEMENT

• Strategy


  A plan to create competitive advantage and superior profitability in particular markets
• Firm's external environment


  • Provides opportunities - ways of taking advantage of conditions in the environment to become more profitable
  • Provides threats - conditions in the competitive environment that endanger the profitability of the firm
• Successful firms have a deep understanding of their environment and constantly scan the horizon to see opportunities and threats as they emerge
• Competition


  Goes beyond established industry competitors to include four other forces that shape industry attractiveness and profitability: customers, suppliers, potential entrants, and substitute products
• Five forces that shape average profitability within industries

  Rivalry, buyer power, supplier power, threat of new entrants, threat of substitute products
• Using the five forces analysis tool

  1. Identify the specific factors relevant to each of the five major forces

  2. Analyze the strength of each force

  3. Estimate the overall strength of the combined five forces to determine the general attractiveness of the industry, the profit potential for an average firm in the industry
• Rivalry


  Competition among established companies, where each firm's profits often come at the expense of other firms in the industry
• Factors critical to understanding the intensity of rivalry in an industry

  • The number and size of competitors
  • Standardization of products
  • Costs to buyers of switching to another product
  • Growth in demand for products
  • Levels of unused production capacity
  • High fixed costs and highly perishable products
  • The difficulty for firms of leaving the industry
• Fragmented industry


  • An industry with a lot of competitors, where it is difficult to keep track of the pricing and competitive moves of multiple players
• Concentrated industry


  • An industry with far fewer competitors, typically dominated by a few large firms where rivalry is much less intense
• Differentiated products


  Products that boast different features or better quality, stimulating loyalty in customers
• Standardized/commodity-like products


  Products that are interchangeable regardless of who makes them, where buyers are less loyal and firms have to compete by offering sales, rebates, or lowering prices
• Switching costs


  Any cost to the customer for changing brands, related to the degree of product standardization
• Slow growth in demand for products or services

  Firms become desperate and try to increase their sales volume by attracting customers from their competitors through sales promotions, price discounts, or other tactics
• Unused production capacity


  Expensive for firms, who often try to produce more product than the market demands, leading them to drop prices to avoid unsold product
• High fixed costs, highly perishable products, high storage costs


  Industries with these characteristics may be tempted to steeply discount products to avoid losses, leading to increased rivalry as competitors respond with discounts
• High exit barriers


  In some industries, companies don't exit even when they aren't making a lot of money, leading to increased rivalry as they compete to recoup their investments
• When a scheduled flight is going to have few passengers

  An airline may be tempted to discount steeply in order to fill as many seats as possible
• The variable cost of an additional passenger is very little, so selling a seat for less would not cost the airline money, but leaving it empty would mean the airline has fewer passengers over whom to spread its fixed costs
• As food reaches the date when it will spoil

  Grocery chains often steeply discount it rather than lose the sale completely
• If firms have an oversupply and are forced to store the product

  They may discount the price to avoid storage costs
• Steep discounting leads to increased rivalry


  As competitors are forced to respond with discounts of their own or be left with losses while others recoup their production costs
• High exit barriers


  • Companies don't exit even when they aren't making a lot of money
  • Investments in specialized equipment that can't be used in any other industry
  • Labor or government agreements that make it difficult to close a plant
  • Emotional ties to employees or a business can also lead to less than rational decisions by top management to stay in business
• Buyer power


  Bargaining power and price sensitivity
• Buyer bargaining power


  • Number, or concentration, and size of buyers
  • Credible threat of backward integration
• Buyer price sensitivity


  • Buyers are struggling financially
  • Product is significant proportion of buyer's costs
  • Buyers purchase in large volumes
  • Product doesn't affect buyers' performance very much
  • Product doesn't save buyers money
• Supplier bargaining power


  • Number, or concentration, and size of suppliers
  • Credible threat of forward integration
• Not all industries are created equal. Industries in which the average firm is making good profits can often be targets, tempting firms from outside those industries to enter
• Quickly growing industries are often attractive, which increases the incentive for outside firms to enter those industries
• Threat of new entrants

  • New entrants pose a double hazard: they typically are anxious to gain market share, and they bring new production capacity, which tends to drive prices down unless demand is growing faster than the increase in supply
• Existing firms often try to discourage new entrants by building barriers to entry
• The higher the barriers to entry, the more difficult it is for potential entrants to get a position in the industry, and the more likely that they are to quit or choose to not enter in the first place
• Incumbent firms often signal new entrants that they are likely to react by slashing prices, increasing advertising, or other competitive moves that help the established firms hold on to their market share
• If the threats of retaliation are perceived as credible, potential entrants might decide to stay away
• It is essential for firms to understand the barriers to entry that already exist in their industry and to consider ways of increasing them
• Firms that are considering going into an industry can use an analysis of the barriers to entry in the target industry to help them determine how likely they are to succeed if they attempt to enter
• Strategy


  The art of the general, the art of war
• Business strategy


  A company's dynamic plan to gain and sustain competitive advantage in the marketplace
• A company's business strategy is based on the theory its leaders have about how to succeed in a particular market
• This theory involves predictions about which markets are attractive and how a company can offer unique value to customers in those markets in a way that won't be easily imitated by competitors