MANAGING STRATEGY - BUSI

1324
We l c o m e b a c k
to Ma n a g i n g
St r a t e g y
 Agenda

• Key learning points from our first three

Workshops
• Industry Analysis: applying Porter’s 5
forces model
• Limitations of the model
 Key L e a rn i n g
points fr o m o u r
FIRS T T H R E E
Wo rk s h op s
KEY LEARNING POINT 1
What makes a Strategy Successful ?

t o p r o v i d e
T h e a b i l i ty
es s a s t o b e a b l e
u n i q u e n
s u s ta i n a b l e
to build a
e a d v a n t a g e
competitiv

5
KEY LEARNING POINT 2
Components of a Strategy Successful
Successful
Strategy

EFFECTIVE IMPLEMENTATION

Long-term, Profound Objective

simple and understanding of appraisal of
agreed the competitive resources
objectives environment

6
KEY LEARNING POINT 3
How to set long-term goals?

a l P u r p o s e :
Organisation
, v i s i o n a n d
mission
d o b j ec ti v e s
val u e s a n

7
KEY LEARNING POINT 4
Components of a Strategy Successful

a b l e t o i d e n ti f y
We need to be h
O fa c t o rs w h i c
those MACR
i n d u s tr y u n d e r
influence the u r
ti on an d – i n tu rn - o
inv e sti ga
company

8
In du s t r y
a na ly s is :
A p p ly i n g
Por t e r ’ s 5
odel
 Porter’s 5 forces as the tool for
the industry analysis
To identify the main structural features of an industry
that influence competition and profitability
 understand how an industry structure drives the
level of competition within the industry, which
determines the level of its profitability

Industry Structure  Competition  Industry

Porter’s 5 forces of competition
PORTER’S 5 FORCES
THINKING STRATEGICALLY ABOUT A COMPANY’S
INDUSTRY AND COMPETITIVE ENVIRONMENT

1. Does the industry offer attractive opportunities for growth?

2. What kinds of competitive forces are industry members facing, and
how strong is each force?
3. What factors are driving changes in the industry, and what impact will
these changes have on competitive intensity and industry
profitability?
4. What market positions do industry rivals occupy—who is strongly
positioned and who is not?
5. What strategic moves are rivals likely to make next?
6. What are the key factors for competitive success in the industry?
7. Does the industry offer good prospects for attractive profits?
The Five Competitive Forces
Using the Five-Forces Model of Competition

For each of the five forces, identify the

different parties involved, and the specific
Step 1
factors that bring about competitive
pressures.

Evaluate how strong the pressures stemming

Step 2 from each of the five forces are (strong,
moderate to normal, or weak).

Determine whether the strength of the five

Step 3 competitive forces, overall, is conducive to
earning attractive profits in the industry.
Factors Affecting the
Threat of Entry
 Market Entry Barriers Facing New Entrants

♦ Economies of scale in production, distribution,

advertising, or other areas of operation
♦ Experience and learning curve effects
♦ Unique cost advantages of industry incumbents
♦ Strong brand preferences and customer loyalty
♦ Strong “network effects” in customer demand
♦ High capital requirements
♦ Building a network of distributors or dealers and
securing adequate space on retailers’ shelves
♦ Restrictive government policies
 Competitive Pressures Associated
with the Threat of New Entrants

♦ Entry Threat Considerations:

● Strength of barriers to entry
● Expected reaction of incumbent firms
● Attractiveness of a particular market’s growth in
demand and profit potential
● Capabilities and resources of potential entrants
● Entry of existing competitors into market segments
in which they have no current presence
Factors Affecting
Competition from
Substitute Products
 Competitive Pressures from the Sellers
of Substitute Products

♦ Substitute Products Considerations:

● Ready availability of substitutes
● Pricing, quality, performance, and other relevant
attributes of substitutes
● Switching costs that buyers incur

♦ Indicators of Substitutes’ Competitive Strength:

● Increasing rate of growth in sales of substitutes
● Substitute producers adding output capacity
● Increasing profitability of substitute producers
Factors Affecting the
Bargaining Power of
Suppliers
 Competitive Pressures Stemming from
Supplier Bargaining Power

♦ Supplier Bargaining Power Considerations:

● Ready availability of supplier products
● Criticality of supplier products as industry inputs
● Number of suppliers of standard\commodity items
● Buyers’ costs for switching among suppliers
● Availability of substitutes for suppliers’ products
● Fraction of supplier sales due to industry demand
● Ratio of suppliers relative to industry buyers
● Backward integration into suppliers’ industry
Factors Affecting the
Bargaining Power of
Buyers
 Competitive Pressures Stemming from Buyer
Bargaining Power and Price Sensitivity

♦ Buyer Bargaining Power Considerations:

● Buyer costs for switching to competing sellers
● Degree to which industry products are
commoditized
● Number and size of buyers relative to sellers
● Strength of buyer demand for sellers’ products
● Buyer knowledge of products, costs and pricing
● Backward integration of buyers into sellers’ industry
● Buyer discretion in delaying purchases
● Buyer price sensitivity due to low profits, size of
purchase, and consequences of purchase
Factors Affecting the
Strength of Rivalry
 Competitive Pressures That Act to Increase the
Rivalry among Competing Sellers

♦ Buyer demand is growing slowly or declining.

♦ It is becoming less costly for buyers to switch brands.
♦ Industry products are becoming more alike.
♦ There is unused production capacity, and\or products
have high fixed costs or high storage costs.
♦ The number of competitors is increasing and\or they
are becoming more equal in size and competitive
strength.
♦ The diversity of competitors is increasing.
♦ High exit barriers stop firms from exiting the industry.
Is The Collective Strength of the Five Competitive
Forces Conducive to Good Profitability?

♦ Is the state of competition in the industry

stronger than “normal”?
♦ Can industry firms expect to earn decent profits
given prevailing competitive forces?
♦ Are some of the competitive forces sufficiently
powerful to undermine industry profitability?
Limita t i on s of
the M o d e l
Can Porter’s Five Forces Model be
applied to all industries?
 Defining the industry
• The industry must not be defined too
broadly (too wide to be meaningful) or
too narrowly (thus excluding
important competitors).
• The broader industry value chain
needs to be considered – different
stages in the value chain should be
treated as separate industries.
• Industries can be analysed at different
levels – for example, different
geographies, markets and even
 Porter’s 5 Forces Model: Key Issues

• Defining the ‘right’ industry. Applying

the model at the most appropriate level –
not necessarily the whole industry. For
example, the European low-cost airline
industry rather than airlines globally.
• Converging industries – particularly in
the high tech arenas – where industries
overlap (e.g. digital industries – mobile
phones/cameras/mp3 players).
• Complementary organisations – which
enhance the attractiveness of a business to
customers or suppliers. Microsoft Windows
and McAfee computer security systems are
 Implications of Porter’s 5 Forces
analysis
• Which industries/markets to enter
or leave? – It helps identify the
attractiveness of industries.
• What influence can be exerted?
Identifies strategies that can influence
the impact of the five forces. For
example, building barriers to entry by
becoming more vertically integrated.
• The forces may have a different
impact on different organisations.
 Steps in an industry analysis
There are several important steps in an
industry analysis before and after analysing
the five forces:
• Define the industry clearly.
• Identify the actors of each of the five
forces and any different groups within
them and the basis for this.
• Determine the underlying factors of, and
the total strength of, each force.
• Assess the overall industry structure and
attractiveness.
• Assess recent and expected future
changes for each force.
St r a t e gi c
G r ou p s &
Ma r k e t
Se g m e n t s
 Competitor Analysis
o What drives the competitor - its future objectives
o What the competitor is doing and can do – its current strategy
o What the competitor believes about the industry – its
assumptions
o What the competitor’s capabilities - its strengths and
weaknesses

 Collected data equals competitor intelligence

Competitor Analysis Components
 Strategic Groups

Strategic groups are organisations within an

industry or sector with similar strategic
characteristics, following similar strategies or
competing on similar bases.

• These characteristics are different from those in

other strategic groups in the same industry or
sector.
• There are many different characteristics that
distinguish between strategic groups.
• Strategic groups can be mapped on to two-
dimensional charts (maps). These can be useful
tools of analysis.
 Uses of strategic group analysis
• Understanding competition – enables
focus on direct competitors within a
strategic group, rather than the whole
industry. (e.g. Tesco will focus on
Sainsburys and Asda.)
• Analysis of strategic opportunities –
helps identify attractive ‘strategic spaces’
within an industry.
• Analysis of ‘mobility barriers’ – that is,
obstacles to movement from one strategic
group to another. These barriers can be
overcome to enter more attractive groups.
 Market segments
A market segment is a group of customers
who have similar needs that are different from
customer needs in other parts of the market.
• Where these customer groups are relatively small,
such market segments are called ‘niches’.
• Customer needs vary. Focusing on customer needs
that are highly distinctive is one means of building a
secure segment strategy.
• Customer needs vary for a variety of reasons – these
factors can be used to identify distinct market
segments.
• Not all segments are attractive or viable market
opportunities – evaluation is essential.
 Market segment analysis
Two issues are particularly important
in market segment analysis:
• Variation in customer needs:
Focusing on customer needs that are
highly distinctive from those typical in
the market is one means of building a
long-term segment strategy.
• Specialisation within a market
segment can also be an important basis
for a successful segmentation strategy.
This is sometimes called a ‘niche
Who are the strategic customers?
A strategic customer is the person(s) at
whom the strategy is primarily addressed
because they have the most influence over
which goods or services are purchased.
Examples:
• For a food manufacturer, it is the multiple
retailers (e.g. Tesco) that are the strategic
customers, not the ultimate consumer.
• For a pharmaceutical manufacturer, it is the
health authorities and hospitals, not the final
patient.
 Critical success factors (CSFs)
Critical success factors are those
factors that are either particularly valued
by customers or which provide a
significant advantage in terms of cost.
• Critical success factors are likely to be an
important source of competitive advantage
if an organisation has them (or a
disadvantage if an organisation lacks
them).
• Different industries and markets will have
different critical success factors (e.g. in
low-cost airlines the CSFs will be
 Activity
1. Apply the 5 forces of competition framework by
Michael Porter to the industry and draw implications
to Alibaba (20 minutes).

Remember to analyse each force by stating if the

competitive pressure stemming from each of them is
weak/medium/strong . This will make you able to
drive your conclusions about the level of profitability
of the overall industry under investigation

2. Write down the main points of your analysis (strength

of each force and level of profitability of the
industry)

3. Each group has 5 minutes to report the analysis to

the class in order to create a class discussion around
 Learning outcome from today’s
Activity
Understand the importance
of analysing the industry
and assess its level of
competition and – therefore
– of profitability:
Something you will also do
for both your assignments.
 Summary:
The Analysis of the External Environment

1.1 The Analysis of the Macro-environment

 Through PESTEL analysis
1.2 The Analysis of the Industry
 Through Porter’s five forces of
competition
1.3 The Industry Evolution
 Through the Competitor Analysis
Environmental analysis and SWOT
The Environmental Analysis (Macro-
environment + Industry analysis) provides
the basis for identifying many of the
Opportunities and Threats for the SWOT
Analysis.

NB: Whereas, Strengths and Weaknesses

are INTERNAL to the organisation,
Opportunities and Threats are EXTERNAL.
 Recommended reading

• Textbook (Johnson et al.

Fundamentals of Strategy, 4th edition):
Chapter 3

• Porter, M. (1991). Towards a dynamic

theory of strategy. Strategic
Management Journal, 12(S2), pp.95-
117
• Harvard Business School, Institute for
Strategy & Competitiveness,
TASK BEFORE OUR NEXT WORKSHOP

Download and READ the case study

entitled: “'Inside Dyson': a distinctive
company? ” available on Moodle as to be
ready to apply the internal analysis of the
company during the next tutorial.

Please: Bring your own copy with you

for our next session
Thank you for your attention