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Definition- analysis, decisions, implementations and evaluations a firm undertakes to create and sustain
is competitive advantage. A firm will analyze there external and internal environments and based of that
they pursue an effective strategy for change. Although a company plans out its strategy sometimes an
external effect can change the companies plan (ie. The SARS crises, Microsoft entry into the
Analyzing the external environment
Industry definition- group of organizations or firms that share similar resource requirements (raw
materials, labor, technology, customers). Example would be airline industry (Air canada, westjet...).
Five Forces Model
1.) Threats of new Entrants- New startup firms bring new capacity, desire to gain market share and
substantial resources and capabilities. They may impose significant threats to incumbents due to their
reduced profit (ie, Hyundai can sell cars cheap when they enter the market, so Toyota has to compete
with these prices)
Economies of scale- spreading the costs of production over the number of units produced. The cost of a
product per unit therefore declines as the number of units per period increases. Provides incumbents cost
advantages to compete with new entrants.
Capital requirements- Barriers for new entrants. The required capital to establish a new firm is very high
(mining company for example would need to buy land).
Switching costs- refers to the costs wether monitory or psychological associated with changing from one
supplier to another buyer. Thus the threat of new entrants increases as the switching costs decrease.
(For example if Bel enters the telecommunications market, if Rogers has a switching fee of 100 dollars no
one will make the switch regardless of Bells new prices).
Access to distribution channels- If incumbents control most of the distribution channels new entrants find
it difficult to distribute their products which defers new entry. (For example hydro one vs New electric.
Hydro one is all over the country so it is easy for them to distribute. Compared to the difficulty of new
electric which doesn’t have plants all over the country.)
Cost disadvantages independent of scale- These advantages have nothing to do with scale but have to
do with government policies, legal protection, patents, trademarks...
2.) Bargaining power of suppliers- The firms, organizations or individuals providing raw materials,
technologies or skills to incumbents. (ie Telus leaves the power of there chip in some dud in china, who
can raise the price when he wants). This limits the profit that can be made by Telus. Major factors
contributing to suppliers power- How critical the chip is to Telus. If it is very critical obviously the suppliers
are in good position to raise the price. Number of suppliers- If Telus has four people that supply the chip,
if one guy becomes a tight man, they can just go to the other three. (ie Dell, Hp, IBM..)
3.) Bargaining power of buyers- power held by individuals or organizations to perchance incumbents
products or services. If there are few incumbents then the buyer is limited to switch.
Switching costs- see above.
Undifferentiated products- When incumbents provide a similar product or services to buyer they would not
be in a good position to negotiate with the buyers. The fewer amount of products or services that are
offered within a specific organization the less room a firm within the organization has for bargaining and
messing around with buyers.
Importance of incumbents products to buyers- If everyone wants something, the customer will pay for it. If
it is of critical nesccaity it will be bought.
Number of incumbents relative to the number of buyers- Loblaws, dominions, sobeys are key players in
the grocery industry the grocery producers don’t hold power over the retailers because there are many
producers therefore switching costs for retailers is minimal. Therefore retailers enjoy significant bargaining
power over the producers.
4.) Threats of substitutes- Firms competing against other firms (ie the newspaper firm has to compete
against the radio, internet, television)
5.) Rivalry among existing firms- efficiency, advertisement, price drop, anything that attracts the eye.
Lack of differentiation or switching costs- Apple vs. PC. Apple will try to differentiate there strategy to
compete with PC, they might make better advertisements, launch attempts to attract more customers or
keep existing customers. This enhances there short term performance.
Numerous or equally balanced competitors- the rivalry between firms is highst when the firms are in
similar size. The often target similar market niches and share similar resource requirements.
High exit barrier- economic, strategic, emotional factors that keep companies competing even if they
really can’t afford to.
Limitations: The model doesnt take roles of technological, gov’t regulation into consideration(gov’t barriers
Doesn’t address how they affect power between sources
May have limited implications for future strategic decision making
Assumes all incumbents have the same relationship with each force, which they might not.not
Analyzing the internal enviornment: VRIO:value,rareness,imitiability, organization.
Resources and capabilities: include financial, physical, human resources, and organizational assests
used by industry to develop, deliver, and manufacture their products.
Financial: debt, equity, retained earning, profit
Physical: plants, buildings, machines, facilities
Human: experience, knowledge, risk taking, wisdom of individuals