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Chapter 5

Chapter 5 Notes

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Administrative Studies
ADMS 1000
Eytan Lasry

Readings- Chapter 5 What is Strategic Management? Strategic management: consists of analysis, decisions, implementations & evaluations a firm undertakes in order to create & sustain its competitive advantages It can be an ongoing process where managers of a firm constantly analyze their external & internal environments, make decisions about what kinds of strategies they should pursue, implement the strategies & evaluate the outcomes of the implementations to make more change if necessary Used to sustain its competitive advantage, performance & chance of survival Strategy is goal oriented External Environment; The Five- Forces Model Michael Porter created the five-forces model It allows us to systematically assess the industry environment It helps us make strategic decisions of how to achieve organizational goals 1. Threats of New Entrants: new start-ups & diversification of existing firms in other industries entrants bring new capacity, desire to gain market share & substantial resources & capabilities ** 5 main sources of entry barriers a. Economies of scale: the spreading of the costs of production over the number of units produced. The cost of a product per unit declines as the number of units per period increases b. Capital Requirements: the required capital to establish a new firm is high (airline, mining industries). C. Switching costs: the costs (monetary or psychologically) associated with changing from one supplier to another. D. Access to distribution channels: companies control most of the distribution channels; won’t let them in E. Cost disadvantages independent of scale: governmental policies, legal protection, & proprietary products. These advantages create the barriers for potential new entrants, which defer their entries www.notesolution.com 2. Bargaining Power of Suppliers: Suppliers can exert bargaining power over present companies in an industry by demanding better prices or threatening to reduce quality of purchased goods or services The power of suppliers hold direct impact on the industry profitability & company’s performance **Two factors to supplier’s power in relation to companies in an industry A. The criticality of resources the suppliers hold to the companies. Suppliers can demand better prices B. The number of suppliers available relative to the number of companies is low; the companies compete against each other for the small number of suppliers. This gives suppliers power to negotiate better prices 3. Bargaining Power of Buyers Buyers can affect the industry performance by demanding lower prices, better quality of services, or playing companies against one another. ** 4 factors contributing to buyer power A. Switching costs: the power of buyers increases as switching costs decrease. When buyers can switch which company they buy from, the companies have little power over the buyers to enhance their performance B. Undifferentiated Products: when companies provide similar products or services, they’re not in a good position to negotiate with buyers. They allow buyers to find alternatives from other companies. C. Importance of companies products to buyers: buyers don’t have the power to bargain when certain products or services are essential D. The number of companies relative to the number of buyers: relatively few companies offering products/services that people need 4. Threats of Substitutes Firms that provide substitute products or services with similar purpose 5. Rivalry Among Existing Firms **3 factors of rivalry A. Lack of differentiation or switching costs: when products are different or switching costs of customers are minimal, customer’s choices are often based on price & service. Companies www.notesolution.com may feel pressure to launch more strategic action in an attempt to attract more customers. The rivalry among companies is intensified B. Numerous or equally balanced competitors: rivalry is highest when firms are similar in size & resource C. High exit barriers: exit barriers are economic, strategic & emotional factors that keep firms competing even though they may be earning low or negative returns on their investments ** Limitations of the Five- Forces Model The model doesn’t take roles of technological change & government regulations into consideration; it doesn’t address how technological change & government regulations affect the power relationships between forces The focus of this model is mainly on the power relationships between each force at a given time. It has limited implications for future strategic decision making The model assumes that all companies experience the same power relationship with each force; however they differ in size which gives them more or less power Internal Environment; The VRIO Model Managers need to look inside their firms for competitive advantage Managers need to look at their resources & capabilities & ask 4 important ques tions 1. The question of value: if their firm’s resources & capabilities add any value to capture market share or enhance profitability, either through exploiting emerging opportunities or neutralizing threats. Ie, NeoSet specializes in customized designs of home & office furniture. Its capability in customization of high-quality allows the firm to obtain profitability from a small market, whereas IKEA doesn’t compete 2. The question of rareness: resources & capabilities need to be rare & unique. Ie, wall-mart’s skill in developing & using point-of-purchase data collection to control inventory gave it a competitive advantage against K-Mart 3. The question of limitability: the advantage span depends on how quickly limitation could occur. When it occurs, it diminishes the rareness. Managers need to ask themselves if their resources & capabilities are difficult to be imitated by other firms & how to create barriers for imitation 4. The question of organization: whether their firms are organized in effective & efficient ways to exploit their value. Organization is critical for firm success. www.notesolution.com If all resources & capabilities are in favour of the 4 questions, the firm will have sustainable competitive advantage; if it is not in favour of one or more questions, it is a temporal competitive advantage SWOT Analysis Strengths, weaknesses, opportunities & threats Firms that use their internal strengths in exploiting opportunities, while neutralizing environmental threats & avoiding internal weaknesses, are more likely to increase market share, sales or profitability Different Levels of Strategy 2 main levels business-level & corporate level Business- Level Strategy 1. Cost Leadership: purpose is to gain competitive advantages by reducing economic cost. It requires aggressive construction of efficient-scale facilities, vigorous pursuit of costs reductions from experience, tight cost & overhead control, avoidance of marginal customer accounts, & cost minimization in areas like marketing. 3 main aims a) economies of scale, where firms can increase their production volume to reduce marginal costs. B) learning curve economies, where firms can reduce marginal costs by experience. C) low-cost access to factors of production, referring to access to low costs of raw materials, labour, location etc. 2 major advantage s a) a cost leader gives a firm the highest profit margins in the industry, which allows the firm to obtain abnormal results. B) it gives firms flexibility in response to pressures coming from the five-forces in the industry environment. When competition among firms move towards a price competition, a firm with a cost- leadership strategy would obtain positive profit margins A firm like this can also ensure increases in cost of raw materials when suppliers charge higher prices; they may have to charge the customers to cover costs The firm would be able to win over the competitors customers by charging lower prices New entrants are not likely to impose immediate threat to the firm in terms of its short-term performance Example of cost-leadership firm is Wal-Ma rthas low prices, but is the cost leader in the retailer industry. They save a lot of money. 2. Product Differentiation www
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