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Chapter 9

ADMS 1000 Chapter 9 Notes

6 Pages

Administrative Studies
Course Code
ADMS 1000
Peter Khaiter

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Chapter 9: Responding to the Environment: Developing Business Strategy What is strategic management?  The analyses, decisions and implementations a firm undertakes to create and sustain its competitive advantage  Why are some firms successful than others?  Strategic management attempts to explain differential performance o External and internal models for explaining competitive advantage  Strategy is defined as the plans made or the action takes in an effort to help an organization/firm obtain its intended purposes Analyzing the external environment  Industry structure analysis  Industry; Group of firms with similar resource requirements in raw materials, labor, technology, customers…  The airline industry; west jet, air Canada The five Forces Model  The Five-Forces model attempts to evaluate the attractiveness of an industry, which helps us make strategic decisions in terms of how to achieve organization goals or to find a position in the industry  Based on distorting perfectly competitive markets to generate monopolistic profits o i.e. the less competition, the more profits for firms 1. Threat of New Entrants o Entrants bring new capacity, the desire to gain market share and substantial resources and capabilities o Prices can be bid down or incumbents cost inflated as a result, reducing profitability o Incumbents must create barriers to entry; 5 major sources of entry barriers Economies of scale o Refer to spreading the costs of production over the number of units produced o Can provide the incumbents cost advantages to compete with new entrants on the price if necessary Capital Requirements o Level of required capital for entering the industry creates barriers to new entrants o Threat of new entrants is reduced as the level of required capital increase Switching Cost o Refers to the cost (monetary or psychological) associated with changing from one supplier to another firm the buy perspective o Threat of new entrants increases as the switching cost decrease Access to Distribution Channels o Incumbents control most of the distribution channels, potential entrants would find it difficult to distribute their products or services, which intern defers new entry Cost Disadvantages Independent of scale o Government policies, legal protection (patents and trademarks) and proprietary products 2. Bargaining Power of Suppliers o Suppliers can exert bargaining power over incumbents in an industry by demanding better prices or threating to reduce quality of purchased goods of services  Power supplier hold can effect industry’s profitability as well as the incumbents performance o 2 major factors contributing to suppliers power  1. Supplier holds crucial recourses needed by incumbents in an industry e.g. Raw material  2. Number of suppliers amiable relative to the number of incumbents in an industry; when the number of suppliers is low, incumbents competes against each other for the relative small number of suppliers. Thus gives suppliers power… the opportunity to negotiate better prices between incumbents 3. Bargaining Power of Buyers  Buyers can affect industry performance by demanding lower prices, better quality or services, or playing incumbents against one another  Many factors contributing to buyer power Switching Cost o Bargaining power of buyer increase as switching cost decrease Undifferentiated Products o Allow buyers to find alternatives from other incumbents o Provide an opportunity to buyers to lay against incumbents to get a better price/quality Importance of Incumbents’ Products to Buyers o When products/services are critical to buyers, the power of buyers would be reduced The number of Incumbents’ Relative to the Number of Buyers o Buyer power could be reduced when there are few incumbents offering products or services the buyer need, since the buyers do not have many alternatives to choose from 4. Threats of substitutes o All firms in an industry often compete with other firms in different industries that provide substitute products or services with similar purposes; ex. Newspaper vs. internet 5. Rivalry among Existing Firms  Using different strategic actions, including cutting prices, improving operational efficiency, advertising and through mergers and acquisitions Lack of Differentiation or Switching Costs o Undifferentiated products and low switching costs encourage more intense rivalry o Incumbents may experience pressure to launch more strategic action in an attempt to attract more customers or keep customer by enhancing their short term performance Numerous or Equally Balanced Competitors o Some firms believe they can initiate strategic action without being noticed intensifies rivalry o Rivalry highest when firms are similar in size and resource, because both target same market, leads them to compete hand in hand High Exit Barriers o High exit barriers increase competitive rivalry including High fixed costs, Specialized assets and sunk costs, Escalating commitment and Social pressures Limitation  Does not address how technological change and governmental regulations affect the power relationships between forces  Focus on a given point rather than future decision making  The 5-Forces model is static and assumes all firms experience the forces in the same way Analyzing the Internal Environment  The Resource-based view of competitive advantage attempts to explain firm performance as a function of internal resources and capabilities and their exploitation rather than the structural features of an industry  Resources are the financial (debt, equity etc.), physical (machines, buildings etc.), human (experience, knowledge etc.) and organizational (history, trust etc.) assets used by the firm to develop, manufacture and deliver products or services to its customers The VRIO model  Four key questions about firm resources: o Are they Valuable?  Do they provide added value that customers are willing to pay a premium for? Example; customization o Are they Rare?  Need to be controlled by only a small number of rims in order for the firms to obtain competitive advantage o A
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