ADMS Notes CH.5
o Definition- analysis, decisions, implementations and evaluations a firm
undertakes to create and sustain is competitive advantage.
o A firm will analyze there external and internal environments and based of
that they pursue an effective strategy for change.
o Although a company plans out its strategy sometimes an external effect can
change the companies plan
(ie. The SARS crises, Microsoft entry into the environment).
Analyzing the external environment
o Industry definition- group of organizations or firms that share similar
(raw materials, labor, technology, customers).
Example would be airline industry (Air canada, westjet...).
Five Forces Model
o 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
(ie, Hyundai can sell cars cheap when they enter the market, so
Toyota has to compete with these prices)
o Economies of scale- spreading the costs of production over the number of
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
o Capital requirements- Barriers for new entrants.ADMS Notes CH.5
The required capital to establish a new firm is very high (mining
company for example would need to buy land).
o 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
(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).
o 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
o Cost disadvantages independent of scale- These advantages have nothing to
do with scale but have to do with government policies, legal protection,
2.) Bargaining power of suppliers- The firms, organizations or individuals providing
raw materials, technologies or skills to incumbents.
o (ie Telus leaves the power of there chip in some dud in china, who can raise
the price when he wants).
o This limits the profit that can be made by Telus. Major factors contributing
to suppliers power- How critical the chip is to Telus.
o If it is very critical obviously the suppliers are in good position to raise the
o 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.
ADMS Notes CH.5
o Switching costs- see above.
o Undifferentiated products- When incumbents provide a similar product or
services to buyer they would not be in a good position to negotiate with the
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.
o 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.
o 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.
o 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
This enhances there short term performance.
o 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
o High exit barrier- economic, strategic, emotional factors that keep
companies competing even if they really can’t afford to.
o Limitations: The model doesnt take roles of technological, gov’t regulation
into consideration(gov’t barriers of paADMS Notes CH.5
o 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 universal
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
Financial: debt, equity, retained earning, profit
Physical: plants, buildings, machines, facilities
Human: experience, knowledge, risk taking, wisdom of individuals
Organizational: history relationships, trust, and organizational culture.
o Value: do we have something that apple doesn't have?
o Ie: differentiating value that others don’t offer. What to specialize in to gain
o Value in a niche.(ikea for the certain buyer vs. High class brick for evryone
o Rareness: contorll