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Chapter 5

ADMS 1000 Chapter Notes - Chapter 5: Switching Barriers, Strategic Management, Cost Leadership


Department
Administrative Studies
Course Code
ADMS 1000
Professor
Eytan Lasry
Chapter
5

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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; wont
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
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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 suppliers 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, theyre
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 dont 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, customers choices are often based on price & service. Companies
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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 doesnt take roles of technological change & government regulations into
consideration; it doesnt 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 questions
1.The question of value: if their firms 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 doesnt compete
2.The question of rareness: resources & capabilities need to be rare & unique. Ie, wall-marts
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.
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