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

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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; wonโ€™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
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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 & companyโ€™s
performance
๎€**Two factors to supplierโ€™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
power๎€
๎€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, theyโ€™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 donโ€™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 rivalry๎€
๎€A. Lack of differentiation or switching costs: when products are different or switching costs of
customers are minimal, customerโ€™s 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 doesnโ€™t take roles of technological change & government regulations into
consideration; it doesnโ€™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 questions ๎€
1.The question of value: if their firmโ€™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 doesnโ€™t compete
2.The question of rareness: resources & capabilities need to be rare & unique. Ie, wall-martโ€™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.
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Document Summary

Strategic management: consists of analysis, decisions, implementations & evaluations a firm undertakes in order to create & sustain its competitive advantages. used to sustain its competitive advantage, performance & chance of survival. It allows us to systematically assess the industry environment. ** 5 main sources of entry barriers: 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: 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: 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: bargaining power of suppliers:

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