ADMS 1000 Chapter Notes - Chapter Final: International Trade
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Chapter Five: Strategic Management
The Five Forces Model:
1. Threat of New Entrants
- Can take two basic forms, such as new start-ups and diversification of existing firm in other
- The new entrants bring new capacity; desire to gain market share and substantial resources
- Firms would need to consider how to create entry barriers
- There are five major sources of entry barriers from the potential new entrant’s point of view.
Economies of Scale
: spreading the costs of production over the number of units
produced. It can provide companies with cost advantages on price.
: In some industries the required capital is significantly high. This
creates barriers of entry to new industries.
: refers to costs associated with changing from one supplier to another.
Access to Distribution Channels
: accessibility to distribution channels can be an easy
barrier for potential new entrants. Potential entrants would find it difficult to distribute
their products or services, which in turn defer new entry.
Cost Disadvantages Independent of Scale
: Include legal protection and government
policies, and proprietary products.
2. Bargaining Power of Suppliers
- Focus in on the firms, organizations, individuals that provide raw materials, technologies, or
skills to incumbents in an industry.
- Suppliers can exert bargaining power over incumbents 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 as well as the
- Two major factors contributing to supplier’s power:
Criticality of resources the suppliers hold.
The number of suppliers available relative to the number of incumbents in an
3. Bargaining Power of Buyers
- Buyers can demand lower prices, better quality or services, or playing incumbents against
each other. There are many factors contributing to buyer power:
Switching Costs – the bargaining power of buyer’s increases as switching costs
Undifferentiated Products – when other firms provide similar products or services to
buyers, they would not be in a good position to negotiate with the buyers.
Importance of Incumbents’ Products to Buyers – when products/services that
incumbents offer are important or critical to buyers, the power of buyers diminishes.
The Number of Incumbents Relative to the Number of Buyers – more firms, the
lower the price the consumers want.
4. Threats of Substitutes
- Other firms will provide substitute products or services with similar purposes.
5. Rivalry Among Existing Firms
- The final force that affects industry structure is rivalry. The rivalry among incumbents in an
industry can take many different forms.
- Rivalry can be intensified by several interacting factors;
Lack of Differentiation or Switching Costs
– when products are significantly
differentiated or switching costs of customers are minimal, customer’s choices are
often based on price or service.
Numerous or Equally Balanced Competitors
– some firms may believe that they can
initiate strategic action without being noticed. Their strategic action intensifies the
rivalry among companies.
High Exit Barriers
– refer to economic, strategic or emotional factors that keep firms
competing even though they may be earning low or negative returns on
investments. Ex. fixed costs, specialized assets, escalating commitment of
management and government and social pressures.
The VRIO Model
- Managers need to look inside their firms for competitive advantages. They must ask four
1) The Question of Value – managers need to ask if their firm’s resources and capabilities
add any value to capture market share or enhance profitability, either through exploiting
emerging opportunities or neutralizing threats.
2) The Question of Rareness – Although valuable resources and capabilities help firms
survive, those resources and capabilities need to be rare. Managers need to assess if
their valuable resources and capabilities are unique among competitors.
3) The Question of Imitability - when imitation occurs, it diminishes the degree of rareness.
4) The Question of Organization- whether or not a firm can be organized in effective and
efficient ways to exploit their valuable, rare and difficult to imitate resources and
capabilities to maximize their potentials.
- Strengths, weaknesses, opportunities, threats.
- The strategic logic behind SWOT analysis is that firms that strategically use their internal
strengths in exploiting environmental opportunities and neutralizing environmental threats
while avoiding internal weaknesses are more likely to increase market share, sales or
profitability than other firms.
- Can use the VRIO and Five Force model to help analyze the external and internal
Business Level Strategy:
- Sometimes called generic business strategies.
- They are:
Cost Leadership – the purpose of cost leadership is to gain competitive advantages
by reducing economic cost below that of all competitors. Three sources (1)
economies of scale; volume reduces cost, (2) learning curve economies; firms can
reduce marginal costs by experience, such as learning by doing, (3) low-cost access
to factors of productions.
Product Differentiation - gain competitive advantages.
Focus – targets a particular buyer group, a segment of the product line or a
geographic market. The firm thus can achieve either diffentation by better meeting
the needs of a particular buyer group or lower costs in serving this group.
- Corporate level strategy addresses two related challenges; (1) what businesses or markets a
firm should compete in, (2) how these businesses or markets can be managed so they create
- Successfully managing diversification can give a firm enormous profitability and competitive
- Diversification refers to a situation where a firm operates in more than one market
simultaneously. The market can take many forms like Rogers (cell phone, cable and phone
Motives for Diversification:
1) Intra-firm dynamics include means to growth and managerial self interest. Firms
operating in single markets will face some difficulties to continue growth in the
markets even if they have sustainable competitive advantage. Diversifying to
new markets provides them with opportunities to sustain growth and increase
revenue. By diversifying into new markets firms have new opportunities to share
related activities, which in turn achieve economies of scope (refers to the
situation where the total costs for serving two markets or producing them alone)
and then increase profitability and revenue.
2) Inter-firms dynamics include market power enhancement, response to competition
and imitation. The firm can increase its market power can come from increases in
market share or revenue.
Types of Diversification:
There are three types of diversification – related, unrelated and vertical integration.
Related diversification refers to the situation where a firm expands its core businesses
or markets into related businesses or markets. Such an expansion usually involves
horizontal integration across different businesses or market domains. It enables a firm
to benefit from economies of scope and enjoy greater revenues if these businesses
attain higher levels of sales growth combined than either firm could attain
independently. It also gives companies more market power to compete against
Unrelated diversification, where a firm diversifies into a new market that is not similar
to its current market domains.
Vertical diversification refers to an extension or expansion of a firm’s value chain
activities by integrating preceding or successive productive processes. The firm
incorporates more processes toward the source of raw materials (backward
integration) or toward the ultimate customers (forward integration.)
Means to Diversify:
There are many ways to diversify. Each way has advantages or disadvantages.
Internal developments, through internal developments firms will have full control of
the process of diversification and solely capture the potential revenue and profitability.
Has two disadvantages; requires significant resource commitments, time to develop
the capability unique to the new markets.
The five forces model: threat of new entrants. Can take two basic forms, such as new start-ups and diversification of existing firm in other industries. The new entrants bring new capacity; desire to gain market share and substantial resources and capabilities. Firms would need to consider how to create entry barriers. There are five major sources of entry barriers from the potential new entrant"s point of view. Economies of scale: spreading the costs of production over the number of units produced. It can provide companies with cost advantages on price. Capital requirements: in some industries the required capital is significantly high. This creates barriers of entry to new industries. Switching costs: refers to costs associated with changing from one supplier to another. Access to distribution channels: accessibility to distribution channels can be an easy barrier for potential new entrants. Potential entrants would find it difficult to distribute their products or services, which in turn defer new entry.