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Chapter 5

ADMS 1000 Chapter Notes - Chapter 5: Air Miles, American Express


Department
Administrative Studies
Course Code
ADMS 1000
Professor
Shahab Modirmassihai
Chapter
5

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ADMS 1000 Chapter 5
Chapter 5: Business Strategy
What is strategic management?
-Strategic management consists of the analysis, decisions, implementations, and
evaluations a firm undertakes to create and sustain its competitive advantages.
-What is strategy? The plans made or the actions take in an effort to help an
organization obtain its intended purpose
Five Forces Model
Michael Porter drew upon research from industrial organization economics to propose a
powerful, prescriptive model known as the five-forces model. This consisted of:
- The threat of new entrants
- The bargaining power of suppliers
- The threat of substitutes
- The threat of buyers
- The threat of current industry rivals or competitors
Threat of New Entrants:
New entrants can take two basic forms: new startups and diversification of existing firms in
other industries. Regardless, the entrants bring new capacities, desires to gain market share,
and substantial resources and capabilities. Prices can be bid down or incumbents’ costs inflated
as a result, reducing profitability.

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ADMS 1000 Chapter 5
Is the threat of new entrants high or low?
Barriers to entry
- Economies of scale
- Capital Requirements
- Switching Costs
- Access to Distribution Channels
- Cost Disadvantaged Independent of Scale
1. Economies of scale refers to spreading the costs of production over number of units
produced. The cost of a product per unit declines as the number of units per period
increases. Ex: Global companies that sell their good in various countries often achieve
economies of scale because of the high volume of products they produce.
2. Capital requirements typically refers to the amount of investment or money that is
required to enter an industry.
3. Switching costs refers to the costs (monetary or psychological) associated with
changing from one supplier to another from the buyer’s perspective. When switching
costs are minimal, customers can easily switch buying products from one firm to another.
This creates an opportunity for potential new entrants because they can easily acquire
customers from incumbents.
4. Accessibility to distribution channels can be an entry barrier for potential new
entrants. IN the situation where incumbents control most of the distribution channels,
potential entrants would find it difficult to distribute their products or services.
5. Cost disadvantages independent of scale include governmental policies, legal
protection (patents and trademarks), and proprietary products. These advantages create
barriers for potential new entrants.
Threat of Suppliers
- Is the threat of suppliers high or low?
- Are resources critical?
- Are there many suppliers?
Suppliers can exert bargaining power over companies by demanding better prices or
threatening to reduce the quality of purchased goods or services. The power suppliers hold
directly impacts industry profitability as well as the company’s performance.
There are two major factors contributing to suppliers’ power in relation to companies in an
industry. The first one is how critical the resources are to the incumbents that the supplier holds.
Quite often. When the raw materials suppliers provide are critical to incumbents in an industry,
the suppliers are in a good position to demand better prices. The second factor is the number of
suppliers available relative to the number of incumbents in an industry.
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ADMS 1000 Chapter 5
When the number of suppliers relative to the number of companies is low, the incumbents
compete against each other for the relatively small number of suppliers
Threat of Buyers
Is the power of buyers high or low?
- Switching costs
- Undifferentiated products
- Importance of incumbent’s products to buyers
- The number of incumbents relative to the number of buyers
Switching costs – When buyers can easily switch from one seller to another, the buyer has
considerable power.
Undifferentiated products – The more similar a product is, the more power the customer will
have. When products are undifferentiated, customers have greater bargaining power in terms of
price, quality, or service.
Importance of the product – Customers preferences are not all uniform. So, how important is
the product to the customer? It depends. What is important to one customer, may be different
from another customer.
The number of companies relative to the number of buyers – If there is a monopoly and
only one seller of a good or service exists, the customer will have little power, since there are no
other viable alternatives. When oligopolies exist the customers may have reduced power.
Threat of Substitutes
Is the power of substitutes high or low?
- What is a substitute?
oAny product that can act as a substitute for another product
Although substitutes may not be ideal, customers may be able to turn to them if prices of a
certain good becomes too high, or one product or service is not easily available.
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