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Chapter 5

ADMS 1000 Chapter Notes - Chapter 5: Learning Curve, Stra, Cost Leadership

Administrative Studies
Course Code
ADMS 1000
Shahab Modirmassihai

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Chapter 5: Business Strategy
Learning Objectives
2) Describe the nature of strategic management
3) Identify key forces in determining an industry’s
4) Describe how organizational resources and capabilities
affect firm performance
5) Describe three generic business strategies
6) Explain the nature of corporate strategy
What is strategic management?
Strategic management  consists of the analysis, decisions, implementations, & evaluations a firm undertakes to create and
sustain its competitive advantages
What is a strategy?
oThe plans made or the actions taken in an effort to help an org obtain its intended purposes
The ongoing process of strategic management is critical to firm performance and survival in that effective process of strategic
management can allow a firm to sustain its competitive advantage
oEnhances its performance and changes of survival
Strategy – the plans made or the actions taken in an effort to help an org obtain its intended purposes
oVery similar to strategic management  managers assess their external/internal environments to plan and take actions to
pursue organizational goals short/long term
Industry – grp of org that share similar resource requirements (raw/materials/labour/tech/customers)
The Five Force Model
Systematically assess the industry environment
Consists of the threats of:
oNew entrants
oThe bargaining power of suppliers
oCurrent industry rivals or competitors
Threats of new entrants:
2 basic forms: new start-ups and diversification of existing firms in other industries
Entrants bring: new capacity, desire to gain market share & substantial resources and capabilities
5 majors sources of entry barriers from the potential new entrants point of view:
oEconomies of scale
Spreading the cost of production over the # of units produced
Cost of product produced per unit declines as the # of units per period increases

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Global companies that sell their goods in various countries often achieve economies of scale bc of the high
volume of products they produce
New entrants POV entry barrier is › and threat of new entrants is fl
oCapital requirements
The amount of investment or $ that is required to enter an industry
I.e. if you wanted to manufacture cars/planes you need millions/billions of $ to buy raw materials, build
assembly lines
The threat of new entrants is fl as the level of required capital ›
oSwitching costs
The costs (monetary or psychological) associated w changing from 1 supplier to another from the buyer’s perp
When switching costs are min, customers can easily switch buying prd from 1 firm to another
Creates an opp for potential new entrants bc they can easily acquire customers from incumbents
Threat of new entrants › (or the barrier to new entrants fl) as switching costs fl
oAccessibility to distribution channels
Entry to barrier for potential new entrants
Incumbents control most of the distribution channels, potential entrants would find it difficult to distribute their
products or services  defers new entry
The threat of new entrants fl (or the barrier to new entrants ›) as accessibility to distribution channels fl
oAnd cost disadvantages independent of scale
Governmental policies, legal protection (patents and trademarks) & proprietary products
These advantages create barriers for potential new entrants, which defer their entries
Threats of Suppliers
Bargaining power of suppliers  power held by firms, org and indv that provide raw materials, technologies, or skills to
incumbents in an industry – suppliers can exert power by demanding better prices or threatening to reduce the quality of purchase
odemand better prices or threatening to reduce the quality of g/s
the power suppliers hold directly impacts industry – profitability as well as the company’s performance
2 major factors:
oHow critical the resources are to the incumbents that the suppliers holds
The raw materials suppliers provide to the incumbents are important resources for them  therefore they could
demand better prices
oThe # of suppliers available relative to the # of incumbents in an industry
When the # of suppliers relative to the # of companies is low = incumbents compete against each other for the
small # of suppliers
Have the power to negotiate better prices among incumbents
Bargaining power of buyers
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