Strategic Management Week 2 Notes
Strategic Management Week 2 Notes STRT 4500
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This 4 page Class Notes was uploaded by Dominique LaSalle on Wednesday August 31, 2016. The Class Notes belongs to STRT 4500 at University of Colorado Colorado Springs taught by Eric M. Olson in Fall 2016. Since its upload, it has received 40 views. For similar materials see Strategic Management in Business at University of Colorado Colorado Springs.
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Date Created: 08/31/16
Strategic Management Week 2 The Structural Analysis of Industries - The essence of competitive strategy is relating a company to its environment - The key element in defining the environment is identifying the industries in which the company competes - Definition of an industry: o Groups of firms producing products that are close substitutes for each other o Companies may be in many industries at the same time - Five competitive forces o Competition in an industry is based on five basic competitive forces o It is the collective strength of these forces that determines the ultimate profit potential in an industry o Examples Potential entrants: Hooters Airlines Existing competition: Frontier, United, Southwest Bargaining power of suppliers: Pilots, Fuel Bargaining power of buyers: Passengers Pressure from Substitute Products: Train - Economic Law o Competition drives the rate of return on invested capital to a floor rate measured against long-term government securities o Poor performers go out of business o Very good performers see competition through the influx of new investment - A fresh look at industry and market analysis o Porter’s five forces model was introduced in 1980 o Since then industry dynamics have change - Underlying premises of Porter’s model o Industry is the appropriate unit of analysis Porter defines an industry as close substitutes Very vague Minivans/SUVs Fresh/frozen vegetables Industrial adhesive/nuts and bolts o Industry factors determine the average return on capital o Industry factors influence competition - Market vs Industries o We prefer a customer-oriented demand-side definition of industry o We also prefer the term markets over industries - Identifying markets o Step 1: define a group of buyers who have relatively homogeneous needs Focus groups, survey research, conjoint analysis o Step 2: determine potential demand in market (must be sufficient to make it economically viable) o Step 3: determine if a market is strategically distinctive (if not, merge it with another market) - Industry factors o Average ROI for firms operating in unattractive markets is 13.4% o Average ROI for firms operating in attractive markets is 31.3% o Industry affects account for between 40 and 75% of the difference in industry returns o Rate of change: Stable forces (e.g., brands, patents) do not change rapidly – rare exceptions Transient forces (e.g., demand for full-sized luxury cars) may change rapidly Market analysis must consider the rate and predictability of change as these impact profitability, strategy formation and content o Collective strength of market forces Substantial variation of ROI performance occurs within industries - Industry factors influence completion o some competitive actions (i.e., sets of actions including the development and deployment of resources, that position the business to exploit opportunities and avoid threats) are more effective than others in particular environments (e.g. turbulence) - an augmented model for market analysis o the new model reconfigures and expands Porter’s five forces to eight o each of these forces directly impacts: profitability risk strategy o 1-3: composite competitive rivalry 1: direct competii - Barriers to entry o Economies of scale o Product differentiation o Capital requirements o Switching costs o Access to distribution channels o Cost disadvantages independent of scale o Government policies o Expected retaliation - Existing competitors o Numerous small competitors or a few equally balanced larger competitors o Slow industry sales growth o Lack of differentiation or switching costs o Capacity augmented in large increments o High strategic stakes o High exit barriers - Pressure from substitute products o Products that are subject to trends improving their price-performance trade-off with the industry’s products o Product produced by firms generating high profit margins - An augmented model for market analysis o 4. Complementors The impact of network effects on market evolution Network effects occur when demand for a product rises with the number of complementary products An example being Microsoft’s relationship with Intel o 5. Customer power Greatest when they are large, few in number, and able to switch suppliers easily Powerful customers frequently mean that firms will either accept profit margins that approach their cost of capital or, will attempt to create customer loyalty (benefits, reduce non-price costs, lower prices) o 6. Supplier power Greatest when large, few in number and can readily sell to alternate customers Customer can attempt to bargain either for lower costs or more benefits if sellers see an expanded future relationship o 7. Market change: Growth Growth comes from an increase in the Number of buyers More purchases by existing buyers, or Creation of a solution to a latent needs First two cases are not disruptive – anticipated Third case is disruptive – which can significantly alter market structures o Growth: disruptive Early adopters embrace change in order to give their firms an advantage over competition To significantly impact an existing industry firms must move beyond the early adopters to mainstream customers (crossing the chasm) (e.g., 35mm film – digital photography) o Market change: turbulence Market turbulence – rate of change in customer’s needs and preferences Competitive turbulence – rate at which other firms change their competitive methods (including development and introduction of new technologies) The needs of early adopters are often different than the early or late majority Not all firms (or markets) are equally susceptible to the disruptions or market or competitive turbulence Barriers to imitation are strong deterrents - Strategic positioning in competitive markets o Create a market-focused organization o Market oriented firms: Scan the market broadly Have a long term focus Work closely with lead users Conduct small scale market experiments, learn from results, and modify offerings o Establish relationships with key customers and suppliers Build a foundation of trust Demonstrate the value of the relationship – even if products are commodity o Create new market space Avoid head to head competition by finding untapped market demand (e.g., Home Depot slipped between traditional hardware stores) o Conceive of strategy as a series of real options Traditional approaches to financial analysis have placed too great an emphasis on risk management Strategic options analysis takes a broader view and recognizes that managers are active decision makers
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