Course Meeting 12, June 30, 2009Management 2600C. Howell-Vischer : Course Meeting 12, June 30, 2009Management 2600C. Howell-Vischer
Slow…… Discussion : Slow…… Discussion 2
Porter’s 5 Forces : Porter’s 5 Forces The Five Forces model of Porter is an outside-in business unit strategy tool that is used to make an analysis of the attractiveness (value...) of an industry structure
Porter’s 5 Forces Model : Porter’s 5 Forces Model Allows the development of a competitive strategy
Suggests 5 main forces may be decisive in helping shape the outcome:
Suppliers
New Entrants
Substitutes
Buyers
Industrial competitors
Threat of new entrants : Threat of new entrants New entrants bring increased capacity to the industry and are often backed by substantial resources - Example: Virgin
New entrants can be deterred by ‘barriers to entry’
Threat of new entrants : Threat of new entrants The main barriers are………
Economies of scale
Patents
Product differentiation
Capital requirements (financial & specialist equipment)
Skills
Access to distribution channels
Reaction/strategic decisions of incumbents (ex- all undercut new entrant)
Government policy (ex- de-regulation)
The Bargaining Power of Suppliers : The Bargaining Power of Suppliers Suppliers exert power in the industry by threatening to raise prices or reduce quality
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
The Bargaining Power of Suppliers : The Bargaining Power of Suppliers Suppliers are likely to be powerful if:
Supplier industry is dominated by a few firms
Suppliers products have few substitutes
Buyer is not an important customer to supplier
Suppliers’ product is an important input to buyer’s product
Supplier’s products have high switching costs
The Bargaining Power of Buyers : The Bargaining Power of Buyers Buyers compete with the supplying industry by:
Bargaining down prices
Forcing higher quality
Playing firms off of one another
The Bargaining Power of Buyers : The Bargaining Power of Buyers Buyer groups are likely to be powerful if:
Buyers are concentrated
They purchase a significant fraction of the seller’s goods
Products are undifferentiated
Buyers face few switching costs
Buyers present a credible threat of backward integration
Buyers has full information
The Threat of Substitute products : The Threat of Substitute products Products with similar function limit the prices firms can charge
Keys to evaluating substitute products:
Products with improving price/performance tradeoffs relative to present industry products
Examples: Electric security system replaces a security guard
Fax machine replaces overnight delivery
Digital camera replaces the need for film
Handy Cam replaces need for digital camera
The threat of substitute products.....Questions : The threat of substitute products.....Questions How many substitute products/services have appeared in your industry in the last 5 years?
What are they? How different are they?
Were they introduced by your organisation or others?
Which organisation in your industry does the most Research and Development?
What happens to price, profits and market share when substitutes are introduced?
Rivalry among Existing Competitors : Rivalry among Existing Competitors Intense rivalry often plays out in the following ways:
Price competition
Advertising battles
Increasing consumer warranties and service
New product roll-outs
Price competition often leaves the entire industry worse off
Coca Cola : Coca Cola Traditional competition:
Prices of Pepsi, local brands
Market share
Promotional actions of competition
New entrants:
New “look-a-like” manufacturers
Substitute products:
Fashionable new drinks, milk drinks, coffee, beer, water, smoothies ...
Coca-cola : Coca-cola Suppliers:
Price and availability of ingredients on world market
Quality, speed, safety, traceability, flexibility of supply chain
Buyers/consumers:
High as a result of intense competition both among branded and unbranded products.
Combined purchase power of shops, bars, supermarkets
Michael Porter’s 5 Forces : 17 Michael Porter’s 5 Forces
The Value Chain : 18 The Value Chain
What is a Value Chain? : 19 What is a Value Chain? A sequential process of value-creating activities
A categorization of the generic value adding activities of an organization
A concept described and popularized by Michael Porter in his 1985 best-seller, “Competitive Advantage: Creating and Sustaining Superior Performance”
It defines the organization’s activities as being either primary or support activities
The Value Chain : 20 The Value Chain General administration Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service
Primary Activities : 21 Primary Activities Associated with receiving, storing and distributing inputs to the product
Location of distribution facilities
Material and inventory control systems
Systems to reduce time to send “returns” to suppliers
Warehouse layout and designs
Primary Activities : 22 Primary Activities Associated with transforming inputs into the final product form
Efficient plant operations
Appropriate level of automation in manufacturing
Quality production control systems
Efficient plant layout and workflow design
Primary Activities : 23 Primary Activities Associated with collecting, storing, and distributing the product or service to buyers
Effective shipping processes
Efficient finished goods warehousing processes
Shipping of goods in large lot sizes
Quality material handling equipment
Primary Activities : 24 Primary Activities Associated with purchases of products and services by end users and the inducements used to get them to make purchases
Highly motivated and competent sales force
Innovative approaches to promotion and advertising
Selection of most appropriate distribution channels
Proper identification of customer segments and needs
Effective pricing strategies
Primary Activities : 25 Primary Activities Associated with providing service to enhance or maintain the value of the product
Effective use of procedures to solicit customer feedback and to act on information
Quick response to customer needs and emergencies
Ability to furnish replacement parts
Effective management of parts and equipment inventory
Quality of service personnel and ongoing training
Warranty and guarantee policies
Support Activities : 26 Support Activities Typically supports the entire value chain and not individual activities
Effective planning systems
Ability of top management to anticipate and act on key environmental trends and events
Ability to obtain low-cost funds for capital expenditures and working capital
Excellent relationships with diverse stakeholder groups
Ability to coordinate and integrate activities across the value chain
Highly visible to inculcate (fix in people’s minds) organizational culture, reputation, and values
Support Activities : 27 Support Activities Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel
Effective recruiting, development, and retention mechanisms for employees
Quality relations with trade unions
Quality work environment to maximize overall employee performance and minimize absenteeisn
Reward and incentive programs to motivate all employees
Support Activities : 28 Support Activities Related to a wide range of activities and those embodied in processes and equipment and the product itself
Effective R&D activities for process and product initiatives
Positive collaborative relationships between R&D and other departments
State-of-the art facilities and equipment
Culture to enhance creativity and innovation
Excellent professional qualifications of personnel
Ability to meet critical deadlines
Support Activities : 29 Support Activities Function of purchasing inputs used in the firm’s value chain
Procurement of raw material inputs
Development of collaborative “win-win” relationships with suppliers
Effective procedures to purchase advertising and media services
Analysis and selection of alternate sources of inputs to minimize dependence on one supplier
Ability to make proper lease versus buy decisions
Resource-Based View of the Firm : 30 Resource-Based View of the Firm Two perspectives
The internal analysis of phenomena within a company (SWOT)
An external analysis of the industry and its competitive environment (PEST)
Three key types of resources
Tangible resources
Intangible resources
Organizational capabilities
Types of Resources : 31 Types of Resources Relatively easy to identify, and include physical and financial assets used to create value for customers
Financial resources
Firm’s cash accounts
Firm’s capacity to raise equity
Firm’s borrowing capacity
Physical resources
Modern plant and facilities
Favorable manufacturing locations
State-of-the-art machinery and equipment
Types of Resources : 32 Technological resources
Trade secrets
Innovative production processes
Patents, copyrights, trademarks
Organizational resources
Effective strategic planning processes
Excellent evaluation and control systems Types of Resources Relatively easy to identify, and include physical and financial assets used to create value for customers
Types of Resources : 33 Types of Resources Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time
Human
Experience and capabilities of employees
Trust
Managerial skills
Firm-specific practices and procedures
Types of Resources : 34 Types of Resources Innovation and creativity
Technical and scientific skills
Innovation capacities
Reputation
Effective strategic planning processes
Excellent evaluation and control systems Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time
Types of Resources : 35 Types of Resources Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end
Outstanding customer service
Excellent product development capabilities
Innovativeness of products and services
Ability to hire, motivate, and retain human capital
How Resources & Capabilities Lead to Advantages : 36 How Resources & Capabilities Lead to Advantages
Adding Value : 37 Adding Value
Adding Value : 38 Adding Value Adding value means making the customer feel like they are getting real value for their money. This can happen by/through:
understanding and being close to the customer
committing to quality
maintaining a high level of all around service
reacting speedily to competitive opportunities and threats
constant innovation
Examples of Adding Value : 39 Examples of Adding Value warranties
extra car features (rust filter)
airlines (mix of offerings in seat choices)
taking away features seen as a nuisance (handy features)
services (grocery delivery)
convenience packaging (salad in a bag)
cleanliness, value, quality, service (formerly McDonalds)
ambience/lifestyle (Starbucks)
Opportunities for Adding Value : 40 Opportunities for Adding Value changes in industry regulation
marketing (segmentation/globalization)
operations (technology, cost reduction, service, quality)
people (exploiting expertise, encouraging innovation)
finance (globalization of financial markets, better use of assets)
information (exploiting the potential of information technology)
acquisition and restructuring strategies
co-operation strategies