Ch1 Analysis of the Environment

Competitive Strategy Module 1 - Analysis of the Environment Industries and the Life Cycle Competitive Strategy is about trying to achieve some kind of advantage over competitors. The growth rate of an industry should not be thought of as necessarily a passive element that firms have to adjust to. A firm may be in a position to influence the industry growth rates and course of the life cycle. Two main techniques: Pricing strategies in the introductory phase Life cycle stretching and renewal 1.2.1 Critical Turning Points in the Life Cycle Industry life cycle: (product life cycle) 1.2.2 The Stages of the Life Cycle Growth stage: Relatively low price elasticity of demand for each brand because of (a) limited substitutability, (b) user unfamiliarity with the “right” prices (c) early pioneering users more attracted by novelty and less concerned about price Relatively high price High level of advertising to create demand for new product Profits low or negative to begin with, then increasing Variety of product designs Radical product and process innovation. R&D can be a major tool of strategy here as firms search for ways to create sustainable sources of competitive advantage. Major demands for new investment Product can be characterised by frequent bugs and defects Capacity shortages, at least in the early stages can change at critical point A, see above Easy entry into this market. Fluid and rapidly growing market and the relative lack of standardisation and brand advantage, can create opportunities for entry Few firms Patchy or limited distribution Maturity stage Increasing price elasticity of demand Falling price Brand advertising important Profitability begins to decline Increased standardisation Mostly incremental innovations, emphasis on process innovation Replacement investment emphasised Improved quality and reliability of design Capacity may settle to match demand Entry becomes more difficult and less attractive Many firms Well established distribution channels Decline stage High price elasticity of demand Price continues to fall Lack of both differentiation and growth creates little role or room for advertising Low or negative profits Further standardisation Little innovation Little investment Well established design, few bugs Overcapacity Entry unattractive Fewer firms Distribution and access to distribution increasingly important for firms Porter suggested that there may be a variety of strategies that a firm in decline stage can pursue: Dominance and leadership. A high market share can give a cost advantage and may allow the firm to exercise some control over price. Niche exploitation Harvest. Maximise short-term cash-flow -for example by limiting models Exit Internalise the threat The Five Forces Framework The logic of the framework is based on the argument that there are five basic competitive forces that together determine the profit potential of an industry. The five forces are as follows: Threat of new entrants Intensity of rivalry among existing competitors Bargaining power of buyers Bargaining power of suppliers Pressure from substitute products Force One: Threat of new entrants There are a number of elements that can influence threat of entry as follows: Economies of scale Two elements: The cost gradient – the slope of the AC curve below the MES level The minimum efficient scale (MES) – where the firm achieve the lowest average cost in the long run Economies of scope Two main sources of both Economics for Scale and Scope Increased output –fuller of indivisible resources Increased output –more opportunities for specialisation The difference between economies of scale and scope: Minimum Efficient Scale (MES) and the cost gradient in economies of scale: The experience curve differs from economies of scale and scope in that cost per unit falls in relation to the accumulated output of goods or service, not in relation to the level of output in a given period. Differentiation (brand name) Risky and costly capital requirement for entry Switching cost (loyalty cards or bank-service) Access to supplies and outlets Other cost advantage (Cheap local resources) Government policies Exit barriers Expected retaliation Force Two: Rivalry Rivalry may express itself in a number of dimensions in an industry: its objectives, its channels, its strength Rivalry exists and are strong depending on a number of factors including: Relatively high fixed costs. Flying aircraft's - an additional passenger doesn’t make the tour more expensive Low growth - companies usually have growth objectives and to achieve this the only way is to get shares from competitors High exit barriers Differentiation and switching costs is weak Absence of a dominant firm Force Three: Bargaining Power of Buyers Factors that could augment the bargaining power of buyers: One or a few buyers The buyers earn low profits (cannot pay high prices) The product represents a large proportion of the buyers overall purchases – the bigger the purchase, the more sensitive the buyer is likely to be to the price Standardised, undifferentiated product with low switching costs for buyers Buyers can threaten backward integration Force Four: Bargaining Power of Suppliers Supplying group has only one or a few firms There are no close substitute for the suppliers products The product is an important input into the buyers business The buyer industry is not an important customer The suppliers products are differentiated or there are switching costs for the buyers The supplier can threaten vertical integration Force Five: Pressure from Substitute products These depend on the substitute being able to perform similar functions to the industry in question, and its price/performance characteristics compared to that industry. Game Theory Perspectives The Prisoner's Dilemma You Partner Silent Confess Silent 1 10 Confess 0 7 You confess: You stay Silent: You go free if Partner stays silent You get 1 year if Partner is silent You get 7 years if Partner confesses You get 10 years if Partner confesses Collusion is when two parties are free to discuss and agree on what they should do. Once an agreement is reach both have an incentive to cheat and confess anyway. Both can conceal information on true costs and profits. Dominant Strategy Equilibrium is the best strategy independent of the other party's choice. Strategic Moves A strategic move is something that is intended to alter the beliefs or expectations of others in a direction favourable to you. Its fundamental characteristic is that you deliberately limit your freedom to manoeuvre. Important question: What would be in the best interests of your rival once you have entered the market? How can credibility be won and maintained? Examples: Reputation Contracts Specialisation Investment Incrementalism Hostages Social context