STRATEGY REVIEW

EXTERNAL
&
INTERNAL
ANALYSIS
1
 SOURCE OF PROFITABILITY

Industry

Business Functional
Strategy Strategy
Company Profitability

Low Cost

Company Specific Value Chain

Differentiation

Resource Based View

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PORTERS 5 FORCE ANALYSIS +
COMPLEMENTS Strong force = limit price
increase (threat)
Weak force = opportunity
to charge higher price &
more profit

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THREAT OF NEW ENTRANTS
1. Economies of Scale arise when unit costs fall
as a firm expands its output.
New competitors with small scale face cost
disadvantage
Operating in large scale carries investment risk
2. Demand Side Benefits of Scale
Network Effects of Platform Business
3. Government regulation has constituted a major
entry barrier for many industries
Bank license, water utility provider, etc.

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RISK OF ENTRY
4. Brand loyalty & Customer Switching Costs exists when consumers
have a preference for the products of established companies.
4. Soft drink companies providing full range of products (Coke, Fanta, Sprite) creating
significant switching cost for resturants (McD)
5. Absolute Cost Advantages: entrants cannot expect to match the
established companies’ lower cost structure
Superior production operations and processes due to accumulated experience, patents,
or trade secrets.
Control of particular inputs required for production, such as labor, materials,
equipment, or management skills that are limited in their supply
Access to cheaper funds because existing companies represent lower risks than new
entrants
6. Barriers to Entry
6. Coke with full portfolio of brands to retailer, it is impossible for competition
to get access to resturants

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RIVALRY AMONG ESTABLISHED
COMPANIES
 Competitive struggle between companies within an industry
to gain market share from each other
 Price v.s. Non Price competitive strategy – Product Design,
Promotion
 Intense rivalry lower price threat to profitability
 Factors that impact the intensity of rivalry among
established companies within an industry
 Industry competitive structure (Number & Size Distribution):
Fragmented (threat) : low entry barrier & commodity type product: boom
& bust cycle – excess capacity, cut price, price war. Strategy: Minimize cost!
Restaurant business
Consolidated – Oligopoly or Monopoly. (Airplane Manufacturer)
Set price by watching, interpreting, anticipating & responding to one
another’s strategy. Pepsi & Coke, Play Station & Xbox.

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RIVALRY AMONG ESTABLISHED
COMPANIES
 Demand conditions: rising & falling.
 Cost conditions: fixed vs variable cost
High fixed cost = price - sales (to cover fixed cost) = price
war (threat). Think Airlines, Hotels !
 Exit barriers: Prevent company from leaving an industry
Investment in specific assets, Strategic (severance pay) &
emotional.
 Undifferentiated Product
 Perishable Product

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BARGAINING POWER OF BUYERS AND SUPPLIERS
Buyers (Individual or Reseller) = Suppliers = High Bargaining
High Bargaining Power. Ability to Power. Ability to increase price
decrease price
Choose sellers (more than one) Few or No Substitute: Product has no
Airline Tickets. Purchase in large or few substitutes and is vital to the
quantities. Undifferentiated Product buyer (Intel)
Supplier industry is dependent on Not dependent on one particular
them for a major portion of sales industry for their sales
(Toyota’s Supplier)
With low switching costs and ability to Companies would incur high
purchase an input from several switching costs if they moved to a
companies at once, buyers can pit different supplier (Software
companies against each other companies CISCO, Oracle, SAP)
(Government importing stones for High Supplier Concentration
Padma Bridge)
Threat of entering the industry and Threat of entering customers’ industry
producing the product (Toyota and knowledge that companies
threatening to produce a component) cannot enter the suppliers’ industry
(De Beers Diamond, Microsoft making
PC)

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SUBSTITUTE PRODUCTS AND
COMPLEMENTORS
 Substitute products - Those of different businesses that
satisfy similar customer needs
 Price increase in one, increases the demand in another
 Limit the price that companies in an industry can charge for
their product
 Complementors - Companies that sell products that add
value to the other products
 Strong complementors - Provide a increased opportunity for
creating value
 Weak complementors - Slow industry growth and limit
profitability
Value of PC / Smart Phones has increased through high
quality software & app
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©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10
INDUSTRY ANALYSIS – FEW WARNINGS
 Managers must not always avoid low profit industries
Apple is highly profitable in competitive PC industry
 The objective is not to declare the industry attractive or
unattractive but to understand the foundations of competition
and the root causes of profitability
 Ways to Manage the 5 Forces:
 Threat of New Entry: Product or Process Innovation
 Internal Rivalry: Choice of Strategic Groups
 Bargaining Power of Supplier: Backward Integration or Tapered
Integration
 Bargaining Power of Buyer: Choice of Buyers / Segmentation
 Substitute: Continuous Innovation & Value Creation

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INTERNAL ANALYSIS: BUSINESS
STRATEGY
 Business Level Strategy
Cost Leadership
Differentiation
 Customer’s Willingness to Pay
 Company’s Cost to Supply

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 - THE VALUE CHAIN

Structure,
Culture

Logistics Motivation

Designing new Creation /

product / process Manufacturing Branding

Transform inputs into outputs that customer value

After Sales
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VALUE CHAIN CONFIGURATION
LOW COST
• Research &
Development
• Designing products that
are easier to manufacture
• Process innovation to
reduce assembly time &
materials/parts
• Production
• Economies of Scale, Learning
Effect (learning by doing;
complex task), Experience Curve
DIFFERENTIATION
• Research & Development
• Designing products that
requires fewer parts to
assembly – less error better
quality
• Designing products with high
perceived quality
• Production
• Shorter Production Runs
• TQM / Six Sigma
• Product & Service
Attributes: Reliability,
Durability, Style, Design,
After sales services, etc.
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VALUE CHAIN CONFIGURATION
LOW COST DIFFERENTIATION
• Marketing & Customer • Marketing & Customer
Service Service
• Aggressive Marketing • Design Products according to
Customer’s Need -
Strategy
Customization
• CS: Limit Customer • Branding
Defection • CRM

• Logistics • Logistics
• JIT, Cross Docking • Rationalize Suppliers

• HRM • HRM
• Hiring, Training, Reward: Pay • Hiring, Training – Black Belt,
for Performance (Employee Reward
Productivity)
15
VALUE CHAIN CONFIGURATION
LOW COST
• Information System
• Saving Cost from
Automation
• Company Infrastructure
• Low Cost Culture
• Flat Organizational Structure
DIFFERENTIATION
• Information System
• Enterprise Systems
• Creating value adding
services for customers
• Supplier & Customer
Analytics
• Company Infrastructure
• Inverted Hierarchy – Customers at top
• Matrix Structure: Collaboration across
departments
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RESOURCES BASED VIEW

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RESOURCES BASED VIEW

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RBV WITH VRIO ATTRIBUTES
 Valuable:
Does the resource helps to achieve low cost?
Does the resource helps to achieve differentiation, increasing customer’s
willingness to pay?
 Rare:
Is the resource widely available to my competitors?
 Imitate:
Can the resources be copied by my competitors easily?
Historical Condition
Causal Ambiguity
Social Complexity (Network Complexity)
 Organized to Capture Value
Do I have qualified people and proper governance structure to turn my
resources into products / services that customer values?

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