BS L08 Competitive Advantage Analysis

8/9/2019 BS L08 Competitive Advantage Analysis

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COMPETITIVE

DV NT GE N LYSIS

Prof.Dr.Dr.Dr.H.C. Constantin Bratianu

Facul ty of Bus iness Adm inis t rat ion

Academy of Econom ic Studies

Bucharest , Romania


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Strategic

Intention

Strategic

Analysis

Strategies

Elaboration

Strategies

Implementation

Strategic managementprocess


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Porters Five-forces model

Potentialentrants

Substitutes

Suppliers

Rivalry amongexisting firms

Buyers

Threat of new

entrants

Threat of

substitutes

Bargaining power of

buyers

Bargaining power of

suppliers

Industrycompetitors


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Five Forces

1. The threat of new entrants.

2. The bargaining power of buyers.

3. The bargaining power of suppliers.

4. The threat of substitute products and services.5. The intensity of rivalry among competitors in an

industry.

Each of these forces affects a companys success tocompete in a given market. Together, these forcesdetermine the potential profit in a given industry.


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THE THREAT OF NEW ENTRANTS (I)

If the potential profit for the industry competitors isattractive, then there is a probability that a newcompany may enter the business at any time.

Any new company that enters the market means anincreased competition and a good probability forerosion of the profit.

The extent of the threat depends on existing barriers toentry and the combined reactions from existingcompetitors.

There are entry barriers and exit barriers thatdiscourage new companies to enter the market.

Some of these barriers are high enough to make verydifficult the entrance of a new company.


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THE THREAT OF NEW ENTRANTS (II)

Economy of scale. A company may have an economy ofscale if there is high volume of products and servicesthat decreases the cost of production per unit product.For a new company to enter in such a market it wouldbe very difficult to have from the very beginning a highvolume of products, and therefore a low cost/unitproduct. Economy of scale is fitted for massproduction.

Strong brands and customer loyalty. When companies

on the market have strong brands, it is very difficult fora new company to compete against these knownbrands. This is one of the main reasons manycompanies invest heavily in creating strong brands.


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THE THREAT OF NEW ENTRANTS (III)

Capital requirements. There are fields of businesswhere there is a need for heavy investment from thevery beginning. If that investment is done in conditionsof high risks, then companies would not be able to

compete against the existing companies on the market. Switching costs. If the buyer must support a significant

switching cost from the existing supplier to a newsupplier, then the reaction would be not to do it. That isequivalent to an entry barrier for the new supplier.

Access to distribution channels. The new company thatenters the market needs distribution channels. If that iscostly, it is like a barrier.


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THE THREAT OF NEW ENTRANTS (IV)

Exit barriers. There are some businesses for whichthere are high exit barriers which may reduce thetemptation of new companies to enter the market.

In 1970s after the oil crisis, in Europe governments inFrance, UK and Germany developed nuclear energy.

The lifetime of a nuclear reactor is about 25 years,which means that after such an operational period itmust be closed down and decommissioned.

However, during these 25 years the regulations forenvironment protection changed and asked for the siteto have the same level of radioactivity like before.

That is a high exit barrier for companies generatingnuclear energy.


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ENTRY BARRIERS BUSINESS STORY

In 1986, Nynex issued the first electronic phone book, a CD

containing all telephone numbers for New York City area. Nynexcharged $10,000 per copy and sold CDs to other companies andgovernmental agencies.

James Bryant who was in charge with this project had the intuitionof a big business, left Nynex and started his own business ProCD

aiming at producing a phone book for entire US. However,telephone companies refused to give him for nothing their YellowPages.

Bryant went to China and used a very cheap labour force (i.e. 3.5$/day) to copy manually all Yellow Pages for US, and produced a

CD with more than 70,000 entries. Each CD cost was less than &1.0and was sold for hundreds of dollars.

The huge profit attracted new companies to do the same. Finally,the competition was on prices, and these kind of CDs were sold for

just a few dollars. The business failed to yield a good profit

anymore.


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THE BARGAINING POWER OF BUYERS (I)

Buyers may threaten an industry by forcing downprices, and bargaining for higher quality or moreservices.

The actions of buyers erode the industry profitability.

A buyer group is powerful under the followingconditions:

- It purchases large volumes of products relative to theseller scale (e.g. a mechanical equipment company

from a steel company).- The products are standard not specific to theproducer. The buyer may switch easily to othercompanies.

- The buyer faces small switching costs.


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THE BARGAINING POWER OF BUYERS (II)

- The buyer earns a low profit which means that it isprice sensitive.

- The buyer poses a credible threat of backwardintegration. If a buyer is partially backward integrated oris credible for doing a backward integration, then it hasa good power for bargaining.

- The industrys product is unimportant to the quality ofthe buyers products or services. That makes the

buyers products to be price sensitive.

Buyers can increase their bargaining power byaggregating in some groups with common interests andnegotiating through the group power.


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THE BARGAINING POWER OF SUPPLIERS

Suppliers can exert bargaining power over participantsin an industry by threatening to raise prices or reducethe quality of purchased goods and services.

Factors that enable the bargaining power of suppliers

mirror those discussed for buyers (i.e. by symmetry). Examples of enabling factors:

- The supplier is dominant on the market (i.e. there arefew suppliers of the same products on the market).

- The buyer is not an important client of the supplier.- The suppliers products are important inputs in thebuyers production.

- The supplier poses a credible threat for forward

integration.


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THE THREAT OF SUBSTITUTE PRODUCTS (I)

Substitute products are those able to satisfy the sameneeds.

Substitute products are a serious threat to the productsexisting on the market especially if their price issignificant lower, and their performance significanthigher.

Innovation generates new products and servicesmaking some existing products less competitive.

Companies must develop their own innovationcapability in order to make safer their products. Thatmeans to provide themselves the substitute productsthrough continuous innovation and renewal.


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THE THREAT OF SUBSTITUTE PRODUCTS (II)

The digital cameras eliminated practically the traditional

cameras based on films and chemical production.Polaroid could not anticipate the success of digitalcameras and lost the dominance of the market.

In the beginning new substitute products may not be of a

very good quality but in time it can be increased. In thebeginning the photos taken by digital cameras had a poorquality by comparison with classical photos, but now theyattain a very quality.

Ball pens almost eliminated the classical fountain pens. Email services are more used today than ordinary mail

services.

Ebooks become more popular than printed books for

youngsters.


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RIVALRY AMONG COMPETITORS (I)

Rivalry among existing companies on the same markettakes the form of competition for a better positioning.

Competition between companies develops throughdifferent forms: price competition, advertising

competition, innovation competition, resourcescompetition, brand competition, loyalty competition etc.

In such an industry any action of a company willgenerate reactions from the competitors which means a

continuous battle for a competitive advantage. The intensity of competitive rivalry among companies

depends on the business life cycle, with low intensity inthe growth period and high intensity at the maturity of

the business field.


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RIVALRY AMONG COMPETITORS (II)

The intensity of rivalry among companies depend alsoon the following factors:

- Numerous or equally balanced competitors. Industrieswith numerous competitors have a high intensity ofrivalry. To protect their market shares companiesengage in intense competitive battles.

- Industry growth speed. When industry grows fast therivalry is not intense. But when the growths slow downthe intensity increases.

- The level of switching costs. When switching costs arelow buyers may switch easier from one competitor toanother, and rivalry increases.


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Strategic groups

Strategic group = a group of companies being on thesame market with same types of products and services,

and developing similar strategies

A strategic group is a kind of reference system for

strategy analysis since any change in any companies

belonging to the same group induce changes in the other

companies

The competition pressure is highest within a strategic

group


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StrenghtsWeaknesses

Threats

SW

O T

Internalenvironment

Externalenvironment

SWOT Analysis

maxm in

max m in

O

Opportunities


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Strategies matrix

Internal environment

S W

O

T

Externalenvironment

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BS L08 Competitive Advantage Analysis