Chapter 12 Competitive Factors

Chapter 12 Competitive Factors

Part 1 Competitive Advantage

1.1 Environmental Analysis

Whether the firm has a sustainable competitive advantage will be analysed in three steps:

• the different ways a firm can achieve a competitive advantage
• the main competitive forces in an industry
• how different activities and departments within the firm contribute to its competitiveness

1.2 Competitive Advantage

Michael Porter stated that a firm wishing to obtain a competitive advantage over its rivals is faced with two choices.

• cost leadership versus differentiation - lower cost than its rivals for similar products and services, or offering a better product than competitiors
• degree of focus - scope of the area in which the company wishes to obtain competitive advantage

Lower cost, Broad target - Cost leadership

Differentiation, Broad target - Differentiation

Lower cost, Narrow target - Cost focus

Differentiation, Narrow target - Differentiation focus

Part 2 Porter's Five Forces Analysis

2.1 Introduction

-Porter's 5 forces approach looks in detail at the firm's competitive environment by analysing five forces

2.2 Porter's Five Forces Model

Competitive Rivalry

High competitive rivalry will put pressure on firms to cut prices and/or improve quality to retain customers. (Reduced Margins)

The intensity of existing competition depends on:

-Number and relative strength of competitors

-Rate of growth (of the market)

-High/Low fixed costs

-Easy switching for buyers

-High/Low exit barrier

-Need of strategic

Threat of Entry

New entrants into a market will bring extra capacity and intensify competition.

Six major sources of barriers to entry:

-Economies of scale

-Product differentiation

-Capital Requirements

-Switching costs

-Access ti distribution channels

-Cost advantages independent of scale

Threat of Substitute Products

This threat is across industries (e.g. rail travel versus bus travel versus private car) or within an industry (e.g long-life milk as a substitute for delivered fresh milk).

Bargaining Power of Customers

Powerful customers can force price cuts and/or quality improvements. Either way margins are eroded.

Factors:

-Buyer's purchases are a high proportion of the supplier's total business.

-Buyer makes a low profit

-Quality of purchases is unimportant or delivery timing is irrelevant

-Products have been strongly differentiated with good brand image

Bargaining Power of Suppliers

The power of suppliers to charge higher prices will be influenced by:

-The degree to which switching costs apply and substitutes are available

-The presence of one or two dominant suppliers controlling prices

-The extent to which products offered have a uniqueness of brand, technical performance or design not available elsewhere.

Part 3 Porter's Value Chain

-Porter developed his value chain to determine whether and how a firm's activities contribute towards its competitive advantage

3.2 Value Chain
(a) Primary Activities
1. Inbound logistics :Receiving,storing and handling raw materials inputs.
2.Operations: Transformation of raw materials into finished goods and services
3.Outbound logistics : Storing,Distributing and delivering finished goods to custmers
4.Marketing and sales : Market research + 4Ps
5. Service : All activities occur after point of sale.

(b) Supporting activities
1. Firm infrastructure : How firm organised
2. Techonology Development :How firm uses technology
3. Human resources development : How people contribute to competitive advantage
4. Procurement : Purchasing but not just limited materials

3.3 How different departments contribute to competitive advantage

(1) Purchasing:
Cost advantage- sourcing cheaper materials, bulk discounts
Quality advantage - sourcing high quality materials

(2) Production:
Cost advantage - Mass production lines, standardisation,Employing workers just above minimum wage
Quality advantages- Using better quality materials, more quality control procedures,employing high-skilled stagg, flexible manufacturing system

(3) Marketing:
Cost advantages- word-of-mouth promotion, sell direct to cut distribution costs
Quality advantages- Market research can help tailor products to meet customer needs,large promotional budgets,sponsorship

(4) Service:
Cost advantages- Outsourcing, not offering service provision
Quality advantages- High skilled staff