PBE Summary

8/13/2019 PBE Summary

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Graduate School Building, M.H. del Pilar

Valencia st. corner R. Magsaysay Blvd.

Sta. Mesa, Manila

COMPETITIVE STRATEGY

(Summary)

PHILIPPINE BUSINESS ENVIRONMENT

MBA 663

Submitted By:

Jason Patrick F. Pastrana

Submitted to:

Dr. Ofelia M. Carague


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Part 1

Chapter 1 Structural Analysis

The essence of formulating competative strategy is relating a company to its environment. It

evolves in the five basic competitive forces:

Structural Determinants of the intensity competition

Competition in an industry continually work to drive down the rate of return on invested

capital toward the competitive floor rate of return or the return that would be earned by the

economists perfectly competitive industry.

The following forces are identified:

Competition

New entrants

End users/buyers

Suppliers

Substitutes

Complementary products/ the government/ the public

Threat of Entry

New entrants to an industry bring new capacity, the desire to gain market share and often

substantial resources. This could lead to price down and profitability. It also depends on the barriers to

entry which will define the threat if it is low or high for new entry.


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Six Barriers to entry:

1. Economies of scale

As a company grows, not all costs increase with it, and some may even go down. Incumbent

companies who have economies of scale can hence have a significant cost advantage over new

entrants and smaller competitors.Economies of scale can be demand-side or supply-side and may be found in the cost of:

Original research

Raw materials

Manufacturing and production

Marketing to larger audiences

Shipments and logistics

Service and support

Attracting talented personnel

Overcoming economies of scale requires innovation and bold moves, such as devising lower-cost

manufacturing methods or sourcing overseas.In practice, economies of scale are often not as significant as they may appear, as the costs associatedwith their increasing complexity can significantly offset any reduction in prices paid.

2. Product differentiation

When a brand is well-established, it is known to many in the market, and customer loyalty is morecommon. This leads to lower costs and hence greater profits.

Products which are different to others stand out and are the natural choice for those customers whoseek what these products offer.

With such differentiation and sufficient demand, companies have the choice of charging higher pricesor increasing sales through lower prices.

Lower prices, which is also a part of how a brand is differentiated, acts as a significant barrier. If youcannot make a product that is any better than one which is currently sold for the price that it is sold at,then entering this market will be very difficult.

Overcoming product differentiation barriers often needs strong innovation to create products thatleapfrog existing competitor offerings in terms of both functionality and cost. The latter may beachieved through approaches such as parts reduction and assembly simplification.

3. Capital requirements

Some industries require significant investment in setting up and operating. Manufacturing, forexample, can require large factories and specialist machines. Service also can be costly to set up, forexample where a large number of service personnel needs to be recruited, trained and equipped.

High capital costs are typical when setting up for the first time. There may also be ongoing capital

investments required, for example to cope with rapid changes in technology. Other capital costsinclude parts inventories, customer credit, and various other start-up losses.

Big and cash-rich companies are able to make a large capital investment required, or may be able toraise the funds elsewhere. Even so, this may require careful analysis that could result in a non-entrydecision. For smaller companies, capital requirements can be a significant barrier.

Overcoming capital requirements may be achieved by starting small and growing organically, fromprofit, rather than seeking large loans. When rapid growth is essential, this is a less valid approachand collaborative options such as partnering or licensing may be preferable.

When there is rapid change in the industry, with such as the need to replace out of date machinery,and incumbents are slow to made needed investments, then this can play to the advantage of newentrants.

- Switching Cost: one-time costs facing the buyer of switching from one suppliers productsto another.


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4. Cost disadvantages

As well as capital costs there are all kinds of other types of cost that can give incumbents anadvantage and new entrants a headache. These are often independent of the size of the company and

can hence give smaller firms a big advantage over new-entrant large companies.

Such additional costs/advantages may include:

The learning/experience curve gained from trying different things in the marketplace.

The sheer extent of how much knowledge is required to operate in the market, and the

accessibility of this.

Proprietary technology that cannot be copied.

Preferential access to limited supplies of materials and parts.

Assets bought when they were much cheaper.

Advantageous locations, from shopping mall positions to being close to customers.

Government subsidies and other national benefits.

Overcoming cost disadvantages depends on the size of the cost. One way to help with this is toleverage experience and benefits from an already-successful marketplace elsewhere.

Porter notes the importance of the experience curve and differentiates it from the learning curve(gaining skill through simple repetition). Where the rules of doing business are unwritten anddifferent to other markets, then the only way to learn may be through a persistent cycle of trial andfailure. Those who have made this journey may jealously guard marketing secrets to help sustain thisbarrier to entry.

5. Access to distribution channels

If you have products which you produce and distribute, and particularly if these channels are held by

relatively few players, then you may have difficulty in connecting with these partners or suppliers.

It is also possible in developing economies that such channels simply do not exist or cannot betrusted to reliably and safely store and transport goods.

One way of overcoming a lack of access to distribution channels is to set up your own. This can bevery expensive, but it may provide you with a period of advantage during which you can establishyour market position.

6. Government policy

Governments in developing economies (and developed economies, for that matter) have a difficulttask in both helping their own fledgling industries to develop while also encouraging foreigncompanies to set up locally. Inward investment helps by . creating more jobs and injecting investmentinto the wider economy.

As a barrier, governments may support local firms to the extent that new entrants find it much harderto find a profitable entry to the market. Local regulations may have subtle bias while other controlsmay blatantly limit new entrants.

Despite the need to support local firms, governments, especially in developed economies, likecompetition as it improves products for consumers and generally strengthens the economy.

Not all governments are uncorrupted and in some countries getting permissions is based more onbribery than law.

Governments may also be weak in some areas, for example in protection of intellectual property. Insuch cases companies with strong IP advantages may choose not to enter a local market whereunfettered coping would be rife.

When the general law is weak, contracts may not be worth the paper they are written on whensuppliers and others can ignore agreements with you at will. Again, this can make market entry moreproblematic.

Overcoming government blockages often needs one's own government to be involved in such as trade

agreements and equalization around standards.


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Expected retaliation

If new entrants to a marketplace are treated seriously by existing firms, they may find themselvesunder attack by these incumbents.

Factors that make retaliation a serious issue for market entrants include:

The size of competitors and their ability to attack. The extent and duration of the retaliation.

The number of competitors who retaliate.

The ability of competitors to control access to resources, key suppliers and market channels.

Bias in governments or local bodies towards supporting existing incumbents.

Before this happens, when analyzing the market, the expectedretaliation increases with:

The impact you will likely have on incumbents' business, for example by taking significantshare in a static market.

The resources incumbents have that they could use to retaliate.

The history of retaliation by incumbents.

The likelihood of damaging competitive actions, including loss-making price cuts.

The Entry Deterring Price

This condition entry in an industry is the prevailing structure of prices (and related terms such as

products quality and service) which just balances the potential rewards from entry (forecast by

potential entrant) with the expected costs of overcoming structural entry barriers and risking

retaliation.

Properties of Entry Barriers:

First: entry barriers can and do change as the conditions previously described change.

Second: although entry barriers sometimes change for reasons largely outside the firm's

control, the firm's strategic decisions also can have a major impact.

Lastly: some firms may possess resources or skills which allow them to overcome entry

barrier into an industry more cheaply than most other firms.

Experience and Scale as entry barriers:

Although they often coincide, economies of scale and experience have very different

properties as entry barriers. The presence of economies scale always leads to a cost advantage for the

large scale firm (or firm that can share activities) over small-scale firms, presupposing that the former

have the most efficient facilities, distribution systems, service organizations or other functional

activities for their size. While experience is more ethereal entry barrier than scale, because the mere

presence of an experience curve does not insure an entry barrier. The limitations for economies of

scale are: large scale and lower cost, technological change, commitment and for Experience are: can

be nullified by products, pursuit of low cost, more than one strategy on experience curve and

aggressive pursuit of cost.

Intensity of Rivalry Among existing competitors.


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Rivalry among existing competitors takes the familiar form of jockeying for position - using

tactics like price competition, advertising battles, product's introduction, and increased customer

service or warranties.

Structural factors that intensify rivalry

- Numerous or Equally balanced Competitors

- Slow Industry Growth

- High Fixed or Storage Costs

- Lack of Differentiation or Switching Costs

- Capacity Augmented in Large Increments

- Diverse Competitors

- High Strategic Stakes

- High Exit Barriers

Shifting Rivalry

As industry matures its growth rate declines, resulting in intensified rivalry, declining profits,

and (often) a shake-out.

Exit Barriers and Entry Barriers

Barriers and Profitability

The best case from the viewpoint of industry profits is one in which entry barriers are high but

exit barriers are low. Here entry will be deterred, and unsuccessful competitors will leave the industry.

When both entry and exit barriers are high, profit potential is high but is usually accompanied by

more risk. Although entry is deterred, unsuccessful firms will stay and fight in the industry.

Pressures from Substitute Products

All firms in an industry are competing, in a broad sense, with industries producing substitute

products. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms

in the industry can profitably charge. The more attractive the price performance alternative offered bysubstitutes, the firmer the lid on industry profits.


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Identifying substitute products is a matter of searching for other products that can perform the

same function as the product of the industry. Sometimes doing so can be a subtle task, and one which

leads the analyst into businesses seemingly far removed from the industry.

'The impact of substitutes can be summarized as the industry's overall elasticity of

demand.

Bargaining Power of Buyers

Buyers compete with the industry by forcing down prices, bargaining for higher quality or

more services, and playing competitors against each other-all at the expense of industry profitability.

The power of each of the industry's important buyer groups depends on a number of characteristics of

its market situation and on the relative importance of its purchases from the industry compared with

its overall business. A buyer group is powerful if the following circumstances hold true:

- It is concentrated or purchases large volumes relative to seller sales

- The products it purchases from the industry represent a significant fraction of the buyer's cost or

purchases- The products it purchases from the industry are standard or undifferentiated.- It faces few switching costs- It earns low profits- Buyers pose a credible threat of backward integration- The industry's product is unimportant to the quality of the buyer's products or services

- The buyer has full information

Altering Buyer Power

As the factors described above change with time or as a result of a company's strategic decisions,

naturally the power of buyers rises or falls.

BARGAINING POWER OF SUPPLIERS

Suppliers can exert bargaining power over participants in an industry by threatening to raise

prices or reduce the quality of purchased goods and services. Powerful suppliers can thereby squeezeprofitability out of an industry unable to recover cost increases in its own prices.A supplier group is powerful if the following apply:- It is dominated by a few companies and is more concentrated than the industry it sells to.- It is not obliged to contend with other substitute products for sale to the industry.

- The industry is not an important customer of the supplier group.- The supplier's product is an important input to the buyer's business- The suppliers group poses a credible threat of forward integration- The suppliers group's products are differentiated or it has built up switching costs.

Government as a force in Industry Competition

Government has been discussed primarily in terms of its possible impact on entry

barriers, but in the 1970s and 1980s government at all levels must be recognized as potentially

influencing many if not all aspects of industry structure both directly and indirectly. In many

industries, government is a buyer or supplier and can influence industry competition by the

policies it adopts. Government can also affect the position of an industry with substitutes through

regulations, subsidies, or other means. Thus no structural analysis is complete without a diagnosis

of how present and future government policy, at all levels, will affect structural conditions.


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Structural Analysis and Competitive Strategy

Once the forces affecting competition in an industry and their underlying causes have beendiagnosed, the firm is in a position to identify its strengths and weaknesses relative to the industry.From a strategic standpoint, the crucial strengths and weaknesses are the firm's posture vis-a-vis the

underlying causes of each competitive force.

Three Approaches for effective Competitive Strategy

- Positioning the firm so that its capabilities provide the best defense against the existing array ofcompetitive forces;- Influencing the balanceof forces through strategic moves, thereby improving the firm's relativeposition; or- Exploiting Change/ anticipating shifts in the factors underlying the forces and responding to them,

thereby exploiting change by choosing a strategy appropriate to the new competitive balance beforerivals recognize it.

Diversification StrategyThe framework for analyzing industry competition can be used in setting diversification

strategy. It provides a guide for answering the extremely difficult question inherent in

diversification decisions: "What is the potential of this business?" The framework may allow

a company to spot an industry with a good future before this good future is reflected in the prices

of acquisition candidates.

Structural Analysis and Industry Definition

Structural analysis, by focusing broadly on competition well beyond existing rivals, should

reduce the need for debates on where to draw industry boundaries. Any definition of an industry

is essentially a choice of where to draw the line between established competitors and substituteproducts, between existing firms and potential entrants, and between existing firms and suppliers

and buyers. Drawing these lines is inherently a matter of degree that has little to do with the

choice of strategy.

Definition of an industry is not the same as definition of where the firm wants to compete

(defining its business), however. Just because the industry is defined broadly, for example,

does not mean that the firm can or should compete broadly; and there may be strong benefits to

competing in a group of related industries, as has been discussed. Decoupling industry definition

and that of the businesses the firm wants to be in will go far in eliminating needless confusion in

drawing industry boundaries.

Chapter 2 Generic Competitive Strategies

Three Generic StrategiesIn coping with the five competitive forces, there are three potentially successful generic strategic

approaches to outperforming other firms in an industry:

1. overall cost leadership - The first strategy is to achieve overall cost leadership in an industry

through a set of functional policies aimed at this basic objective. Cost leadership requires

aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from

experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost

minimization in areas like R&D, service, sales force, advertising, and so on.


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2. differentiation - The second generic strategy is one of differentiating the product or serviceoffering of the firm, creating something that is perceived industrywide as being unique.

3. focus - The final generic strategy is focusing on a particular buyer group, segment of theproduct line, or geographic market; as with differentiation, focus may take many forms.

OTHER REQUIREMENTS OF THE GENERIC STRATEGIES

The generic strategies may also require different styles of leadership and can translate into very

different corporate cultures and atmospheres. Different sorts of people will be attracted.


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Stuck in the Middle

The three generic strategies are alternative, viable approaches to dealing with the

competitive forces. The converse of the previous discussion is that the firm failing to develop its

strategy in at least one of the three directions-a firm that is "stuck in the middle9'-is in an

extremely poor strategic situation.

RISKS OF OVERALL COST LEADERSHIP

Some of these risks are

- technological change that nullifies past investments or learning;

- low-cost learning by industry newcomers or followers, through imitation or through their ability

to invest in stateof- the-art facilities;

- inability to see required product or marketing change because of the attention placed on cost;

- inflation in costs that narrow the firm's ability to maintain enough of a price differential to offset

competitors' brand images or other approaches to differentiation.

RISKS OF DIFFERENTIATION

Differentiation also involves a series of risks:

- the cost differential between low-cost competitors and the differentiated firm becomes too great

for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or

image possessed by the differentiated firm for large cost savings;

- buyers' need for the differentiating factor falls. This can occur as buyers become more

sophisticated;

-imitation narrows perceived differentiation, a common occurrence as industries mature.

RISKS OF FOCUS

Focus involves yet another set of risks:

- the cost differential between broad-range competitors and the focused firm widens to eliminate

the cost advantages of serving a narrow target or to offset the differentiation achieved by focus;

- the differences in desired products or services between the strategic target and the market as a

whole narrows;

-competitors find submarkets within the strategic target and outfocus the focuser.

Chapter 3 A Framework for Competitor Analysis

Competitive strategy involves positioning a business to maximize the value of the capabilities

that distinguish it from its competitors.

There are four diagnostic components to a competitor analysis1. future goals- At all levels of managementand in multiple dimensions2. assumptions- Held about itself and theindustry

3. current strategy- How the business iscurrently competing4. capabilities- Both Strength and weaknesses


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