Chapter 5: Strategic Process

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Chapter 5 Strategic Process

• Prof. Stephen Y. L. Cheung
• Department of Economics Finance
• City University of Hong Kong

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The Key Structural Features of Industries

• Strength of competitive force
• Industry profitability
• The goal is to
• Identify its position in the industry
• Can best defend itself
• Can influence them in its favor

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Competitive Pressure

• Critical strengths and weaknesses
• Its positioning in its industry
• Clarifies the areas where strategic changes may
  yield greatest payoff
• Opportunities
• Threats

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• Competition ? rate of return in invested capital
  to the competitive floor rate of return
• (long-term government securities the risk of
  capital loss)

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Five Competitive Forces

• Barrier to entry
• Threat of substitution
• Bargaining power of buyers
• Bargaining power of suppliers
• Rivalry among competitors

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Forces Driving Industry Competition
POTENTIAL ENTRANTS
Threats of new entrants
Bargaining power of buyers
Bargaining power of suppliers
INDUSTRY COMPETITORS Rivalry among Existing
Firms
BUYERS
SUPPLIERS
Threat of substitute products or services
SUBSTITUTES
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Five Competitive Forces

• Barrier to entry
• Economies of scale
• Declining in unit costs of a product as volume
  increases, functional area
• Product differentiation
• Customer loyalties
• Risk of building up brand name
• Example baby care products, over-the-counter
  drugs, cosmetics, and investment banking

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Five Competitive Forces

• Barrier to entry
• Capital requirement
• Large financial resources
• Switching costs
• Investment in new hardware
• Access to distribution channels

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Five Competitive Forces

• Barrier of entry
• Cost disadvantages (independent of scale)
• Proprietary independent of scale
• Favorable access to raw materials
• Favorable locations
• Government subsidies
• Learning or experience curve
• Government policy
• Regulated industries like railroads, liquor
  retailing and utilities

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Five Competitive Forces

• 2. Rivalry among existing competitors
• Cutting price
• Slow industry growth
• High fixed or storage costs
• Exist Barriers
• 3. Pressure from substitute products

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Barriers and Profitability
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Five Competitive Forces

• 4. Bargaining power of buyers
• Concentrated sales
• Significant fraction of a buyers costs
• Products are standard or undifferentiated
• Few switching costs
• Low profits
• Backward integration
• The buyers has full information

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Five Competitive Forces

• 5. Bargaining power of suppliers
• A few company dominate
• A few substitute products
• Not an important customer of the supplier group
• Suppliers product is important to the industry
• Suppliers products are different
• Switching cost
• Threat of forward integration

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Analysis

• Positioning the firm so that its capabilities
  provide the best defense to the existing away of
  competitive forces
• Influence the balance of forces through strategic
  moves, thereby improving the firms relative
  position or
• Anticipating changes

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Three Generic Strategies

• Cost leadership
• Differentiation
• Focus

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Three Generic Strategies
Strategic Target
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Cost Leadership

• Efficient-scale facilities
• Cost reduction from experience
• Tight cost and overhead control
• Requires a high market share
• Favorable access to raw materials

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Differentiation

• Unique
• Design or brand image
• Technology
• Features
• Customer service

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Focus

• Focusing on a particular buyer group, segment of
  the product line, or geographic market

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Other

• Stuck in the middle

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The Anti-trust Guidelines

• Concentration tests
• Economics of the industry
• How dangerous is Microsoft, Economist July 1995
• Microsoft held 80 of its market
• Market shares exceeded 20
• ? investigation

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1982 Guidelines

• Herfindahl-Hirschman Index (HHI) a
  concentration measure based on the market shares
  of all firms in the industry
• A sum of squared market shares of each firm in
  the industry

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For Example

• 10 firms in the industry and each held a 10 of
  market share
• HHI (10)2 10 1,000
• 1 firm held 90 and the other 9 firms held 1
  each
• HHI (90)2 9 (1)2 8,109
• Note Now having a dominant firm greatly increase
  the HHI

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HHI

• A merger in an industry with a resulting HHI of
  less than 1,000 is unlikely to be investigated
• A HHI between 1,000 to 1,800 is considered to
  represent moderate concentration
• Investigation depends on the amount by which HHI
  increased over its pre-merger level
• An increase of 100 or more may trigger an
  investigation
• An industry with a post merger HHI above 1,800 is
  considered a concentrated market.

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HHI