Week 3 – The Strategic Framework and BPR for e-Business

Week 3 – The Strategic Framework and BPR for e-Business

Source:

1. Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy,Harvard business Review, January 2008.


2. Ireland, Hoskisson, Understanding Business Strategy. SOUTH WESTERN.


3. Rainer and Turban, Introduction to Information Systems (2nd edition), Wiley, 2009, pp 36–41.

4. Assessment of 5 Competitive Forces of the Indian Apparel Retail Industry: Entry and Expansion Strategies for Foreign Retailers, by Manveer K Mann ( 2011 ) 

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As Helen mentioned in the lecture, PEST and SWOT analysis are typical tools to analyze internal and  external factors affecting a company. However, there is another powerful model - Porter's five forces model  to find the industrial factors which are affecting a pricing decision specially.

Porter's five forces model

According to Porter's five forces model, industry competition is a function of the threat of new entrants, the threat of substitutes, the bargaining power of suppliers and buyers, and rivalry among existing competitors. The cumulative strength of these forces determines the profitability of incumbent and emerging firms in the industry.

Porter's generic strategies model can be used by managers to conceptualize possible sources of competitive advantage. A company can pursue broad market strategies of low cost and differentiation or the more targeted approaches of cost focus and focused differentiation.

Many companies are discovering that industry competition is changing from a purely domestic to a global phenomenon. Thus, competitive analysis must also be carried out on a global scale. Global marketers must also have an understanding of national sources of competitive advantage.

1.      the threat of new entrants

The first force, the threat of new entrants, depends on the presence or absence of barriers to entry. As industries globalize, the threat on new entrants into national markets increases. Strong global brands may also constitute a barrier to entry by providing product differentiation.

Scale Economies

When existing firms achieve significant scale economies, it becomes difficult for new entrants to be competitive. Porter outlines two types of scale economies that can act as barrier to entry: supply-side and demand-side scale economies.

Supply-side scale economies arise when firms with large production volumes enjoy lower costs per unit by spreading fixed costs over more units, utilizing more efficient technology, or demanding better terms from suppliers.

Demand-side scale benefits, also referred to as network effects, arise with the increase in customers’ willingness to pay for a company’s products. Customers tend to trust larger firms due to their large customer base, preferring to be part of a large network of customers. Demand-side scale benefits discourage new entrants by lowing customer’s willingness to buy from newcomers in a market and by lowing the price new firms can command until they can develop a large network of customers.

Switching Costs

Switching costs refer to the cost for the retailers in switching from one supplier to another. High switching costs deter new entrants from entering the market. When a buyer switched vendors, the change may require altering product specifications, processes or information systems, and retraining employees to be familiar with a new product, process, or system, resulting in increased costs for the buyer. However, apparel manufacturing is labor intensive and usually does not require heavy investments in specialized equipment, leading to low switching costs.

Government Policy

Government policy can be a direct or indirect entry barrier. For example, licensing requirements and restrictions on foreign investments can be direct barriers, whereas regulations on land, environment, or safety may be indirect barriers.

2.      The threat of substitute products

The second force, the threat of substitute products, limits a company’s ability to raise prices. Global competitive pressures often compel companies to search for manufacturing sources low-wage countries. The thread of substitute products can be evaluated in terms of the availability and performance of substitutes, switching costs incurred by the consumer, and propensity of the consumer to substitute.

3.      Bargaining power of buyers

Bargaining power of buyers accrues with lower buyer-to-supplier ratio, large purchase volume, and high threat to integrate backward. Retailers in the organized sectors are characterized by large size, differentiated products, high purchase volume, and greater geographical spread and revenue, thus creating a buyers’ market. By contrast, unorganized retailers are characterized by small size, undifferentiated products, and small purchase volume and revenues, factors limiting their market capability and the number of suppliers from which to choose, thus creating a sellers’ market. A buyer may gain power if there is a possibility of integrating backwards.

4.      Bargaining power of suppliers

Bargaining power of suppliers depends on the level of supplier concentration, importance of volume, and threats of forward integration. Suppliers are powerful when they are concentrated and there is a high threat of forward integration, affecting the buyer’s ability to achieve profitability.

5.      Intensity of Rivalry

Finally, rivalry among competitors can be especially intense in global industries such as automobiles, consumer electronics, and pharmaceuticals. The intensity of rivalry is determined by industry growth, industry concentration, diversity of competitors, and product differences. High rivalry within an industry drives down the profitability of an industry by influencing prices and costs of competition. While high intensity of rivalry makes an industry less attractive, a fast-growing market creates opportunities for revenues.

Industry concentration refers to the number of companies competing in the same markets. Rivalry is intensified if these companies have similar market shares, thus destroying profitability. Product differentiation can increase profitability by creating lesser rivalry in the market, and delivery of customer value though non-price competition, such as product features, services, delivery time, or brand image, is less likely to erode profitability.




Moreover, there are some extra internal factors also should be considered in a company:
- Cost Considerations
- Availability of Capital
- Time
- Human Resources
- Image
- Size of business
- Management Levels and Objectives
- Work Nature
- Product Nature
- Size of Market Currently Occupied