Firm Growth and Competitive Strategy

Dr. Ravikesh Srivastava

Strategic Analysis
Porter's five forces model
the five forces
the bargaining power of suppliers

the bargaining power of buyers

the threat of potential new entrants the threat of substitutes the extent of competitive rivalry

Porter's Five Forces Model

Industry competitors

Porter's Five Forces Model

Industry competitors

Rivalry among existing firms

Porter's Five Forces Model

Potential entrants
Threat of new entrants

Industry competitors

Rivalry among existing firms

Porter's Five Forces Model

Potential entrants
Threat of new entrants

Industry competitors

Rivalry among existing firms

Threat of substitutes

Substitute products

Porter's Five Forces Model

Potential entrants
Threat of new entrants Bargaining power of suppliers

Industry competitors

Suppliers
Rivalry among existing firms

Threat of substitutes

Substitute products

Porter's Five Forces Model

Potential entrants
Threat of new entrants Bargaining power of suppliers

Industry competitors Bargaining power

of buyers

Suppliers
Rivalry among existing firms

Buyers

Threat of substitutes

Substitute products

The Threat of New Entrants

Profits of established firms in the industry may be eroded by new competitors High entry barriers lead to low threat of new entries
Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale

The Bargaining Power of Buyers

Buyers threaten an industry
Force down prices Bargain for higher quality or more services Play competitors against each other

The Bargaining Power of Buyers

A buyer group is powerful when
It is concentrated or purchases large volumes relative to seller sales The products it purchases from the industry are standard or undifferentiated The buyer faces few switching costs It earns low profits The buyers pose a credible threat of backward integration The industrys product is unimportant to the quality of the buyers products or services

The Bargaining Power of Suppliers

Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services

The Bargaining Power of Suppliers

A supplier group will be powerful when
The supplier group is dominated by a few companies and is more concentrated than the industry it sells to The supplier group is not obliged to contend with substitute products for sale to the industry The industry is not an important customer of the supplier group

The Bargaining Power of Suppliers

A supplier group will be powerful when
The suppliers product is an important input to the buyers business The supplier groups products are differentiated or it has built up switching costs for the buyer The supplier group poses a credible threat of forward integration

The Threat of Substitute Products and Services

Substitutes limit the potential returns of an industry
Ceiling on the prices that firms in that industry can profitably charge Price/performance ratio

The Intensity of Rivalry among Competitors in an Industry

Jockeying for position Price competition Advertising battles Product introductions Increased customer service or warranties

The Intensity of Rivalry among Competitors in an Industry

Interacting factors lead to intense 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 High exit barriers

Using Industry Analyses: A Few Caveats

Five-forces analysis implicitly assumes a zero-sum game Five-forces analysis is essentially a static analysis
Value net
Suppliers and customers (the vertical net) Substitutes and complements (the horizontal net)

The Value Net

Transactions Interactions Interactions

Transactions

Strategic Groups within Industries

Two unassailable assumptions in industry analysis
No two firms are totally different No two firms are exactly the same

Strategic groups
Cluster of firms that share similar strategies
Breadth of product and geographic scope Price/quality Degree of vertical integration Type of distribution system

Strategic Analysis
Value chain analysis
nature of value chain analysis primary activities
inbound logistics operations outbound logistics marketing and sales service procurement technological development human resources management firm infrastructure

secondary activities

The value chain

After-sales service Marketing and sales Outbound logistics

Operations

Inbound logistics

Strategic Choice
Environment or market-based strategy
types
cost leadership differentiation focus

importance of establishing: the basis of a firm's competitive advantages the nature of the target market

Resource-based strategy
exploiting core competencies defining & establishing core competencies

Growth Strategy
Growth by internal expansion
product differentiation vertical integration

diversification

Growth by external expansion: mergers and takeovers

horizontal mergers
vertical mergers conglomerate mergers

Alternative growth strategy

GROWTH OF A FIRM

Internal expansion
(1) Differentiation
Horizontal expansion (same product, increase in market share)

External expansion
(1) Horizontal integration
Mergers of firms producing the same product

(2) Vertical integration

Different products, but belonging to different stages of same product

(2) Vertical integration

Mergers of firms producing at different stages of same process

(3) Conglomerate
Diversification introduction of totally different products

(3) Conglomerate
Diversification - merger of firms producing totally unrelated products

The Growth of Firms

Internal Growth: Generated through increasing sales To increase sales firms need to:
Market efficiency Invest in new equipment and capital Invest in labour Invest in management professionals

The Growth of Firms

External Growth: Through Expansion and Diversification Through amalgamation, merger or takeover (acquisitions) Mergers agreed amalgamation between two firms Takeover One firm seeking control over another
Could be friendly or hostile

External Growth
Vertical Integration Horizontal Integration Conglomerate Merger

Vertical Integration
Primary Vertical Integration Backwards acquisition takes place towards the source

Secondary

Manufacturer

Tertiary

Retail Stores

Vertical Integration
Primary Dairy Farming cooperative Vertical Integration Forwards acquisition takes place towards the market

Secondary

Cheese Processing Plant

Tertiary

Horizontal Integration
Amalgamation, merger or takeover at the same stage of the productive process

Horizontal Integration
Primary

Confectionery Secondary Manufacturer

Soft Drinks Manufacturer

Tertiary

Why Mergers?
Cost Savings
External growth may be cheaper than internal growth acquiring an under performing or young firm may represent a cost effective method of growth

Shareholder Value
Improve the value of the overall business for shareholders

Asset Stripping
Selling off valuable parts of the business

Managerial Rewards
External growth may satisfy managerial objectives power, influence, status

Economies of Scale
The advantages of large scale production that lead to lower unit costs

Why Mergers?
Efficiency
Improve technical, productive or allocative efficiency

Control of Markets
Gain some form of monopoly power Control supply Secure outlets

Synergy
The whole is more efficient than the sum of the parts (2 + 2 = 5!)

Risk Bearing
Diversification to spread risks