Threat of new entrants pizza industry

Defining Strategic Management

Strategic Management is "consisting of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages” (Dess, Lumpkin, Eisner, & McNamara, 2014, p. 7). This definition captures two main elements of the field of strategic management.

First, strategic management entails three on-going processes: analysis, decisions, and actions. That is, managers must analyze the internal and external environment as well as their hierarchy of goals in order to formulate and implement strategies.

Second, the essence of strategic management is the study of why some firms outperform others. Looking at Michael Porter's work we can make the important distinction between strategy and operational effectiveness. Managers must create advantages that are sustainable over a period of time, instead of merely temporary. That is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute?

After reading this week's material, and looking back at Chapters 1 & 2 in the textbook, answer the following questions in this forum.

Forum Assignment

Review Porter’s Five-Forces model of industry competition. Using your own words (do not copy definitions from the text), explain the model’s importance in the concept of strategic grouping within industries. Then, find a company with a “mission statement”. Do not use the military please. Pick a commercial company that is not routinely discussed. Select a company with a mission statement and tell us whether or not you think the statement is constructive and provides employees with motivation and strategic direction. Include the mission statement in your post.

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Analyzing the External
Environment of the Firm
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Learning Objectives

After reading this chapter, you should have a good understanding of:

The importance of developing forecasts of the business environment.
Why environmental scanning, environmental monitoring, and collecting competitive intelligence are critical inputs to forecasting.
Why scenario planning is a useful technique for firms competing in industries characterized by unpredictability and change.
The impact of the general environment on a firm’s strategies and performance.
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Learning Objectives

After reading this chapter, you should have a good understanding of:

How forces in the competitive environment can affect profitability and how a firm can improve its competitive position by increasing its power vis-à-vis these forces.
How trends and events in the general environment and forces in the competitive environment are interrelated and affect performance.
How the internet and digitally based compatibilities are affecting the five competitive forces and industry profitability.
The concept of strategic groups and their strategy and performance implications.
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Creating the Environmentally
Aware Organization

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Environmental Scanning & Monitoring

External Scanning
Surveillance of a firm’s external environment:
Predict environmental changes to come
Detect changes already under way
Proactive mode
External Monitoring
Track evolution of:
Environmental trends
Sequence of events
Streams of activities
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Competitive Intelligence

Define and understand a firm’s industry
Identify rivals’ strengths and weaknesses
Intelligence gathering (data)
Interpretation of intelligence data
Helps a firm avoid surprises
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What Competitive Intelligence
Is and Is Not

Competitive Intelligence Is …

Information that has been analyzed to the point where you can make a decision.
A tool to alert management to early recognition of both threats and opportunities.
A means to deliver reasonable assessments.
A way of life, a process.
Competitive Intelligence Is Not …

Spying. Spying implies illegal or unethical activities. It is a rare activity.
A crystal ball. Competitive Intelligence is good approximation of reality; it does not predict the future.
Database search. Data by itself is not good intelligence.
A job for one smart person.
Adapted from Exhibit 2.2 What Competitive Intelligence Is and Is Not!

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Environmental Forecasting

Plausible projections about
Direction of environmental change
Scope of environmental change
Speed of environmental change
Intensity of environmental change
Scenario analysis
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Question

Which of the following is a danger of forecasting?

Managers assume that the world is not open to precise predictions.

Managers may view uncertainty as black and white and ignore grey areas.

Managers assume that the world is uncertain.

Managers view the world as completely unpredictable.

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Answer: B

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SWOT Analysis

Managers need to analyze
The general environment
The firm’s industry and competitive advantage
SWOT analysis
Strengths
Weaknesses
Opportunities
Threats
Basic technique for analyzing firm and industry condition
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Example

Harley Davidson SWOT
Strengths
Strong & adaptable brand image
Weaknesses
Limited ability to develop new non-traditional products
Opportunities
Growing leisure interest in motorcycles worldwide
Threats
Differing foreign policies governing motorcycles
Source: Developed from www.harley-davidson.com

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The General Environment

Segments of the general environment include:
Demographic
Sociocultural
Legal/Political
Technological
Economic
Global
General environmental trends and events:
Little ability to predict them
Even less ability to control them
Can vary across industries
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Demographic Segment

Aging population
Rising affluence
Changes in ethnic composition
Geographic distribution of population
Greater disparities in income levels
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Sociocultural Segment

More women in the workforce
Increase in temporary workers
Greater concern for fitness
Greater concern for environment
Postponement of family formation
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Political/Legal Segment

Tort reform
Americans with Disabilities Act (ADA)
Repeal of Glass-Steagall Act in 1999
Deregulation of utility and other industries
Increases in federally mandated minimum wages
Taxation at local, state, federal levels
Legislation on corporate governance reforms (Sarbanes-Oxley Act)
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Technological Segment

Genetic engineering
Emergence of Internet technology
Computer-aided design/computer-aided manufacturing systems (CAD/CAM)
Research in synthetic and exotic materials
Pollution/global warming
Miniaturization of computing technologies
Wireless communication
Nanotechnology
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Economic Segment

Interest rates
Unemployment
Consumer Price index
Trends in GDP
Changes in stock market valuations
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Global Segment

Increasing global trade
Currency exchange rates
Emergence of the Indian and Chinese economies
Trade agreements among regional blocs (NAFTA, EU, ASEAN)
Creation of WTO (decreasing tariffs/free trade in services)
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The Competitive Environment

Segments of the competitive environment include:
Competitors
Customers
Suppliers
Sometimes called the task or industry environment
Porter’s five forces model
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Porter’s Five Forces Model
of Industry Competition

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Example

Porter’s Five Forces Model: BMW
Threat of new entrants
Very low
Threat of substitutes
Medium
Power of suppliers
Medium
Power of buyers
Medium
Rivalry among existing firms
Very High
Source: Developed from www.bmw.com

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Threat of New Entrants - Very Low
In order to enter the automotive market, a company would need a large amount of capital and a tremendous amount of tacit and explicit knowledge.

Threat of Substitutes - Medium
Available substitutes include public transportation such as buses, trains, boats, and aircraft.

Power of Suppliers - Medium
Some suppliers are smaller and do not have much power over the pricing and distribution of their products. However, there are not that many small part manufacturers in this market. The majority of suppliers to major automotive makers are medium to large businesses and have some flexibility in determining product pricing, delivery, and distribution.

Power of Buyers - Medium
Buyers in today’s day and age have an immense amount of information available to them regarding the pricing and cost to manufacture a car. Therefore, buyers do have some leverage in being able to negotiate a purchasing price of a car.

Competitive Rivalry - Very High
There is an intense competition in each segment of the automobile industry from large global companies.

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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
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Question

If you are considering opening a new pizza restaurant in your community, what would be the threat of new entrants? How would you evaluate Porter’s other forces for this industry?

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The threat of new entrants in the food industry is very high, which is why a majority of new food restaurants fail within their first year. The minimum requirements to open a pizza shop are an oven and a small amount of capital. The potential number of competitors is unlimited due to these factors. Based on other forces also, this industry is not very attractive.

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The Bargaining Power of Buyers

Buyers threaten an industry

Force down prices
Bargain for higher quality or more services
Play competitors against each other
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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 industry’s product is unimportant to the quality of the buyer’s products or services
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The Bargaining Power of Suppliers

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

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
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A supplier group will be powerful when (cont.)

The supplier’s product is an important input to the buyer’s business

The supplier group’s products are differentiated or it has built up switching costs for the buyer

The supplier group poses a credible threat of forward integration

The Bargaining Power of Suppliers

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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

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The Intensity of Rivalry among
Competitors in an Industry

Jockeying for position

Price competition

Advertising battles

Product introductions

Increased customer service or warranties

Interacting factors lead to intense rivalry

Numerous or equally balanced competitors
Slow industry growth
High fixed or shortage costs
Lack of differentiation or switching costs
Capacity augmented in large increments
High exit barriers
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How the Internet and Digital Technologies Influences Industry

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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)
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The Value Net

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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
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Strategic Groups within Industries

Value of strategic groups as an analytical tool
Identify barriers to mobility that protect a group from attacks by other groups
Identify groups whose competitive position may be marginal or tenuous
Chart the future direction of firms’ strategies
Thinking through the implications of each industry trend for the strategic group as a whole
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Analyzing the External
Environment of the Firm
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Answer: B

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Threat of New Entrants - Very Low
In order to enter the automotive market, a company would need a large amount of capital and a tremendous amount of tacit and explicit knowledge.

Threat of Substitutes - Medium
Available substitutes include public transportation such as buses, trains, boats, and aircraft.

Power of Suppliers - Medium
Some suppliers are smaller and do not have much power over the pricing and distribution of their products. However, there are not that many small part manufacturers in this market. The majority of suppliers to major automotive makers are medium to large businesses and have some flexibility in determining product pricing, delivery, and distribution.

Power of Buyers - Medium
Buyers in today’s day and age have an immense amount of information available to them regarding the pricing and cost to manufacture a car. Therefore, buyers do have some leverage in being able to negotiate a purchasing price of a car.

Competitive Rivalry - Very High
There is an intense competition in each segment of the automobile industry from large global companies.

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The threat of new entrants in the food industry is very high, which is why a majority of new food restaurants fail within their first year. The minimum requirements to open a pizza shop are an oven and a small amount of capital. The potential number of competitors is unlimited due to these factors. Based on other forces also, this industry is not very attractive.

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