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STRATEGIC BUSINESS MANAGEMENT PRINCIPLES

AGBE 445

Agribusiness Management

Dr. Gary W. Brester

Department of Agricultural Economics and Economics

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THREE PRIMARY ASPECTS OF STRATEGIC BUSINESS MANAGEMENT

Industry and Competitive Analysis

Strategy and Competitive Advantage

Company Situation and Analysis

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THREE PRIMARY ASPECTS OF STRATEGIC BUSINESS MANAGEMENT

Industry and Competitive Analysis

Strategy and Competitive Advantage

Company Situation and Analysis

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INDUSTRY AND COMPETITIVE ANALYSIS

Situation Analysis Industry Environment Five Competitive Forces Driving Forces Key Success Factors

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INDUSTRY AND COMPETITIVE ANALYSIS

Situation Analysis

Industry Environment

Five Competitive Forces

Driving Forces

Key Success Factors

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WHY DO A SITUATION ANALYSIS?

Identify features in a firm’s external & internal environment which frame its window ofSTRATEGIC OPTIONSOPPORTUNITIES

Focuses on two considerations:EXTERNAL factors: MACRO environment

(industry & competitive conditions) INTERNAL factors: MICRO environment

(firm’s internal situation & competitive position)

Objective

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Figure 1: How Strategic Thinking and Analysis Lead to Good Choices

Thinking StrategicallyAbout Industry

and CompetitiveConditions

Thinking StrategicallyAbout a Company’s

Own Situation

IdentifyingStrategic Options

Open to the Company

Choice ofThe Best Strategy

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INDUSTRY AND COMPETITIVE ANALYSIS

Situation Analysis

Industry Environment

Five Competitive Forces

Driving Forces

Key Success Factors

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KEY QUESTIONS REGARDING EXTERNAL ENVIRONMENT

1. Industry’s dominant economic traits

2. Competitive forces at work in industry & strength

3. Drivers of change in industry

4. Firms in strongest/weakest competitive positions

5. Competitive moves of rivals

6. Key factors determining competitive success or failure in industry

7. Attractiveness of industry

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IDENTIFYING AN INDUSTRY’S DOMINANT ECONOMIC TRAITS

Market size & growth rate/stage in life cycle Scope of competitive rivalry Number of competitors & relative sizes Prevalence of backward/forward integration Entry/exit barriers Nature & pace of technological change Product & customer characteristics Scale economies & experience curve effects Capacity utilization & capital requirements Industry profitability

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INDUSTRY AND COMPETITIVE ANALYSIS

Situation Analysis

Industry Environment

Five Competitive Forces

Driving Forces

Key Success Factors

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ANALYSIS OF COMPETITIVE FORCES

To identify Main SOURCES of competitive forces and STRENGTH of these pressures

Objective

COMPETITIVE FORCES MATTER BECAUSE:To be successful, strategy must be designed

to cope effectively with competitive pressures -objective must be to build a strong, marketposition based on competitive advantage!

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Figure 2: The Five Forces Model of Competition: A Key Analytical Tool

SubstituteProducts

RivalryAmong

CompetingSellers

PotentialNew

Entrants

Suppliers Buyers

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THE FIVE COMPETITIVE FORCES

1. RIVALRY among competing sellers in an industry

2. SUBSTITUTE PRODUCTS offered by firms in OTHER industries

3. Potential ENTRY of new competitors

4. Bargaining power of SUPPLIERS

5. Bargaining power of BUYERS

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PROCEDURE: ANALYZING THE FIVE COMPETITIVE FORCES

Identify main sources of competitive pressures Rivalry among competitors Substitute products Potential entry Bargaining power of suppliers Bargaining power of buyers

Assess strength of each competitive force Strong? Moderate? Weak?

Explain how each competitive force works & its role in overall competitive picture

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RIVALRY AMONGCOMPETING SELLERS

Usually the MOST POWERFUL of the five competitive forces

Weapons of COMPETITIVE RIVALRY Price Quality Performance features offered Customer service Warranties and guarantees Advertising & special promotions Dealer networks Product innovation

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COMPETITIVE FORCEOF POTENTIAL ENTRY

New entrants boost competitive pressures By bringing new production capacity into play Through actions to build market share

Seriousness of threat of entry depends on BARRIERS to entry Expected REACTION of existing firms to entry

Barriers to entry exist WHEN It is difficult for newcomers to enter market A new entrant’s small sales volume puts it a

price/cost disadvantage

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COMPETITIVE FORCE OFSUBSTITUTE PRODUCTS

SUBSTITUTES matter when products of firms in another industry enter the market picture

Transgenic Seeds vs. Chemicals Transgenic Seeds vs. Traditional Seeds

Concept

Examples

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COMPETITIVE FORCE OF SUPPLIERS

Suppliers are a strong competitive force whenwhen Item makes up large portion of costs of product,

is crucial to production process, and/or significantly affects product quality

It is costly for buyers to switch suppliers They have good reputations & growing demand

for their product They can supply a component cheaper than

industry members can make it themselves They do not have to contend with substitutes Buying firms are not important customers

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COMPETITIVE FORCE OF BUYERS

Buyers are a strong competitive force when They are large & purchase a sizable percentage

of industry’s product They buy in volume quantities They incur low costs in switching to substitutes They have flexibility to purchase from several

sellers Selling industry’s product is standardized They can integrate backward Product being purchased does NOT save buyer

money or has low value to buyer

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STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES

Competitive environment is unattractiveunattractive when:

Rivalry is very strong Entry barriers are low Competition from substitutes is

strong Suppliers & customers have

considerable bargaining power

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INDUSTRY AND COMPETITIVE ANALYSIS

Situation Analysis

Industry Environment

Five Competitive Forces

Driving Forces

Key Success Factors

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IDENTIFYING & ASSESSINGDRIVING FORCES

Industry conditions change because EXTERNAL FORCES are DRIVING industry participants to alter their actions

DRIVING FORCES are the MAJOR UNDERLYING CAUSES of changing industry & competitive conditions

Concept

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TYPES OF DRIVING FORCES

Changes in long-term industry growth rate Changes in who buys the product & how

they use it Product innovation Technological change/process innovation Marketing innovation Entry or exit of major firms Diffusion of technical knowledge

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TYPES OF DRIVING FORCES

Increasing globalization of industry Changes in cost and efficiency Shifting from standardized to differentiated

products (or vice versa) Regulatory influences & government policy

changes Changing societal concerns, attitudes, &

lifestyles Changes in degree of uncertainty & risk

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INDUSTRY AND COMPETITIVE ANALYSIS

Situation Analysis

Industry Environment

Five Competitive Forces

Driving Forces

Key Success Factors

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PINPOINTING INDUSTRYKEY SUCCESS FACTORS

KEY SUCCESS FACTORS (KSFs) spell difference between Profit & loss Competitive success or failure

A KEY SUCCESS FACTOR can be Specific skill or talent Competitive capability Something a firm must do to satisfy

customers

Basic Concept

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PINPOINTING INDUSTRY KEY SUCCESS FACTORS

Identifying KSFs is top priority as they are good cornerstones of a firm’s strategy Winning COMPETITIVE ADVANTAGE

often hinges on being distinctively better than rivals at one or more of the KSFs

KSFs consist of the 3 - 5 really major determinants of financial & competitive success in industry

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INDUSTRY AND COMPETITIVE ANALYSIS

Situation Analysis Industry Environment Five Competitive Forces Driving Forces Key Success Factors

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THREE PRIMARY ASPECTS OF STRATEGIC BUSINESS MANAGEMENT

Industry and Competitive Analysis

Strategy and Competitive Advantage

Company Situation and Analysis

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STRATEGY AND COMPARATIVE ADVANTAGE

Three Generic Competitive Strategies

Low-Cost Leadership Strategy

Differentiation Strategies

Focus Strategies

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STRATEGY &COMPETITIVE ADVANTAGE

COMPETITIVE ADVANTAGE exists when firm has an edge in Defending against competitive forces & Securing customers

Convince customers firm’s product/service offers SUPERIOR VALUE Offer buyers a good product at a lower price Use differentiation to provide a better product

buyers think is worth a premium price

KEY TO SUCCESS

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WAYS TO WIN ACOMPETITIVE ADVANTAGE

Become the low-cost producer Make the best-made product Provide customer more value for the money Save customer money Provide superior customer service Enhance performance buyer gets Provide more convenient locations Make a more reliable & durable product

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Figure 3: The Three Generic Competitive Strategies

Low-CostLeadership

Strategy

DifferentiationStrategy

FocusedStrategy

TYPE OF ADVANTAGE SOUGHT

MA

RK

ET

TA

RG

ET

Lower Cost Differentiation

Broad Rangeof Buyers

Buyer Segmentor Niche

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THE THREE GENERICCOMPETITIVE STRATEGIES

LOW-COST LEADERSHIP

Striving to be the overall low-cost provider in industry

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THE THREE GENERICCOMPETITIVE STRATEGIES

DIFFERENTIATION

Striving to build customer loyalty by differentiating

one’s product offerings from rivals’ products

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THE THREE GENERICCOMPETITIVE STRATEGIES

FOCUS STRATEGY

Concentrating on a narrow buyer segment, out-competing rivals on either a lower cost basis

or

offering niche members a product or service customized to their needs

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THREE PRIMARY ASPECTS OF STRATEGIC BUSINESS MANAGEMENT

Industry and Competitive Analysis

Strategy and Competitive Advantage

Company Situation and Analysis

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COMPANY SITUATION ANALYSIS

Determining How Well Present Strategy is Working

SWOT Analysis Strengths & Weaknesses of Firm Opportunities & Threats Facing Firm

Strategic Cost Analysis & Value Chains Assessing Firm’s Competitive Position Identifying Strategic Issues

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KEY QUESTIONS IN COMPANY SITUATION ANALYSIS

1. How well is firm’s present strategy working?

2. What are firm’s strengths, weaknesses,

opportunities, & threats?

3. Are firm’s prices & costs competitive?

4. How strong is firm’s competitive position?

5. What strategic issues does firm face?

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S W O T ANALYSIS

S W O T S W O T represents the first letter in S trengths W eaknesses O pportunities T hreats

SWOTSWOT analysis involves sizing-up firm’s INTERNAL strengths & weaknesses and EXTERNAL opportunities & threats

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IDENTIFYING INTERNALSTRENGTHS & WEAKNESSES

A STRENGTH is something firm is good at or characteristic giving it an important capability Useful skill Important know-how Valuable organizational resource or

competitive capability Achievement giving firm a market

advantage A WEAKNESS is something firm lacks, does

poorly, or condition placing it at a disadvantage

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IDENTIFYING EXTERNAL OPPORTUNITIES

OPPORTUNITIES most relevant to a

firm are factors in EXTERNAL

environment offering

Some kind of competitive advantage

Important avenues for growth

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IDENTIFYING EXTERNAL THREATS

EXTERNAL FACTORS posing a danger to firm Emergence of cheaper technologies Introduction of new/better products by rivals Entry of low-cost foreign competitors New regulations Vulnerability to rise in interest rates Potential of hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Political upheaval in a country

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SUMMARY

Industry and Competitive Analysis Current Industry Situation Competitive Forces in the Industry Driving Forces Causing Change Key Success Factors

Strategy and Competitive Advantage Low-Cost Strategy Differentiation Strategy Focus Strategy

Offensive Strategy -- Implement

Defensive Strategy -- Protect

Company Situation and Analysis SWOT Analysis