Module 1: Introduction to strategy and leadership

Module 1: Introduction to strategy and leadership

1

MODULE 1: Introduction to strategy and leadership

Part A: Introducing strategy and leadership

The evolution of strategy

Differentiating strategy from tactics

The emergence of strategy

Developing the strategy

Ethics in leadership

Approaches to strategy

17

17

18

20

21

24

26

Part B: Strategy process

Understanding the external environment—Module 2

Understanding the internal environment—Module 3

Strategic options in products and markets—Module 4

Strategic options, themes and implementing the final strategy—Modules 5 and 6

Leading the strategy—Module 7

28

28

30

30

31

31

Part C: Strategic thinking

Linking strategic thinking and strategic planning

Strategic fit and strategic stretch

Strategy equation

32

33

33

34

Part D: Levels of strategy

Corporate strategy

Business strategy

Functional strategy

36

36

37

37

Part E: The global context of business

Drivers of globalisation

Challenges of globalisation

Benefits of globalisation

Value of localisation

38

39

42

45

46

Part F: The role of the accountant in strategy development

The accountant as a strategic business driver

46

50


2

PART A: Introducing strategy and leadership p17

The evolution of strategy p17

Adam Smith – ‘invisible hand’: where self-interested behaviour self-regulated the market and was the core developmental and structuring impetus of modern business.

Alfred Chandler – ‘visible hand: how capitalist function, administrative structure and managerial coordination are the core developmental and structuring impetus of modern business.

Porter: firm’s profitability was determined by the characteristics of its industry and by its position in that industry, and these factors determine the organisation’s overall strategy (be a low-cost producer, or differentiate its products or offerings in a unique way that would allow it to command a higher profit margin.)

Mintzberg: strategy should be flexible, develop continuously and emerge from ‘intuition and creativity’.

Differentiating strategy from tactics (p18)

Overview Example

Tactics Operational effectiveness to improve the performance of activities

Short term improvement

A car insurer that improves its customer claims process saves the customer time and the organisation money, which results in an overall business improvement.

Note: would expect competitors to then take the same steps

Strategy Competitive strategy to transform the activities performed, so that they differ from rivals or are completed in a different manner to standard practice in the market.

Long-term improvement

A strategic move would be for the car insurer to start offering health insurance as well.

This involves the car insurer entering into a new market, and differentiating itself from other traditional car insurers.

Strategy is about ‘thinking outside the box’ and expanding into new products and markets.

Efficient frontier – the curve on which the most efficient performers in the industry are placed

Although organisations are continually moving closer to the productivity frontier, simultaneously the productivity frontier continues to be pushed out

The emergency of strategy (p20)

Strategy is the means by which senior management communicates the tasks of coordinating complex activities towards the achievement of organisational goals.

Serves to legitimise the position and role of management and the direction which they take as an organisation

More important in a globalised economy – which creates a more complex operating environment


3

Developing the strategy (p21)

1. Strategic analysis: where are we today? - Collect external and internal forms of data, including market and industry information and data

related to finance, competition and benchmarking (Modules 2 and 3) - Undertake a detailed analysis of the external influences the affect the organisation’s performance

including industry, market and competition analysis (Module 2) - Conduct diagnostic review of internal operations and current performance (Module 3) - Analyse internal performance including using comparators from industry competitors (Module 3) - Review existing product / service offerings and identify new / improvement opportunities

(Module 3) 2. Defining the future state: where are we going and by when?

- Identify the growth areas for the organisation, including new product development, innovation and penetrating new markets (Module 4)

- Develop an overarching vision and supporting mission to drive the strategic direction of the organisation (Module 5)

- Identify and agree on values are guiding principles (Module 5) - Validate and agree on SMAR T goals to achieve vision and mission (Module 5)

3. Evaluating options and developing the plan: how are we going to get there? - Develop and evaluate strategic drivers and options (Module 5) - Identify and evaluation high-level strategic themes (Module 5) - Senior management team to agree on strategic direction, options and themes from the data

collected to date (Module 5) - Develop the detailed strategic plan (Module 5) - Define key performance measures for agreed strategies and agree on reporting mechanisms

(Module 5) - Review and validate new model and identify and correct any gaps (Module 5)

4. Implementation: how do we implement the strategy? - Design and develop detailed implementation plans and project briefs (Module 6) - Implement the strategy (Module 6) - Manage change (Module 6) - Monitor implementation and performance (Module 6)

The role of leadership

Focus on influencing activity, rather than forcing action.

Leaders are required to be a part of each step of the strategy process:

- driving analysis; - reviewing outcomes; - determining the key aspects of the strategy; - developing the plan; and - implementing the strategy.

Ethics in leadership (p24)

Corporate misconduct often results from the failure of leaders to establish and enforce ethical compliance with their organisations operating procedures.

Ethical issues often arise in situations where people have power and influence over others, and for this reason, leadership and ethics are closely linked.


4

Ethics and morals guide leaders, while rules and laws can restrict their behaviour and ensure they act appropriately.

Classical view of ethics (p25)

Milton Friedman

The primary obligation of senior management is to provide a return on investment to the owners of the organisation for which they work.

The only social responsibility of the organisation is to utilise its resources and engage in profit-maximising activities, as long as those activities are conducted without fraud or deception. Other types of social responsibility will incur costs / refocus the firm and may reduce productivity and profits.

Argues that in pursuit of economic efficiency – wellbeing can be maximised

Socioeconomic view of ethics

Ferrell & Fraedrich

Leaders of organisations have a responsibility to the society that creates and sustains them.

Organisations have significant economic and social power – in return for granting organisations a separate legal entity, society is entitled to expect from them a significant net positive contribution to the general good


5

Approaches to strategy p26

Rational approach

Based on a linear and mechanistic model, in which the conception and execution of strategy are treated as discrete sequential activities.

Necessary to consider the vision, missions, values and goals of the organisation – as this helps understand how to move the organisation from its current state (using all the resources available) to a more desirable future state (including one that fits with the organisation’s longer term aspirations).

Key features:

- Senior management involved - An organised plan (external focus: market positioning; internal focus: how to achieve success) - Formed by managers who are able to observe and analyse their business - Long process of analysis and goal setting - Separated stages

1. Context analysis

Analysis of an organisation’s situation, its external environment and its internal resources and capabilities. A range of ‘rational’ and ‘objective’ tools and techniques are employed in this process. This is discussed in Modules 2 and 3.

2. Customer value

The establishment of clear strategic vision, mission, values and goals. This is discussed in Module 5.

3. Vision, mission, values, goals

The generation of strategic options that are evaluated and chosen on the basis of their potential to optimise the achievement of the established goals. This is discussed in Modules 4 and 5.

4. Implement strategic options

Implementation of the chosen strategic option, which is usually expressed in a strategic plan. This is discussed in Module 6.

Examples of a rational approach:

- Board reaffirms each year that its mission is to provide X and its key strategic objective is to increase shareholder wealth

- Strategy committee meets to discuss strategic options for the company and then make recommendations to the board

- Annual budget is set each year within the framework of a five year plan

Criticisms:

- long process of analysis and goal setting, once formulated was filed away and not implemented because too busy with day to day operations

- Events are reduced to linear cause and effect relationship that does not capture enough of what is going on in a changing organisational world.


6

PART B: Strategy process p28

Mod 2: Understanding the external environment Comprised of:

1. Macro and industry environment and 2. Customers and markets

Industry Define the industry: an industry is a group of organisations participating in similar economic or commercial activities. Describe the industry: in terms of its competitive advantage and method of competing Convergence: when industries begin to overlap their activities, tech, products and customers Organisation’s environment Split between the macro-environment and the industry environment:

- Macro: PESTEL - Industry: Porter’s five forces

Customers and Markets Focus on the basis of competition – market share, customer segments etc Drivers of change in basis of competition includes homogenisation of customer needs / preferences, development of global supply, distribution and communication channels, drive to gain economies of scale through economies of scale and other improvements, deregulation of markets. Mod 3: Understanding the internal environment (p30) Internal environment: the variables inside an organisation that together make up the requirements of key stakeholders, the strategic capabilities and ultimately determine its current performance. Three drivers: 1. Strategic, 2. Operational, 3. People and organisational drivers Need to develop a strategy that leverages the strengths and overcomes or minimises the impact of weaknesses. Mod 4: Strategic options in products and markets Analyse the market and become aware of the opportunities and threats the environment poses to the org. Potential opportunities include the ability to move into new markets, expanding the product line to meet customer needs and transferring skills and know-how to new products. Mod 5 & 6: Strategic options, themes and implementing the final strategy (p31) Strategy is both planned and emergent, representing a pattern of decisions intended to improve the performance and competitive position of the organisation. Requires constant monitoring and adjustment. Mod 7: Leading the strategy Leaders must have the ability to identify when there is a case for change and whether incremental or transformational change is required, as well as how the change program decided upon will be implemented.


7

PART C: Strategic thinking p32

Strategic thinking is about linking concepts to operational practices, and being able to understand and articulate the big picture in terms of an organisation’s potential directions and developments.

An effective leader needs to be capable of seeing the big picture and understanding how that picture is changing in order to conceive of the current and future contexts in which their organisation is and will be operating. Too much focus on the specifics of the situation faced today can constrain strategic thinking.

Linking strategic thinking and strategic planning p32

Leaders and managers to focus creative energy in a synergistic and intuitive manner, rather than getting bogged down in linear thinking, rigid processes and established routines

Strategic fit and strategic stretch p33

Matching the organisation’s goals, values, assets and capabilities, structures and systems to the external environment.

Strategic fit = strategic planning: ensuring that the organisation can meet the challenges associated with its environment and the changes occurring within in.

Examples:

- Small company has identified a niche in the market for selling high-quality fashion footwear, and it protects this market because of its capability for production quality and because it employs a skilled marketing organisation

Strategic stretch = strategic thinking: thinking outside the box in developing alternative products and services, or exploring new ways of operating to provide existing products and services

Examples:

- A manufacturer of computer equipment recognises that a product is currently sold to business users could also be useful for consumers.

- An accountancy firm recognises opportunities for environmental auditing and recruits a team of specialists to carry out this work

- An IT Company sees an opportunity to offer cloud computing services to business customers and take over management of the information systems of these customers

- A specialist medical company sees an opportunity to develop its market by visiting its patients to provide medical services rather than requiring patients to visit the company’s hospitals.


8

Strategy equation p24

Strategy is the fit and stretch between an organisation and its environment—its market and industry.

- An alignment or fit of an organisation’s strategy with its parts: Culture and subcultures, power and politics, leadership, systems of technology, information, communications, finance, operations and marketing.

- A fit between an organisation and its environment: Strategy is about managing this fit, and achieving stretch; that is, leveraging resources to position the organisation, relative to its rivals, for future competitive advantage and being proactive to avoid strategic drift or strategic inertia.

The strategy needs to have enough stretch in it so that it extends upon the ‘fit’ that can currently be achieved with the organisation’s present structure and offerings, creating a gap to where it wants to be.


9

PART D: Levels of strategy p36

Corporate strategy Thompson & Strickland et al. (2007) identified the following initiatives of corporate strategy:

- establish business positions across a number of industries; - boost the combined performance of the businesses and improve competitive

position; - capture and use the synergy among the businesses to improve competitive

advantage; and - effectively allocate corporate resources, prioritising growth businesses within

the portfolio. Business strategy The distinction between corporate and business strategy is only relevant for

diversified organisations.

A business unit is a strategic grouping of businesses within a larger corporate group.

Functional strategy Operates at the level of the department or functional activities in the business (e.g. marketing, finance, operations etc).


10

PART E: The global context of business p38

The term ‘globalisation’ refers to international organisations with operations in many countries that are integrated in some way through finance, production, marketing or sales activities.

Global business activities can take the form of import/export businesses, entering into licensing or franchising, joint venture arrangements with a local organisation, strategic alliances and/or by operating a wholly-owned foreign subsidiary in the local market.

Drivers of globalisation p40

Four primary and converging forces:

Competitive Removal of trade barriers, expansion of multinational companies

Technological Costs of transport and telecommunications have reduced

Social Convergence in global consumer tastes i.e. coffee, mobiles, PCs

Political WTO encouragement of relaxation of trade barriers

Note interdependency of global economies as evidenced in GFC

Importance of small businesses in globalisation

Challenges of globalisation p42

Competition The number and type of competitors have typically increased as more countries open up for trade

e.g. car industry (US and then Japanese entering the European car market which was already crowded).

Distribution Requires greater coordination and logistical skill to execute across markets

May require regional subsidiaries to operate autonomously or the implementation of standardised products across the portfolio.

Macro-economic

Changes in trading environments need to be understood (e.g. GDP, labour costs, consumption patterns)

Socio-economic

Social and economic structure and practices differ across locations

For example, Anglo-American: market based systems; Europe: relationship based system

Financial Variation in interest rates, inflation rates and taxation systems

Legal Differing laws and regulations

Physical Basic infrastructure levels (roads, energy and water) may be different. May be necessary to establish essential infrastructure in order to operate the business

Political Differing governments and international agencies.

International agencies such as World Bank, IMF, UN, WTO

Socio-cultural Different cultures, values, beliefs and ways of doing business.

Labour Employment and industrial relations institutions and practices differ across countries and regions

Technological Technological break throughs, utilisation of online platforms etc

Globalisation risk

Globalised risks such as health (epidemics), computer viruses, corporate governance gailures, scams and frauds, contagion (e.g. GFC)


11

Benefits of globalisation p45

As per Lasserre (2003):

Cost Economies of scale delivered by standardisation of products and processes, with greater access to raw materials, components and equipment.

Timing Coordinated approach to product development and launching. Targeting optimal market volumes across all locations.

Learning Higher rates of learning can be secured by the coordination of more rapid rates of information transfer across countries and subsidiaries (eliminating knowledge silos)

Arbitrage By using resources in different subsidiaries in different countries to take advantage of the price differentials across locations.

Value of localisation p46

A central problem confronted in any ambitious globalisation plan is that customer needs differ

While standardisation of products for global markets can increase integration and achieve cost savings, some markets are segmenting, particularly in the advanced industrial countries. As these consumers become more discriminating, they are looking for differentiation rather than standardisation.


12

PART F: The role of the accountant in strategy development p46

Accountants are more likely to work in partnership with local and/ or international cross-functional teams, dealing with different cultures and business practices.

The accountant’s role in organisational strategy implementation includes aligning functional strategy with the organisation’s business strategy, the re-allocation of resources and budgets to facilitate and fund the organisation’s strategic options, and the development of key performance measures to monitor the organisation’s performance against its strategy.

CPA will most likely have involvement with international buyers and suppliers, with foreign corporations entering the local market, or be trading in markets around the world.

Data p47

‘Big data’ is the term commonly used for the exponentially increasing data sets created from the millions of interactions that occur every day with internet-created devices.

CPAs are now required to identify which structured and unstructured forms of data could be used for these ends:

- Structured data: data that has been traditionally stored in databases and spreadsheets, etc. - Unstructured data: data that is generated by emails, social media, online videos, GPS tracking, etc.

Four Vs of data (EY 2014): the huge volume, wide variety, velocity and the veracity of the historical and real-time data now available to the organisation to use for business intelligence purposes

A key part of the CPA’s role is to find ways to make big data manageable in order to use it to better value assets, make better and more timely operational and strategic decisions, and anticipate and mitigate risks much more effectively.

The accountant as a strategic business driver p50

The accounting discipline is becoming more integrated with the discipline of strategic analysis and strategic decision-making. This integration has broadened the accountant’s role to include:

- the assessment of the financial impact of external or market changes on existing and proposed strategies;

- the analysis of the profitability of market segments, customers, brands and product attributes; - the costing analysis of the value chain to identify cost and value drivers; and - financial evaluation to inform decision-making for the selection of a strategic option for the

organisation.

CPAs have a key role to play in influencing and facilitating strategy through resource and budget allocations, and in translating higher level strategic goals into specific growth and earnings targets and measures for operating managers.

Module 2: Understanding the external environment

1

MODULE 2: Understanding the external environment

Part A: Understanding the external environment

The role of the CPA in analysis

External environment analysis—analysing an industry

Defining the industry for analysis

77

78

79

82

Part B: Remote and industry environment analysis Future expectations

Remote environment analysis—industry growth

Industry environment analysis—industry profitability

97

98

99

114

Part C: Understanding customers and markets

What is a market?

Linking markets to industries

Customer market segmentation

127

127

127

128

Part D: Competition in the industry

The basis of competition

Competitive positioning matrix

Industry key success factors

Competitor analysis

Identifying strategic groups

How IT contributes to data analysis and decision-making

From external to internal analysis

130

130

133

134

135

139

140

142


2

PART A: Understanding the external environment p77

External environment: factors outside the organisation that influence the organisation’s strategy.

Markets, industry and external environment

Industry: the grouping of similar economic or commercial activities that produce goods or services.

Market segments: a segment being defined as a group of consumers with similar needs, or a geographic area with a targeted focus. Note market segments are within an industry.

External environment: everything external to the organisation, including but not limited to: markets and industries, political forces, regulations, environmental, society, technology and a variety of other factors.

The role of the CPA in analysis p78

Analysis of financial and economic influences on the organisation

Capture, collect and analyse the contribution of data to decision-making improves the value and appropriateness of the analysis of that data for rigorous decisions

Will use metrics to evaluation (such as financial metrics to measure the performance of a strategy).

For financial implications and influence on the competitive environment, the CPA is the most knowledgeable member of the planning team to conduct this assessment and advise both an industry and organisational level.

External environment analysis – analysing an industry p78

A strategic analysis process needs to consider factors that affect both the growth and profitability of an industry, which in turn will affect an industry’s level of competition.

The process includes an understanding of:

1. the definition of the industry to be analysed, its value chain and its various segments; 2. the life cycle stage of the industry; 3. how the industry has evolved to its current state, and the key factors that have driven historical

growth and profitability; 4. how the factors may change, and their impact on future growth and profitability; 5. what drives customer demand for the products and services offered by the industry; and 6. the industry key success factors and how competitors in the industry compete.

Gathering data for industry external analysis

BIDA: Business intelligence and data analytics

• BI: a discipline made up of several related activities, including datamining, online analytical processing, querying and reporting.

• DA: the analysis process

Example BIDA tools: data optimisation, predictibe modelling and agile visualisation.

What differentiates BIDA from previous methods of research and analysis using data is that it combines data derived from the industry in which an organisation operates (external data) with data from company sources internal to the business such as financial and operations data (internal data), thus providing a more comprehensive representation than can be offered by any one set of data.

Forms of data: quantitative / qualitative and structured / unstructured

New technology: digital textual analysis, social media analytics. Sources of BIDA: page 81


3

Defining the industry for analysis p82

Industry: a group of organisations or business units producing close substitutes. The competitive market that the firm sees itself operating in.

Definition Example Pros Cons

Wide Global software industry

Minimises the risk of missing new trends, which often come from new entrants and substitutes

A much more complex analysis than narrow

Narrow Australian retail software manufacturing industry

Easier to analyse

May miss new trends, especially those in overseas markets

May miss competitors outside of the region (if narrowing geographically)

May be too focused on what is produced now and fail to consider customer need (and how this may change)

The industry value chain

Different industries have different value chains, and each stage of the chain can comprise a number of competitors, each of whom may have operations in one or more stages of the chain.

Comprises: processes, people, organisations, intellectual property, technology and physical infrastructure that transform raw materials or talents into finished goods and services, which are offered and distributed to consumers to satisfy demand.

Value / Returns

A key proposition of value chains is that new ‘value’ is created at each stage of the chain from the activities and processes undertaken in that component of the chain. Note that there are different risks / costs associated with each point of the value chain, which thereby influences the return at this point (see page 89 for additional detail)

Measures of economic value creation have been refined over centuries, resulting in a host of performance measures, including return on investment, debt-equity ratios, price-earning ratios and numerous others.

Wholesaling – this capability is not seen as particularly difficult to acquire, and does not add significant value to suppliers and retailers. In a lot of instances, it’s been absorbed by either suppliers or retailers – “Cut out the middle man”. E.g. Apple directly supplies their goods to other retailers (enabling them to control pricing, discounts etc).

Offshoring – where an organisation sends certain components of the value chain overseas to reduce costs (usually taking advantage of cheap labour).

Industry segmentation


4

Segments are based on the characteristics of products or services and there can be several of these within an industry.

Type of segmentation Description Airline example

Product and service segmentation What the industry offers First, business, economy seats

Market segment Who the industry offers it to Business or leisure travellers

When analysing a segment the type of information needed includes:

1. segment definition—what it does and does not include; 2. total segment size—volume and value broken down where appropriate; 3. average annual growth rate for the past five years (10 years if possible)—preferably, this should be

real growth (after inflation has been taken out, if this figure is known); and 4. an explanation of the data.

The industry lifecycle (p94)

The life cycle position of the industry is an important factor in formulating organisational strategy.

Introduction Supply: few competitors, and nor is there any threat of substitutes. The power of suppliers is relatively high as the industry is yet to have a significant impact.

Demand: the power of buyers is low because there are few alternatives.

Style of leadership: Single manager, Management by intuition / vision

Issue: how to make it happen

Growth Supply: surge in competitors, although they are yet to gain market share and their rivalry is low

Demand: demand currently exceeds supply

Style of leadership: Functional delegation, Management by conflict / hope

Issue: how to make it grow

Maturity Supply: rivalry is intensified and companies may consolidate. Supply will start to match demand during this phase

Demand: customers become more knowledgeable and demanding and not all products will survive

Style of leadership: Market orientation, Management of ROI, cost control, marketing

Issue: how to manage markets, assets

Shakeout Supply: reduced rivalry and competitiveness as many suppliers will exit the industry. More industry consolidation


5

Demand: plateau and possible decline in demand – impacting profitability for suppliers

Style of leadership: Strategic management, Industry analysis, competitive advantage

Issue: how to manage industry position

Decline Supply: supply exceeds demand

Demand: customers may be seeking new products / new technology

Style of leadership: Strategic management, Organisational renewal

Issue: how to avoid decline

Renewal May be an opportunity to regrow instead of decline, if using new technologies, strategies, product innovation.


6

PART B: Remote industry and environment analysis p97

Having defined the industry, its value chain and life cycle stage, the environment is broken down into two categories for further analysis:

1. the remote environment; and 2. the industry operating environment including the competitive environment.

Remote environment analysis – industry growth p99

Factors to consider are:

• industry growth rate (a product of population growth and price inflation) and • the timeframe.

Historical and future growth

Analysis: PESTEL

The remote environment includes those general influences that affect an industry. Remote environment issues affect many industries, but we are concerned with their effect on the growth of the particular industry we are analysing.(eg. carbon tax)

Historical and future profitability

Analysis: Porter’s 5 forces

In the industry environment analysis, we consider those factors within the industry that affect its profitability and the competitive position of organisation within it.


7

When investigating these factors, two questions should be considered:

1. How has this particular factor contributed to shaping the industry into its current state (e.g. what has been its impact on historical industry growth)?

2. Will this change in the future and if so, what impact will the factor have on industry growth in the future?

Political

p101

Impact of political influence and government legislation. Often linked to social and technological factors

- Tariffs OR rebates and subsidies - Quarantine regulations - Reduction in trade barriers (as encouraged by WTO) - Tax policy changes - Legislative changes - Change of government - Competition policy (ACCC)

Economic

p102

Economic factors such as GDP, inflation, unemployment, interest rates, exchange rates, taxation rates and wage rates. GFC can be good case study.

- How reliant is industry on economic growth and prosperity? - What are the key economic indicators? - Impact of exchange rates, labour costs etc - Available debt / equity finance

Social

p104

Socio-cultural and demographic factors

- Cultural / cross border communications - Changing family structures (gender equality, age of having children) - Population growth - Population profile (including age) - Education profile - Type of work (part time, full time, flexible)

Technological

p105

Adaption to new technology (with big changes relating to telecommunications (e.g. high frequency trading), internet, transport (e.g. Uber))

- Consider dependency on technology - Impact on technology on customers, distribution network, cost of production,

risk of obsolescence, speed in which a supplier needs to change his product suite).

Environmental

p109

Driven by unsustainability of individual and corporate practices (driving sustainability reporting)

- How do environmental factors impact the industry’s value chain? - Recycling options - Industry reliant on resources - Potential legislative changes (including carbon pricing)

Legal

p110

Regulation and compliance – serves to increase the costs and complexity of doing business.

- Employment, intellectual property, environmental, health and safety - Competition (ACCC) - Restrictions on ownership - Industry production could be banned (e.g. asbestos) - Class actions for industry due to past behaviour


8

Application

Purpose is to determine whether the industry is attractive for future investment, or if new competitors will enter because growth is more attractive or exit where it is not.

1. Assess each issue identified as +, -, = 2. Summarise + and -. Ensure weighting is given to major factors 3. Write down a summary, identifying major reason for conclusion – is the industry growing:

a. Faster than average (+); b. At an average rate (=); c. Slower than average (-).

Industry environment analysis – industry profitability p114

Second stage of process is to analyse the industry in order to determine profitability:

1. What are the forces within the industry that determine the profitability of the industry? 2. Based on these forces, what is the current and expected future profitability of the industry? 3. How are the forces changing and how are they expected to change over time?

Porter’s five forces

Threat of new entrants

p116

Typical barriers to entry

- Industry size: the smaller the industry, the greater the barrier - Economies of scale: if existing players have cost advantage due to

scale, creates a barrier - Product differentiation: industries with well-established branded

products have higher barriers to entry - Intellectual property: limits industry entry - Capital requirements: a large capital outlay (e.g. to build a factory)

will limit industry entry - Switching costs: high cost of switching means low threat of new

entrants - Access to distribution channels: low threat if established

distribution channels are already locked up - Government policy: may restrict new entrants through licencing /

policies like FIRB

Questions to ask:

- Is the industry large enough to be attractive to new entrants? - Are economies of scale needed to compete? - How much capital investment is required? - Availability of distribution channels? - Government policy / restrictions? - How strong are existing brands? - Ease of switching for customers and suppliers?

Power of suppliers

p117

Suppliers: provide products or services to the industry – raw material, labour and capital

Suppliers can affect returns within the industry via ability to raise prices and determine quantity.

High supplier power:

- A high concentration of suppliers (i.e. few) - High switching costs

Module 1: Introduction to strategy and leadership

Documents

Transcript of Module 1: Introduction to strategy and leadership