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Porters Five Forces Framework
Organizational Analysis 1
Porters Five Forces Framework as an Industry and Competitive Analysis;
STI Foundation - Davao Campus
I. Background of the Study
The word Strategy is common now days in business world or even in
daily life you may heard lots of time people discussing about strategies to
achieve something. You must be thinking that strategies are developed in
dreams or common sense by higher management of the company but this is not
the case, best strategies always comes after proper evaluation of internal and
external environment of the company. The strategies are made by strategist to
achieve objective or goals to allow the business to compete in industry.
In order to analyze the state of competition within a given industry, one
must examine the composite of five competitive forces in the overall market.
(Porter, 1979) But what are the five competitive forces? How does it work? In
what way it is effective?
In 1979, Harvard Business Reviewpublished How Competitive Forces
Shape Strategy by a young economist and associate professor, Michael E.
Porter. It was his first HBR article, and it started a revolution in the strategy field.
In subsequent decades, Porter has brought his signature economic rigor to the
study of competitive strategy for corporations, regions, nations, and, more
recently, health care and philanthropy.
Porters five forces have shaped a generation of academic research and
business practice. With prodding and assistance from Harvard Business School
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Moreover, upon conducting the Porters five forces framework, the
researcher concluded that STI Foundation in general has its brand equity,
absolute cost advantage, great level of advertising expense and amazing
technique in industry and marketing analysis. STI foundation is willing to spend
millions of money in advertisement (choosing models and appear on TV like
ABS-CBN halalan) and sponsorship (Voice of the youth event and tabulation
system for beauty pageant like Ms. Earth). What make the STI down are its
access distribution, substandard product or facilities, communication channeling
and administrative framework into its branches that leads disappointment as a
result, small number of employee and students.
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II. Overview of Porters Five Forces Framework
Porter's five forces is a framework for the industry analysis and business
strategy draws upon Industrial Organization (IO) economics to derive five forces
that determine the competitive intensity and therefore attractiveness of a market.
Attractiveness in this context refers to the overall industry profitability. An
"unattractive" industry is one in which the combination of these five forces acts to
drive down overall profitability. A very unattractive industry would be one
approaching "pure competition", in which available profits for all firms are driven
down to zero.
Three of Porter's five forces refer to competition from external sources.
The remainders are internal threats. It is useful to use Porter's five forces in
conjunction with SWOT analysis (Strengths, Weaknesses, Opportunities, and
Threats).
Porter referred to these forces as the micro environment, to contrast it with
the more general term macro environment. They consist of those forces close to
a company that affect its ability to serve its customers and make a profit. A
change in any of the forces normally, requires a business unit to re-assess the
marketplace given the overall change in industry information. The overall industry
attractiveness does not imply that every firm in the industry will return the same
profitability. Firms are able to apply their core competencies, business model or
network to achieve a profit above the industry average. A clear example of this is
the airline industry. As an industry, profitability is low and yet individual
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companies, by applying unique business models, have been able to make a
return in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition:
threat of substitute products, the threat of established rivals, and the threat of
new entrants; and two forces from 'vertical' competition: the bargaining power of
suppliers and the bargaining power of customers.
This five forces analysis is just one part of the complete Porter strategic
models. The other elements are the value chain and the generic strategies.
Figure 1.0: Porters Five Forces Framework
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1. The threat of the entry of new competitors
Profitable markets that yield high returns will attract new firms. This
results in many new entrants, which eventually will decrease profitability
for all firms in the industry. Unless the entry of new firms can be blocked
by incumbents, the profit rate will fall towards zero (perfect competition).
y The existence of barriers to entry (patents, rights, etc.) The most
attractive segment is one in which entry barriers are high and exit
barriers are low. Few new firms can enter and non-performing firms
can exit easily.
y Economies of product differences
y Brand equity
y Switching costs or sunk costs
y Capital requirements
y Access to distribution
y Customer loyalty to established brands
y Absolute cost advantages
y Learning curve advantages
y Expected retaliation by incumbents
y Government policies
y Industry profitability; the more profitable the industry the more
attractive it will be to new competitors
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2. The intensity of competitive rivalry
For most industries, the intensity of competitive rivalry is the major
determinant of the competitiveness of the industry.
y Sustainable competitive advantage through innovation
y Competition between online and offline companies
y Level of advertising expense
y Powerful competitive strategy
y The visibility of proprietary items on the Web
Used by a company which can intensify competitive pressures on their
rivals. How will competition react to a certain behavior by another firm?
Competitive rivalry is likely to be based on dimensions such as price, quality,
and innovation. Technological advances protect companies from competition.
This applies to products and services. Companies that are successful with
introducing new technology are able to charge higher prices and achieve
higher profits, until competitors imitate them. Examples of recent technology
advantage in have been mp3 players and mobile telephones. Vertical
integration is a strategy to reduce a business' own cost and thereby intensify
pressure on its rival.
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3. The threat of substitute products or services
The existence of products outside of the realm of the common product
boundaries increases the propensity of customers to switch to alternatives:
y Buyer propensity to substitute
y Relative price performance of substitute
y Buyer switching costs
y Perceived level of product differentiation
y Number of substitute products available in the market
y Ease of substitution. Information-based products are more prone to
substitution, as online product can easily replace material product.
y Substandard product
y Quality depreciation
4. The bargaining power of customers (buyers)
The bargaining power of customers is also described as the market of
outputs: the ability of customers to put the firm under pressure, which also
affects the customer's sensitivity to price changes.
y Buyer concentration to firmconcentration ratio
y Degree of dependency upon existing channels of distribution
y Bargaining leverage, particularly in industries with high fixed costs
y Buyer volume
y Buyer switching costs relative to firm switching costs
y Buyer information availability
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y Ability to backward integrate
y Availability of existing substitute products
y Buyer price sensitivity
y Differential advantage (uniqueness) of industry products
y RFM Analysis
5. The bargaining power of suppliers
The bargaining power of suppliers is also described as the market of
inputs. Suppliers of raw materials, components, labor, and services (such as
expertise) to the firm can be a source of power over the firm, when there are
few substitutes. Suppliers may refuse to work with the firm, or, e.g., charge
excessively high prices for unique resources.
y Supplier switching costs relative to firm switching costs
y Degree of differentiation of inputs
y Impact of inputs on cost or differentiation
y Presence of substitute inputs
y Supplier concentration to firm concentration ratio
y Employee solidarity (e.g. labor unions)
y Supplier competition - ability to forward vertically integrate and cut out
the buyer
Ex. If you are making cookies and there is only one person who sells flour,
you have no alternative but to buy it from him .
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Usage
Strategy consultants occasionally use Porter's five forces framework when
making a qualitative evaluation of a firm's strategic position. However, for most
consultants, the framework is only a starting point or "checklist" they might use.
Like all general frameworks, an analysis that uses it to the exclusion of specifics
about a particular situation is considered naive.
According to Porter, the five forces model should be used at the line-of-
business industry level; it is not designed to be used at the industry group or
industry sector level. An industry is defined at a lower, more basic level: a market
in which similar or closely related products and/or services are sold to buyers.
A firm that competes in a single industry should develop, at a minimum, one
five forces analysis for its industry. Porter makes clear that for diversified
companies, the first fundamental issue in corporate strategy is the selection of
industries (lines of business) in which the company should compete; and each
line of business should develop its own, industry-specific, five forces analysis.
The average Global 1,000 Company competes in approximately 52 industries
(lines three of Porter's five forces refer to competition from external sources. The
remainder are internal threats. It is useful to use Porter's five forces in
conjunction with SWOT analysis (Strengths, Weaknesses, Opportunities, and
Threats).
Porter referred to these forces as the micro environment, to contrast it with
the more general
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III. Companys Background
A. History of STI Foundation
It all started when four visionaries conceptualized setting up a training
center to fill very specific manpower needs.It was in the early 80s when Augusto
C. Lagman, Herman T. Gamboa, Benjamin A. Santos, and Edgar H. Sarte
four entrepreneurs came together to set up Systems Technology Institute (STI), a
training center that delivers basic programming education to professionals and
students who want to learn this new skill.
Systems Technology Institutes name came from countless brainstorming
sessions among the founders, perhaps from Sartes penchant for three-letter
acronyms from the companies he managed at the time. The first two schools
were inaugurated in August 21, 1983 in Buendia, Makati and in Espaa, Manila,
and offered basic computer programming courses. With a unique and superior
product on their hands, it was not difficult to expand the franchise through the
founders business contacts. A year after the first two schools opened, the
franchise grew to include STI Binondo, Cubao, and Taft.
A unique value proposition spelled the difference for the STI brand then:
First Well Teach You, Then Well Hire You. Through its unique Guaranteed
Hire Program (GHP), all qualified graduates were offered jobs by one of the
founders companies, or through their contacts in the industry. The schools 1st
batch of graduates, all 11 of them, were hired by Systems Resources
Incorporated. And through GHP, more qualified STI graduates found themselves
working in their field of interest straight out of school.
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No one among the four founders imagined that the Systems Technology
Institute would become a college, or would grow to have over 100 schools across
the country. But it did, all because of its unique value proposition, the synergy
between the founders and their personnel, and the managements faithfulness to
quality. A long way since its birth, STIs thrust has permeated right into the core
of the globally competitive market it has transcended beyond ICT and beyond
education, addressing the need for job-ready graduates.
Mission
We are an institution committed to provide knowledge through the
development and delivery of superior learning systems. We strive to
provide optimum value to all our stakeholders our students, our faculty
members, our employees, our partners, our share holders, and our
community. We will pursue this mission with utmost integrity, dedication,
transparency, and creativity.
Vision
To be the leader in innovative and relevant education that nurtures
individuals to become competent and responsible members of society.
B. Services offered
Establishing ones career in todays competitive industries has become a
challenging pursuit to most job seekers. Employers too are increasingly having
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difficulty finding the right person for the job. Too often, there remains a huge gap
between the skills required by the industry and what a graduate has to offer.
STI steps up to bridge this gap by introducing the Enrollment to
Employment or E2E System. The E2E System is a complete approach to human
resource development, which aims to develop ICT-enabled professionals through
innovative learning and career planning methodologies. Through the E2E
System, STI students get applicable education, job market skills, job
preparedness, and job placement assistance. The first step is the Learning
Systems Development which ensures that the curriculum content is up-to-date
and job market-oriented. A group of exemplary professionals in various fields
prepares the curriculum/curricula being taught in all STI campuses.
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To make sure that the courses being offered are carried out well, STI
implements the Academic Delivery System. This guarantees that highly qualified
faculty and the state-of-the-art facilities of campuses are at par with the
standardized courseware and curriculum, thus providing world class learning
across all STI campuses.
The third step, Student Certification, assures that students are prepared
for employment through rigid assessment, evaluation, and certificate programs.
Before the students leave the security of their four-walled classrooms, they are
given the opportunity to undergo on-the-job training with some of STIs reputable
partner companies.
STIs responsibility to its graduates goes beyond quality education. The
final step, Job Placement Assistance, warrants every graduate employment
support with the help of Interactive - Career Assistance Recruitment System (I-
CARES) and international placement agencies like GROW, INC..With these
unique processes making up the E2E System, STI has become a pioneer all over
again. It has introduced a holistic approach to education and bravely took on the
challenge to ensure a bright future for its graduates through job placement
assistance and a stronger alumni support system.
The E2E System has redefined the landscape of the education sector.
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STI Channels
Channel Manager
STI HQ owned branch schools
School Administrator
STI franchised schools
School Administrator
STI Head Quarter (HQ)
CEO
C. Administrative / Communication Channeling Policies
The diagram above shows how STI Foundation distributes access and
communication policies into its branches.
From the STI head quarters (HQ) the distribution access and
communication will pass first into its STI Channels, and from STI channels into its
HQ owned branch schools and franchised schools then vise versa. In this
situation, STI Foundation is composes of 67 colleges and education services
(diploma) for the entire Philippines managed by the school administrator. The 67
colleges is categorize into Metro Manila, Southern Luzon, Northern Luzon,
Southern Visayas, Northern Visayas, Southern Mindanao and Northern
Mindanao in which we called STI Channels managed by channel manager . STI
Channel Manger will now cater all the administrative and access concerned by
the each school administrator before this concerned proceeds into STI HQ. So
therefore, STI Davao particularly is under Southern Mindanao channel manager
and STI Zamboaga in under Northern Mindanao.
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IV. Industry Analysis for STI Foundation using Porters Five Forces
Porters Five Forces Checklist
1. New Entrants JoBs Academy, Opportunity abroad like Singapore and Home
based outsourcing
a.)Market size and market potential the new entrants above attracts
employee of STI to work for them due to its salary price and benefits
provided.
b) Present and expected market growth rate JoBs academy is said to
be growing and progressively attracting enrollees due to it competitive
faculty and high standard facilities.
c) Degree of concentration
> number of participants
> market share of participants
> market shares of leaders
> joint market share of 3 to 5 leading companies
e) methods of competitive rivalry intensive marketing strategy ,
certified instructors and high standard facilities
Impacts:
y cost of initial investment and level of fixed costs
y cost advantage of existing players
y brand loyalty of customers
y existence of controlled patents and licenses
y limited access to raw materials
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y scarcity of important resources
y control of distribution channels
y close relationships between customers and existing suppliers
y cost to customers of switching suppliers
2. Threat of Substitutes TESDA Certification and Passing Philnits Examination
and Masters degree
a) barriers to entry If their instructors are certified , has finished
graduate degree and has qualified skills
b) present and future industry`s profitability number of enrollees
d) possible entry candidates opportunity abroad and othercompany
Impacts:
y there are no close relationships with customers
y customers can produce product themselves
y switching costs are cheap
3. Rivalry in the Industry
$Present substitutes -STI franchised schools, AMA Computer College,
JoBs Academy and other Computer University schools
c) Future substitutes and their potential danger for the sector call
centers and Home Based Jobs; the student will no longer enroll and study
for 4 5 years instead acquire the skills and get the job provide by the
employer
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- In STI Foundation are trying to lower their prices to increase consumer
call ratio by minimize per minute profit margin but increasing overall company
revenues.
- In the past few years, numbers of new features were added in the STI
marketing and administrative technique. Like having pre-school, grade school
and high school in which other IT schools are following each other strategies to
minimize the differentiation in the services rendered so customer can easily apply
other services.
- In the past, IT schools offers free training and seminars to compete each
other that is why customer is getting more services in the form of certification and
master degree unit.
Impacts:
y there are many similar size players
y
there is little difference between the products
y there is low market growth
y barriers of exit are high, due to earlier investment
y all players have similar strategies
4. Bargaining Power of Customers students and faculty acquired potential
skills in IT field
Impacts:
y knowledge of production costs of product
y volume bought
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y number of company hiring is abundant
y level of supplier fixed costs
y availability of substitutes
y price sensitivity of customers
y strategic importance of product to customer
5. Bargaining Power of Suppliers Enrollment to Employment System of STI,
Certified Instructor, and highly skilled and competitive students, high standard
courseware (because STI has a research department who always revised and
update the courseware used by the instructors), and unique marketing strategy (
that keep STI foundation grow and more competitive to other rivalry)
- The bargaining power of IT University schools is more because they are the
huge provider of computer facilities, conducive class room and avail accreditation
from CHED. JoBs Academy on the other hand also provides high standard
facility and certified student graduates that other IT schools provides high
standard facilities also
Impacts:
y suppliers decide to produce the whole product themselves
y a few suppliers dominate the market
y switching costs from one supplier to another is high
y there are no substitutes for a particular input
y the supplier's customers are fragmented, and so have little power
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V. Conclusions
Upon conducting the Porters five forces framework, the researcher
concluded that STI Foundation in general has its brand equity, absolute cost
advantage, great level of advertising expense and amazing technique in industry
and marketing analysis. STI foundation is applied effort to spend millions of
money in advertisement (choosing models and appear on TV like ABS-CBN
halalan) and sponsorship (Voice of the youth event and tabulation system for
beauty pageant like Ms. Earth and Bb. Pilipinas and the like). What make the STI
down are its access distribution, substandard facilities, communication
channeling and administrative framework into its branches that leads
disappointment as a result, small number of employee and students.
In STI Davao Campus the main problem why the number of enrollees is
degrading is the location and the campus itself, it is my 4 th semester in teaching
in this institution I have no problem regarding the subject loading, course ware ,
relationship with my head and co-faculty, and salary . What disappointed me in
teaching STI is 1st the building itself is not conducive for learning and it is even
prone to bad influences like internet caf, malls and smoking. 2nd is the access of
communication and the administrative policy of STI as a whole not only in Davao.
For instance, I am the ICT coordinator it makes me so hard to request funding
and materials for events and activates of ICT department due to its delay of
approval, communication and it needs a thorough justification. As a result, as a
coordinator I planned ahead time - 4 to 5 months before the said event
unfortunately it was not even granted. It so happened because of channeling
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framework they had , STI Davaos request will past 1st into Southern Mindanao
channel manager (as I have mentioned in STI communication framework above)
which was located at Gensan Campus before it will be send into STI HQ at
central Luzon. That is why, currently in STI Davao nobody will accept the
position of Dean, Program Head and Coordinator, and if ever there is one who
accepted the position after 1 or 2 sems resignation letter arises; the shifting or
passing of position is very fast. I think this is the disadvantage of a business
school.
In order to analyze the state of competition within a given industry, STI must
examine the composite of five competitive forces in the overall market.
And the areas of inquiry that an industry must examine are as follows:
y Competitive pressures associated with existing rivalry
y Competitive pressures associated with the threat of new entrants
y
Competitive pressures associated with the threat of substitute products
y Competitive pressures stemming from supplier bargaining power
y Competitive pressures stemming from buyer bargaining power
Another thing is that, we must identify the steps in the process of Analysis as
show below:
y Step 1 Identify specific competitive pressures associated with each
of the five forces
y Step 2 Evaluate how strong the pressures comprising each of the
five forces are
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y Step 3 Determine whether the collective strength of he five
competitive forces is conducive to earning attractive profits
Porters work, directed at both strategic business planners and general
managers, argues that many of the contemporary strategic planning frameworks
view competition too narrowly and pessimistically because they were primarily
based on projections of market share and market growth. His five competitive
forces provide a detailed description of the factors that determine the relative
strength each force.
I have notice that Porter initial work did not include IT as a component of
the framework, according to Betz (2001), it has proven that extremely useful in its
regard.
Figure 1.0 Impact of Competitive Forces
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The figure above describes the impact of IT on the five competitive forces.
Column 1 lists the key competitive forces that shape competition given industry
segment. At STI Foundation, not all forces are equal of importance. STI HQ
sometimes are dominated by supplier (for example, linearization on Diploma
program) , while other IT school are preoccupied with the threat of new entrants
and/or substitute products ( such as certification and outsourcing ) .
Figure 2.0 shows the Elements of Industry Structure.
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Column 2 of figure 1.0 lists key implications of each competitive fore. For
example, when new entrants move into an establish industry segment, they
generally introduce significant additional; capacity because they frequently have
allocated substantial resources to gain a foothold in the industry. Typically, new
entrants cause a reduction in prices or an increase in costs.
Column3 lists some example of how IT can be used to change the
balance of power among these five forces. For example, IT can raise barriers to
entry by increasing economies of scale, increasing switching costs, differentiating
a product services, or limiting access to key markets or distribution channels.
Figure 3.0 shows the Impact of Competitive Forces.
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I have understood that Porter identified 3 generic strategies for achieving
proprietary advantage within an industry that is applicable also in STI foundation:
cost leadership, differentiation and focus.
Figure 4.0 Three Generic Strategies Related to Competitive Advantage and
scope
Each generic strategy involves two key choices: 1. the competitive
Mechanism - STI can lower its cost or differentiate its products and services; and
2. the competitive scope - STI can target a broad market or narrow one. Cost
leadership and differentiation strategies are targeted toward a broad market,
while focused strategies seek to lower costs (cost focus) or differentiate and
services ( differentiation focus ) in a narrow industry segment . The specific
actions required to implement each generic strategy vary widely from industry to
industry, as do feasible genetic strategies in a particular industry. Selecting and
implementing the appropriate generic strategy are thought to be central to
achieving long- term competitive advantage in an industry.
Competitive Advantage
Lower Cost Differentiation
Competitive
Scope
Broad Target Cost Leadership Differentiation
Narrow Target Cost Focus Differentiation Focus
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At the core of the concept of genetic strategies are two basic principles.
1st, competitive advantage is believed to be the goal of any strategy. 2nd, I
believed that STI must define the type of competitive advantage it seeks to attain
and the scope within which it will be attained. I believe that the decision to be
attain to be all thins to all people is a recipe for strategic mediocrity and below
average performance . More recently, I would like to emphasize that, attention
has shifted from focus on the specific strategy of a firm to focus on core
competencies. This shifts the focus of attention from a specific strategy to the
underlying organizational competencies that will enable (or prevent ) a firm from
reaching that strategy .
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VI. Recommendation
As a recommendation for STI Foundation particularly in Davao, the
administration should use the Value chain analysis or value chain; both refer to
the same concept. Systematic Analysis of Companys Value Chain is an
effective way to search for potential IT opportunities.
This concept of value chain analysis was put forward initially by Michael
Porter in 1985. This concept relates to business management. It entitles all the
niche activities and the strategies, carried out to value the customer. This
concept was deduced to develop sustainable competitive advantages for an
organization within the business arena of the present epoch. It helps us
understand how different services within an organization and values added to
them. It is pretty necessary because every organization is a conglomeration of
certain set of activities that altogether by linking up together, add value to the
business and moreover, altogether these form the organizations value chain.
The activities may include the buying of products, the distribution, the marketing
activities etc. The value chain analysis model is served as one of the most
powerful strategic tools for the strategic internal planning of an organization.
The activities which the value chain analysis focuses on, relate to primary
activities such as the operations, inbound logistics, outbound logistics, sales and
marketing, and services respectively. Other than the primary activities, the
support activities include the human resource management, R & D,
administrative infrastructure management and the procurement.
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Each of these mentioned activities is a chain, which a firm in a specific
industry takes out. A product or a service passes through the entire chain of
activities and thus gaining more value as this chain of activities nourishes the
product through more added values. It is necessary for the managers to carry out
value chain analysis for an organization to draw a competitive advantage with
sustained company repute. This competitive advantage over the other
competitors is the ability to perform all the activities along with the value chain.
It is feasible for a company to understand its capabilities in accordance
with the needs of the customers in order to make the competitive strategy
successful. The company tends to be more profitable provided if the activities
within the value chain are effectively and efficiently managed in such a way that
the price which the customer pays for any product or a service exceeds the
relative costs of the activities carried out in within the value chain. Though this
theory is pretty easy to understanding, but quite time consuming when practiced.
The first step in conducting a value chain analysis for an organization is to
break up all the activities which are carried out within the organization and which
are entailed in a similar framework. After that, the assessment is carried out in
order to check the potential for adding certain values like cost/ differentiation etc.
and lastly, the analyst determines the pertinent strategies that altogether serve in
enabling the company to achieve a sustainable competitive advantage.
The value chain analysis model is used by the companies in order to
identify and understand the crucial aspects with respect to the internal
competitive strengths and external market competencies. The model also
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highlights that how the value chain activities are linked together to create value
for the buyer at the end.
In summary, a systematic examination of a companys value chain is an
effective way to research for profitable IT applications. This analysis requires
keen administrative insight, awareness of industry structure, and familiarity with
rules of competition in the particular setting. STI Foundation needs to understand
their own value chains as well as those of key customers and suppliers in order
to uncover potential new service areas. Similarly, understanding competitors
value chains provides insight on potential competitive moves. Careful thought I
needed to identify potential new entrants to an industry those companies
whose current business could be enhanced by an IT enabled product or
service.
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VI. References
Books
Betz, F. (2001). Strategic management and information technology. New York ,
Toronto , Singapore: John Wiley and Sons, Inc.
Curtis, Jeith. (Ed.). (1994). From management goal setting to organizational
results transforming strategies into action.West Port: CT. Publication.
Drejer, Anders. (2002). Strategic management and core competencies - Theory
and application . Westport, Connecticut London: Qourum .
(1) Porter, Michael, How Competitive Forces Shape Strategy, Harvard Business
Review, Issue 57, No. 2 (Mar-Apr 1979), pp 137-145
Electronic sources
A. Articles / Journals
Drucker, P. (1954). The practice of management. Harper and Raw, 4. Retrieved
from www.questia.com
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Porters Five Forces Framework
B. Websites
http://www.whatmakesagoodleader.com/Porters-five-forces.html
http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1
http://www.soopertutorials.com/business/strategic-management/4114-value-
chain-analysis.html
http://www.sti.edu/campuses.asp
http://www.quickmba.com/strategy/vertical-integration/
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