SORSOGON STATE UNIVERSITY

College of Business and Management Education

BULAN, SORSOGON

BUSINESS LOGIC

In Partial Fulfillment of the Requirements for BSA

SUBMITTED BY:

BSA 2

SUBMITTED TO:

GLORIANE DELMONTE, MBA

 TABLE OF CONTENTS

CHAPTER 1:

Overview of Business Model and Strategic Making Process------------------------- 03

CHAPTER 2:

Components of Strategic Planning Process---------------------------------------------- 24

CHAPTER 3:

Distinctive Competencies, Competitive Advantage, Superior Performance and

Profitability---------------------------------------------------------------------------------------- 33

CHAPTER 4:

Competitive Forces Model: Risk of Entry by Potential Competitors---------------- 46

CHAPTER 5:

Competitive Forces Model: Rivalry Among Established Company----------------- 52

CHAPTER 6:

Competitive Forces Model: Bargaining Power of Buyers----------------------------- 57

CHAPTER 7:

Competitive Forces Model: Bargaining Power of Suppliers-------------------------- 63

CHAPTER 8:

Competitive Forces Model: Threat of Substitutes-------------------------------------- 73

CHAPTER 9:

The Complementors--------------------------------------------------------------------------- 86

CHAPTER 10:

Macro Environment and its Model--------------------------------------------------------- 96

 CHAPTER 1

OVERVIEW OF BUSINESS MODEL AND STRATEGIC

MAKING PROCESS

OBING, JERICK G.

HABITAN, BRIAN ANDREI G.

VALENZUELA, MARICHELLE Z.

LOZANTA, DAPHNE ANN

What Is a Business Model?

A business model is a conceptual structure that supports the viability of

the business and explains who the business serves to, what it offers, how it

offers it, and how it achieves its goals.

All the business processes and policies that a company adopts and

follows are part of the business model.

According to management guru Peter Drucker:

A business model is supposed to answer who your customer is, what

value you can create/add for the customer and how you can do that at

reasonable costs.

Thus, a business model is a description of how a company creates,

delivers, and captures value for the customer as well as itself.

What Are the Components of a Business Model?

An ideal business model usually conveys four key aspects of the business

which is presented using a specialized tool called business model canvas. These

key components are customers, value proposition, operating model, and revenue

model.

Precisely, a business model answers the following key questions –

1. Who is the customer?

2. What value does the business deliver to the customers?

3. How does the business operate?

4. How does the business make money?

Who Is the Customer?

The customer forms the heart of a business model. It answers who the

company plans to sell its offerings to. A business usually groups the customers

into different segments with certain homogeneous needs, characteristics, or

behaviour. It then defines one or more customer segment that it serves or wants

to serve, followed by an answer to why it plans to serve this segment.

What Value Does the Business Deliver To The Customers?

This is the most important component of a business model that answers

several key customers and business’s value related questions. It is often usually

presented using a value proposition canvas.

 What are the jobs the customer wants to be done?

 What are their pains in doing the job? What do they gain by doing the job?

Once these questions are answered, the business answers another set of

questions that relates business to the customers:

 How does business get the job done?

 How does the business relieve the customer’s pain?

 How can the business help the customer get the gains?
How Does the Business Operate?

It’s the operating model of the business that elaborates:

 Key Activities: What all offerings does the business sell to the customers?

 Key Partners: Who all help the business in delivering value to the

customers?

 Key Resources: What all resources does the business use to develop

and deliver its offerings?

 Key Channels: What channels does the business use to deliver its

offerings to the customers.

 Customer Relationships: What type of relationships does the business

maintain with its customers?

How Does the Business Make Money?

Making money is important for the business to sustain. This component of

the business model focuses on elaborating on the financials and how the

business makes money.

It’s called the revenue model of the business and has two components:

 The cost structure includes all the expenses that the business incurs in

creating and delivering value to the customers.

 The revenue streams include all the primary and non-primary revenue

streams that the business utilizes.

Why Is It Important to Develop A Business Model?

The business model acts as the blueprint of the business and a roadmap

for its success (or failure). This tool helps the founders decide how their business

will work and make money.

It is the only documentation that makes clear –

  The business concept – the market opportunity the business capitalizes

on.

 The target market the business caters to.

 The problems the business intends to solve.

 The solution the business offers and how it creates customer value.

 How the business gets its customers.

 The operating model the business follows.

 How the business makes money and what are the costs incurred to get

the same.

Moreover, the business model gives a reason for the customers to choose

the offering over others in the market. People chose Facebook because it helped

them connect and chat with other people around the world (operating model) and

it didn’t even charge for it (revenue model). Netflix’s business model was

preferred over others as it provided value in the form of consistent on-demand

content instead of the usual TV streaming business model.

There are different types of business models meant for different

businesses. Some of the basic types of business models are:

1. Manufacturer

A manufacturer makes finished products from raw materials. It may sell

directly to the customers or sell it to a middleman i.e another business that sells it

finally to the customer.

Examples – Ford, 3M, General Electric.

2. Distributor

A distributor buys products from manufacturers and resells them to the

retailers or the public. Examples – Auto Dealerships.

3. Retailer

A retailer sells directly to the public after purchasing the products from a

distributor or wholesaler. Examples – Amazon, Tesco.

4. Franchise

A franchise can be a manufacturer, distributor or retailer. Instead of

creating a new product, the franchisee uses the parent business’s model and

brand while paying royalties to it. Examples – McDonald’s, Pizza Hut, Jollibee

5. Brick-and-Mortar

Brick-and-mortar is a traditional business model where the retailers,

wholesalers, and manufacturers deal with the customers face-to-face in an office,

a shop, or a store that the business owns or rents.

6. Ecommerce

E-Commerce business model is an upgradation of the traditional brick-

and-mortar business model. It focuses on selling products by creating a web-

store on the internet.

7. Bricks-and-Clicks

A company that has both an online and offline presence allows customers

to pick up products from the physical stores while they can place the order online.

This model gives flexibility to the business since it is present online for customers

who live in areas where they do not have brick-and-mortar stores. Examples –

Almost all apparel companies nowadays.

8. Nickel-and-Dime

In this model, the basic product provided to the customers is very cost-

sensitive and hence priced as low as possible. For every other service that

comes with it, a certain amount is charged. Examples – All low-cost air carriers.
9. Freemium

This is one of the most common business models on the Internet.

Companies offer basic services to the customers for free while charging a certain

premium for extra add-ons. So there will be multiple plans with various benefits

for different customers. Generally, the basic service comes with certain

restrictions or limitations, such as in-app advertisements, storage restrictions etc.,

which the premium plans shall not have. For example, the basic version of

Dropbox comes with 2 GB storage. If you want to increase that limit, you can

move to the Pro plan and pay a premium of $9.99 a month for it. Other

examples are Zoom, Dropbox, MailChimp, Evernote etc.

10. Subscription

If customer acquisition costs are high, this business model might be the

most suitable option. The subscription business model lets you keep customers

over a long-term contract and get recurring revenues from them through repeat

purchases.

Examples – Netflix, LinkedIn, Amazon Prime, Dollar Shave Club,

11. Aggregator

Aggregator business model is a recently developed model where the

company various service providers of a niche and sell their services under its

own brand. Also called On-Demand Delivery model . Aggregator Business Model

is a network model where the aggregator firm collects the information about a

particular offering providers, sign contracts with such providers, and sell their

services under its own brand.

Since the aggregator is a brand, it provides the offering which has uniform

quality and price, even though it is offered by different partner providers.

 The offering providers never become aggregator’s employees and

continue to be the owners of the product or service provided. Aggregator just

helps them in marketing in a unique win-win manner.

12. Online Marketplace

Online marketplaces aggregate different sellers into one platform who

then compete with each other to provide the same product/service at competitive

prices. The marketplace builds its brand over different factors like trust, free

and/or on-time home delivery, quality sellers, etc. and earns commission on

every sale carried on its platform.

Examples – Amazon, Alibaba.

13. Advertisement

Advertisement business models are evolving even more with the rise of

the demand for free products and services on the internet. Just like the earlier

times, these business models are popular with media publishers like Youtube,

Forbes, etc. where the information is provided for free but are accompanied with

advertisements which are paid for by identified sponsors.

14. Data Licensing / Data Selling

With the advent of the internet, there has been an increase in the amount

of data generated upon the users’ activities over the internet. This has led to the

advent of a new business model – the data licensing business model. Many

companies like Twitter and Onesignal sell or license the data of its users to third

parties who then use the same for analysis, advertising, and other purposes.

15. Affiliate Marketing

Affiliate marketing business model is a commission-based model where

the affiliate builds its business around promoting a partner’s product and directs

all its efforts to convince its followers and users to buy the same. In return, the
affiliate gets a commission for every sale referred. Affiliate marketing is the

process of promoting other people’s (or company’s) products/services and earn a

commission every time you refer a paid customer to an affiliate offer using your

unique affiliate link. It’s a type of performance-based marketing which means no

sale, no commissions.

Examples are Clickbank, JVzoo, CJ affiliate, WarriorPlus, Amazon

Affiliate program,

16. Dropshipping

Dropshipping is a type of e-commerce business model where the business

owns no product or inventory but just a store. The actual product is sold by

partner sellers who receive the order as soon as the store receives an order from

the ultimate customer. These partner sellers then deliver the products directly to

the customer.

Examples are China brand, Dropify ,Oberlo ,OJMD Dropshipping

17. Network Marketing

Network marketing or multi-level marketing involves a pyramid structured

network of people who sell a company’s products. The model runs on a

commission basis where the participants are remunerated when –

They make a sale of the company’s product. Their recruits make a sale

of the product.

Network marketing business model works on direct marketing and direct

selling philosophy where there are no retail shops but the offerings are marketed

to the target market directly by the participants. The market is tapped by making

more and more people part of the pyramid structure where they make money by

selling more goods and getting more people on board.

Examples Amway, Avon, Herbalife

18. Crowdsourcing

Crowdsourcing business model involves the users to contribute to the

value provided. This business model is often combined with other business and

revenue models to create an ultimate solution for the user and to earn money.

Examples of businesses using the crowdsourcing business model are

Wikipedia, reCAPTCHA, Duolingo, Youtube.

19. Blockchain

The Blockchain is an immutable, decentralized, digital ledger. It is a digital

database that no one owns but anyone can contribute to. Many businesses are

taking this decentralized route to develop their business models. Models based

on blockchain are not owned or monitored by a single entity. Rather, they work

on peer-to-peer interactions and record everything on a digital decentralized

ledger. . Blockchain-based businesses make a profit using tokens and offer

Blockchain as a service

Many crypto currencies like Bitcoin, Ethereum, and Litecoin use

Blockchain technologybased business model

20. High Touch

The High Touch model is one which requires lots of human interaction.

The relationship between the salesperson and the customer has a huge impact

on the overall revenues of the company. The companies with this business

model operate on trust and credibility.

Examples – Hair salons, consulting firms.

21. Low Touch

The opposite of the High Touch model, the low touch model requires

minimal human assistance or intervention in selling a product or service. Since

as a company, you do not have to maintain a huge sales force, your costs
decrease, though such companies also focus on improving technology to further

reduce human intervention while making the customer experience better at the

same time.

Examples – Ikea, SurveyMonkey , use of digital platforms in banking

transactions., Zendesk

22. Auction-Based

Mostly used for unique items that are not frequently traded and that

don’t have a well-established market value, like collectables, antiques, real estate,

and even businesses.

This business model involves the listing of an offering by the seller and the

buyers making repeated bids to buy that offering while fully aware of other bids

by other buyers. The offering is sold to the highest buyer with the auction broker

charging a listing fee and/or commission based on the transaction value. eBay is

one such auction platform.

23. Reverse-Auction-Based

A reverse auction is an auction where the roles of a buyer and seller are

exchanged, i.e. sellers bid prices instead of buyers.

The reverse-auction-based business model is often used when there are

several sellers selling a similar offering to a single buyer. These sellers lower

their price with every bid and generally the bidder with the lowest bid wins the

auction. However, there are cases when the bidder with a price higher than the

lowest bid wins the auction as the buyer likes his offer (offering with add-ons)

A platform which lets sellers bid for government contracts is an example of

a reverse auction-based business model.

24. Razor And Blades

Razor and blade model is used by companies which deal in

complementary or companion products like razors and blades. It involves selling

the high-margin root product at a low price to increase the volume sales of the

complementary or related low-margin product.

The razor-razorblade model is a pricing strategy in which one good is sold

at a discount or loss and a companion consumable good at a premium to

generate profits.By using this model, businesses create a stream of recurring

income over the life of the root product.

Companies dealing in razors, mosquito vaporizers, and other refillable

products employ this business model. The game industry also makes use of this

model by providing the gaming console at a very economical price and making

good profits with the sale of games.

Example: Xbox or PlayStation Video Games, HP Printers, Nespresso

coffee machines, AT&T Mobile phones with 2-year contract.

25..Reverse Razor and Blades

A business employing a reverse razor and blades model offers the low

margin item at a very less price or below the cost to encourage the sale of the

high margin product.

The sellers here offer the dependent product at a premium price and

consumable at a lower and convenient price

Amazon employs this business model to sell its Kindle e-reader. It

provides Kindle ebooks at a price lower than their actual cost so to make people

consider Kindle as a one-time investment to enjoy low-cost books throughout its

life.
 Example: Apple employs this business model perfectly. Apple’s App Store

and iTunes sell apps, movies, songs, etc. at reasonable rates but charges

premium prices on its devices like iPhone, iPad, and Mac

26. User Community

Driven by the network effect, this business model involves granting access

to a community or a network in return for a membership fee. Glassdoor is a good

example of such a user community, Hubspot. Shopify.

27. Multi-sided platform model

Any company that offers services to both sides of business carries out a

multi-sided business model. The perfect example is LinkedIn, which provides

subscription services to people to find job opportunities as well as to HR

managers to find candidates for their vacancies.

Example: LinkedIn, Freelancer.com

28. Hidden revenue business model

This model refers to a revenue generation system in which users don’t

have to pay for the services offered, but the company still earns revenue streams

from other sources. Like, Google earns from advertising money spent by

businesses to bid on keywords while users don’t pay for the search engine.

Examples: Google, Facebook, Instagram, Twitter

29. Bundling Business Model

Bundling is a business strategy that combines products or services to offer

a package gathered as a single combined unit to sell at a comparatively low price.

It is the form of convenient purchasing for several products and services from a

single business unit.

Example: Microsoft Office 365 (PowerPoint, Excel, Word, OneNote,

Outlook) Value meal at Burger King or McDonald’s, Printer and ink

30. Fractionalization business model

Fractionalization model is selling a product or service for partial usage or

separate parts. It’s a strategy which divides products and services into further

subcategories to introduce variety in the products, charging for each category

separately.

STRATEGIC LEADERSHIP: STRATEGY MAKING PROCESS FOR

COMPETITIVE ADVANTAGE

Identifies and describes the strategies that managers can pursue to

achieve superior performance and provide their company with a competitive

advantage. One of its central aims is to give a thorough understanding of the

analytical techniques and skills necessary to identify and implement strategies

successfully.

Strategy. A set of related actions that managers take to increase their

company’s performance.

Strategic leadership. Creating competitive advantage through effective

management of the strategy-making process.

Strategy formulation. Selecting strategies based on analysis of an

organization’s external and internal environment.

Strategy implementation. Putting strategies into action.

Strategic leadership is concerned with managing the strategy-making

process to increase the performance of a company, thereby increasing the

value of the enterprise to its owners, its shareholders

Strategic leadership is concerned with managing the strategy-making

process to increase the performance of a company, To do this, a company

must be able to outperform its rivals; it must have a competitive advantage

Superior Performance

Maximizing shareholder value is the ultimate goal of profit-making

companies, for two reasons:

a. First, shareholders provide a company with the risk capital that enables

managers to buy the resources needed to produce and sell goods and

services.

b. Second, shareholders are the legal owners of a corporation, and their shares,

therefore, represent a claim on the profits generated by a company. Thus,

managers have an obligation to invest those profits in ways that maximize

shareholder value.

Risk capital is capital that cannot be recovered if a company fails and

goes bankrupt. Shareholders will not provide risk capital unless they believe that

managers are committed to pursuing strategies that provide a good return on

their capital investment. Managers must behave in a legal, ethical, and socially

responsible manner while working to maximize shareholder value.

Shareholder value, are the returns that shareholders earn from

purchasing shares in a company. These returns come from two sources: (a)

capital appreciation in the value of a company’s shares and (b) dividend

payments.

For example, between January 2 and December 31, 2010, the value of

one share in Verizon Communications increased from $30.97 to $35.78, which

represents a capital appreciation of $4.81. In addition, Verizon paid out a

dividend of $1.93 per share during 2010. Thus, if an investor had bought one

share of Verizon on January 2 and held on to it for the entire year, the return

would have been $6.74 ($4.81 + $1.93), an impressive 21.8% return on her

investment.
 Profitability is the return that it makes on the capital invested in the

enterprise. It is the result of how efficiently and effectively managers use the

capital at their disposal to produce goods and services that satisfy customer

needs. The return on invested capital (ROIC) that a company earns is defined as

its net profit over the capital invested in the firm (profit/capital invested). A

company that uses its capital efficiently and effectively makes a positive return on

invested capital

-By net profit, we mean net income after tax.

-By capital, we mean the sum of money invested in the company: that is,

stockholders’ equity plus debt owed to creditors.

The profit growth of a company can be measured by the increase in net

profit over time. A company can grow its profits if it sells products in markets that

are growing rapidly, gains market share from rivals, increases the amount it sells

to existing customers, expands overseas, or diversifies profitably into new lines

of business.

Competitive Advantage and a Company’s Business Model

A company is said to have a competitive advantage over its rivals when

its profitability is greater than the average profitability and profit growth of other

companies competing for the same set of customers. The higher its profitability

relative to rivals, the greater its competitive advantage will be. A company has a

sustained competitive advantage when its strategies enable it to maintain

above average profitability for a number of years.

A business model is managers’ conception of how the set of strategies

their company pursues should work together as a congruent whole, enabling the

company to gain a competitive advantage and achieve superior profitability and

profit growth.
 A business model encompasses the totality of how a company will:

 Select its customers.

 Define and differentiate its product offerings.

 Create value for its customers.

 Acquire and keep customers.

 Produce goods or services.

 Lower costs.

 Deliver goods and services to the market.

 Organize activities within the company.

 Configure its resources.

 Achieve and sustain a high level of profitability.

 Grow the business over time.

Strategic Managers

Managers must lead the strategy making process. In most companies,

there are two primary types of managers:

a. general managers - who bear responsibility for the overall performance

of the company or for one of its major self-contained subunits or divisions,

b. functional managers - who are responsible for supervising a particular

function, that is, a task, activity, or operation, such as accounting,

marketing, research and development (R&D), information technology, or

logistics.
 Figure 1.4 shows the organization of a multidivisional company. As you

can see, there are three main levels of management: corporate, business, and

functional. General Managers are found at the first two of these levels, but their

strategic roles differ depending on their sphere of responsibility.

Levels of Strategic Management

1. Corporate-Level Managers

The corporate level of management occupy the apex of decision making

within the organization. It consists of:

a. the chief executive officer (CEO), b. other senior executives, c. corporate

staff.

The CEO is the principal general manager. In consultation with other

senior executives, the role of corporate-level managers is to oversee the

development of strategies for the whole organization. This role includes:

a. defining the goals of the organization,

b. determining what businesses it should be in,

c. allocating resources among the different businesses,

d. formulating and implementing strategies that span individual businesses,

and providing leadership for the entire organization.

 e. provide a link between the people who oversee the strategic

development of a firm and those who own it (the shareholders).

2. Business-Level Managers

A business unit is a self-contained division (with its own functions—e.g.,

finance, purchasing, production, and marketing departments) that provides a

product or service for a particular market.

The principal general manager at the business level, or the business-level

manager, is the head of the division. The strategic role of these managers is to

a. translate the general statements of direction and intent that come from

the corporate level into concrete strategies for individual businesses.

b. business-level general managers are concerned with strategies that are

specific to a particular business.

The general managers in each division work out for their business the

details of a business model that is consistent with this objective.

Functional-Level Managers

Functional-level managers are responsible for the specific business

functions or operations (human resources, purchasing, product development,

customer service, etc.) that constitute a company or one of its divisions. Thus, a

functional manager’s sphere of responsibility is :

a. generally confined to one organizational activity

b. Functional managers nevertheless have a major strategic role: to

develop functional strategies in their area that help fulfill the strategic

objectives set by business- and corporate-level general managers.

c. Functional managers provide most of the information that makes it

possible for business- and corporate-level general managers to formulate

realistic and attainable strategies. Indeed, because they are closer to the
 customer than is the typical general manager, functional managers

themselves may generate important ideas that subsequently become

major strategies for the company.

The Strategy-Making Process

A Model of the Strategic Planning Process

The formal strategic planning process has five main steps:

1. Select the corporate mission and major corporate goals.

2. Analyze the organization’s external competitive environment to identify

opportunitiesand threats.

3. Analyze the organization’s internal operating environment to identify the

organization’s strengths and weaknesses.

4. Select strategies that build on the organization’s strengths and correct its

weaknesses inorder to take advantage of external opportunities and

counter external threats. These strategies should be consistent with the

mission and major goals of the organization. They should be congruent

and constitute a viable business model.

SAMPLE CASE STUDY: STARBUCKS CORPORATION

Starbucks' success is also attributed to its strategic management decisions,

which focus on expansion, innovation, and customer engagement. It strategically

expands into international markets using localized marketing approaches. For

example, the company offers region-specific beverages in Asian markets, such

as matcha-flavored drinks in Japan. Positions itself as an ethical and socially

responsible brand. Through initiatives like environmental sustainability, fair trade

sourcing, and community development, Starbucks strengthens its global

reputation. It frequently introduces new products, seasonal offerings, and

customized beverages to keep pace with evolving customer preferences.

Collaborates with companies such as Spotify, Uber Eats, and Nestlé to expand

its market presence and improve service accessibility. Starbucks heavily invests

in employee training, fair wages, and career growth opportunities. This strategy

ensures positive workplace culture and enhances customer service quality.

Despite its success, Starbucks has faced challenges such as market saturation,

rising competition, and economic downturns. To overcome these issues,

Starbucks implemented strategic store closures, enhanced its digital platform,

and diversified its product offerings to attract new customer segments. By

embracing innovation and proactive problem-solving, Starbucks maintained its

competitive edge. Starbucks Corporation's journey demonstrates the power of

combining a robust business model with strategic management practices. By

prioritizing customer experience, embracing innovation, and remaining committed

to sustainability, Starbucks has achieved global recognition and sustained

success. Businesses seeking to expand and innovate can draw valuable insights

from Starbucks' strategic initiatives and customer-focusedapproach.

Source and references:

1. https://www.feedough.com/what-is-a-business-model /

2. https://slidemodel.com/templates/editable-business-model-canvas-

powerpoint- template/

3. https://www.aha.io/roadmapping/guide/product-strategy/what-are-some-

examples-of-a-business-model/

4. Strategic Management, An Integrated Approach by Charles W.L. Hill and

Gareth R, Jones 10th Edition

5. https://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.

pdf
 CHAPTER 2

COMPONENTS OF STRATEGIC PLANNING PROCESS

HUFANCIA, LESLY ANN E.

GALAROSA, JESSICA S.

RABULAN, FRANCINE G.

ESTERNON, CHRISTINE MAE

What is Strategic Planning?

Strategic planning is the process of determining a company’s long-term goals

and then identifying the best approach for achieving those goals. It is a systematic

approach that organizations use to define their direction, make decisions, and allocate

resources to achieve their goals. The strategic planning process requires considerable

thought and planning on the part of a company’s upper-level management. Before

settling on a plan of action and then determining how to strategically implement it,

executives may consider many possible options. In the end, a company’s management

will, hopefully, settle on a strategy that is most likely to produce positive results (usually

defined as improving the company’s bottom line) and that can be executed in a cost-

efficient manner with a high likelihood of success, while avoiding undue financial risk.

Components of a Strategic Plan

A Mission Statement

An organization’s mission statement states the company’s purpose and the

reasons why it exists. Although you might be already clear on the mission, reiterating

your mission statement and connection to the plan acts as a foundation for the strategic

plan and your strategy.

A Vision Statement

The company vision is the bigger objective that the company aspires to achieve.

This may be as broad as making the world a better place through your product or service

or ridding bathrooms of mildew. Whatever your vision, it should be connected to your

strategic plan

Aligning the company mission and vision statements is the first crucial step to

strategic planning.

Environmental Analysis

Environmental analysis is the process of evaluating the macro-environment

(external factors) and micro-environment (internal factors) that influence an

organization’s operations and performance. It helps organizations understand their

current position, anticipate changes, and make informed decisions.

Tool for Internal Analysis:

SWOT Analysis: Strengths, Weaknesses, Opportunities, Threats.

 Strengths: Strong brand reputation, loyal customer base.

 Weaknesses: High production costs, limited distribution channels.

 Opportunities: Growing demand for eco-friendly products, expansion into new

markets.

 Threats: New competitors, economic downturn.

Internal Environment:

 What are our core competencies and competitive advantages?

 What resources (financial, human, technological) do we have?

 What are our operational strengths and weaknesses?

 Are there any gaps in our capabilities or processes?

Tool for external Analysis:

PEST Analysis: Political, Economic, Social, Technological factors.

 Political: Changes in government regulations, trade policies, or tax laws.

 Economic: Inflation rates, unemployment, economic growth, or exchange rates.

 Social: Demographic shifts, cultural trends, or consumer behavior.

 Technological: Advances in technology, automation, or digital transformation.

 Purpose: Helps the organization understand its current position and identify

opportunities and challenges.

External Environment:

 What are the current trends in our industry or market?

 How are customer needs and preferences changing?

 What are the political, economic, social, and technological factors affecting our

business?

 Who are our competitors, and what are their strategies?

 Are there any emerging opportunities or threats in the market?

Goals & Objectives

Goals and objectives need specific, measurable, achievable, and time-bound

targets the company wants to achieve. Ensure your goals are achievable, measurable,

and can be clearly communicated as part of your strategic planning. High-level company
objectives should cascade and align with the objectives of various divisions and teams.

The Strategic plans of each division and team should map directly to broader company

goals and methods.

Strategies

The specific courses of action that the company will take to achieve its

measurable goals and specific strategic issues.

Action Plans

Detailed steps and tasks required to implement the strategies. It translates the

organization’s strategies and goals into specific, actionable steps that can be

implemented to achieve desired outcomes. The action plan ensures that the strategic

plan is not just a theoretical document but a practical roadmap for execution.

Resource Allocation

The process of distributing resources (financial, human, technological) to support

the implementation of the plan.

Monitoring and evaluation

The process of tracking progress, measuring outcomes, and making adjustments

as needed.

It ensures that the organization stays on track to achieve its goals and objectives by

systematically tracking progress, measuring outcomes, and making necessary

adjustments.

Strategic Planning – Importance

Strategic planning offers the following benefits:

1. Financial Benefits:

Firms that make strategic plans have better sales, lower costs, higher EPS

(earnings per share) and higher profits. Firms have financial benefits if they make

strategic plans.

2. Guide to Organizational Activities:

Strategic planning guides members towards organizational goals. It unifies

organizational activities and efforts towards the long-terms goals. It guides members

to become what they want to become and do what they want to do.

3. Competitive Advantage:
 In the world of globalization, firms which have competitive advantage

(capacity to deal with competitive forces) capture the market and excel in financial

performance. This is possible if they foresee the future; future can be predicted

through strategic planning. It enables managers to anticipate problems before they

arise and solve them before they become worse.

4. Minimizes Risk:

Strategic planning provides information to assess risk and frame strategies to

minimize risk and invest in safe business opportunities. Chances of making mistakes

and choosing wrong objectives and strategies, thus, get reduced.

5. Beneficial for Companies with Long Gestation Gap:

The time gap between investment decisions and income generation from

those investments is called gestation period. During this period, changes in

technological or political forces can disrupt implementation of decisions and Plans

may, therefore, fail. Strategic planning discounts future and enables managers to

face threats and opportunities.

6. Promotes Motivation and Innovation:

Strategic planning involves managers at top levels. They are not only

committed to objectives and strategies but also think of new ideas for implementation

of strategies. This promotes motivation and innovation.

7. Optimum Utilization of Resources:

Strategic planning makes best use of resources to achieve maximum output.

General Robert E. Wood remarks, “Business is like war in one respect. If its grand

strategy is correct, any number of tactical errors can be made and yet the enterprise

proves successful.” Effective allocation of resources, scientific thinking, effective

organization structure, co-ordination and integration of functional activities and

effective system of control, all contribute to successful strategic planning.

Who is Responsible for Creating a Strategic Plan?

In general, creating a strategic plan is the responsibility of the company’s top

management team – the CEO, CFO, other executives, etc.

However, though the top management will do the strategic thinking, it’s essential

for key members throughout the entire organization to be involved in the strategic
planning process as different departments, employees, and human resources will have

valuable insights and perspectives to contribute to the strategy formation. Also, when

various constituents are a part of and the planning process a sense of ownership and

commitment to the strategic plan’s success is reinforced.

It’s also common for companies to seek input from external stakeholders,

customers, suppliers, and industry experts as part of the strategic planning process. As

part of your planning process make sure to identify any critical stakeholders outside of

your company.

What Makes the Strategic Planning Process Effective?

Below are some key factors that contribute to the overall effectiveness of a

successful strategic plan and the strategic planning process. Understanding these points

will help make your strategic planning process more effective:

Clear

The plan needs to be clear & concise, with specific strategic goals & objectives

that are easy for everyone to understand. Senior leadership plays a critical role in

ensuring that each objective is clear and how objectives will be achieved is understood.

Realistic

The strategic plan needs to take the company’s resources & capabilities into

account, and the goals need to be realistic & achievable based on the market data.

Flexible

The plan needs to be flexible enough to allow for adjustments to be made in

response to changes in the external environment after deployment.

Aligned

The plan must be aligned with the company’s mission, vision & values and

should support the organization’s overall direction in terms of business plan and annual

budgets.

Easily Communicated

The plan needs to be communicated effectively to all stakeholders & investors,

including employees & customers.

Actionable
 The plan needs clear & actionable steps and a timeline for implementation. It

must be followed consistently to ensure progress toward business goals like increasing

sales and maximizing profit.

Measurable

The plan needs to measure & evaluate progress, collect feedback, and be

reviewed and updated regularly to ensure continuous progress toward company goals

and that the plan remains relevant and practical and targets logical key performance

indicators.

Adaptable

An effective strategic plan identifies potential factors that might derail the plan

and, at a minimum, provides high-level alternatives should the plan become derailed.

When Do Strategic Plans Fail?

Listed below are a few potential reasons why strategic planning might fail.

Understanding why strategic plans fail will help create more effective strategic planning

outcomes:

Lacks Clarity

Plans need to be clear and specific. If not, it may be difficult to understand and

challenging to implement. When a strategic plan is ambitious it is tough for people to feel

connected and motivated to take action.

Lack of Realistic Options and Objectives

Plans need to be realistic. If the plan cannot really be achieved, it’ll be difficult to

implement and lead to frustration, disappointment, and potential failure.

Lack of Flexibility

The plan needs to be flexible; if it’s not is not flexible and doesn’t allow for

adjustments in response to changes in the environment (internal and external) or from

evaluation or measurement, it may become irrelevant or ineffective.

Lack of Alignment

The plan needs to be aligned with the company’s mission, vision, and values; if

not consistent with the organization’s overall direction, it can quickly become out of sync

with its underlying purpose and be ineffective in helping to reach desired goals.
Lack of Understanding

The plan needs to be communicated effectively to all key stakeholders and take

feedback from all stakeholders; otherwise, it may be misunderstood or, worse – ignored

or seen as not valuable.

Lack Actionable Steps

The strategic plan needs to be implemented swiftly and consistently; if the action

steps are not clear or too hard to implement, they may not be implemented effectively.

Lack of Measurable Outcomes

The strategic plan needs to be reviewed and updated regularly, and its

performance evaluated after implementation; otherwise, it may become ineffective or

outdated, therefore ineffective at achieving desired outcomes.

External Factors

Changes in the external environment can have a huge effect. Changes like shifts

in the economy or customer preferences, if not accounted for, can seriously impact the

effectiveness of a once brilliant strategic plan.

However, as in life and business, things change, and every business must be

able to adapt quickly to changing circumstances. This is why an effective plan includes

contingencies.

Conclusion

Having a clear strategic plan is one of those obvious items that every company

should have in place yet many companies don’t.

Although the effort of investing the time and resources into creating a strategic

planning template can be demanding, the value and impact of your investment can

return a healthy multiple.

Once your mission and vision statements and strategic plan are in place they

become a touchstone to focus your business, align teams, and what makes your way of

navigating your market and competition unique.

SOURCE: https://skylineg.com/resources/blog/what-is-strategic-planning
 CHAPTER 3

DISTINCTIVE COMPETENCIES, COMPETITIVE

ADVANTAGE, SUPERIOR PERFORMANCE AND

PROFITABILITY

GODILO, MARK JAMES G.

MESA, EUNICE

ARIOLA, DANNA MAE

ANINIPOT, ROANNE MARIE M.

 DISTINCTIVE COMPETENCIES, COMPETITIVE ADVANTAGE,

SUPERIOR PERFORMANCE AND PROFITABILITY

In today’s competitive business landscape, achieving superior

performance and profitability hinges on a company’s ability to cultivate distinctive

competencies and leverage them into a sustainable competitive

advantage. Distinctive competencies represent unique strengths and capabilities

that set a firm apart, allowing it to create value for customers and outperform

rivals. This introduction will explore the interconnectedness of these four key

concepts—distinctive competencies, competitive advantage, superior

performance, and profitability—and how businesses can strategically utilize them

to achieve lasting success.

DISTINCTIVE COMPETENCIES

Internal Analysis

Analyzing a firm’s internal organization in today’s global economy requires

a global mindset, moving beyond traditional resource advantages like low labor

costs or protected markets. Firms now build core competencies through

resource integration, enabling successful international strategies. This analysis

must encompass the firm’s entire portfolio of resources and capabilities,

recognizing that unique combinations of resources create capabilities, which in

turn develop core competencies and potentially, competitive advantage. The

goal is to understand how to leverage this unique resource bundle to create

customer value and outperform competitors.

RESOURCE, CAPABILITIES, AND CORE COMPETENCIES

Resources, capabilities, and core competencies are the foundation of

competitive advantage. Resources are bundled to create organizational

capabilities. In turn, urn, capabilities are the source of a firm’s core competencies,

which are the basis of establishing competitive advantages.

Resources

Resources, ranging from individual skills to organizational structures, are

crucial but require combination to form capabilities. These capabilities,

developed by integrating resources, become core competencies when they

create unique value.

Two Types of Resources

1. Tangible Resources– observable and quantifiable, like equipment or facilities

2. Intangible Resources – accumulated over time and difficult to imitate, such

as brand reputation or organizational culture

Intangible resources, often more vital for core competencies, need

ongoing nurturing. Tangible resources, while visible (e.g., facilities, equipment),

are difficult to leverage and their value is often underestimated by financial

statements. Intangible resources (e.g., knowledge, brand reputation) are

superior for creating capabilities and core competencies because they are harder

for competitors to imitate or substitute. The less observable a resource is, the

more valuable it becomes. Unlike tangible resources, intangible resources, such

as shared knowledge, can be leveraged without diminishing their value, leading

to performance improvements. A strong reputation is a particularly valuable

intangible resource, potentially providing a competitive advantage.

Capabilities

Capabilities are created by combining tangible and intangible

resources. They are used to perform organizational tasks, creating value for

customers and forming the foundation for core competencies and competitive

advantages. Human capital is crucial in developing and utilizing capabilities.

Core competencies
 Core competencies are capabilities that provide a sustainable competitive

advantage, distinguishing a firm from its rivals. They emerge from accumulating

and deploying resources and capabilities, representing a company’s unique

value-adding activities. Examples include Apple’s innovation (stemming from its

R&D capabilities) and excellent customer service (built on employee skills and

store design). Identifying core competencies involves using criteria to assess

capabilities and value chain analysis to determine which should be developed,

maintained, or outsourced.

Discovering Core Competencies

Four Criteria For Sustainable Competitive Advantage

1. Valuable

Capabilities must provide value to customers, either by offering

superior products or services or by enabling cost reductions.

2. Rare

Capabilities must be possessed by few, if any, competitors.

Common capabilities result in competitive parity, not advantage.

3. Costly to Imitate

Capabilities must be difficult for competitors to replicate. This can

be due to unique conditions, causal ambiguity, or social complexity.

4. Nonsubstitutable

Capabilities must have no strategically equivalent alternatives. The

more intangible and invisible a capability is, the harder it is to substitute.

Only by meeting all four criteria can a firm achieve sustainable competitive

advantage. Capabilities that fail to meet these criteria may lead to competitive

parity or temporary advantage, but ultimately won’t provide lasting success.

Value Chain Analysis

 Value chain analysis identifies value-creating and non-value-creating

activities within a firm’s operations, essential for exceeding costs and earning

above-average returns. It’s a global framework analyzing cost positions and

strategy implementation, focusing on supply chain activities.

The Value Chain Comprises:

1. Value Chain Activities – are activities or tasks the firm completes in

order to produce products and then sell, distribute, and service those

products in ways that create value for customers.

2. Support Functions – include the activities or tasks the firm completes in

order to support the work being done to produce, sell, distribute, and

service the products the firm is producing.

Core competencies arise when capabilities in these areas create unique

customer value that competitors can’t match. To achieve this, a capability must

provide superior value or perform a unique value-creating activity. Strong

supplier and customer relationships (social capital) are crucial for value creation,

requiring trust and knowledge transfer. Evaluating value chain activities requires

judgment, and outsourcing is a viable option for non-core competency areas.

Outsourcing

Outsourcing, the purchase of value-creating activities from external

suppliers, offers flexibility, risk mitigation, and reduced capital

investment. However, careful analysis is needed; only non-value-creating or

disadvantageous activities should be outsourced. Outsourcing allows firms to

focus on core competencies, avoiding overextension. Potential drawbacks

include reduced innovation and job losses, particularly acute with offshoring

(outsourcing to foreign suppliers). However, studying outsourced activities can

sometimes enhance a firm’s innovation capabilities.

 Analyzing a firm’s internal organization reveals strengths and weaknesses

based on resources, capabilities, and core competencies. Weaknesses

necessitate resource acquisition and capability development, sometimes through

outsourcing. Having many resources isn’t equivalent to having the right

resources—those forming core competencies and creating customer

value. Resource constraints can paradoxically improve focus and

productivity. While core competencies are vital for competitive advantage, they

aren’t permanent; they can become core rigidities due to external environmental

changes. Understanding both internal capabilities and external opportunities

informs the selection of a business-level strategy

COMPETITIVE ADVANTAGE

Company has a competitive advantage over its rivals when its profitability

is greater than the average profitability of all companies in its industry. It has a

sustained competitive advantage when it is able to maintain above-average

profitability over a number of years .

A competitive advantage is a feature or characteristic that allows a

company to outperform its competitors in the marketplace. It’s what sets a

business apart and gives it an edge over its rivals.

COMPETITIVE ADVANTAGE IN RELATION WITH DISTINCTIVE

COMPETENCIES

Competitive advantage is based upon distinctive competencies.

Competitive advantage and competitive competencies are intrinsically linked;

competencies form the base upon which competitive advantage is built.

Competencies represent a company’s internal capabilities—its skills, knowledge,

and processes—such as operational excellence, innovative product development,

or superior customer service. These internal strengths, when effectively

leveraged, translate into a competitive advantage in the marketplace, allowing

the company to outperform rivals by providing superior value to customers.

Essentially, competencies are the tools, and competitive advantage is the

expertly crafted product resulting from their skillful application. A company’s

ability to identify, develop, and strategically deploy its core competencies is

crucial for achieving and sustaining a competitive edge.

The Building Blocks of Competitive Advantage

The building blocks of Competitive Advantage. Base on the Strategic

Management book of Charles Will, Gareth Jones, and Melissa Schilling, there

are four blocks of Competitive Advantage.

1. Efficiency

Efficiency is best measured by the ratio of outputs to inputs; higher

efficiency means more output for a given input, or equivalently, less input

needed for a given output, leading to lower costs. This tells about how the

available resources are managed well to create an output.

2. Quality as Excellence and Reliability

Quality as excellence include a product’s design, aesthetics, functionality,

and the quality of associated services. “Quality as excellence” in a product goes

beyond simply meeting basic standards or being free from defects. It’s about

exceeding expectations and creating a product that’s truly exceptional in its

category. It’s about focusing on the “wow” factor, the elements that make a

product stand out and leave a lasting positive impression on the customer.

However, reliable tells about how products boost employee productivity

and lower unit costs by minimizing time spent on defective items, substandard

services, and error correction. This reliability not only enhances product

differentiation but also directly reduces expenses.

High product reliability significantly improves efficiency and lowers costs.

Fewer defects mean less time wasted on rework, repairs, and troubleshooting,
freeing employees to focus on productive tasks and boosting overall output. This

reduction in wasted time translates directly to lower manufacturing and service

costs per unit. Consequently, reliable products not only differentiate a company

from its competitors by offering superior value but also contribute significantly to

its bottom line through increased efficiency and reduced expenses.

3. Innovation

Innovation is the complete process of creating and implementing new

products or processes. It begins with identifying a need or opportunity, followed

by generating and developing potential solutions through prototyping and testing.

Successful innovations are then implemented and launched, requiring careful

planning and execution to achieve market impact. This iterative process requires

creativity, collaboration, and a focus on creating value for customers or improving

efficiency.

Two Main Types Of Innovation: The Product And Process Innovation

Product innovation means creating new products or significantly

improving existing ones. This involves developing new features, designs, or

technologies to meet changing customer needs and stay ahead of market trends.

On the other hand, Process Innovation is about finding new and better ways to

do the work that your company does. It’s not just about making small

improvements, but about fundamentally changing how things are done. It’s

about finding ways to be more efficient, effective, and productive.

4. Customer Responsiveness

Customer responsiveness means how quickly and effectively a company

responds to its customers’ needs, inquiries, and feedback.

It’s about being there for your customers when they need you, whether it’s

answering a question, resolving an issue, or providing support. Superior

customer responsiveness requires a company to outperform its competitors in

identifying and meeting customer needs.

SUPERIOR PERFORMANCE

Superior Performance: A Key to Business Success

Superior performance in business refers to a company’s ability to not only

achieve profitability but also sustain and grow that profitability over time. It’s more

than just short-term success, it’s about long-term strength and consistent

outperformance compared to competitors in terms of market share, customer

loyalty, and financial stability.

This kind of performance is crucial for several reasons. First, it ensures a

company’s financial health and long-term sustainability. Second, it gives the

business a competitive edge, helping it stand out in a crowded market. Third,

superior performance strengthens customer loyalty, as satisfied customers are

more likely to return and recommend the company to others. Finally, it attracts

investors and builds their confidence in the company’s direction, which can lead

to increased funding and support.

Achieving superior performance doesn’t happen by accident. It involves

deliberate strategy and constant innovation. One core approach is lowering costs

relative to competitors while maintaining quality. This might involve streamlining

operations, optimizing supply chains, or adopting technology to increase

efficiency.

Another strategy is differentiating the company’s products or services.

Offering something unique, whether it’s better design, customer experience, or

features, can help a business stand out and attract loyal customers. Businesses

must also develop distinctive competencies, such as strong branding,

exceptional service, or innovative R&D capabilities. These strengths give the

company something that is hard for others to replicate.

 Sustaining this performance over time requires building a long-lasting

competitive advantage. This means doing things that competitors either cannot

or find very difficult to imitate. It could be securing patents, building a strong and

recognizable brand, developing proprietary technology, or investing in exclusive

partnerships.

Management plays a critical role in this process. It’s the job of business

leaders to identify what makes their organization unique and to build upon those

strengths. They must continuously adapt, make smart strategic decisions, and

protect the company’s advantages to prevent competitors from catching up.

In essence, superior performance is both a goal and a journey. It requires

focus, innovation, and strong leadership, and when done right, it sets the

foundation for long-term success.

PROFITABILITY

Profitability shows how well managers use the company’s capital to

produce goods and services that meet customer needs. A company that uses its

capital well generates a positive return on invested capital.

To measure a company’s profit growth, look at how net profit increases

over time. A company can grow its profits by selling products in fast-growing

markets, gaining market share from competitors, selling more to existing

customers, expanding into international markets, or successfully entering new

business areas.

Return On Invested Capital (ROIC)

A company’s profitability can be measured by the return it makes on the

money invested in it. This measure is called the Return On Invested Capital

(ROIC).
 ROIC is calculated by dividing net profit by the capital invested. Here, net

profit means the income left after taxes, and capital includes both stockholders’

equity and debt owed to creditors.

Formula: ROIC = Net profit / Capital Invested

Net profit

Net profit is the money a company makes after paying all its costs and

taxes. You calculate it by subtracting total costs from total revenues.

Formula: Net Profit = Total Revenues – Total cost

Invested capital

Invested capital is the money used for a company’s operations, including

buildings, equipment, inventory, and other assets. This capital comes from two

main sources: loans and shareholders’ money.

ROIC measures how well a company is using its available capital for

investments. To increase profits and make them grow over time, managers need

to create and carry out plans that give their company an edge over competitors.

It’s important to understand how the company’s strengths can lead to higher

profits and how its weaknesses can cause lower profits.

A Company’s Profitability Mainly Depends On Three Things:

1. The value customers see in its products

2. The prices it sets for those products

3. The costs to make those products.

The value customers see in a product shows how much satisfaction or happiness

they get from using or owning it.

Price and Value

 Value refers to what customers gain from a product. It depends on the

product’s features, like its performance, design, quality, and the service received

when buying and after purchase. When a company increases the value of its

products for customers, it has more options for pricing. The company can raise

prices to match that value or keep prices lower to attract more buyers and

increase sales. No matter which pricing strategy the company chooses, the price

is usually less than the value the customer assigns to the product.
 CHAPTER 4

COMPETITIVE FORCES MODEL: RISK OF ENTRY BY

POTENTIAL COMPETITORS

GRANADIL, GUIA ALGHEN M.

ABEJUELA, KEN IVAN S.

ROQUE, EMY ROSE B.

ANDES, ALEXANDER CARL C.

INDUSTRY ENVIRONMENT ANALYSIS

INDUSTRY - is a group of firms producing products that are close substitutes. In

the course of competition, these firms influence one another. Typically,

companies use a rich mix of different competitive strategies to pursue above-

average returns when competing in a particular industry. An industry's structural

characteristics influence a firm's choice of strategies.

Source: Strategic Management: Competitiveness and Globalization Concepts

and Cases by Hill et al.( 13th edition)

THREAT OF NEW ENTRANTS

The threat of new entrants in an industry can challenge existing firms by

increasing competition and decreasing profit margins. New entrants bring

additional production capacity and often try to capture a significant market share,

pushing incumbent firms to become more efficient or adopt new distribution

methods like online channels. The likelihood of new entrants depends on barriers

to entry and the potential retaliation from existing firms.

The likelihood of new firms entering an industry depends on two key

factors: Entry barriers and expected retaliation from existing competitors.

BARRIER TO ENTRY

Entry barriers make it difficult for new firms to enter an industry and often

place them at a competitive disadvantage even when they can enter. As such,

high entry barriers tend to increase the returns for existing firms in the industry

and may allow some firms to dominate the industry. Thus, firms competing

successfully in an industry want to maintain high entry barriers to discourage

potential competitors from deciding to enter the industry.

Different kind of barrier that may discouraged competitors from entering a market;

1. Economies of Scale:

Economies of scale refer to the cost advantages firms experience as they

grow larger, reducing the cost per unit produced. Larger companies benefit from

increased efficiency in various functions, such as manufacturing, marketing, and

R&D. New entrants may struggle to achieve economies of scale due to lower

demand and production capacity. To gain these economies, firms may form

alliances, acquire competitors, or expand their operations.

Larger firms can also become more flexible, adapting to changes in

customer demand, which may act as a barrier for new entrants. However,

economies of scale are not always a barrier, especially when companies use

scale-free resources or engage in mass customization, where products are

tailored for smaller customer groups. Advanced manufacturing and online

ordering have made customization more feasible, allowing companies to meet

customer needs without relying on traditional economies of scale.

2. Product Differentiation:

The process by which a company makes its product appear unique or

distinct from competitors' offerings, leading to strong customer loyalty and repeat

purchases. This can be achieved through factors like customer service, effective

advertising, or being the first to market.

Strong brand loyalty, developed over time, can make it hard for new

entrants to attract customers unless they offer lower prices or superior products.

3. Capital Requirements:

The financial resources needed to enter and compete in a new industry.

This includes investments in physical facilities, inventory, marketing, and other

essential business functions. High capital requirements may limit the ability of

new firms to enter in a certain industries.

4. Switching Costs:

Refer to the one-time expenses customers face when changing from one

supplier to another. These costs can include purchasing new equipment,

retraining employees, and the emotional or psychological effort involved in

ending an existing relationship.

High costs for customers to change suppliers (e.g., retraining or

equipment) make it hard for new entrants to lure customers away from

established firms.

5. Access to Distribution Channels:

Refers to the ability of a firm to place its products in the market through

established distributors. This includes building relationships with distributors,

which can create switching costs for them and make it challenging for new

entrants to access these channels.

6. Cost Disadvantages Independent of Scale:

 Are advantages that established competitors may have, which new

entrants cannot easily replicate, such as proprietary technology, favorable

access to raw materials, or desirable locations.

7. Government Policy:

Refers to the decisions made by governments regarding licenses, permits,

and regulations that can control or restrict entry into an industry. These policies

can impact industries by regulating foreign firms, enforcing antitrust laws, and

restricting or allowing entry based on factors like service quality, job protection, or

economic importance.

Governments influence industry entry through policies such as granting

licenses, issuing permits, and setting regulations. Governments may restrict entry

to ensure quality service or protect jobs, but deregulation can lead to more

competition. Additionally, governments may regulate foreign firms in sectors

deemed critical to the economy.

Antitrust policies also play a role in controlling entry, with mergers

potentially being blocked if they create too dominant a player in the market.

EXPECTED RETALIATION

Refers to the anticipation of competitive responses from existing firms in

an industry when a new company seeks to enter. Swift and vigorous retaliation is

more likely when the incumbent firm has substantial resources, significant stakes,

and when industry growth is slow or constrained. Market entry can be avoided by

targeting neglected market niches, where small entrepreneurial firms can thrive

by serving overlooked segments.

Established firms may retaliate strongly against new entrants, especially in

industries with slow growth or significant assets at risk.

CASE STUDY

Analyzing the Aviation Industry through Porter's Five Forces

To navigate the highly competitive aviation industry effectively, airlines

must understand the forces that impact their profitability and competitiveness,

given the industry's characteristics such as strict regulation, high fixed costs, and

intense competition. The aviation industry is capital-intensive and requires

significant investment in aircraft, fuel, maintenance, and other critical inputs.

Threat of New Entrants The aviation industry is a highly capital-intensive

industry that demands significant investments in aircraft, technology, ground

facilities, and staffing. New players must overcome significant barriers to entry,

including regulatory barriers such as obtaining necessary licenses and adhering

to safety regulations that can be stringent and vary by country.

Existing players in the aviation industry benefit from economies of scale,

which new entrants cannot match initially. Despite the allure of the aviation

industry, many startup airlines have failed to sustain the capital required to

compete against established players. These airlines were unable to compete

effectively with larger, more established players, indicating the challenges faced

by new entrants to the market.

GUIDE QUESTIONS

1. What are the reasons why an aviation industry is an industry with a low

risk of new entrants? Give at least 1 reason.

Because of high capital requirements, the aviation industry requires a

massive investment in aircraft, infrastructure, maintenance, and compliance with

safety regulations. This high initial cost makes it difficult for new entrants to enter

the market.

2. Site an specific reason why a new/starting airline struggles to compete

with older and larger airlines?

 Established airlines have strong brand recognition and customer loyalty.

New airlines struggle to compete because passengers often prefer well-known

airlines with proven safety records, better service, and extensive route networks.

3. The benefit of economies of scale in a business, spicifically to an airline

business?

Larger airlines benefit from lower costs per unit due to bulk fuel purchases,

streamlined operations, and better bargaining power with suppliers. This allows

them to offer lower ticket prices and maximize profits, making it harder for smaller

competitors to compete.

4. Is Porter's Five Forces: The threat of new entrants helpful in identifiying

the competitiveness of a business/industry? Why yes? Why not?

Yes, It helps businesses understand the barriers to entry in an industry

and assess how difficult it is for new players to compete. This insight allows

existing companies to strategize effectively and maintain their competitive

advantage.

5. How do strict regulatory requirements in the aviation industry impact the

overall competitiveness and profitability of new and existing airlines?

Compliance with safety, security, and environmental regulations increases

operational costs for all airlines. For new airlines, meeting these requirements

can be particularly burdensome, limiting their profitability and making it harder to

compete with well-established carriers that already have regulatory expertise and

resources.

Refrerence:

Strategic Management_ Michael Hitt, Robert Hoskisson_2023

Edition
 CHAPTER 5

COMPETITIVE FORCES MODEL: RIVALRY AMONG

ESTABLISHED COMPANIES

GIBAGA, JOHN NIEMER G.

AVILA, ARCYN MAE C.

ASTANO, JONAS H

GIPIT, JOSEPH BENEDICT.

Competitors

Are firms operating in the same market offering similar products and

targeting similar customers

Competitive Rivalry

The dynamic and often intense battle that businesses wage against each

other to succeed in the marketplace

Competitive Behavior

A fundamental aspect that encompasses actions taken by businesses

striving to outperform others, particularly in situations involving limited resources

or desired outcomes

Competitive Dynamics

The intricate dance of actions and reactions between rival firms within a

marketplace. It's essentially the study of how companies compete, adapt, and

respond to each other's strategic moves

Market Commonality

Occurs when companies overlap in their product markets or geographic

markets. This means they are targeting the same customers with similar products

or services in the same locations

high market commonality results to Likelihood of Mutual Forbearance

Firms may be less likely to initiate aggressive competitive actions (like price wars)

Resource Similarity

Refers to the extent to which competing firms possess comparable types

and amounts of tangible (equipment, facilities) and intangible resources (brand

reputation, intellectual property)

High resource similarity leads to intense competition

Drivers of Competitive Behavior

Are the underlying factors that influence how companies or individuals act

in a competitive environment. These drivers determine the intensity, type, and

likelihood of competitive actions and responses

 1. Awareness

Refers to a firm's or individual's understanding of their competitors'

actions, intentions, and capabilities.

2. Motivation

The reasons why a company or individual engages in competitive

behavior (for market share growth and profit maximization)

3. Capabilities/ Ability

The resources and abilities that a company or individual possesses

to take competitive actions

Market Share Growth

An increase in the percentage of a market that a company controls

Strategic Actions

Are deliberate, planned initiatives that a company undertakes to achieve

its long-term goals and gain a competitive advantage (market expansion &

product innovation)

Tactical Actions

Are short-term, focused activities designed to implement specific parts of a

broader strategy (flash sales, influener marketing)

Factors to Respond to Competitors

1. Develop stronger competitive advantage

2. It may damage the ability of firm's ability to use its core competencies

Factors to Take Action to Attack

1. Firms have the strength to attack

2. Firms have a strategic opportunity

Slow-cycle Market

Characterized by its stability and the relative difficulty for competitors to

imitate a firm's competitive advantages.

Competitive advantages are often shielded from imitation for long periods,

typically through patents, copyrights, or unique ownership of resources.

 ex. Pharmaceutical Companies

Fast-cycle Market

Characterized by rapid innovation, short product lifecycles, and intense

competition.

Companies constantly introduce new products and technologies to stay

ahead of the competition

ex. Smartphones

Standard-cycle Market

Characterized by moderate levels of innovation, a balance between

imitation and innovation,

Innovation occurs, but not at the frenetic pace of fast-cycle markets, new

products and technologies are introduced periodically, but not constantly.

ex. Appliances and Automotive

QUESTIONS & ANSWERS

1. What do companies do to try and get more customers than their rivals?

They compete through lower prices, better products, stronger marketing,

and improved customer service.

2. Why do companies sometimes lower their prices?

To attract more customers, increase market share, or clear excess

inventory.

3. What is one way companies try to make their products different from

their competitors'?

Through product innovation, adding unique features or improving quality.

4. What role does data analysis play in competitive strategy?

It helps companies understand market trends, customer behavior, and

competitor actions to make informed decisions.

5. How do regulatory changes influence industry competition?

 They can create new barriers to entry, alter production costs, or change

the rules of the game, affecting how companies compete.

CASE STUDY QUESTION & ANSWER

What are the most effective strategies should Coca-Cola and Pepsi Co. to

achieve sustainable competitive advantage and profitability in carbonated drinks

industry

Both companies must adapt to the growing health consciousness of

consumers.

 They must continue to innovate and diversify their product portfolios.

 Building strong brand loyalty and customer engagement is crucial.

 Optimizing supply chain and distribution is essential for efficiency and

sustainability.

 - Data analytics and consumer insights are vital for informed decision-

making.

Importance of Understanding Competitive Rivalry

Understanding competitive rivalry is fundamental to developing effective

business strategies, managing risk, and achieving sustainable profitability. It's a

critical component of a company's ability to navigate the complex and ever-

changing marketplace.

Refrerence:

Strategic Management_ Michael Hitt, Robert Hoskisson_2023

Edition
 CHAPTER 6

COMPETITIVE FORCES MODEL: BARGAINING POWER

OF BUYERS

CAYUBAN, STEVEN G.

GOLLOSO, HAZEL ANN G.

GOJAR, SHANAIA DEXIE G.

ABEJUELA, KIERL L.
 The Bargaining Powers of Buyers is one of the forces in Porter’s Five

Forces Industry Analysis framework, refers to the pressure that

customers/consumers can put on businesses to get them to provide higher

quality products, better customer service, and/or lower prices.

Firms maximize returns on the invested capital as business operates for

the desired profit. But buyers want to maximize the value of their hard-earned

money by bargaining the lowest price possible. To maintain the equitable

balance, the firm must adjust to the buyer’s bargaining power and satisfy

customer needs as substitute products could be available in the market.

The consumers group has the bargaining power under these situations:

SITUATION 1: When they purchase a large volume of the firm’s output.

When buyers purchase a large volume of a firm's output, their bargaining

power significantly increases. This heightened leverage allows them to negotiate

more favorable terms, such as lower prices, improved product quality, or

enhanced services. Suppliers, aiming to maintain substantial sales volumes,

often accommodate these demands to preserve the business relationship.

When buyers purchase a large volume of a firm's output, their bargaining power

increases, leading to several notable impacts:

 Enhanced Negotiating Leverage: High-volume buyers can secure more

favorable pricing and terms from suppliers due to the significant business

they provide.

 Influence Over Product Development: Large-scale purchasers can

collaborate with suppliers to tailor products to their specific needs,

potentially leading to customized solutions and innovations.

  Economies of Scale: Bulk purchasing allows buyers to reduce the cost

per unit, enhancing profit margins and providing a competitive edge in

pricing strategies.

 Market Influence: Significant buyers can affect market trends and pricing

structures, potentially setting industry standards that other firms may

follow.

 Strengthened Supplier Relationships: Consistent large orders can

foster stronger partnerships with suppliers, leading to benefits such as

priority service, better quality control, and collaborative opportunities.

Example: Walmart and Procter & Gamble (P&G)

Walmart, as the world’s largest retailer, purchases massive quantities of

consumer goods from suppliers like Procter & Gamble (P&G). Since Walmart

buys in bulk, it negotiates lower prices, exclusive product variations, and priority

stock allocation.

SITUATION 2: When there is available substitute of similar quality

When buyers can get similar products/services from other suppliers or

there are many alternative suppliers available, buyers depend less on a particular

supplier. Therefore, the power of the buyer would be greater.

Here's how the availability of substitutes impacts buyer power:

 Increased Choice: Customers have more options to choose from, giving

them leverage to negotiate better prices, demand higher quality, or seek

improved customer service.

 Reduced Dependence: Buyers are less dependent on a single supplier,

as they can readily switch to a substitute if they are unhappy with the

current provider.

 Price Sensitivity: The availability of substitutes makes buyers more

price-sensitive, as they can easily find a cheaper alternative.

  Lower Switching Costs: If the quality of substitutes is similar, switching

costs are often low, making it easier for buyers to change providers.

Example:

You need a new smartphone. You've narrowed it down to two models: one

from Apple and one from Samsung. Both models offer similar features and

performance.

SITUATION 3: When the sales are a significant portion of the firm’s sales volume.

When buyers purchase in large volumes or represent a significant portion

of a seller’s sales they gain more bargaining power.

Here’s how significant sales impact buyer power?

 Increased Leverage: Buyers who account for a large share of a firm's

sales have significant leverage to negotiate favorable terms. They can

demand lower prices, special discounts, or customized products and

services.

 Financial Impact: Firms are more sensitive to the demands of large

buyers, as losing their business would have a substantial financial impact.

 Dependence on Buyers: Firms become more dependent on these large

buyers, making them more willing to accommodate their requests.

 Threat of Switching: Even if switching costs are high, large buyers can

threaten to switch to competitors if their demands are not met.

Example:

A small, local bakery relies heavily on a large supermarket chain for a

significant chunk of its sales. This supermarket chain accounts for, say, 60% of

the bakery's total revenue.

SITUATION 4: When the buyer or dealer can be a threat for backward

integration.
 The threat of buyer backward integration arises when buyers have the

potential or motivation to take over the supply chain processes of their suppliers.

This can be a significant concern for suppliers, as it poses risks to their business

stability and market control.

Here are some key threats associated with buyer backward integration:

 Loss of Business: If buyers choose to produce the goods or services

themselves, suppliers may lose their customer base, leading to reduced

revenue.

 Increased Competition: By entering the supplier's space, buyers can

become direct competitors, intensifying the competition within the market.

 Price Pressure: Buyers with the ability to integrate backward can

leverage this threat to negotiate lower prices, reducing suppliers' profit

margins.

 Knowledge Transfer Risk: In relationships where buyers gain insight into

suppliers' processes, there is a risk that buyers could use this knowledge

to replicate or improve upon those processes.

 Market Dependence: Buyers with greater influence or larger market

share can use backward integration to dominate the value chain, leaving

suppliers at a competitive disadvantage.

Example:

A coffee shop purchases a coffee farm instead of buying coffee beans

from suppliers.

CASE STUDY

“Estimating the effect of Buyers’ Bargaining Power on Kenyan Small Food

Manufacturers’ Income”

The case study identified six key factors contributing to buyers’ bargaining

power:
1. Price Sensitivity: How much customers are influenced by price

fluctuations.

2. Knowledge Level: The degree of awareness buyers have about

product attributes and quality.

3. Union: The presence of organized customer groups (unions or

alliances) that can negotiate collectively.

4. Ability to Integrate Backwards: Buyer’ capability to control

upstream processes in the supply chain (e.g., producing their own

ingredients)

5. Switching Costs: The difficulty and inconvenience for customers to

switch to a competitor’s product.

6. Resale Buying: Buyers who purchase goods for resale, often in larger

quantities.
 CHAPTER 7

COMPETITIVE FORCES MODEL: BARGAINING POWER

OF SUPPLIERS

PAMPLONA, DAISY ROSE B.

GIDOC, HAZEL ANDREA

VENUS, MA. BIANCA M.

BAYOS, GWYNETH LOUISE

KEY OBJECTIVES:

 Define Key Concepts: Explain the Bargaining Power of Suppliers and

its significance within Porter’s Five Forces framework.

 Identify Supplier Types: List and describe the various types of suppliers

across different industries.

 Analyze Determining Factors: Identify the key factors that influence the

bargaining power of suppliers.

 Evaluate High and Low Power Scenarios: Distinguish between high

and low supplier power scenarios and their implications for businesses.

WHAT IS BARGAINING POWER OF SUPPLIERS?

The Bargaining Power of Suppliers, one of the forces in Porter’s Five

Forces Industry Analysis Framework, is the mirror image of the bargaining power

of buyers. The Bargaining Power of Suppliers refers to the influence suppliers

have over companies. This power can manifest in various ways, such as raising

prices, lowering product quality, or limiting product availability. This framework is

a standard part of business strategy. Understanding this dynamic is crucial for

assessing the competitive landscape and profit potential within an industry.

The bargaining power of the supplier in an industry affects the competitive

environment and profit potential of the buyers. The buyers are the companies

and the suppliers are those who supply the companies.

The bargaining power of suppliers is one of the forces that shape the

competitive landscape of an industry and help determine the attractiveness of an

industry. The other forces include competitive rivalry, bargaining power of buyers,

the threat of substitutes, and the threat of new entrants.

TYPES OF SUPPLIERS

Depending on the industry, there are various types of suppliers. A list of

types includes:

1. Manufacturers and Vendors: Sell products to distributors, wholesalers,

and retailers

2. Distributors and Wholesalers: Purchase goods in medium/high

quantity for sale to retailers or local distributors

3. Independent Suppliers / Independent Craftspeople: Sell unique

products directly to retailers or agents

4. Importers and Exporters: Purchase products from manufacturers in one

country and export to a distributor in a different country

5. Drop shippers: Suppliers of products for different kinds of companies

FACTORS INDICATING SUPPLIER POWER

There are six major factors when determining the bargaining power of suppliers:

1. Concentration of Suppliers - When a few large suppliers dominate the

market, they hold significant power over the companies they supply. This

concentration means that these suppliers can dictate terms, prices, and

conditions, as buyers have limited options.

2. Lack of Substitutes - When there are no satisfactory substitute products

available, suppliers gain increased power. Buyers are compelled to rely

on the supplier’s products, as alternatives do not meet their needs or

standards.

3. Industry Dependence - If the firms within an industry do not represent

significant customers for a supplier group, the suppliers can exert more

power. This is because the suppliers are not reliant on the industry for
 their revenue, allowing them to dictate terms without concern for losing

business.

4. Critical Goods - When suppliers provide products that are vital for the

success of buyers in the marketplace, their power increases. These

critical goods are often essential for production processes or service

delivery, making it difficult for buyers to operate without them.

5. Switching Costs - High switching costs associated with a supplier’s

products create barriers for industry firms to change suppliers. These

costs can include financial investments, time, training, and operational

disruptions.

6. Forward Integration Threat - Suppliers can pose a credible threat of

forward integration into the buyer’s industry, especially if they possess

substantial resources and offer differentiated products. This means that

suppliers could potentially start selling directly to the end customers,

bypassing the buyers altogether.

WHEN IS BARGAINING POWER OF SUPPLIERS HIGH/STRONG?

 Switching costs of buyers are high

 Threat of forward integration is high

 Small number of suppliers relative to buyers

 Low dependence of a supplier’s sale on a particular buyer

 Switching costs of suppliers are low

 Substitutes are unavailable

 Buyer relies heavily on sales from suppliers

1. Switching costs of buyers are high

When switching costs for buyers are high, it means that buyers face

significant financial, time, or operational barriers to changing suppliers. This

situation strengthens supplier power because buyers are less likely to switch to

alternative suppliers, even if prices increase or quality decreases. As a result,

suppliers can maintain higher prices and impose less favorable terms, knowing

that buyers have limited options for switching.

2. Threat of forward integration is high-

A high threat of forward integration occurs when suppliers have the

capability and resources to move into the buyer's market, either by selling directly

to consumers or taking over distribution channels. This situation increases

supplier power because it creates uncertainty for buyers about their future market

position. If suppliers can bypass buyers and sell directly to end customers, they

can exert greater control over pricing and market access, making buyers more

vulnerable to supplier demands.

3. Small number of suppliers relative to buyers-

When there is a small number of suppliers relative to buyers, suppliers

hold more power in negotiations. This is because buyers have limited options

and may be forced to accept higher prices or less favorable terms. In markets

where suppliers are few, they can dictate terms more easily, leading to increased

supplier leverage and potentially higher costs for buyers.

4. Low dependence of a supplier’s sale on a particular buyer-

If a supplier has low dependence on any single buyer for their sales, their

bargaining power increases. This is because suppliers with a diverse customer

base are not reliant on one buyer for their revenue, allowing them to negotiate

better terms. In contrast, if a supplier relies heavily on a specific buyer, they may
feel pressured to accommodate that buyer's needs to maintain the relationship,

which diminishes their overall power.

5. Switching costs of suppliers are low-

When switching costs for suppliers are low, it means that suppliers can

easily change their customers or markets without incurring significant costs. This

situation weakens supplier power because it allows suppliers to seek better

opportunities elsewhere if they are dissatisfied with their current buyers. As a

result, buyers can negotiate more favorable terms, knowing that suppliers have

the option to switch to other customers without much difficulty.

6. Substitutes are unavailable-

The unavailability of substitutes increases supplier power because buyers

have no alternative options to turn to if they are dissatisfied with a supplier's

product or service. In such cases, buyers are compelled to rely on the supplier’s

offerings, which allows suppliers to raise prices or impose unfavorable terms

without fear of losing customers. This scenario is common in specialized

industries where unique products are essential and alternatives do not meet

buyers' needs.

7. Buyer relies heavily on sales from suppliers-

When a buyer relies heavily on sales from suppliers, it indicates a strong

dependence on those suppliers for essential products or services. This reliance

can weaken the buyer's bargaining position, as they may have limited leverage to

negotiate better terms. Suppliers can take advantage of this situation by

maintaining higher prices or imposing stricter conditions, knowing that the buyer

has little choice but to continue purchasing from them.

WHEN IS BARGAINING POWER OF SUPPLIERS LOW/WEAK?

 Buyers can easily switch suppliers

 There are many suppliers available

 Suppliers rely heavily on sales to specific buyers

 Substitutes are readily available

1. Easy Switching for Buyers-

When buyers can easily switch from one supplier to another without

incurring significant costs or challenges, supplier power diminishes. This

flexibility allows buyers to seek better prices or terms, putting pressure on

suppliers to remain competitive. For example, if a company can quickly change

suppliers for office supplies without any penalties, suppliers must work harder to

retain their business.

2. Many Suppliers Available-

When there is a large number of suppliers in the market, the bargaining

power of individual suppliers weakens. Buyers have multiple options to choose

from, which means they can negotiate better terms and prices. For instance, in a

commodity market where numerous suppliers offer similar products, buyers can

easily switch to a competitor if one supplier raises their prices.

3. Supplier Dependence on Specific Buyers-

When suppliers rely heavily on a small number of buyers for their sales,

their power is reduced. In this scenario, suppliers may feel pressured to

accommodate the needs and demands of their key customers to maintain those

relationships. For example, a supplier that derives most of its revenue from a

single large client may have to accept lower prices to keep that client satisfied.
 4. Readily Available Substitutes-

When there are many viable alternatives to a supplier’s product or

service, their power is significantly weakened. Buyers can easily switch to

substitutes if they are dissatisfied with price or quality, which forces suppliers to

remain competitive. For instance, if a supplier of a specific type of software

faces competition from multiple similar products, buyers can choose a different

software solution without much hassle.

CASE STUDY

FOCUS ON: Wal-Mart's bargaining power and efficiency

When Wal-Mart and other discount retailers began in the 1960s, they

were small operations with little purchasing power. To generate store traffic, they

depended in large part on stocking nationally branded merchandise from well-

known companies such as P&G and Rubbermaid. Because the discounters did

not have high sales volume, the nationally branded companies set the price. This

meant that the discounters had to look for other ways to cut costs, which they

typically did by emphasizing self-service in stripped-down stores located in the

suburbs where land was cheaper (in the 1960s, the main competitors for

discounters were full-service department stores such as Sears that were often

located in downtown shopping areas). Discounters such as K-Mart purchased

their merchandise through wholesalers, which in turned bought from

manufacturers. The wholesaler would come into a store and write an order, and

when the merchandise arrived, the wholesaler would come in and stock the

shelves, saving the retailer labor costs. However, Wal-Mart was located in

Arkansas and placed its stores in small towns. Wholesalers were not particularly

interested in serving a company that built its stores in such out-of-the-way places.

They would do it only if Wal-Mart paid higher prices. Wal-Mart’s Sam Walton

refused to pay higher prices. Instead he took his fledgling company public and
used the capital raised to build a distribution center to stock merchandise. The

distribution center would serve all stores within a 300-mile radius, with trucks

leaving the distribution center daily to restock the stores. Because the distribution

center was serving a collection of stores and thus buying in larger volumes,

Walton found that he was able to cut the wholesalers out of the equation and

order directly from manufacturers. The cost savings generated by not having to

pay profits to wholesalers were then passed on to consumers in the form of lower

prices, which helped Wal-Mart continue growing. This growth increased its

buying power and thus its ability to demand deeper discounts from

manufacturers.Today, Wal-Mart has turned its buying process into an art form.

Because 8% of all retail sales in the United States are made in a Wal-Mart store,

the company has enormous bargaining power over its suppliers. Suppliers of

nationally branded products, such as P&G, are no longer in a position to demand

high prices. Instead, Wal-Mart is now so important to P&G that it is able to

demand deep discounts from P&G. Moreover, WalMart has itself become a

brand that is more powerful than the brands of manufacturers. People don’t go to

Wal-Mart to buy branded goods; they go to Wal-Mart for the low prices. This

simple fact has enabled Wal-Mart to bargain down the prices it pays, always

passing on cost savings to consumers in the form of lower prices. Since the early

1990s, Wal-Mart has provided suppliers with real-time information on store sales

through the use of individual stock-keeping units (SKUs). These have allowed

suppliers to optimize their own production processes, matching output to Wal-

Mart’s demands and avoiding under- or overproduction and the need to store

inventory. The efficiencies that manufacturers gain from such information are

passed on to Wal-Mart in the form of lower prices, which then passes on those

cost savings to consumers.

REFERENCES

Bargaining Power of Suppliers.(n.d.). CFI Team.

https://corporatefinanceinstitute.com/resources/management/bargaining-power-

of-suppliers/

Hitt, I., Ireland, R.D., & Hoskisson, R. (2016) STRATEGIC MANAGEMENT:

Competitiveness & Globalization: Concepts and Cases. Cengage Learning; 12th

edition (January 14, 2016).

Greenspan, R. (2024). "Walmart Five Forces Analysis & Recommendations

(Porter’s Model)".Panmore Institute.

https://panmore.com/walmart-five-forces-analysis-porters-model-

casestudy#:~:text=Bargaining%20Power%20of%20Walmart,as%20having%20w

eak%20potential
 CHAPTER 8

COMPETITIVE FORCES MODEL: THREAT OF

SUBSTITUTES

GOMEZ, JOSE V.

RAYNON, MA. RESURRECION

ARDALES, MARY GRACE J.

Introduction to Porter’s Five Forces Model

Porter’s Five Forces Mode was develop by Michael Porter in the year

1979, this is a strategic framework that were utilize to analyze the industry

profitability as well as competition. It assist different businesses to understand

the key forces that shape their respective market environment and helps them

develop their own competitive strategies, This model includes the following

1. Competitive Rivalry - Pertains to the competition between firms

2. Threat of new entrants - Pertains to how easily other new companies

can enter into market

3. Bargaining Power of Suppliers - Revolves around supplier's influence on

the prices and availability of different resources

4. Bargaining Power of Buyers - The effect of customers on demand that

results on better products or price availability

5. Threat of Substitute Products - Risk created by different alternative

products that can satisfy the same need

The focus of this presentation is on the threat of substitute product, which

is one of the significant forces in ascertaining an industry’s profitability.

Definition of Substitute Products

Substitute product is an alternative product or alternative service that has

the capability to perform the exact same function as another product or service

but is created by a different industry (Business-to-you, 2023). Unlike direct

competitors, susbstitute product provides customer with alternatives to satisfy

their needs.

Some examples include

1. Soft drinks vs bottled water: A buyer can put down the Coca-Cola bottle

and take some bottled water or fresh juice instead.

 2. Air travel: Companies will be using Zoom or Microsoft Teams to conduct

business in lieu of flying (Strategic CFO, 2023).

If a customer experiences a substitute product that they find to be cheaper, more

convenient or better suited to their needs, they are most likely to switch.

Importance of the Threat of Substitutes in Industry Analysis

Strong substitutes can pressure industry profitability and will do so

depending on three different factors:

1. Pricing Pressure

Companies can’t just raise prices in a vacuum without fearing to lose

customers when alternatives exist. The inverse effect occurs when flying

gets more expensive, making high-speed similar an appealing alternative

(especially when it is there in place): (Octopus Intelligence, 2024).

2. Customer Loyalty & Demand Shift

Potential substitute: Consumers may shift towards substitutes if they

provide better value or match evolving preferences. An example where some

substitutes disrupt traditional industry, are plant-based meats (Konsyse 2023).

3. Industry Move and Innovation

Business changing and adapting continuously is essential to

remain relevant. Netflix began as a DVD rental service and was forced to

become a streaming service to compete with substitutes: YouTube and other

digital platforms (Cleverism, 2023).

Therefore, companies need to continuously monitor substitute product, in

order to adapt to consumer behavior, and make their products unique or different

to maintain a competitive advantage (Harvard Business School, 2024).

Understanding Substitute Products

Difference Between Direct Competitors and Substitutes

People often confuse the direct competition with substitutes, when the two

are entirely different things:

Direct competitors are basically just businesses that are in the same

market and offer similar products or services.

Example: For instance, you have direct competitors like Pepsi & Coca-

Cola from the soft drink industry.

Substitutes are from other industries but meet the same customer needs

with an alternative solution.

Example: A customer could substitute fresh juice, tea, or bottled water for

Coca-Cola and soft drink (Business-to-you, 2023).

The threat of substitutes is higher (Investopedia, 2024) and therefore to

avoid that companies often innovate, change pricing strategy, and create

differentiation strategy to keep its customers.

Factors Affecting the Threat of Substitutes

Several known factors affect how much pressure substitute product do on

an industry, The following factors below are the most significant

A. Price-Performance Trade-off (is it the cheaper Substitute?)

Subs provide similar or quality in lower cost.

Example:

The emergence of streaming services such as Netflix has shaken up

traditional cable tv by providing affordable, `content on-demand' with an lacks of

long-term contracts (Cleverism (2023).

 The article explains how low-cost airlines such as from Ryanair and

AirAsia are putting pressures on traditional airlines by providing cheap tickets

(Strategic CFO, 2023).

Customers are more likely to switch if they can save money without giving

up much in quality.

B. Switching Cost (How easy is it to switch?)

This basically refer to effort, time and money expensed or used for a

customer to switch to another product or substitute product

If the cost to switch is low, the threat of substitute is high. But if switching

cost are high, Businesses have a much better time retaining customer or

preventing customer outflow

Exampes:

Individuals switching from Microsoft office to Google docs tackle lower

switching costs for the reason that Google docs is easy to access on the internet

Apple users on the other hand are less likely to switch to android because

of what we call an ecosystem lock in

Different companies use loyalty programs, contracts and as well as

ecosystem integration to make sure that switching cost is increase and therefore

lowers the impact of substitute product

C. Consumer Preferences and Trends

Changes in the consumer behavior of customers as well as market trends

can increase the threat of substitute

Example:
 More and more people is choosing plant-based meat like Beyond Meat

and Impossible Burger instead of regular meat because they want tolive healthier

(Konsyse, 2023).

Apps like Uber and Lyft is making it more difficult for regular taxis to get

customers since they are more convenient and somewhat cheaper (Harvard

Business School, 2024).

By knowing these things, businesses can change, come up with new

ideas, and still do well even if they have competitors trying to take their

customers.

Real World Examples

Case Study 1: Soft Drink Industry

Coca-Cola vs. Fruit Juices, Bottled Water, and Energy Drinks

Coca-cola as we know it primarily operates in the carbonated soft drinks

industry however it also encounters threats from susbtitute product, this includes

 Bottled water - Since these products are a healthier and a sugar free

substitute

 Fruit Juice - Since these drinks are always marketed as natural

 Energy drinks - As this could be a substitute for caffeine addicted individuals

(Investopedia, 2024).

Impact on Coca-Cola:

Customer who are health conscious are leaning more towards low-sugar

and non-carbonated drinks, which decreases the demand for cocacola

Governments are also known to impose sugar taxes (excise tax) on

carbonated, sweetened drinks

Coca-Cola’s Response:
  Diversification: Coca-Cola acquired various companies such as

Glacéau Smartwater, Minute Maid, and Powerade to compete with

substitute.

 Health-conscious products: Coca-Cola Introduce Zero Sugar to reduce

consumer concerns about the high sugar intake when drinking Coke

(Strategic CFO, 2023).

Conclusion:

The soft drink industry in itself face a strong threat from substitute

products, forcing major players like Pepsi or Cocacola to expand their product

lines and market healthier alternative in order to not lose significant amount profit

Case Study 2: Transportation Industry

Airlines vs. High-Speed Trains, Buses, and Virtual Meetings

The airline industry as well face growing competition from alternative

affordable transportation option and as well as digital/electronic communication:

 High-speed trains) – Faster customer check in and registration,

affordable and somewhat more ecofriendly.

 Long-distance buses – Has some cons but is significantly more

affordable compaired to airlines.

 Virtual meetings – Completely eliminates the need for individuals to do

business travel (Harvard Business School, 2024).

Impact on Airlines:

High-speed rail in developed countries like China, Japan, and USA has

reduce significantly the short-haul flight demand in those countries.

Airlines’ Response:
  Lowering prices: Airlines introduced a new segment called budget

carriers to compete with the cheap transport fee of alternatives.

 Customer incentives: Loyalty programs like frequent flyer are given

rewards to further encourage them to repeat using the airline

(Octopus Intelligence, 2024).

Conclusion:

Airlines must always innovate, lower costs, and enhance customer

experiences in order to preserve profitbility

Case Study 3: Technology Industry

Smartphones vs. Tablets, Smartwatches, and Laptops

The smartphone industry is challenged by various substitutes products

that is already widely use by several individuals:

 Tablets – Larger screens instruments used for different purposes ranging

from gaming to professional works.

 Smartwatches – Utilize for various purpose fitness tracking and quick

messaging.

 Laptops – Most preferred by professsional individual due to its features

(Cleverism, 2023).

Impact on Smartphone Companies:

Some users rely on smartwatches for basic communication, reducing the

need for smartphone features.

Tablets replaced smartphone for gaming in some areas as well as in

media consumption , this is more visible in younger generation.

Industry Response:
  Integration of features: Smartphones now include larger screens

(phablets), stylus support, and foldable designs to atleast copy

features of tablets.

 Companion ecosystems: Companies like Apple and Samsung

integrate their respective products across devices to reduce

substitution risk (Konsyse, 2023).

 Premium features: Smartphones offer advanced cameras as well as

AI-driven functions, to makethem more valuable than other products.

Conclusion:

The smartphone industry must continuously evolve adapting different

features from different product in order to remain dominant in their respective

markets.

Impact on Businesses

Substitute products pose a threat for most businesses that forces them to

adapt and develop strategies that are crucial in maintaining customer loyalty and

market share. There are four key approaches that companies can use to reduce

the risk of substitute products:

1. Product Differentiation– Apple’s Ecosystem Strategy

Companies differentiate their products to offer unique value that

substitutes cannot easily replicate.

Example: Apple

 Apple always aims to set itself apart from competitors through competitive

advantage based on its product’s seamless ecosystem such as iPhone,

MacBook, iPad, Apple Watch, and Air Pods to attracts costumers, making it

harder for them to switch.

 Offering features like iCloud, Air Drop, and iMessage helps to keep the

interest of users locked into Apple’s ecosystem.

 This strategy reduces the probability of consumers changing to alternatives

including android smartphones or windows laptop (Harvard Business School,

2024).

Key Impact:

Customers stay loyal because of they offer high-quality product, continuous

innovation and their level of satisfaction with the product.

2. Customer Loyalty Programs– Amazon Prime & Starbucks Rewards

Loyalty programs increases cost to switch in order to make substitutes

less attractive or valuable. It offers rewards, discount, and other special

incentives to attract and retain costumers.

Example: Amazon Prime

 Amazon Prime offers fast shipping, exclusive discounts, and streaming

services to encourage customers to stay within their ecosystem. It also

reduces the risk of customers switching to Walmart, eBay, or other retailers

(Strategic CFO, 2023). Example: Starbucks Rewards

 Rewards such as free drinks, discounts, and personalized offers help

Starbucks to gain more loyal costumers and also to make it less probable for

customers to switch to other competitors like Dunkin’ (Cleverism, 2023).

Key Impact:

Loyalty programs significantly increases customer retention and decreases

customer loss rate, turning one-time buyers into loyal customers.

3. Innovation & R&D– Netflix Moving into Gaming

 Investing in innovation and research helps companies to improve their

market position, generate revenue and enhance their competitive advantage.

Also companies can offer high quality products or services that can set them

apart from their competitors.

Example: Netflix

 Competition from YouTube, TikTok, and video games, has made Netflix

eager to expand into gaming to retain users engagement.

 Netflix offers mobile games and exclusive content that is not available on any

other platform to reduce the risk of users shifting to other gaming platforms

like PlayStation, Xbox, or mobile games (Investopedia, 2024).

Key Impact:

Continuous innovation allows businesses to expand their ideas and develop

quality products that can help companies to stay competitive.

4. Competitive Pricing– Fast-Food Industry Price Wars

By using price strategies, companies can make their products more

affordable than substitutes.

Example: Fast-Food Chains

 Fast food such as McDonald's, Burger King, and Wendy’s both offers

affordable meals, discounts, and promotions to compete with:

 Grocery store meal options (home cooking as a substitute).

 Healthier alternatives (salad bars, organic food brands). Dollar menus and

combodeals prevent customers from switching to cheaper alternatives

(Octopus Intelligence, 2024).

Key Impact:
 Competitive pricing aims to guarantee that they offer the most affordable and

value products for them to be able to compete with their rivals.

Conclusion

The threat of substitute products is a crucial factor in Porter’s Five Forces

Model, influencing industry competition and company strategy. Businesses must

continuously adapt and develop to remain competitive with its competitors.

Summary of Key Points

 Substitute products are alternatives that fulfill the same customer need and

customer’s level of satisfaction (Investopedia, 2024).

 There are three (3) factors affecting the threat of substitutes, this includes

price-performance trade-offs, switching costs, and consumer preferences

(Cleverism, 2023).

 In a real-world examples , it shows how industries face the threat of

substitutes:

Soft drinks (Coca-Cola vs. water and energy drinks).

Transportation (Airlines vs. high-speed rail and virtual meetings).

Technology (Smartphones vs. tablets and smartwatches) (Harvard

Business School, 2024).

 Differentiating products, creating loyalty programs, innovating, and adjusting

pricing strategies is the key components in reducing the threat of substitute

products. (Strategic CFO, 2023).

Importance of Monitoring Substitute Products

 Businesses should adapt in tracking market changes and consumer

preferences to anticipate new substitutes.

 A failure to adapt can lead to market share losses and customer loss like to

what happened with companies including Blockbuster (disrupted by Netflix)

and traditional taxis (disrupted by Uber) (Konsyse, 2023).

 Companies invest in market research, consumer engagement, and

competitive intelligence to stay competitive and to give its customer the

satisfaction they need. (Octopus Intelligence, 2024).

Future Trends and Emerging Threats

 AI &Automation

Businesses must watch for AI-driven substitutes, such as AI-powered

writing tools replacing human content creators. AI hold immense potential to

transform industries, drive innovation, and address complex challenges.

 Sustainability Trends

Eco-friendly substitutes like electric cars as a substitute for gasoline cars

is a sustainable and also an environmental-friendly innovation which will help in

shaping future competition.

 Digital Disruption

Streaming services, virtual workspaces, and blockchain technology are

creating new substitute threats across industries (Business-to-You, 2024).

Final Thought:

Continuous innovation, adapting products to evolving customer needs and

market conditions, and adapting more strategies can help to reduce the threats of

substitute products. By making necessary adjustments, you enhance your

product’s quality, relevance, and value ensuring that it continuously meets

customers expectation. This adaptability helps you stay competitive and retain

customer loyalty amidst changing market dynamics.

 CHAPTER 9

THE COMPLEMENTORS

BANALNAL, KYLA B.

FULLENTE, SHERWIN

ALMONTE, MARY JOY

Introduction

When businesses work together in this way, they can find new opportunities,

increase profits, and grow faster than they would on their own. Instead of seeing

similar businesses as rivals, companies are learning that teaming up can help

them reach more customers, improve their services, and become stronger in the

market.

A complementor is a company from a different industry that significantly

influences your customers at key moments before they make a buying decision.

These businesses do not compete with you directly but play a crucial role in

shaping customer choices. By working with complementors, companies can gain

early access to valuable customer insights, allowing them to understand

preferences, refine their marketing strategies, and position their products or

services more effectively. This strategic advantage enables businesses to

influence purchasing decisions before customers even reach the final stage,

ultimately increasing sales and strengthening their market position.

Complementors are businesses, products, or services that add value to a

company’s main product or service. Unlike competitors, who offer similar

products and compete for the same customers, complementors work alongside a

business by offering additional features, accessories, or services that enhance

the overall customer experience.

Why Work with Complementors Instead of Competing?

Working with complementors instead of focusing only on competition can

bring many benefits to a business. These are the few key reasons:

1. Gaining a Competitive Edge

One great way to do this is by working with complementors — businesses that

offer products or services that go hand in hand with yours. Instead of trying to do

everything alone, teaming up with others can help you give customers more
value and a better overall experience. For example, if you sell phones and

partner with a company that makes apps or accessories, together you create a

complete package that customers will appreciate. Plus, working with

complementors lets you share ideas, resources, and even customers, helping

both businesses grow faster. So, rather than just focusing on competing, building

strong partnerships can give you that extra edge to succeed.

2. Expanding Market Reach

Expanding market reach means finding ways to connect with more customers

and enter new markets. One effective way to do this is by working with

complementors — companies that offer products or services that go well with

yours. When you collaborate with complementors, you get a chance to introduce

your business to their customers, and they get to do the same with yours. This

way, both businesses benefit by reaching new audiences that they may not have

reached on their own.

3. Creating New Revenue Streams

When you work together, you can create new products, services, or bundles

that give customers more options and reasons to buy. This not only brings more

value to customers but also gives both businesses a new way to earn income.

4. Avoiding Price Wars and Conflict

Avoiding price wars and conflict is another important reason why businesses

should work with complementors. When companies only focus on competing,

they sometimes end up lowering their prices just to attract customers, which can

hurt profits for everyone involved. But when you team up with complementors —

businesses that offer products or services that go well with yours — you don’t

have to fight over the same customers. Instead, you work together to give

customers more value, which makes them willing to pay for a better overall

experience.
Benefits of Working with Complementors

Instead of just competing, businesses can collaborate with companies that

offer complementary products or services to create more value, strengthen their

market position, and grow in new ways. Let’s explore the key benefits of working

with complementors.

1. Adds Value to Customers

One of the biggest advantages of working with complementors is that it

increases the value you provide to your customers. When businesses collaborate

with the right partners, they can offer more complete and useful solutions that

meet customer needs.

For example, imagine a furniture store partnering with an interior designer.

Instead of just selling furniture, the store can offer expert advice on home décor,

helping customers create beautiful and functional spaces. This makes the

shopping experience better and more valuable for the customer.

By working with complementors, businesses also stand out from competitors.

Customers appreciate businesses that go beyond just selling a product and offer

additional services that improve their experience.

2. Enhancing Competitive Strength

Another major benefit of working with complementors is that it makes a

business stronger in the market. When companies team up with the right

partners, they create a more complete and attractive offering for customers,

which can increase market share and revenue. Working with complementors can

reduce costs by improving efficiency. When businesses share resources, such as

marketing efforts or logistics, they can lower expenses while increasing their

reach. To maximize these benefits, companies should carefully choose

complementors that align with their goals and build strong relationships based on

trust and mutual benefit.

3. Broadening Financial Options

Another great advantage of working with complementors is the opportunity to

broaden financial options. By partnering with businesses that offer related

products or services, companies can reach new customers and expand into new

markets.

For example, a software company that specializes in project management

tools could partner with a company that offers time-tracking or invoicing software.

Together, they create a complete solution that helps businesses manage their

work more efficiently. This not only increases revenue for both companies but

also positions them as industry leaders.

“Broadening financial options through partnerships helps businesses achieve

more stable and sustainable growth. Instead of relying on just one product or

service, companies can generate income from multiple sources, making them

more resilient in a changing market.”

Types of Complementors

Understanding the various categories of complementors and their

contributions is essential for firms aiming to foster innovation and meet evolving

customer demands.

1. Product Complementors

Product complementors are companies that offer products enhancing or

adding value to another company’s product. A perfect example is the relationship

between smartphones and mobile applications. Mobile apps significantly

augment the functionality of smartphones, providing users with a diverse array of

services ranging from productivity tools to entertainment options. This symbiotic

relationship not only enriches the user experience but also stimulates demand for

both smartphones and applications. Jacobides and Tae (2021) discuss how such
interdependencies among products can lead to complex value dynamics within

business ecosystems.

2. Service Complementors

Service complementors are entities offering services that synergize with a

company’s product, thereby enhancing the overall customer experience. An

illustrative case is the collaboration between streaming services and smart TV

manufacturers. For instance, the integration of the Freely streaming platform—a

joint venture by the BBC, ITV, Channel 4, and Channel 5—into Amazon’s Fire TV

operating system exemplifies this synergy. This partnership allows users to

seamlessly access a vast array of live and on-demand content, thereby enriching

the viewing experience and expanding the reach of public broadcasters. Rong,

Shi, and Yu (2020) highlight that such collaborations contribute to the evolution of

service ecosystems by fostering co-creation of value and enhancing service

delivery mechanisms.

3. Technology Complementors

Technology complementors provide technological solutions that integrate with

or support a company’s product, creating a cohesive and enhanced user

experience. A pertinent example is the collaboration between telecom operators

and Android TV box manufacturers. Telecom operators often partner with these

manufacturers to offer devices preloaded with streaming services, optimized for

network performance, and sometimes featuring co-branded interfaces. This

integration facilitates seamless access to content, thereby improving customer

satisfaction and loyalty. Li, Hou, and Wu (2021) emphasize that such

technological collaborations within platform-based ecosystems lead to value co-

creation and are instrumental in sustaining competitive advantage.

4. Distribution Complementors
 Distribution complementors are companies that assist in delivering or

promoting a product to a broader audience, such as retail partners or online

marketplaces. For example, the collaboration between public service

broadcasters and Amazon to integrate the Freely streaming service into

Amazon’s Fire TV platform exemplifies this. This partnership ensures that content

from the BBC, ITV, Channel 4, and Channel 5 is readily accessible to a wider

audience through Amazon’s distribution channels, thereby enhancing viewership

and engagement. Chen, Shao, and Wang (2020) discuss how such

collaborations within digital platform ecosystems are crucial for expanding market

reach and enhancing the value proposition of the involved entities.

5. Knowledge and Expertise Complementors

Knowledge and expertise complementors are partners that contribute

specialized knowledge, skills, or expertise to improve a company’s offerings. This

category includes consulting firms or research and development alliances that

provide insights and innovations, thereby enhancing product development and

strategic decision-making. Cennamo and Santaló (2023) explore how such

collaborations address generativity tensions and contribute to value creation

within platform ecosystems.

Key Strategies to spot the right business Complementors

Building the right partnerships can help a business grow, reach new

customers, and offer better products or services. However, not every company is

the right fit as a complementor. It’s important to be strategic in choosing

businesses that align with your goals and add real value. Here are five key steps

to finding the right complementors for your business.

1. Take the Time to Research

 Before teaming up with another business, do some background research.

Look at what they offer, how they operate, and what their reputation is like. A

strong complementor should not only have a product or service that fits well with

yours but should also share your business values and commitment to quality.

For example, if you own a gym, you might consider partnering with a

health supplement brand. But before making a decision, you’d want to check

their product quality, customer reviews, and whether their brand aligns with your

gym’s health-focused message. Good research ensures that your partnership will

be beneficial in the long run.

2. Know Your Strengths and Weaknesses

The best business partnerships work when both sides bring something

valuable to the table. Take a step back and assess your own business—what do

you do really well? What areas could use improvement?

Let’s say you run an online store that sells fashion items. You might be

great at curating trendy collections but struggle with fast delivery. Instead of

trying to build your own delivery service, partnering with a reliable shipping

company can solve that problem. By working with a complementor that fills in

your gaps, both businesses can grow together.

3. Focus on Your Customers’ Needs

Your customers should always be the priority when choosing a

complementor. Think about their needs, habits, and preferences. If you find a

business that already serves a similar audience, a partnership could benefit both

of you.

For instance, a local coffee shop could team up with a nearby bakery.

Since people who love coffee often enjoy pastries, this partnership would make

sense. By working together, both businesses can provide a better customer

experience while increasing sales.

 4. Build Strong Relationships with Your Partners

Finding the right complementor isn’t just about choosing the right

business—it’s about creating a strong working relationship. Good partnerships

require open communication, trust, and a shared vision.

A great example is how smartphone brands partner with app developers. A

phone is only as good as the apps it runs, and app developers need devices to

showcase their products. When these companies collaborate effectively, they

create a better experience for customers. A successful partnership is built on

teamwork, respect, and a commitment to helping each other grow.

5. Keep Checking if the Partnership Works

Just because a partnership starts strong doesn’t mean it will always be the

best fit. It’s important to check in regularly to see if it’s still benefiting both sides.

Ask yourself: Is this partnership helping us grow? Are we both getting value from

it?

For example, a retail store that partners with a digital payment provider

should monitor whether customers are actually using that payment method. If

customers prefer something else, the store might need to adjust by offering

additional payment options. Businesses need to stay flexible and open to making

changes when needed.

SOURCES:

https://strategycapstone.org/complementors/

Jacobides, M. G., & Tae, C. J. (2021). Kingpins, bottlenecks, and value dynamics

in ecosystems. Industrial and Corporate Change, 30(1), 1–16.

Rong, K., Shi, Y., & Yu, J. (2020). Service ecosystem evolution: A system

dynamics model. Technological Forecasting and Social Change, 155, 119969.

Li, F., Hou, B., & Wu, A. (2021). Platform-based ecosystems: Complementors’

technological contributions and value co-creation. Journal of Business Research,

130, 378–387.

Chen, J., Shao, W., & Wang, Y. (2020). Complementor’s role in digital platform

ecosystems: A review and future research agenda. Internet Research, 30(3),

808–827.

Cennamo, C., & Santaló, J. (2023). Generativity tensions and value creation in

platform ecosystems. Strategic Management Journal, 44(2), 391–419.

 CHAPTER 10

MACRO ENVIRONMENT AND ITS MODEL

HATE, ERON G.

RODRIGUEZ, JOMARI P.

HITOSIS, ZAINA ROSE

 The Macro Environment

Objectives:

 Define what macro environment is.

 Identify the roles or forces of macro environment; and

 Develop an understanding on how these forces affect businesses

Introduction to Macro Environment and Its Roles

Understanding the macro-environment is fundamental to an effective

strategic management of a business.

A macro environment refers to the overall, broader economy and the

forces affecting it versus a microenvironment, which focuses on a specific sector

or region’s economy. It refers to the set of conditions that exist in the economy as

a whole, rather than in a particular sector or region. These conditions or forces

are deemed external or generally outside of a company's direct control, and they

can affect and influence an organization.

It is crucial to understand that changing conditions or forces in the wider

macro environment have direct implications on the overall structure of an

organization, business or industry. These may affect the level of attractiveness

and competitiveness of a particular business in the market.

There are different forces concerning the macro environment and its effect

on businesses, including macroeconomic, global, technological, demographic,

social, political and legal forces.

Source: Strategic Management: An Integrated Approach by Hill et al. (11th edition)

Forces of Macro Environment

1. Macroeconomic forces

These forces may affect the general health and well-being of an entire

economy, which in turn affects the ability of companies and industries to

generate income.

Four (4) Significant Macroeconomic Forces

 a. growth of the economy

b. interest rates

c. currency exchange rates and;

d. inflation or deflation rates.

Economic growth

Economic growth is an increase in the capacity of an economy to produce

goods and services, compared from one period of time to another.

When there is growth in an economy, there is also an increase in the

purchasing power of the consumers. It can lead to the expansion of customer

expenditure, meaning more customers will spend money on goods and services.

This event can be an opportunity for the business to expand their operations,

thus earning higher profits. Economic growth may also reduce competitive

pressure within an industry, since all operating businesses are earning sufficient

returns.

Meanwhile, if there is economic decline or recession, customers will

purchase less due to financial difficulty. A reduction in customer expenditure will

cause a decline in sales. In other words, less profitability or lower rate of

return. In this case, the company may reduce their level of operation or

production. When customer activities are not active, competitive pressure tends

to increase, just like price wars within an industry. Businesses will implement

different strategies such as price reduction to secure these customers.

Interest Rates

Interest rate is the percentage of interest relative to the principal. It is

either what lenders charge borrowers or what is earned from deposit accounts.
 This factor is also crucial when conducting a business, especially when

you need to raise capital for operations. Oftentimes, businesses resort to credit

transactions characterized by interest rates.

When the interest rate is high, it becomes more expensive for the

businesses to borrow money. Higher borrowing cost may also reduce the level of

investments, given that lack of financial resources will not attract potential

investors. Higher interest rate may also affect customer spending, as it may

discourage customers from making purchases on credit. On the other hand,

lower interests indicate lower cost of capital and more investments, which are

both advantages on the part of the business. In short, higher interests are threats,

and falling rates are opportunities.

Currency Exchange Rates

An exchange rate is the rate at which one currency can be exchanged for

another currency. The value of one currency relative to another has a direct

impact on the competitiveness of a company's product in the global marketplace.

For example, when a business is trading goods internationally, the value

of currencies may affect the price of these commodities, which determines the

potential income of the business. Let's say that business A exports goods from

the Philippines to the US. When there is an increase in the value of Philippine

peso, the local product from the Philippines will become more expensive in other

countries. It means that business A will earn more from selling products abroad.

Another example, there are businesses which procure materials from

other countries for their production or operation. Let's assume that this business

is currently operating in the Philippines and the supplier of materials comes from

the United States. When the value of Philippine Peso decreases against US

dollars, the cost of imported goods and raw materials increases. It leads to higher

production costs and reduces the profit margin of the business.

Price Inflation or Deflation

Abnormal increase in the prices of goods and services will produce slower

economic growth, higher interest rate, and lower value of currency. It lowers

customer spending and investment volumes. It also makes the future less

predictable, which hinders the business to plan and forecast effectively. In

general, price inflation depressed economic activity, resulting in economic

rescission or destabilized economy.

On the other hand, price deflation also has a destabilizing effect on

economic activity. Although it may increase the purchasing power of consumers

and may reduce production costs, a general decline in price may increase debt

burden. It means that the real value of debt rises, making it difficult for the

business to pay their financial obligations. This is damaging for companies and

individuals with a high level of debt who must make regular fixed payments on

that debt. Similar to price inflation, major price decline may depress the level of

economic activity.

2. Global Forces

Over the past 50 years, there has been a major shift in the global

economy. Many countries that were once closed off, like China, India, and Brazil,

have opened up to international trade and investment. As a result, companies

have new markets to sell their products. Western and Japanese companies are

now investing billions in these economies. But at the same time, competition has

intensified — foreign companies now enter domestic markets more easily. This

shift means businesses must think globally to survive. Those that expand wisely

can tap into high-growth markets, while those that don’t may find themselves

outcompeted by international rivals.

3. Technology Forces
 People nowadays live in an era of rapid technological change, often

referred to as a ‘perennial gale of creative destruction.’ This means new

innovations can wipe out old industries overnight. But at the same time, they

create new opportunities for businesses that adapt. A great example is the

internet. It dramatically lowered barriers to entry in industries like news and

media. Previously, companies like major newspapers dominated. But today, they

must compete with digital-first companies like Yahoo! Finance, The Motley Fool,

and Google News. For businesses, this means constant innovation is essential—

if you don’t keep up with technology, you risk becoming obsolete.

4. Demographic Forces

It refers to how changes in population characteristics affect business. One

of the biggest trends today is an aging population in many industrialized nations.

Here’s how this has played out: in the 1980s, baby boomers were getting married,

boosting demand for household appliances like dishwashers and washing

machines. In the 1990s, they focused on saving for retirement, which led to a

boom in mutual funds and financial services. In the next 20 years, many will retire,

driving demand for retirement communities, healthcare, and senior services. For

businesses, these shifts mean that understanding your customers' needs at

different life stages is crucial for long-term success.

5. Social Forces

The evolution of societal attitudes and conduct patterns produces effects

which influence different sectors of business. The alteration of public beliefs and

practices presents both new business possibilities and establishes new risks for

corporate operations.

People now show heightened awareness about their health since recent

years began. The social shift has produced significant business impacts

throughout the market. The initial businesses that identified this emerging trend
successfully made profits out of it. Philip Morris (a tobacco company) utilized

societal health concerns through its acquisition of Miller Brewing Company to

develop and introduce Miller Lite for low-calorie beer consumption. Pressing on

with the release of diet sodas and fruit-based beverages enabled PepsiCo to

defeat Coca-Cola by securing a consumer base interested in health products.

Social changes generate both positive and negative effects on industries.

The increase in public awareness about health dangers because of smoking

resulted in a decrease in tobacco industry sales.

6. Political Forces

The business environment is affected by political factors together with

legal authorities through changes in government rules and corresponding laws.

The modifications affect businesses through concurrent advantages and

adversities.

Changing government rules and regulations about business operations

either facilitates or obstructs business activities. Deregulation has become a

main political force across several nations with particular focus on the United

States. Governments in these countries actively remove regulatory barriers from

selected economic sector. The U.S. government permitted new businesses to

join the airline market through its airline industry deregulation in 1979 which

increased market competition. Between 1979 and 1993 new airline companies

numbering 29 appeared in the industry.

Business operations transform according to changes in laws and political

actions and these reforms either support or undermine business success.

Sample Case Study

The U.S. steel industry faced severe challenges from the 1970s to the

early 2000s due to foreign competition, the rise of cost-efficient mini-mills

(smaller, nonunionized producers using scrap steel), and declining demand as

customers shifted to substitutes like plastics. Excess capacity, price wars, high

labor costs, and union constraints led to bankruptcies among major firms like

Bethlehem Steel.

A turnaround began In the early 2000s when surging demand from

emerging economies (e.g., China) and industry consolidation reduced global

excess capacity. U.S. producers, now more efficient and technologically

advanced, benefited from a weaker dollar, making imports costlier and boosting

exports. Prices and profits soared: U.S. Steel swung from a 406M loss in 2003 to

a 2B profit in 2008, while Nucor’s profits rose from 63M to1.8B.

The 2008 financial crisis caused another downturn, slumping demand and

production (108M tons in 2007 to 65.5M in 2009), leading to losses industry-wide.

However, a 2010 rebound in demand (44% production increase) restored

profitability. The sector’s volatility highlights its sensitivity to global economic

shifts and competitive pressures.

Guide Questions

 How do macroeconomic forces such as inflation and interest rates

influence the competitive landscape of an industry?

Big economic changes, like inflation and interest rates, can affect how

businesses compete. For example, high inflation can make it harder for

businesses to make money.

 In what ways has technological change reshaped industry structures,

and what are some examples of industries that have been

significantly affected?

New technologies can change entire industries. For example music

streaming changed the music industry, online shopping changed the retail

industry.
  How do demographic shifts, such as an aging population, create both

opportunities and challenges for businesses?

Changes in the population, like people getting older, can create new

opportunities and challenges for businesses. Example older people might need

more healthcare services. Businesses might need to design products that are

easier for older people to use.

 What are some examples of social forces that have led to major

changes in consumer behavior, and how have companies adapted to

these changes?

Changes in what people value and how they live can affect how

businesses operate. For example people caring more about the environment led

to more eco-friendly products. People wanting to be healthier led to more fitness

and wellness services.

 How can changes in political and legal forces, such as deregulation,

impact the profitability and competitiveness of industries?

Changes in laws and regulations can affect how businesses make money.

For example changes in tax laws can help or hurt businesses. New

environmental regulations can force businesses to change how they operate.