MANAGEMENT &

ORGANIZATION
Prof. Milena Tekeste
 CONTENT

What is The 5 Porter’s Five

Strategy ? elements of Forces
strategy

2
 LAYERS OF THE BUSINESS
ENVIRONMENT

3
 DEFINITIONS OF STRATEGY

urces: A.D. Chandler, Strategy and Structure: Chapters in the History of American Enterprise, MIT Press, 1963, p. 13; M.E. Porter, ‘What is strategy?’,
rvard Business Review, November–December 1996, p. 60; P.F. Drucker, ‘The theory of business’, Harvard Business Review, September–October
94, pp. 95–106; H. Mintzberg, Tracking Strategies: Towards a General Theory, Oxford University Press, 2007, p. 3.
Slide 2.5

STRATEGIC DECISIONS

Source: From G. Johnson, K. Scholes and R. Whittington. Exploring Corporate Strategy, 8th edn, Pearson Education 2008.
THE 5 ELEMENTS OF
INTERNAL STRATEGY
(HAMBRICK AND
FREDRICKSON, 2001)

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people
 5 ELEMENTS OF STRATEGY

Arenas
Economic Logic • Where will we be active?
(and with how much emphasis?)
• How will we obtain our Arenas
returns/ How will you
generate revenue?

Staging Economic
Vehicles
logic
Staging Vehicles
• What will be our speed • How will we get there?
and sequence of moves?
Differentiators

Differentiators
• How will we win?
ELEMENTS OF STRATEGY: IKEA
 ELEMENTS OF STRATEGY:
ARENAS

Where will we be active? Important to be specific!

(and with how much
Whichemphasis?)
product categories?
Which market segments?
Which geographic areas?
Which value-creation stages (e.g.,
manufacturing, selling, distribution,
servicing, etc.)?

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 IKEA: ARENAS

Question: Where is IKEA active?

• Product/market segments, geographic areas, value-creation stages, etc.

Inexpensive, contemporary furniture market

Target market: Young, primarily white-collar (but not

extremely wealthy)

Geography: Worldwide

Value-creation stages: Design and retail, but not

manufacturing

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 ELEMENTS OF STRATEGY:
VEHICLES

How will we get there? What means we will use How will we grow?
to attain the needed
presence in our chosen
arenas? Internal expansion?
Joint ventures?
Acquisitions?
Franchising?

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 IKEA: VEHICLES

What vehicle(s) does IKEA use to enter/serve its

chosen arenas?

Internal expansion

• Builds its own, wholly-owned stores

• Doesn’t make acquisitions of existing retailers
• Provides IKEA full control so as to maintain its unique and innovate
retailing concept

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 ELEMENTS OF STRATEGY:
DIFFERENTIATORS

How do we attract customers? How do we differentiate

ourselves from our competitors, in the eyes of our
customers?
• Price?
• Image?
• Customization?
• Service?
• Style?
• Reliability?

Requires choices and trade-offs; cannot be all things at

once or satisfy all customers

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 IKEA: DIFFERENTIATORS

Question: How does IKEA differentiate itself from its

competitors, in the eyes of customers?

What is unique about what IKEA provides?

• Low price for level of quality/reliability/style (Customers perform
own assembly/delivery, Standardized store model)
• Fun, non-threatening environment (No commissioned salesmen)
• Convenience: In-store child care; extended hours
• Furniture available immediately (Vs. other stores with long
waiting times)

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 ELEMENTS OF STRATEGY:
STAGING

What will be our speed and

Once arenas, vehicles,
sequence of moves and differentiators are chosen
initiatives?

E.g., speed of expansion

E.g., choosing whether to expand product line or

geographic presence first

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 IKEA: STAGING

Choice of arena: But only one country at

Worldwide a time
• Rapid international • Focus resources on a
expansion single flagship store
and aggressive
advertising and public
relations
• Once foothold is
established, then add
more stores

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 ELEMENTS OF STRATEGY:
ECONOMIC LOGIC

More detailed, low-level analysis of costs,

returns, expected profits, etc.

E.g., low costs via economies of scale?

E.g., high prices due to unique

product/service features?

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 IKEA: ECONOMIC LOGIC

Efficiencies/ Standardization
Stores are high-
advantages of across
volume operations
scale markets/countries

Many more
Provides
customers and
efficiencies in
greater inventory
staffing,
turnover than
advertising,
typical furniture
inventory, etc.
stores

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EXTERNAL
STRATEGIC
ANALYSIS:
PORTER’S FIVE
FORCES

The exceptional place for exceptional

people
THE FIVE FORCES FRAMEWORK (1 OF 6)

Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter, copyright © 1980, 1998 by The Free
Press.
All rights reserved.
 PORTER’S FIVE FORCES

Analytical tool
• Characteristics of the industry (or
to analyze the
segment of an industry) that drive
industry and profitability
competitive • What are potential competitors doing?
pressures within How will this affect potential profits?
it
Helps answer Q • As well as: what industry to start a new
of which company in; whether to exit or remain
industry to in an industry
invest in

21
 RIVALRY BETWEEN EXISTING
COMPETITORS

Competitive rivals are organisations with similar products and

services aimed at the same customer group and are direct
competitors in the same industry/market (distinct from
substitutes).

The degree of rivalry depends on:

• Competitor concentration and balance.

• Products/services are similar
• Industry growth rate (slow).
• Many competitors

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 THE THREAT OF ENTRY

Barriers to entry are the factors that need to be overcome by new

entrants if they are to compete. The threat of entry is low when the
barriers to entry are high and vice versa. The strength of this force is
primarily driven by barriers to entry

The main barriers to entry are:

Economies of scale/Experience/Network effects.

Access to supply and distribution channels.

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 SOME GENERAL BARRIERS TO
ENTRY

Capital requirements
• Start-up costs required to enter a market

Economies of scale

Customer switching costs

• E.g., switching from IBM to Mac

Government regulations

Incumbency advantages
• Brand loyalty
• Reputation

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Slide 2.25

THE THREAT OF SUBSTITUTES

Substitutes are products or services that offer a similar benefit to an

industry’s products or services, but have a different nature i.e. they are from
outside the industry.

Customers will switch to alternatives (and thus the threat increases) if:

The price/performance ratio of the substitute is superior (e.g. aluminium

is more expensive than steel but it is more cost efficient for car parts)
The substitute benefits from an innovation that improves customer
satisfaction (e.g. high speed trains can be quicker than airlines from city
centre to city centre on short haul routes).
Extra-industry effects. Substitutes come from outside the incumbents’
industry which forces managers to look outside their own industry to
consider more distant threats and constraints.
• E.g., railways vs. airlines vs. automobiles
• Substitutes are not always easy to spot; they may initially appear very different
• Blockbuster vs. Netflix
 THE BARGAINING POWER OF
BUYERS

Buyers are the organisation’s immediate customers, not

necessarily the ultimate consumers. If buyers are
powerful, then they can demand cheap prices or
product/service improvements to reduce profits.

Buyer power is likely to be high when:

• Buyers have low switching costs.

• Firm offerings are undifferentiated; buyers can buy from multiple sources

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THE BARGAINING POWER OF SUPPLIERS

Suppliers are those who supply what

organisations need to produce the product
or service. Powerful suppliers can reduce an
organisation’s profits.
Supplier power is likely to be high when:
• The suppliers are concentrated (few of
them).
• Suppliers provide a specialist or rare input.
• Switching costs are high (it is disruptive or
expensive to change suppliers).
• They have the ability to enter the market
themselves (forward vertical integration).
 STRATEGIC ANALYSIS

We now know But where does How is a good

what strategy strategy come strategy shaped?
is… from?

28
 USE THE FIVE FORCES
FRAMEWORK TO EVALUATE
COMPETITIVE PRESSURE AND
POTENTIAL PROFITABILITY OF A
NEW COFFEE SHOP OUTSIDE
CAMPUS

The exceptional place for exceptional

people

29
NEXT SESSION:
CASE STUDY

The exceptional place for exceptional

people