10.1 capon: understanding organisational context 2nd edition © pearson education 2004 understanding...

10.1Capon: Understanding Organisational Context 2nd edition © Pearson Education 2004

Understanding Organisational Context 2e

Slides by Claire Capon

Chapter 10

The competitive environmentEnvironmental linkages

Assessing the nature of competition

Competitive strategies


Environmental linkages

Within-to-within linkages

Outside-in and inside-out linkages

Outside linkages


Figure 10.2 Environmental linkagesSource: Based on Emery, F E and Trist, E L (1965) ‘The causal texture of organisational environments’ in Human Relations 18: 21–32.


Within-to-within linkages

• Within-to-within linkages are internal dependencies

• Internal dependencies can be co-operative or confrontational in nature



• Outside-in and inside-out linkages are called transactional dependencies



• Transactional dependencies are:

- links in and out of the organisation

- the dependencies between the organisation and its external

environment


Outside linkages

• Outside linkages are called causal textures and are linkages or dependencies which are external to the organisation


Outside linkages

• Causal textures are concerned with the cause and effect relationships between elements or bodies in an organisation’s external environment


Assessing the nature of competition

The five forces of competition


Figure 10.3 The five forces that determine industry profitabilitySource: Reprinted with the permission of The Free Press, a division of Simon & Schuster, from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E Porter. Copyright © 1985 by Michael E Porter.


Questions - threat of new entrants

• Which companies are potential entrants to the industry?

• Which industries are potential new entrants currently operating in?


Answers - threat of new entrants

• The threat of new entrants will be greatest if the industry is attractive


Answers - threat of new entrants

• An attractive industry has:

- no high capital set-up costs

- market growth

- a sufficient customer base to support new entrants

- good profit opportunities


Questions - threat of substitute products

• Which industry provides present and potential substitutes?

• What is the impact of substitutes on the company and the industry?


Answers - threat of substitute products

• Substitute products and services will be a threat if:

- customers perceive them to perform the same

function

- they offer better value for

money


Questions - buyers and buyer power

• Who buys the company’s products and services?

• How powerful are the buyers with regard to the company?


Answers - buyers and buyer power

• Buyers are powerful if:

- alternative sources of supply exist

- they exercise their power and shop around


Questions - suppliers and supplier power

• Who supplies the company’s inputs?

• How powerful are the suppliers with regard to the company?


Answers - suppliers and supplier power

• Suppliers are powerful if:

- there are few suppliers

- the cost of switching from

one supplier to another is high



• Decision 1:

- is competition to be based on cost/price or added

value?

• Decision 2:

- is a broad or narrow target market to be served?



• The competitive strategies which arise from decisions 1 and 2 are:

- cost leadership

- differentiation

- cost focus

- differentiation focus


Figure 10.4 Generic strategiesSource: Porter, Michael E (1965) Competitive Advantage, Free Press.


Cost leadership

• Selling a standard product to a mass market

• A number of suppliers will

- supply a similar product

- charge similar prices


Cost leadership (cont)

• MOST competitors attempting to follow a cost leadership strategy will:

- have average costs

- make an average profit


Cost leadership (cont)

• However, the SUCCESSFUL cost leader will have:

- below-average costs

- better than average profits


Figure 10.6 Cost, profit and price relationships for cost-based competitive strategies


Differentiation

• Selling an added value product to a mass market

• Added value can be in any aspect of the product which customers will pay for


Differentiation (cont)

• Added value could be in:

- quality of inputs

- packaging and labelling

- image

- promotion



• Costs are:

- average in areas which do not add value

- extra for added value

- higher overall



• A differentiation strategy allows:

- a higher price to be charged

- a higher profit margin


Cost focus

• Selling a low-cost product to a niche market

• Customers are very price sensitive


Cost focus (cont)

• Cut costs where possible:

- inputs

- processing

- packaging

- delivery

- promotion


Figure 10.7 Cost, profit and price relationships for differentiation-based competitive strategies


Cost focus (cont)

• Overall lower costs

• Charge an overall lower price

• Small profit

• Average profit still possible


Differentiation focus

• Selling a product with lots of added value to a niche market

• Factors relating to added value are similar to those for differentiation

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