ExpertCompetitive factors
Learning outcomes
- Identify a business's SWOT and the main sources of competitive advantage.
- Identify the main elements within Porter's value chain and explain a value network.
- Explain the factors that influence competitiveness using Porter's five forces model.
- Describe the key activities of an organisation that affect its competitiveness.
Objective A: Identify a business's strengths, weaknesses, opportunities and threats (SWOT) in a market and the main sources of competitive advantage.
To survive in a competitive market, a business must understand its strategic position. SWOT analysis is a fundamental tool for this. It is divided into two halves: Internal and External. Strengths and Weaknesses are internal to the organisation; they are things the business can control. A strength might be a highly skilled workforce, a strong brand, or exclusive patents. A weakness might be outdated machinery, high debt, or poor management.
Opportunities and Threats are external factors; they arise from the PESTEL environment and the business cannot control them, only react to them. An opportunity might be a new government subsidy, a competitor going bankrupt, or a new technological trend. A threat might be an impending economic recession, a new aggressive competitor entering the market, or changing consumer tastes. The goal of strategy is to use internal strengths to exploit external opportunities, while mitigating internal weaknesses to defend against external threats.
This leads to Competitive Advantage: the attribute that allows an organisation to outperform its rivals. According to Michael Porter, there are two main sources of competitive advantage. Cost Leadership: being the lowest-cost producer in the industry (e.g., Ryanair, Walmart), allowing the firm to either undercut rivals on price or enjoy higher profit margins. Differentiation: offering a product or service that is perceived industry-wide as unique and superior (e.g., Apple, Rolex), allowing the firm to charge a premium price. Consider 'AstroGrip', a company making specialized climbing shoes. Their patented rubber formula is an internal Strength, giving them a Differentiation competitive advantage. However, a looming global recession is an external Threat that could reduce spending on leisure activities.
Internal vs. External in SWOT
A very common exam mistake is classifying a competitor's action as a 'Weakness'. Remember: if it happens inside your company, it's a Strength/Weakness. If it happens outside in the market, it's an Opportunity/Threat.
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Step 1: Internal Analysis (S & W)
AstroGrip analyzes its internal operations. Strength: They hold a 10-year patent on 'GripMax' rubber, making their shoes objectively stickier than rivals. Weakness: Their manufacturing plant is old and inefficient, leading to high production costs.
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Step 2: External Analysis (O & T)
AstroGrip looks at the market. Opportunity: Indoor rock climbing is becoming a massive social trend, expanding the market size. Threat: A large, low-cost manufacturer from overseas is planning to enter the market next year.
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Step 3: Defining Competitive Advantage
Because of their high production costs (weakness), AstroGrip cannot compete on Cost Leadership. They must lean into their patented rubber (strength) to pursue a Differentiation strategy, marketing their shoes as the premium, high-performance choice to defend against the cheap overseas threat.
SWOT analysis directly informs which type of competitive advantage a firm should pursue.
In a SWOT analysis, how should a company categorize a sudden increase in the cost of raw materials caused by global supply chain issues?
According to Michael Porter, what are the two primary sources of competitive advantage?
A software company has a team of highly skilled, industry-leading programmers. In a SWOT analysis, where does this factor belong?
Objective B: Identify the main elements within Porter's value chain and explain the meaning of a value network.
Porter's Value Chain is a model that breaks down a firm into its strategically relevant activities to understand the behavior of costs and the existing/potential sources of differentiation. The chain is divided into Primary Activities and Support Activities. Primary Activities are directly involved in the physical creation, sale, and support of the product. They include: 1) Inbound Logistics (receiving/storing raw materials), 2) Operations (manufacturing/transforming inputs into the final product), 3) Outbound Logistics (distributing the finished product), 4) Marketing & Sales (advertising and selling), and 5) Service (after-sales support, repairs).
Support Activities provide the infrastructure that allows the primary activities to take place. They include: 1) Firm Infrastructure (management, finance, legal), 2) Human Resource Management (recruiting, training), 3) Technology Development (R&D, IT systems), and 4) Procurement (the function of purchasing inputs). A firm achieves competitive advantage by performing these activities either cheaper or better than rivals.
However, a firm's value chain does not exist in isolation; it is part of a larger Value Network (or value system). This network includes the value chains of suppliers (upstream) and the value chains of distributors and customers (downstream). For example, 'BeanCrafters', a coffee roaster, has its own internal value chain. But its success also depends on the value chain of the farmer in Colombia (supplier) and the value chain of the local cafe (buyer). If the farmer's operations are inefficient, BeanCrafters' inbound logistics suffer. Managing the entire value network, not just the internal chain, is crucial for modern competitiveness.
Primary vs. Support
Examiners frequently test your ability to categorize an activity. Remember: Procurement (the act of buying) is a Support activity. Inbound Logistics (the physical handling/storing of what was bought) is a Primary activity.
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Step 1: Primary Activities in Action
BeanCrafters receives raw green beans at their warehouse (Inbound Logistics). They roast the beans in large ovens (Operations). They package and ship the roasted beans to cafes (Outbound Logistics). They run social media ads (Marketing) and offer barista training to the cafes (Service).
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Step 2: Support Activities Enabling the Process
To make this happen, the HR department hires skilled roasters (HRM). The IT department maintains the automated roasting software (Technology Development). The purchasing manager negotiates contracts with Colombian farmers (Procurement).
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Step 3: The Value Network
BeanCrafters integrates its IT system with the Colombian farmer's system, so BeanCrafters can see exactly when the beans are harvested. By optimizing the link between the supplier's value chain and their own, they create efficiencies across the entire Value Network.
Value is added at every step of the chain, and competitive advantage is found by optimizing these specific activities.
According to Porter's Value Chain, which of the following is classified as a 'Primary Activity'?
In the context of the Value Chain, what is the specific function of 'Operations'?
What does the term 'Value Network' (or value system) refer to?
Objective C: Explain the factors or forces that influence the level of competitiveness in an industry or sector using Porter's five forces model.
Michael Porter's Five Forces model is used to analyze the competitive intensity and attractiveness (profitability) of an industry. The collective strength of these five forces determines the ultimate profit potential of an industry.
- Threat of New Entrants: How easy is it for new firms to enter the market? If barriers to entry (e.g., capital costs, patents, regulations) are low, new firms will flood in, driving down profits.
- Threat of Substitutes: Are there alternative products outside the industry that serve the same need? (e.g., video conferencing is a substitute for business air travel). High substitute threat caps the prices an industry can charge.
- Bargaining Power of Buyers (Customers): If buyers are large, concentrated, and have many choices, they can demand lower prices and higher quality, squeezing industry profits.
- Bargaining Power of Suppliers: If suppliers are few, or their inputs are highly unique, they can charge high prices for raw materials, squeezing the industry's margins from the other side.
- Rivalry Among Existing Competitors: This is the center of the model. If there are many equally sized competitors, slow market growth, and high fixed costs, rivalry will be fierce, often leading to destructive price wars.
Consider the commercial airline industry. It is notoriously unprofitable because all five forces are strong. Rivalry is intense. Buyers (passengers) have high power because they can easily compare prices online. Suppliers (Boeing/Airbus, oil companies) have massive power because they are monopolies/oligopolies. Substitutes (high-speed rail, Zoom) are growing. The only saving grace is that the Threat of New Entrants is relatively low due to the billions of dollars required to buy planes and secure airport slots.
Substitutes vs. Rivals
A rival is a direct competitor in the same industry (e.g., Coca-Cola vs. Pepsi). A substitute is a product from a different industry that serves the same purpose (e.g., Coca-Cola vs. Tap Water or Fruit Juice).
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Step 1: Analyzing Entrants and Rivals
Orbit Mining extracts rare earth metals from asteroids. Threat of New Entrants is extremely LOW; it costs $10 billion to build a spaceship. Rivalry is LOW; there are only two other companies in the universe doing this.
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Step 2: Analyzing Buyers and Suppliers
Buyer Power is LOW; tech companies desperately need these metals and have nowhere else to go. Supplier Power is HIGH; Orbit relies on a single monopoly manufacturer for its specialized rocket engines, allowing the supplier to dictate prices.
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Step 3: Analyzing Substitutes
Threat of Substitutes is currently LOW, but growing. Scientists on Earth are trying to develop synthetic alternatives to rare earth metals. If successful, this substitute would destroy Orbit's pricing power.
By analyzing these forces, Orbit Mining knows its main strategic threats come from its rocket supplier and potential synthetic substitutes, not from new entrants.
In Porter's Five Forces model, which of the following would increase the 'Threat of New Entrants' into an industry?
A train operating company considers a domestic airline to be a competitive threat. In the context of Porter's Five Forces, how should the airline be classified?
When is the 'Bargaining Power of Buyers' likely to be highest?
Objective D: Describe the key activities of an organisation that affect its competitiveness.
Competitiveness is not just about external positioning; it is driven by how effectively an organisation manages its key internal activities. These activities span across the value chain and directly impact the firm's ability to achieve cost leadership or differentiation.
Innovation and R&D are critical. A firm that continuously innovates its products (e.g., a pharmaceutical company developing new drugs) or its processes (e.g., a manufacturer inventing a faster assembly line) stays ahead of rivals. Quality Management is another key activity. Consistently delivering high-quality, defect-free products builds brand loyalty and reduces the costs associated with returns and repairs. Marketing and Branding activities create perceived value. Even if two products are physically identical, superior marketing can make one appear more desirable, allowing the firm to charge a premium.
Furthermore, Supply Chain Management directly affects competitiveness. Efficiently managing the flow of materials from suppliers to customers reduces inventory holding costs and ensures products are available when customers want them. Finally, Human Resource Management is vital. Recruiting top talent, training them effectively, and motivating them ensures the firm has the intellectual capital required to execute its strategy. Consider 'Quantum Robotics'. Their competitiveness relies on intense R&D (to invent better robots), strict Quality Management (so the robots don't break), and strategic HRM (to attract the world's best AI engineers). If any of these key activities fail, their competitive advantage collapses.
Integration of Activities
Competitiveness is rarely achieved by excelling at just one activity. It is the integration of these activities (e.g., R&D inventing a product that Marketing can easily sell, and Supply Chain can cheaply deliver) that creates an unbeatable advantage.
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Step 1: The Role of R&D and Innovation
Quantum's R&D team develops a new robotic arm that is 20% faster than any competitor's model. This innovation activity directly creates a differentiation advantage.
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Step 2: The Role of Supply Chain Management
To build the arm cheaply, the Supply Chain team sources lightweight carbon fiber from a new, low-cost supplier. This activity lowers production costs, contributing to a cost advantage.
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Step 3: The Role of Quality Management
Before shipping, the Quality Management team subjects the arms to rigorous stress tests. This ensures zero defects upon delivery, building a reputation for reliability that competitors cannot match.
A firm's ultimate competitiveness is the sum total of how well it executes these fundamental business activities.
Which key organisational activity is primarily responsible for ensuring that products are free from defects and meet customer expectations?
How does effective Supply Chain Management primarily enhance a firm's competitiveness?
A technology firm invests heavily in its Human Resource Management (HRM) to offer extensive training and high salaries to software developers. How does this activity most directly affect its competitiveness?