Swinburne University of Technology

Faculty of Business and Design

ACC30009/HBC229N
Analysis for Competitive Advantage
Lecture 1: Intro to Business Strategy & Competitive Advantage
LEARNING OBJECTIVES
After working through this topic, you will be able to:
1. Identify the strategic options available to businesses and suggest a generic strategy suitable
for a particular industry.
2. Expound on the three tiers of environmental factors affecting contemporary businesses in
order
to have an appreciation of the way businesses compete.
3. Comprehend how management accounting information relates to strategic choices
and appreciate the varied role of management accountants.

LECTURE OUTLINE
1. Why focus on strategy; Business level strategy and value proposition; Generic strategies
• product differentiation
• cost leadership
2. Three tiers of environmental factors affecting the firm
• Remote environment
• Industry environment
o Porter’s 5-Force Industry Analysis=> New Entrants; Powerful Suppliers,
Powerful Buyers; Substitute Products, Industry Competitors
• Operating environment
3. Implications for Management Accounting; The changing role of Management Accountant

ESSENTIAL READINGS:
• Chapter 4, Pearce and Robinson, 10th edition, pp. 83-114
• Porter, Michael, Notes on Structural Analysis of Industries

STRATEGY AND VALUE PROPOSITION

Recent changes in the business environment (markets becoming global, sophisticated technology,
greater competition and more discerning customers) exacerbate the need to make strategic decisions
in order to maximise the firm’s competitive advantage. Horngren, Datar and Foster (2006, p. 456)
state that strategy ‘specifies how an organisation matches its own capabilities with the opportunities in
the market place to accomplish its objectives’.

An important element of an organisation’s strategy is the identification of its target customers and
delivering what those customers want. i.e. value proposition.

Value Proposition has four elements:

1. Cost 2. Quality
3. Functionality and features 4. Service

Two Generic Strategies:

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 1. Product differentiation 2. Cost leadership

THE FIRM’S EXTERNAL ENVIRONMENT

Factors that more directly influence a firm’s prospects originate in the environment of its industry,
including entry barriers, competitive rivalry, the availability of substitutes, and the bargaining power
of buyers and suppliers. The operating environment comprises factors that influence a firm’s
immediate competitive situation—competitive position, customer profiles, suppliers, creditors, and
the labor market. These three sets of factors provide many of the challenges that a particular firm
faces in its attempts to attract or acquire needed resources and to profitably market its goods and
services. Environmental assessment is more complicated for multinational corporations (MNCs) than
for domestic firms because multinationals must evaluate several environments simultaneously.

I. Remote Environment
The remote environment comprises factors that originate beyond, and usually irrespective of, any
single firm’s operating situation: (1) economic, (2) social, (3) political, (4) technological, and (5)
ecological factors.
 Economic Factors - concern the nature and direction of the economy in which a firm operates and
the emergence of international power brokers.
a) Because consumption patterns are affected by the relative affluence of various market segments,
each firm must consider economic trends in the segments that affect its industry.
b) On both the national and international levels, managers must consider the general availability of
credit, the level of disposable income, and the propensity of people to spend.
c) Prime interest rates, inflation rates, and trends in the growth of the gross national product are other
economic factors they should monitor.
d) Among the most prominent of these power brokers are the European Economic Community (EEC,
or Common Market), the Organization of Petroleum Exporting Countries (OPEC), and coalitions of
developing countries.

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 Social Factors
The social factors that affect a firm involve the beliefs, values, attitudes, opinions, and lifestyles of
persons in the firm’s external environment, as developed from cultural, ecological, demographic,
religious, educational, and ethnic conditioning.
 Political Factors - the direction and stability of political factors are a major consideration for
managers on formulating company strategy.
a) Political factors define the legal and regulatory parameters within which firms must operate.
b) Political constraints are placed on firms through fair-trade decisions, antitrust laws, tax programs,
minimum wage legislation, pollution and pricing policies, administrative jawboning, and many other
actions aimed at protecting employees, consumers, the general public, and the environment.
c) Because such laws and regulations are most commonly restrictive, they tend to reduce the potential
profits of firms.
 Technological Factors - to avoid obsolescence and promote innovation, a firm must be aware of
technological changes that might influence its industry. Creative technological adaptations can
suggest possibilities for new products, for improvements in existing products, or in manufacturing and
marketing techniques. A quasi-science of attempting to foresee advancements and estimate their
impact on an organization’s operations is known as technological forecasting. Technological
forecasting can alerts strategic managers to both impending challenges and promising opportunities.
 Ecological Factors - the most prominent factor in the remote environment is often the reciprocal
relationship between business and the ecology. The term ecology refers to the relationships among
human beings and other living things and the air, soil, and water that supports them. Threats to our
life-supporting ecology caused principally by human activities in an industrial society are commonly
referred to as pollution. The global climate has been changing for ages; however, it is now evident
that humanity’s activities are accelerating this tremendously.

International Environment => Monitoring the international environment, perhaps better thought of
as the international dimension of the global environment, involves assessing each nondomestic market
on the same factors that are used in a domestic assessment. While the importance of factors will
differ, the same set of considerations can be used for each country.

II. Industry Environment

A. Harvard professor Michael E. Porter propelled the concept of industry environment into the
foreground of strategic thought and business planning. Porter’s well-defined analytic framework
helps strategic managers to link remote factors to their effects on a firm’s operating environment.

How Competitive Forces Shape Strategy

A. The essence of strategy formulation is coping with competition.
 The state of competition in an industry depends on five basic forces.
a) The collective strength of these forces determines the ultimate profit potential of an industry.
b) Profit potential ranges from intense to mild.

Contending Forces
A. Industry Competitors. The strongest competitive force or forces determine the profitability of an
industry and so are of greatest importance in strategy formulation.

B. Threat of Entry - New entrants to an industry bring new capacity, the desire to gain market share,
and often substantial resources. The seriousness of the threat of entry depends on the barriers present
and on the reaction from existing competitors that the entrant can expect. If barriers to entry are high
and a newcomer can expect sharp retaliation from the entrenched competitors, he or she obviously
will not pose a serious threat of entering.

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1. Economies of Scale. These economies deter entry by forcing the aspirant either to come in on a
large scale or to accept a cost disadvantage. Economies of scale also can act as hurdles in distribution,
utilization of the sales force, financing, and nearly any other parts of a business (including production,
research, marketing, and service).
2. Product Differentiation, or brand identification, creates a barrier by forcing entrants to spend
heavily to overcome customer loyalty.

3. Capital Requirements. The need to invest large financial resources in order to compete creates a
barrier to entry, particularly if the capital is required for unrecoverable expenditures in upfront
advertising or R&D.
4. Cost Disadvantages Independent of Size
a) Entrenched companies may have cost advantages not available to potential rivals, no matter what
their size and attainable economies of scale.
b) These advantages can stem from the effects of the learning curve (and the experience curve),
proprietary technology, access to the best raw materials sources, assets purchased at pre-inflation
prices, government subsidies, or favorable locations.
c) Sometimes cost advantages are enforceable legally, as with patents.
5. Access to Distribution Channels
a) The new boy or girl on the block must, of course, secure distribution of his or her product or
service.
b) The more limited the wholesale or retail channels are and the more that existing competitors have
these tied up, obviously the tougher that entry into that industry will be.
c) Sometimes this barrier is so high that, to surmount it, a new contestant must create its own
distribution channels.
6. Government Policy
a) The government can limit or even foreclose entry to industries, with such controls as license
requirements, limits on access to raw materials, and tax incentives.
b) The potential rival’s expectations about the reaction of existing competitors also will influence its
decision on whether or not to enter.

C. Powerful Suppliers
1. Suppliers can exert bargaining power on participants in an industry by raising prices or reducing
the quality of purchased goods and services.
2. Powerful suppliers can squeeze profitability out of an industry unable to recover cost increases in
its own prices.
3. The power of each important supplier (or buyer) group depends on a number of characteristics of
its market situation and on the relative importance of its sales or purchases to the industry compared
with its overall business.
a) A supplier group is powerful if:
(1) It is dominated by a few companies and is more concentrated than the industry it sells.
(2) Its product is unique or at least differentiated, or if it has built-up switching costs. [Switching
costs are fixed costs that buyers face in changing suppliers.]
(3) It is not obliged to contend with other products for sale to the industry.
(4) It poses a credible threat of integrating forward into the industry’s business.
(5) The industry is not an important customer of the supplier group. If the industry is an important
customer, suppliers’ fortunes will be tied closely to the industry, and they will want to protect the
industry through reasonable pricing and assistance in activities like R&D and lobbying.

D. Powerful Buyers
1. Customers can force down prices, demand higher quality or more service, and play competitors off
against each other—all at the expense of industry profits.
2. A buyer group is powerful
if:
a) It is concentrated or purchases in large volumes.
b) The products it purchases from the industry are standard or undifferentiated.
c) The products it purchases from the industry form a component of its product and represent a
significant fraction of its cost.
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d) It earns low profits, which create grate incentive to lower its purchasing costs.
e) The industry’s product is unimportant to the quality of the buyers’ products or services.
f) The industry’s product does not save the buyer money.
g) The buyers pose a credible threat of integrating backward to make the industry’s product.

3. Most of these sources of buyer power can be attributed to consumers as a group as well as to
industrial and commercial buyers; only a modification of the frame of reference is necessary.
a) Consumers tend to be more price sensitive if they are purchasing products that are undifferentiated,
expensive relative to their incomes, and of a sort where quality is not particularly important.
b) The buying power of the retailers is determined by the same rules, with one important addition:
Retailers can gain significant bargaining power over manufacturers when they can influence
consumers’ purchasing decisions.

E. Substitute Products
1. By placing a ceiling on the prices it can charge, substitute products or services limit the potential
of an industry.
a) Unless it can upgrade the quality of the product or differentiate it somehow, the industry will suffer
in earnings and possibly in growth.
b) The more attractive the price-performance trade-off offered by substitute products, the firmer the
lid placed on an industry’s profit potential.

2. Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap
in boom times.
3. Substitute products that deserve the most attention strategically are those that are (a) subject to
trends improving their price-performance trade-off with the industry’s product or (b) produced by
industries earning high profits.

F. Jockeying for Position

1. Rivalry among existing competitors takes the familiar form of jockeying for position—using
tactics like price competition, product introduction, and advertising slug fests.
2. This type of intense rivalry is related to the presence of a number of factors:
a) Competitors are numerous or are roughly equal in size and power.
b) Industry growth is slow, precipitating fights for market share that involve expansion-minded
members.
c) The product or service lacks differentiation or switching costs, which lock in buyers and protect
one combatant from raids on its customers by another.
d) Fixed costs are high or the product is perishable, creating strong temptation to cut prices.
e) Capacity normally is augmented in large increments.
f) Exit barriers are high.
g) The rivals are diverse in strategies, origins, and “personalities.”
3. As an industry matures, its growth rate changes, resulting in declining profits and (often) a
shakeout.
4. An acquisition can introduce a very different personality to an industry.
5. While a company must live with many of these factors—because they are built into the industry
economics—it may have some latitude for improving matters through strategic shifts.

III. Operating Environment

A. The operating environment, also called the competitive or task environment, comprises factors in
the competitive situation that affect a firm’s success in acquiring needed resources or in profitably
marketing its goods and services.
1. Among the most important of these factors are a firm’s competitive position, the composition of its
customers, its reputation among suppliers and creditors, and its ability to attract capable employees.
2. The operating environment is typically much more subject to the firm’s influence or control than
the remote environment.

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3. This allows firms to be much more proactive in dealing with the operating environment than in
dealing with the remote environment.

B. Competitive Position
1. Assessing its competitive position improves a firm’s chances of designing strategies that optimize
its environmental opportunities.

2. Development of competitor profiles enables a firm to more accurately forecast both its short- and
long-term growth and its profit potentials.

C. Customer Profiles
1. Perhaps the most vulnerable result of analyzing the operating environment is the understanding of
a firm’s customers that this provides.
a) Developing a profile of a firm’s present and prospective customers improves the ability of its
managers to plan strategic operations, to anticipate changes in the size of markets, and to reallocate
resources so as to support forecast shifts in demand patterns.
b) Enterprising companies have quickly learned the importance of identifying target segments.
c) Assessing consumer behavior is a key element in the process of satisfying your target market
needs.
d) Many firms lose market share as a result of assumptions made about target segments.
e) Market research and industry surveys can help to reduce a firm’s chances of relying on illusive
assumptions.
f) Firms that are most vulnerable are those that have had success with one or more products in the
marketplace and as a result try to base consumer behavior on past data and trends.

2. Geographic
a) It is important to define the geographic area from which customers do or could come.
b) Almost every product or service has some quality that makes it variably attractive to buyers from
different locations.

3. Demographic
a) Demographic variables most commonly are used to differentiate groups of present or potential
customers.
b) Demographic information is comparatively easy to collect, quantify, and use in strategic
forecasting, and such information is the minimum basis for a customer profile.

4. Psychographic
a) Personality and lifestyle variables often are better predictors of customer purchasing behavior than
geographic or demographic variables.
b) In such situations, a psychographic study is an important component of the customer profile.

5. Buyer Behavior
a) Buyer behavior data also can be a component of the customer profile.
b) Such data are used to explain or predict some aspect of customer behavior with regard to a product
or service.
c) Information on buyer behavior can provide significant aid in the design of more accurate and
profitable strategies.

D. Suppliers
1. Dependable relationships between a firm and its suppliers are essential to the firm’s long-term
survival and growth.
a) A firm regularly relies on its suppliers for financial support, services, materials, and equipment.
b) In addition, it occasionally is forced to make special requests for such favors as quick delivery,
liberal credit terms, or broken-lot orders.
c) At such times it is essential for a firm to have had an ongoing relationship with its suppliers.

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2. In assessment of a firm’s relationships with its suppliers, several factors, other than the strength of
that relationship, should be considered:
a) Are the suppliers’ prices competitive? Are there attractive quantity discounts?
b) How costly are their shipping charges? Are they competitive in terms of production standards?
c) In terms of deficiency rates, are the suppliers’ abilities, reputations, and services competitive? Are
the suppliers reciprocally dependent on the firm?

3. An important way for suppliers to increase their power over customers is to extend them credit.
a) Many suppliers provide their customers a type of loan by allowing them to defer payments if they
pay an interest charge.

E. Creditors
1. Because the quantity, quality, price, and accessibility of financial, human, and material resources
are rarely ideal, assessment of suppliers and creditors is critical to an accurate evaluation of a firm’s
operating environment.
2. With regard to its competitive position with its creditors, among the most important questions that
the firm should address are the following:

a) Do the creditors fairly value and willingly accept the firm’s stock as collateral?
b) Do the creditors perceive the firm as having an acceptable record of past payment?
c) A strong working capital position? Little or no leverage?
d) Are the creditors’ loan terms compatible with the firm’s profitability objectives?
e) Are the creditors able to extend the necessary lines of credit?
3. The answers to these and related questions help a firm forecast the availability of the resources it
will need to implement and sustain its competitive strategies.

F. Human Resources: Nature of the Labor Market

1. A firm’s ability to attract and hold capable employees is essential to its success.
a) A firm’s personnel recruitment and selection alternatives often are influenced by the nature of its
operating environment.
b) A firm’s access to needed personnel is affected primarily by four factors: the firm’s reputation as
an employer, local employment rates, the ready availability of people with the needed skills, and its
relationship with labor unions.
2. Reputation
a) A firm’s reputation within its operating environment is a major element of its ability to satisfy its
personnel needs.
b) A firm is more likely to attract and retain valuable employees if it is seen as permanent in the
community, competitive in its compensation package, and concerned with the welfare of its
employees, and if it is respected for its product or service and appreciated for its overall contribution
to the general welfare.
3. Employment Rates
a) The readily available supply of skilled and experienced personnel may vary considerably with the
stage of a community’s growth.
b) A new manufacturing firm would find it far more difficult to obtain skilled employees in a
vigorous industrialized community than in an economically depressed community in which smaller
firms had recently cut back operations.

4. Availability
a) The skills of some people are so specialized that relocation may be necessary to secure the jobs
and the compensation that those skills commonly command.
b) A firm that seeks to hire such a person is said to have broad labor market boundaries; that is, the
geographic area within which the firm might reasonably expect to attract qualified candidates is quite
large.
c) On the other hand, people with more common skills are less likely to relocate from a considerable
distance to achieve modest economic or career advancements.

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d) Thus, the labor market boundaries are fairly limited for such occupational groups as unskilled
laborers, clerical personnel, and retail clerks.

5. Labor Unions
a) Approximately 12 percent of all workers in the United States belong to a labor union; the
percentages are higher in Japan and western Europe at about 25 and 40 percent, respectively, and
extremely low in developing nations.
b) Unions represent the workers in their negotiations with employers through the process of collective
bargaining.
c) When managers’ relationships with their employees are complicated by the involvement of a
union, the company’s ability to manage and motivate the people that it needs can be compromised.

Emphasis on Environmental Factors

A. The forces in the external environment are so dynamic and interactive that the impact of any single
element cannot be wholly disassociated from the effect of other elements.

1. Strategic managers are frequently frustrated in their attempts to anticipate the environments’
changing influences.
a) Differing external elements affect different strategies at different times and with varying strengths.
b) The only certainty is that the effect of the remote and operating environments will be uncertain
until a strategy is implemented.
c) This leads many managers, particularly in less powerful or smaller firms, to minimize long-term
planning, which requires a commitment of resources.
d) Instead, they favor allowing managers to adapt to new pressures from the environment.
e) There is an associated trade-off, namely that absence of a strong resources and psychological
commitment to a proactive strategy effectively bars a firm from assuming a leadership role in its
competitive environment.

2. There is yet another difficulty in assessing the probable impact of remote, industry, and operating
environments on the effectiveness of alternative strategies.
a) Assessment of this kind involves collecting information that can be analyzed to disclose
predictable effects.
b) Except in rare instances, however, it is virtually impossible for any single firm to anticipate the
consequences of a change in the environment.

IMPLICATIONS AND THE ROLE OF MANAGEMENT

ACCOUNTANT
The complexity of the firm’s external environment determines the strategic decisions the management
has to make which in turn affects the management accounting systems (MAS) adopted by the firm.
For example, the generic strategy chosen by the firm drives the formulation of plans used in the
preparation of budgets. Accounting systems should be designed to highlight differences between
planned objectives and actual outcomes so that corrective actions can be taken. Furthermore,
performance reports need to have a comprehensive coverage of all activities in order to provide
feedback.

The changing demands brought about by the globalisation of markets, technological innovations, high
customer expectations and greater competition necessitated a change in the role of management
accountants. Apart from being able to adapt to the changing market needs, management accountants
need to be able to conduct various analytical techniques with greater emphasis on the external
environment.