UM23AC141A-Business and Technology [ACCA] (4-0-0-4-4)

Unit-3
Competition analysis & stakeholder analysis

Competitive factors are the forces that influence the competitive landscape of a business or
industry. They can be internal or external to the business, and they can be positive or
negative.

Some examples of competitive factors include:

 Product quality and features: What are the strengths and weaknesses of your product
or service compared to those of your competitors?

 Price: How competitive is your pricing?

 Brand recognition: How well-known and respected is your brand?

 Customer service: How well do you treat your customers?

 Distribution channels: How do you get your product or service to your customers?

 Marketing and advertising: How do you promote your product or service to potential
customers?

 Sales force: How effective is your sales team?

 Technological innovation: How quickly do you adopt new technologies?

 Cost structure: How low are your costs?

 Government regulations: How do government regulations affect your business?

  Economic conditions: How do economic conditions affect your business?

Businesses can use competitive analysis to identify and understand the competitive
factors

Competitive advantage
Competitive advantage is what sets a company apart from its competitors and gives it an edge
in the marketplace. Part of a firm’s external analysis will involve assessing the degree and
sources of competition within the industry. The key issue here is whether the firm has a
sustainable competitive advantage. It can be anything that makes a company's products or
services more desirable to customers, such as lower prices, higher quality, better customer
service, or unique features.

There are three main types of competitive advantage:

 Cost advantage: This is when a company can produce goods or services at a lower
cost than its competitors. This can be due to factors such as economies of scale,
access to cheaper raw materials, or more efficient production processes.

 Differentiation advantage: This is when a company's products or services are

perceived as being different from and better than those of its competitors. This can be
due to factors such as higher quality, unique features, or a strong brand identity.

 Focus advantage: This is when a company focuses on a specific market segment or

product category and serves it better than any other company. This can be due to
 factors such as deeper understanding of the customer's needs, more specialized
products or services, or a stronger reputation in the segment.

Companies can achieve a competitive advantage by developing strategies that leverage their
strengths and exploit the weaknesses of their competitors. For example, a company with a
cost advantage can implement a low-cost pricing strategy to attract customers who are price-
sensitive. A company with a differentiation advantage can implement a premium pricing
strategy to target customers who are willing to pay more for higher quality or unique features.
A company with a focus advantage can develop products and services that are specifically
tailored to the needs of its target market.

Having a competitive advantage is essential for businesses of all sizes. It allows businesses to
attract and retain customers, generate higher profits, and grow faster.

Here are some examples of companies that have achieved a competitive advantage:

 Apple: Apple has a differentiation advantage in the smartphone market, thanks to its
innovative products and strong brand identity.

 Costco: Costco has a cost advantage in the retail industry, thanks to its large scale and
efficient operations.

 Amazon: Amazon has a focus advantage in the e-commerce market, thanks to its wide
selection of products, competitive prices, and convenient customer experience.

These companies have been able to achieve a competitive advantage by developing strategies
that leverage their strengths and exploit the weaknesses of their competitors. As a result, they
have become leaders in their respective industries.

This will be analyzed in three steps:

 The main competitive forces in an industry
 The different ways a firm can achieve a competitive advantage
 How different activities and departments within the firm contribute to its competitiveness.

Porter’s five force analysis

PEST analysis is particularly good at identifying whether and why certain markets will be
expected to grow in the future. However, just because a market is growing, it does not follow
that it is possible to make money in it.

Porter’s five forces approach looks in detail at the firm’s competitive environment by
analyzing five key areas, or ‘forces’.

Together these forces determine the overall profit potential of the industry. Looking at an
individual firm, its ability to earn higher profit margins will be determined by whether or not
it can manage the five forces more effectively than competitors.

Porters five forces factors are

 Competitive rivalry
 Threat of entry
 Threat of substitute
 Bargaining power of customers
 Bargaining power of suppliers

Competitive rivalry

Highly competitive rivalry will put pressure on firms to cut prices and/or improve quality to
retain customers. The result is reduced margins.
Intensity of existing competition will depend on the following factors:
 Number and relative strength of competitors – where an industry is dominated by a
few large companies’ rivalry is less intense (e.g. petrol industry, CD manufacture).
 Rate of growth – where the market is expanding, competition is low key.
 Where high fixed costs are involved, companies will cut prices to marginal cost levels
to protect volume, and drive weaker competitors out of the market.
 If buyers can switch easily between suppliers the competition is keen.
 If the exit barrier (i.e. the cost incurred in leaving the market) is high, companies will
hang on until forced out, thereby increasing competition and depressing profit.
  An organisation will be highly competitive if its presence in the market is the result
of a strategic need.

Threat of entry
New entrants into a market will bring extra capacity and intensify competition. The threat
from new entrants will depend upon the strength of the barriers to entry and the likely
response of existing competitors to a new entrant. Barriers to entry are factors that make it
difficult for a new entrant to gain an initial foothold in a market.

There are six major sources of barriers to entry.

 Economies of scale, where the industry is one where unit costs decline significantly as
volume increases, such that a new entrant will be unable to start on a comparable cost
basis.
 Product differentiation, where established firms have good brand image and customer
loyalty. The costs of overcoming this can be prohibitive.
 Capital requirements, where the industry requires a heavy initial investment (e.g. steel
industry, rail transport).
 Switching costs, i.e. one-off costs in moving from one supplier to another (e.g. a
garage chain switching car dealership).
 Access to distribution channels may be restricted (e.g. for some major toiletry brands
90% of sales go through 12 buying points), i.e. chemist multiples and major retailers.
Therefore, it is difficult for a new toiletry product or manufacturer to gain shelf space.
 Cost advantages independent of scale, e.g. patents, special knowledge, favorable
access to suppliers, government subsidies.

Threat of substitute products

This threat is across industries (e.g. rail travel versus bus travel versus private car) or
within an industry (e.g. long-life milk as a substitute for delivered fresh milk). Porter
explains that, ‘substitutes limit the potential returns ... by placing a ceiling on the price
which firms in the industry can profitably charge’. The better the price-performance
alternative offered by substitutes, the more readily customers will switch.

Bargaining power of customers

 Powerful customers can force price cuts and/or quality improvements. Either way
margins are eroded. Bargaining power is high (as, for instance, Sainsbury and Tesco in
relation to their suppliers) when a combination of factors arises.

Such factors could include the following.

 Where a buyer’s purchases are a high proportion of the supplier’s total business or
represent a high proportion of total trade in that market.
 Where a buyer makes a low profit.
 Where the quality of purchases is unimportant or delivery timing is irrelevant, prices
will be forced down.
 Where products have been strongly differentiated with good brand image, a retailer
would have to stock the complete range to meet customer demands.

Bargaining power of suppliers

The power of suppliers to charge higher prices will be influenced by the following:
 the degree to which switching costs apply and substitutes are available
 the presence of one or two dominant suppliers controlling prices
 the extent to which products offered have a uniqueness of brand, technical
performance or design not available elsewhere.

Generic strategies
This model, developed by Porter, examines the different ways that an organisation can
achieve a competitive advantage in its market.
Porter argued that businesses could adopt one of three strategies to gain competitive
advantage. Each business can adopt the strategy that best fits their individual circumstances.
 Cost leadership
 Differentiation
 Focus

Cost leadership
This involves the business making a product of similar quality to its rivals, but at a lower
cost. This is normally achieved through internal efficiencies. Cost leadership will usually
allow the organisation to:
 sell its products at a lower price than rivals, increasing its sales; or
  sell its products at the same price as its rivals, but make higher profits.

For example, Casio Electronics Ltd follows a cost leadership approach and has sold over 1
billion pocket calculators. Its calculators are not of inferior quality, but it has organized its
operations to minimize its production costs, such as through mass manufacturing its products
in countries with low labor costs.

Differentiation
This strategy involves persuading customers that our product is superior to that of our rivals.
It can be done by adding additional features to the product or by altering customer perception
of the product through advertising or branding. Differentiation will usually allow the business
to charge a premium price for its product.

British Airways (BA) is a multinational airline. It has adopted a differentiation approach by

offering passengers a higher quality experience than many of its rivals, through offering
superior customer service and convenient, more luxurious flights. This has allowed the
company to charge a premium for its services.

Focus
This involves aiming at a segment of the market, rather than the market as a whole. A
particular group of consumers is identified with the same needs and the business will provide
products or services that are tailored to their needs. This tailored approach will typically
allow the business to charge a premium for their products.

Saga is an example of a company that has adopted a focus approach. It offers a range of
products and services that are tailored for customers over the age of 50.

Conclusion
Porter argued that businesses needed to adopt one of the above three approaches or they
would be ‘stuck in the middle’, which would make it difficult for them to compete
successfully.

Porter’s value chain

Porter developed his value chain to determine whether and how a firm’s activities contribute
towards its competitive advantage.

The value chain

The approach involves breaking the firm down into five ‘primary’ and four ‘support’
activities, and then looking at each to see if they give a cost advantage or quality advantage.

Primary activities

Support (also known as secondary) activities

How different departments contribute to competitive advantage
Porter’s value chain can now be used to explain how different departments contribute to
competitiveness as follows:

Purchasing
 Cost advantages – sourcing cheaper materials, bulk discounts, centralized buying.
 Quality advantages – sourcing higher quality materials, employing expert buyers.

Production
 Cost advantages – mass production lines, standardization, employing workers just above the
minimum wage, keeping stock levels low.
 Quality advantages – using better quality materials, more quality control procedures,
employing highly skilled staff, flexible manufacturing systems, use of technology to ensure
better consistency, ongoing training of staff.

Marketing
 Cost advantages – word-of-mouth promotion, sell direct to cut distribution costs.
 Quality advantages – market research can help tailor products to meet customer needs, large
promotional budgets, sponsorship, perceived quality pricing, brand development.

Service
 Cost advantages – outsourcing (?), not offering service provision, low paid staff.
 Quality advantages – outsourcing (?), highly skilled staff.

Value networks
This refers to a set of connections between organisations and individuals interacting with
each other to benefit the entire group. It will allow members to share information as well as
buy and sell products. Organizations’ value chains don't exist in isolation. There will be links
between the inbound logistics of a company and the outbound logistics of its suppliers, for
example.

A value network is a network of businesses and individuals that work together to create and
deliver value to customers. It can include suppliers, customers, distributors, and other
partners.

Here is an example of a value network for a smartphone company:

 Suppliers: The company's suppliers provide the raw materials and components that
are used to manufacture the smartphones. These suppliers may include companies that
produce screens, processors, memory chips, and other components.

 Customers: The company's customers are the people who buy its smartphones. These
customers may be individuals, businesses, or government agencies.

 Distributors: The company's distributors sell its smartphones to retailers. These

distributors may be wholesale companies or retail chains.

 Other partners: The company may also partner with other businesses to offer
additional services and benefits to its customers. For example, the company may
partner with a mobile carrier to offer exclusive deals on data plans.

The value network for a smartphone company is complex and involves many different
businesses and individuals. However, all of these businesses and individuals play a role in
creating and delivering value to customers.

Corporate appraisal (SWOT)

SWOT analysis examines the Strengths, Weaknesses, Opportunities and Threats of an
organisation.
This is an integral part of strategic analysis. Unlike PEST analysis, which focuses on external
environmental issues, SWOT analysis is used to view the internal and external situation that
an organisation finds itself in. Strengths and weaknesses examine what an organisation
internally does well or badly, while opportunities and threats look at positive and negative
factors that might impact on the organisation externally.
To do this, it draws on PEST analysis, as well as the other models examined in this chapter.
Because of this, SWOT analysis is a vital tool that an organisation uses in its long-term
strategic planning process.

Once identified, management can consider:

 matching strengths to opportunities may highlight new areas for organizational
development
or:
 methods of removing weaknesses or dealing with the threats the organisation faces
Stakeholders in business organisations

Stakeholders and stakeholder conflict are also discussed in the Financial Management
examination. Mendelow’s matrix is explored further in the Strategic Business Leader
examination.

What are stakeholders?

A stakeholder is an individual or group who has an interest in what the organisation does, or
who affects, or can be affected by, the organization’s actions.
It is vital for managers to understand the varying needs of the different stakeholders in their
organisation. Failure to do so could mean that important stakeholders do not have their needs
met, which could be disastrous for the company.

Stakeholder objectives

Different stakeholders will expect different things from a business. Given their different
interests in the business, sometimes their expectations can cause conflict. The business has to
balance these various interests.

Some examples of the different priorities of stakeholder groups:

 shareholders and owners want to ensure the business is successful and are interested
in how much profit the business can make
 managers want a good salary and opportunities for further career progression
 employees want good levels of pay, job satisfaction and job security, and may also be
interested in career progression
 customers want good quality and a range of products at reasonable prices
  suppliers want to receive payments on time, and regular orders
 the local community (people living in the area) may be looking for work, which local
businesses can provide
 pressure groups want to increase knowledge of their cause, eg if a business is going to
increase traffic pollution in their area
 the government wants businesses to create more jobs in order to raise more money
from taxes and save money on benefit payments

Stakeholders can be broadly categorized into three groups: internal, external and connected.

Types of stakeholders
 Internal stakeholders
 Connected stakeholders
 External stakeholders

Internal stakeholders
These are any stakeholders that are within the organisation itself. Their objectives are likely
to have a strong influence on how it is run.
Connected stakeholders
Connected stakeholders either invest in or have dealings with the firm.

External stakeholders

These stakeholders tend to not have a direct link to the organisation but can influence or be
influenced by its activities.
As with connected stakeholders, they will have very diverse objectives for the organisation to
take account of.
Primary and secondary
This is a different method of categorising stakeholders, which is based on whether or not they
have a contractual relationship with the organisation.

Primary stakeholders are those that have a contractual relationship, for instance employees,
directors, shareholders – in fact any stakeholder who falls into the ‘connected’ or ‘internal’
categories which are examined above.

Secondary stakeholders are parties that have an interest in the organisation, but have no
contractual link, such as the public. Any stakeholders in the ‘external’ category would fall
into this group.

Stakeholder conflict
An organisation can have many different stakeholders, all with different needs. Inevitably,
these needs of some stakeholders will come into conflict with the needs of others.
In the event of conflict, an organisation will need to decide which stakeholder’s needs are
more important. This will commonly be the most dominant stakeholder (in other words, the
one with the most power).

If an organisation is having difficulty deciding who the dominant stakeholder is, they can use
Mendelow’s power-interest matrix.

By plotting each stakeholder according to the power, they have over the organisation and the
interest they have in a particular decision, the dominant stakeholder(s), i.e. the key players
can be identified. The needs of the key players must be considered during the formulation and
evaluation of new strategies.

Further issues with Mendelow's matrix

Although the other stakeholders may be fairly passive, the managers must be aware that
stakeholder groups can emerge and move from quadrant to quadrant as a result of specific
events, so changing their position in the matrix.

Sources of stakeholder power

Sources of stakeholder power include:

Hierarchy – provides people or groups with formal power over others. Influence – may arise
from personal qualities (leadership).
Control of the environment – knowledge, contact and influence of the environment can be a
source of power if they are able to reduce the uncertainty experienced by others.

It should be noted that, in reality, managers need to consider the needs of as many
stakeholders as possible. This means that nearly every decision becomes a compromise. For
example, a business will have to earn a satisfactory return for its shareholders whilst paying
reasonable wages.