BME2. Lesson1 Part 2

Republic of the Philippines
NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY

COLLEGE OF MANAGEMENT AND BUSINESS TECHNOLOGHY –
Hospitality and Tourism Management
ISO 9001:2015 Certified
STRATEGIC
MANAGEMENT
Unit 1 Lesson2
Porter’s Generic Strategies
• For organisations to survive and succeed they need to adopt a
competitive strategy
• Based on gaining competitive advantage
• Gaining advantage through better value, price or benefits
Understanding Porter's Five Forces
Porter's Five Forces is a business
analysis model that helps to explain why
various industries are able to sustain
different levels of profitability. The
model was published in Michael E.
Porter's book, "Competitive
Strategy: Techniques for Analyzing
Industries and Competitors" in 1980.
Porter identified five
undeniable forces that
play a part in shaping
every market and
industry in the world,
with some caveats.
The five forces are frequently used to measure competition
intensity, attractiveness, and profitability of an industry or
market.
1. Competition in the industry

2. Potential of new entrants into the
industry 3. Power of suppliers
4. Power of customers
5. Threat of substitute products
Competition in the Industry
The first of the five forces refers to the number of competitors and
their ability to undercut a company. The larger the number of
competitors, along with the number of equivalent products and
services they offer, the lesser the power of a company. Suppliers
and buyers seek out a company's competition if they are able to
offer a better deal or lower prices. Conversely, when competitive
rivalry is low, a company has greater power to charge higher
prices and set the terms of deals to achieve higher sales and
profits.
Potential of New Entrants into an
Industry A company's power is also affected by the force
of new entrants into its market. The less time and
money it costs for a competitor to enter a
company's market and be an effective
competitor, the more an established company's
position could be significantly weakened. An
industry with strong barriers to entry is ideal for
existing companies within that industry since the
company would be able to charge higher prices
and negotiate better terms.
Bargaining Power of Suppliers
The next factor in the five forces model addresses
how easily suppliers can drive up the cost of inputs. It
is affected by the number of suppliers of key inputs of
a good or service, how unique these inputs are, and
how much it would cost a company to switch to
another supplier. The fewer suppliers to an industry,
the more a company would depend on a supplier. As
a result, the supplier has more power and can drive
up input costs and push for other advantages in
trade. On the other hand, when there are many
suppliers or low switching costs between rival
suppliers, a company can keep its input costs lower
and enhance its profits.
Power of Customers
The ability that customers have to drive prices lower
or their level of power is one of the five forces. It is
affected by how many buyers or customers a
company has, how significant each customer is, and
how muchit wouldcostacompanytofindnewcustomers
or markets for its output. A smaller andmore
powerful client base means that each customer has
more power to negotiate for lower prices and better
deals. A company that has many, smaller,
independent customers will have an easier time
charging higher prices to increase profitability.
Threat of Substitutes
The last of the five forces focuses on substitutes.
Substitute goods or services that can be used in
place of a company's products or services pose a
threat. Companies that produce goods or
services for which there are no close substitutes
will have more power to increase prices and lock
in favorable terms. When close substitutes are
available, customers will have the option to forgo
buying a company's product, and a company's
power can be weakened.
“A substitute performs the same or a similar
function as an industry’s product by a different
function . . . [and] limit an industry’s profit
potential by placing a ceiling on prices” (Porter,
2008: 84).
Prescriptive Vs Emergent Strategies
Prescriptive Strategy
Many executives and business owners believe that it is necessary to have a detailed strategic plan.
This plan shows how they will move their organization from where it is to where they want it to be.
This type of strategic plan is called a ‘prescriptive strategy’ and sets out in detail the activities
that the organization will take over a specific time frame (usually 3-5 years). These activities are
designed specifically to shape the direction and future shape of the organization in order to attain
its goals and aspirations.
The main reason for using this philosophy is based on the premise that if you
don’t know where you are going how are you going to get there? It is also
asserts that having a precise strategic plan allows managers
tounderstandwhatresourceswill berequired. They allowsthem to make plans to
develop skills and acquire the resources the organization will need to enable it to
achieve its goals.
Emergent Strategy
The counter philosophy, which is called an ’emergent strategy’, argues
that strategy should be fluid. Here, it will evolve over time in response
to changes in both the internal and external environment. Proponents
of this philosophy argue that the prescriptive strategy often puts
‘blinkers’ on the organization. This can hinder their ability to react to
changes in the environment and take advantages of opportunities that
present themselves. It is also argued that long-term plans are often
based on incorrect assumptions. The consequences can be that the
strategy has unintended outcomes or consequences that could be
potentially damaging to the organization.

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Republic of the Philippines

NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY

1. Competition in the industry

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