Download Simplified Supply Chain Management and more Study notes Supply Management in PDF only on Docsity!
COMPETITIVE FORCES THAT IMPACT SUPPLY CHAINS
3.1 Introduction A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Competitive advantage is a theory that seeks to address some of the criticisms of comparative advantage. Competitive advantage theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. Porter (1995) emphasizes productivity growth as the focus of national strategies. Competitive advantage rests on the notion that cheap labor is ubiquitous and natural resources are not necessary for a good economy. Competitive advantage is necessary for satisfied customers who will receive higher value in delivered products for higher income what the owners request from management and such requirements can be fulfilled with organization of production, higher application and as low as possible production costs. The resources that are scarce and valuable at the same time can create competitive advantage, and if these resources are also difficult to duplicate, substitute and hard to deliver, they can sustain the advantage. Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high grade ores or inexpensive power, or access to highly trained and skilled personnel human resources. 3.2 Performance dimensions of Competitive strategies in purchasing and sourcing 1: Quality. This involves doing things right by providing error free goods and services , which will satisfy the customers. Quality means fitness for the purpose. Often, quality is also discussed largely in terms of it meaning ‘conformance’. That is, the most basic definition of quality is that a product or service is as it is supposed to be. In other words, it conforms to its specifications. Two major quality dimensions include High performance design: Superior features, high durability, & excellent customer service
Product & service consistency: Meets design specifications Close tolerances Error free delivery Quality needs to address Product design quality – product/service meets requirements Process quality – error free products 2: Speed/time. Another performance objective is speed, which means by doing things fast, to minimize the time between the order and the availability of the product or service that gives the customer speed advantage (reduction in lead time). It involves doing things in time for customers to receive their goods or services when they are promised (being on time). Speed does have both internal perspective as well as the external perspective. Externally speed is important because it helps to respond quickly to customers. Again, this is usually viewed positively by customers who will be more likely to return with more business. The internal affects of speed have much to do with cost reduction. Time related issues involve Rapid delivery: Focused on shorter time between order placement and delivery On-time delivery: Deliver product exactly when needed every time 3: Flexibility. Some researchers argue that we must learn to love change and develop flexible and responsive organizations to cope with the dynamic business. It involves ability to increase or decrease production to meet customer demands. Flexibility always means ‘being able to change the operation in some way’ i.e. how you respond to peak times Company environment changes rapidly Company must accommodate change by being flexible Product flexibility: Easily switch production from one item to another Easily customize product/service to meet specific requirements of a customer
Porter’s Value Chain Primary Activities a. Inbound Logistics Inbound logistics include the receiving, warehousing and inventory control of a company's raw materials. This also covers all relationships with suppliers. For example, for an e-commerce company, inbound logistics would be the receiving and storing products from a manufacturer that it plans to sell. b. Operations Operations include procedures for converting raw materials into a finished product or service. This includes changing all inputs to ready them as outputs. In the above e-commerce example, this would include adding labels or branding or packaging several products as a bundle to add value to the product. c. Outbound Logistics All activities to distribute a final product to a consumer are considered outbound logistics. This includes delivery of the product but also includes storage and distribution systems and can be external or internal. For the e-commerce company above, this includes storing products for shipping and the actual shipping of said products.
d. Marketing and Sales Strategies to enhance visibility and target appropriate customers—such as advertising, promotion, and pricing—are included in marketing and sales. Basically, this is all activities that help convince a consumer to purchase a company’s product or service. Continuing with the above example, an e-commerce company may run ads on Instagram or build an email list for email marketing. e. Services This includes activities to maintain products and enhance consumer experience—customer service, maintenance, repair, refund, and exchange. For an e-commerce company, this could include repairs or replacements, or warranty. Porter's Value Chain Secondary Activities Now, companies can further improve the primary activities of their value chain with secondary activities. Value chain support activities do just that, they support the primary activities. The support, or secondary, activity generally plays a role in each primary activity. Such as human resource management, which can play a role in operations and marketing and sales. Here are the four supporting activities. a. Procurement Procurement is the acquisition of inputs, or resources, for the firm. This is how a company obtains raw materials, thus, it includes finding and negotiating prices with suppliers and vendors. This relates heavily to the inbound logistics primary activity, where an e-commerce company would look to procure materials or goods for resale. b. Human Resource Management Hiring and retaining employees who will fulfill business strategy, as well as help design, market, and sell the product. Overall, managing employees is useful for all primary activities, where employees and effective hiring are needed for marketing, logistics, and operations, among others.
Figure 1: Porter’s Generic Strategies for competitive advantage a) Cost Leadership In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average. b) Differentiation In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price. c) Focus The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. The focus strategy has two variants. (a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a
firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in certain segments.
3. Michael porter’s five competitive forces model Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organization. This theory is based on the concept that there are five forces that determine the competitive intensity and attractiveness of a market. Porter’s five forces help to identify where power lies in a business situation. This is useful both in understanding the strength of an organization’s current competitive position, and the strength of a position that an organization may look to move into. Strategic analysts often use Porter’s five forces to understand whether new products or services are potentially profitable. By understanding where power lies, the theory can also be used to identify areas of strength, to improve weaknesses and to avoid mistakes. Porter’s five forces of competitive position analysis:
Buyers have the power to demand lower price or higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both scenarios result in lower profits for producers. Buyers exert strong bargaining power when: Buying in large quantities or control many access points to the final customer; Only few buyers exist; Switching costs to other supplier are low; They threaten to backward integrate; There are many substitutes; Buyers are price sensitive. d) Threat of substitutes This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. What is the likelihood that someone will switch to a competitive product or service? If the cost of switching is low, then this poses to be a serious threat. Here are a few factors that can affect the threat of substitutes: Buyer propensity to substitute Relative price performance of substitutes Buyer switching costs Perceived level of product differentiation Fad and fashion Technology change and product innovation For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle. e) Rivalry among existing competitors This force is the major determinant on how competitive and profitable an industry is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when:
There are many competitors; Exit barriers are high; Industry of growth is slow or negative; Products are not differentiated and can be easily substituted; Competitors are of equal size; Low customer loyalty.
4. S.W.O.T. Analysis SWOT analysis is a term used to describe a tool that is effective in identifying your S trengths and W eaknesses, and for examining the O pportunities and T hreats you face. 3.1.1 Internal factors Strengths The first element of a SWOT analysis describes the strengths of an operation. These strengths include what an operation does well, and should be viewed from both your point of view as well as the point of view of people with whom you come in contact. In some cases, an organization’s strengths are obvious, for example, being a low cost producer. In other cases, it is a matter of perspective, for instance our product is of high quality. It is important to note that operations that are in a bad position also have strengths. Whether or not these strengths are adequate should be determined through further analysis. Examples Leadership and management skills Core competences Resources Reputation Product or service quality Market position Capacity
Change in political and economic environment Market growth Global influences New technology developments Threats The final element of the SWOT analysis is the external threats that the operation faces. Regardless of size or profitability, all operations face threats. These threats could range from lower international prices to key relationships that are not going well. Whatever the threat, the operation should have a plan in place to resolve the problem. Examples
- Economic downturn
- New market entrants
- Increased competition
- Slow growth
- Change in political and economic environment
- Technological threat
- Global warming/ weather
- Demographic change Developing a Strategic Plan The following questions should be answered in SWOT analysis:
- How do you use your strengths to take advantage of opportunities?
- How do you overcome weaknesses preventing you from taking advantage of opportunities?
- How can your strengths reduce the probability of threats?
- What can you do about your weaknesses to make the threats less likely? As you answer these questions you will begin to understand the external forces you contend with and how to tackle them. Use your understanding of the implications to develop a plan of action. 5.3.5 Macro and Micro environment 5.3.5.1 STEEPLE factors (Macro environment) STEEPLE analysis is a strategic planning tool. It can be helpful when planning the strategic positioning. SWOT Analysis is a popular alternative. STEEPLE is more advanced as it deals with macro-environmental external factors. STEEPLE offers an overview of various external fields. It is an acronym for Social, Technological, Economical, Environmental, Political, Legislative and Ethical. Let us examine these factors in details. 1. Social factors Social factors refer to the cultural and demographic aspects of the environment. For example increase in the health consciousness may affect the demand of the company’s product. Other factor includes: Population growth rate and age profile Population health, education and social mobility, and attitudes to these Population employment patterns, job market freedom and attitudes to work Press attitudes, public opinion, social attitudes and social taboos Lifestyle choices and attitudes to these Socio-Cultural changes Age distribution Gender Emphasis on safety
Environmental factors refer to ecological and environmental aspects such as weather, climate, and climate change. These factors include; Climate change leading to organizations to restructure their operations thus giving space to innovation and concept of Green Business Environmental regulations and protection e) Political factors Political Factors affects the organizations in terms of government regulations and legal issues and define both formal and informal rules under which the firm must operate. Examples are: Employment and labor law i.e. Legislation on minimum wage rates and other benefits like Insurance and Provident Funds Trade restrictions Market regulations being introduced, tightened or loosened by the Govt Government type and stability Freedom of press, rule of law and levels of bureaucracy and corruption Regulation and de-regulation trends Tax policy, and trade and tariff controls Environmental and consumer-protection legislation Likely changes in the political environment f) Legislative factors Legislative factors influence the company’s operation, its costs, and the demand for its products. Factors include; Consumer law Antitrust law Employment law Discrimination law Health and safety law Tax policies Competition regulations g) Ethical factors
Ethical factors refer to the range of social values which shape business behaviour. The values provide a basis for what is right and what is not. You must always check the company’s ethical factors. The ethical ideas of a country will not change overnight. But, small changes in morality take place over time. Factors include; Confidentiality Accountability Avoiding corruption Professionalism Avoiding conflict of interest Transparency Fairness Integrity Due diligence Business owners spend a lot of time to analyze the internal capabilities of their company. The external factors have equal impact on the success of a firm. STEEPLE analysis is a great way to prompt helpful discussion. It helps to find out where your business stands within its external environment. Advantages of using a STEEPLE analysis (i) Simple framework (ii) Facilitates an understanding of the wider business environment (iii) Encourages the development of external and strategic thinking (iv) Can enable an organization to anticipate future business threats and take action to avoid or minimize their impact (v) Can enable an organization to spot business opportunities and exploit them fully (vi) By taking advantage of change, you are much more likely to be successful than if your activities oppose it (vii)Avoids taking action that is doomed to failure from the outset, for reasons beyond your control. Disadvantages Advantages of using a STEEPLE analysis
success. If you operate a highly technical business, for instance, you might have to pay more in salary to attract a limited number of available, specialized workers.
3. Distribution Channels and Suppliers Sourcing goods used in production or resale and distributing your inventory to customers are important as well. Manufacturers rely on materials suppliers and resale companies rely on manufacturers or wholesalers to transport goods. To operate profitably, you need to get good value on products and supplies and, in turn, offer good value to your customers with accessible solutions. 4. Competitors The level of competition also impacts your economic livelihood. In theory, more competitors means your share of dollars customers spend diminishes. However, a large number of competitors in an industry usually signifies lots of demand for the products or services provided. If an industry lacks competition, you might not find enough demand to succeed in the long run. 5. Investors Shareholders and investors may help fund your company at start-up or as you look to grow. Without funds to build and expand, you likely can't operate a business. You could look to creditors, but you have to repay loans with interest. By taking on investors, you share the risks of operating and often gain support and expertise. You do give up some control, though. 6. Media and the General Public Your local community and media also affect your ongoing business image. Communities often support companies that provide jobs, pay taxes and operate with social and environmental responsibility. If you don't do these things, you may run into negative public backlash. Local media often help your story proliferate, for better or worse.
