A Summary of Strategic Management

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QUESTION 1

1. Porter’s Five Forces Model

Porter’s Five Forces Model focuses on the forces that shape competition within an industry. These forces are namely; Risk of Entry by potential competitors, Rivalry amongst established companies, Bargaining power of buyers, bargaining power of suppliers, Substitute products and Competitors. A strong competitive force can be regarded as a threat as it decreases profits while a weak competitive force can be regarded as an opportunity as it allows companies to earn greater profits.

A Cellular Network Providers industry will be used to explain these forces.

• Risk of entry by potential competitors.
Potential competitors are companies that are currently not competing in the industry but have potential to do so. The Cellular Network industry is mainly dominated by Vodacom, MTN and Cell C. The network providers have created significant brand loyalty through advertising, pricing and good service therefore making it very difficult for new competitors to enter this industry. These companies also have absolute cost advantage over potential competitors as they have control over means of production such as labour, equipment, management skills and access to cheaper funds. Because of the strong brand loyalty these companies have created this have resulted in high switching costs for customers, as it takes time and money to switch from one network to another new network even though the new entrant maybe offering better products. Government regulation can prevent new entrants from entering this established industry. Evidence suggests that the height of barriers to an entry is one of most important determinants of profit rates in an industry. Even when entry barriers are high, new companies may still enter an industry if they perceive that the benefits outweigh the substantial costs of entry, for example Virgin Mobile and 8-ta are the new network providers who have entered this industry despite of the high barriers to entry.

• Rivalry among established companies
This refers to the competitive struggle between companies (Vodacom, MTN and Cell C) in an industry to gain market share. In this industry there is intense rivalry as the demand is spread amongst all three networks. The intensity is usually fought by the price of products, advertising and promotion and direct selling. Growing demand from new customers or additional purchases by existing customers tend to reduce rivalry because all companies can sell without taking market share from one another. The cost structure of firms in an industry also determines rivalry. In industries, such as the cellular network industry, where fixed costs are high, profitability tends to be highly leveraged to sales volumes and the desire to grow volume can spark intense rivalry.

• The bargaining power of Buyers
An industry’s buyers may be the individual customers who ultimately consume its products or the companies that distribute an industry’s products to end users such as services providers, Nashua Mobile, Autopage and retailers. The bargaining power of buyers therefore refers to the ability of buyers to bargain down prices charged by companies in an industry or raise the costs of companies by demanding better product quality and services. Powerful buyers can therefore be viewed as a threat.

• The bargaining power of Suppliers
The bargaining power of suppliers refers to the ability of suppliers to raise input prices or to the costs of the industry. Suppliers in this industry can be a threat if products sold by suppliers have few substitutes and are vital to the industry, if suppliers enter the customer industry and thereby compete directly with companies in the industry.

• Substitute products
These are products of different businesses or industries that can satisfy similar customer needs like Telkom and Neotel. The existence of these close substitutes will result in a strong competitive threat since it constraints...
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