Running head: SIB 429 STRATEGIC MANAGEMENT
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SIB 429 Strategic Management
Question 1
For Porter’s five forces analysis of a high profit industry the pharmaceutical industry
has been chosen. The pharmaceutical industry is a very competitive one. Industry structure is
very dynamic. Threat of new competition is very high. Latest tendencies suggest that small
companies can compete on equal terms with large companies, which have been present in the
market for a long time. This competition concerns all stages of product development. Threat
of substitute products is relatively high. The amount of investment in R&D allows new
products to appear regularly. Still, it takes a long time and substantial resources to introduce
this product to the market. It is due to the pharmaceutical industry being regulated. To sum it
up, this factor also contributes to intensification of competition. Bargaining power of buyers
is not very high. Considering the nature of the product proposed by the industry, customers
are usually willing to pay its price. Moreover, customer base is ever-expanding, because
population is augmenting, life expectancy is increasing, and the demand for effective
medication is growing. Thus, customers rely heavily on the industry product. Bargaining
power of suppliers is rather high. Primarily, it is due to the fact that the pharmaceutical
industry depends on qualified workforce. The technologically innovative nature of business
requires having trained and competent workers. The industry also depends on equipment
suppliers and suppliers of raw materials. Finally, industry rivalry is an essential force. The
existing players on the market compete for investment in R&D, gaining access to competent
workforce, and customer loyalty.
There are several value drivers in the pharmaceutical industry. The first such driver is
the quality of R&D. This industry heavily depends on innovation in R&D. There is constant
pressure to deliver new, advanced medicines, as new challenges for health arise. In this
industry, product development has an overwhelming value for the market players. The second
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value driver is trust of the consumers. Effective treatment is always built on trust between the
doctor and the patient. This concept directly relates to the relationship between the patient
(the customer) and the pharmaceutical company. The third success factor in the
pharmaceutical industry is SG&A. Correct pricing of a product can create value in any type
of industry. The customer wants to receive the best product for the best price. This correlation
can create value for companies through enhanced cost control, primarily concerning
management of indirect expenses.
Question 2
For Porter’s five forces analysis of a low profit industry the steel making industry has
been selected. Nowadays, the steel making industry is characterized by intense competition
among a limited number of major players. However, the industry is not very dynamic. Threat
of new competition within the existing market is not high. Current market players have
considerable experience in steel manufacturing. Moreover, entering the market requires
investing immense initial capital. It means that new entrants would have little chances for
success. Threat of substitutes is also not high. The range of products is relatively fixed and
there are few industries that need produce of the steel manufacturers. The power of this factor
will remain low unless some revolutionary changes in customer preferences occur. On the
contrary, the bargaining power of buyers is very high. The demand in this industry is slow
and has been negatively affected by recession. Demand is also a key element of industry
growth and directly impacts profitability of the companies. Besides, distribution of products
is limited only to a number of markets. Bargaining power of suppliers is also rather high.
They influence cost structure through such vital for operation of a steel manufacturer
resources as raw material and energy. Also, technology used by steel companies in
production requires skilled workforce. Finally, industry rivalry is intense. Primarily,
companies compete for distribution markets, investment, best conditions from suppliers, and
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favorable long-term contracts with customers. These factors determine business effectiveness
and competitiveness. That is why internal industry competition is stiff.
There are the following value drivers in the steel making industry. The first key value
driver is technology. Effectiveness of steel production is largely dependent on organization of
the manufacturing process. It is a low profit industry with low attraction for potential
investors. Thus, value can be generated by the companies which are able to introduce the
latest technological developments. This leads us to the second success factor, which is
ecology. Steel factories are sources of considerable pollution and damage to the environment.
The environmental aspect becomes more and more important for the society. Consequently,
being environmentally-friendly is a success factor. Finally, the steel making industry heavily
depends on demand. Through creation of strong, long-lasting relations with the customers
companies can ensure a stable future for themselves. In this context, value can be created
through signing contracts with players from the automotive, construction, oil and gas, and
appliance manufacturing industries.
Question 3
The US smokeless tobacco industry is characterized by low power of threat of new
entrants. The market’s leader, UST Inc., has the market’s largest share and is its dominant
force. The major barrier to entry of the US smokeless tobacco industry is low appeal of the
practice to the society. Overall, chewing tobacco is considered an antisocial practice. Another
barrier is the need for substantial investment to compete with the monopolist power of UST
Inc. Also, the company boasts high brand recognition, which prevents new players from
entering the market.
Threat of substitutes for the smokeless tobacco industry is not very high. In this
context, its primary “competitor” is cigarettes. However, smokeless tobacco is a unique
product. It is differentiated from smoking cigarettes in the conventional opinion. That is one
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of the keys to its recently regained popularity. There is no direct substitute to smokeless
tobacco. Consequently, the market is not endangered by appearance of substitutes.
Bargaining power of buyers is considerable. One the one hand, there is a growing
number of people who enjoy smokeless tobacco. Many of them are from the young
generation. Tobacco is addictive; many people use such products over long periods of time.
Thus, there is no imminent threat of the increasing power of buyers. On the other hand, health
concerns are arising in the society, where smokeless tobacco is associated with health risks.
Anti-tobacco campaigns can reduce customer base in the industry and cause increase in the
bargaining power of buyers.
Bargaining power of suppliers in the US smokeless tobacco industry is high. First of
all, companies rely on the price of raw materials, which define the end product price for the
customers. Besides, there is a limited number of supplies needed to produce smokeless
tobacco. Most tobacco leaves come from the foreign markets. Thus, local market players
depend on foreign producers. They offer competitive prices, but do not rely only on the
demand from the American market. They have substantial freedom to dictate conditions of
trade.
Intensity of internal competition is very low in the American smokeless tobacco
industry. There is one company that clearly dominates the market. It has brands that are wellrecognized. It has significant control over distribution channels, as it works closely with
small retail chains. It is not challenged by key players from the cigarette industry. To sum it
up, the US smokeless tobacco industry has high entry barriers, one dominant force that
controls the market, and low internal competition as a result.
Question 4
There are the following key success factors in the pizza delivery business. The first
factor is the speed of delivery. Apart from the quality of pizza, it is an aspect that customers
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usually value most. They form an opinion of how well a delivery business works based
primarily on the speed of delivery. It should be quick, as pizza is one of the favorite
American meals and should be delivered hot. In this context, it is vital to create feasible
deadlines and stick to them. Breaking a deadline should be compensated accordingly. Speed
as a value driver should be based on transport possibilities of the business.
Another success factor in the pizza delivery business is the price. Customers always
value most a quality product or service that is at an affordable price. Thus, a delivery business
should have vehicles that are not only fast, but also effective in consumption of resources. It
would allow keeping delivery costs low. Depending on the geographic area that a business
covers, it can use cars, motorcycles, bicycles, etc. Of course, the price of gasoline that a
delivery business can obtain is important. It is a good idea to diversify sources of energy
resources. Competition among suppliers would result in lower prices for the delivery
business.
Another key success factor is staff of the business. It is the key source of value for any
kind of business regardless of the type of industry. That is why it is important to have
effective hiring practices. Devoted personnel create a positive social climate at work, where
everyone is dedicated to their responsibilities. For a pizza delivery business, the speed of
delivery and the feedback from the clients depends on the staff. Firstly, employees are the
ones who receive orders. They are also the first people whom the client contacts. Customers
base their opinion of the company by evaluating this contact. Secondly, employees deliver
pizza. They have to be organized, focused, law-abiding, polite, etc. Also, having additional
personnel in the rush hours creates an advantage.
Other factors that can create value include location and contracting best pizza places.
Location can be a source of value if it allows using optimal routes for pizza delivery. Thus,
the owner of the business has to analyze the area prior to deciding where his office would be
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located. For a delivery business, it is also critical to have the best partners. They would
facilitate stable demand for the service. Making exclusive deals with the most popular local
pizza places would provide a competitive advantage over rivals.
Question 5
Starbucks and Dunkin’ Donuts are competitors in the same industry. The primary
difference between the companies is that Starbucks is a competitor within the industry, while
Dunkin Donuts is a new entrant on the market. Originally, Starbucks was a coffee company
with a sales chain to compliment sales of its product. Then, it added certain types of food to
its menu. Dunkin’ Donuts originally focused on producing and selling donuts. Then, it
became a coffee retailer. Thus, Porter’s five forces analysis will be used to evaluate the same
industry.
Threat of new entrants is rather high in the coffee making and selling industry. There
are no major entry barriers. For instance, Dunkin’ Donuts have entered the coffeehouse
industry relatively easy. It is not as easy to challenge the current market players, though.
Threat of substitutes in the coffee shop industry is rather high. Coffee shops or coffeehouse
chains are not unique in their proposal. Moreover, they offer limited options as for food
choice to their customers. They compete with fast food chains, small restaurants, food stores,
etc. They have to find a unique image and appeal to draw the customer in. Bargaining power
of the buyers is very high in the industry. It is a concentrated industry, which means that
customer loyalty is crucial to success of a company. The value drive in this context is
preferences of the customers. Companies compete to provide customized products and satisfy
customer tastes. Clients are also sensitive to the price of coffee and accompanying products.
Though coffee is a popular drink in America, customers want to have special offers, drink
unique blends, and pay affordable prices. Companies strive to build brand recognition, which
is a source of competitive advantage. Bargaining power of suppliers is not very high in this
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industry. To a certain extent, companies rely on suppliers. Of course, the quality of coffee is
important. Coffee is not grown in the US, it is being imported. It means that coffee
companies rely on foreign producers of raw material. However, it has not had a decisive
impact on them so far. Other raw materials impact coffee businesses even to a lesser extent.
Thus, suppliers do not intensify competition in this market. Internal competition in the coffee
making and selling industry is very high. There are about fifty companies that have two thirds
of the market. They fiercely compete against each other and against other smaller companies,
which occupy niche segments. Big chains are represented nationwide and have to compete
for best locations and high traffic in all major areas. To sup it up, currently Starbucks is
outperforming Dunkin’ Donuts. It has better adjusted to the conditions of competition in the
industry.
Grant (2005) explains that profitability and competition are interlinked. Profitability
can be achieved through effective management of three factors: revenue, expenses, and
demand. In the American coffee industry, revenue can be generated through high traffic at
shops, flexible price policies, and offering of complimentary products. Both Starbucks and
Dunkin’ Donuts use these strategies. The second factor is expenses. The major constituents of
this factor are direct and indirect costs. Companies do everything to have minimal value for
both types of expenses. Starbucks and Dunkin’ Donuts have been able to maintain high cost
efficiency. They both are experienced players on the market and use advanced techniques of
controlling costs. In the recent years, both of the above-explained factors have gained special
importance due to recession. Customers across all major industries become more cautious of
their spending. Finally, sales of the company depend on how much customers it can attract.
Clearly, Starbucks is primarily associated with coffee. Coffee-drinkers come there to get
coffee, but also benefit from complimentary items. Dunkin’ Donuts is associated with donuts
and customers may not expect to get good-quality coffee there.
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The drastic differences in profitability between Starbucks and Dunkin’ Donuts should
not be expected. Still, they can be explained by two factors. Firstly, Dunkin’ Donuts is in a
position of the coffee industry entrant, which puts it a disadvantage. Secondly, the company
is not being firmly connected to a coffeehouse in the people’s mind. It is also a disadvantage,
but mostly the result of ineffective company tactics. Still, while Dunkin’ Donuts tries to
challenge Starbucks and other serious market players, it has experience of international
operations and an established business in the industry segment of donuts production and
distribution. There is potential to become as well recognized as a coffee shop. As Porter’s
five forces analysis and evaluation of Grant’s profitability factors show, there is intense
competition in the industry. Still, it is insufficient to explain the differences in profitability
between the two companies.
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References
Grant, R. M. (2005). Contemporary strategy analysis: Concepts, techniques, applications (5th
ed.). Malden, MA: Blackwell Publishing.