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Defining the
Organization’s
Strategic Direction
In 2008, Michael Levie, Rattan Chadha, and Robin Chadha set out to
create a new kind of hotel chain. Convinced that innovation in the hotel
industry had stagnated, they believed that there was an opportunity to
create more value for customers that were frequent travelers, or “Mobile
Citizens of the World.” They named their new hotel chain “citizenM,” and
they set out to rethink what dimensions customers really cared about,
and which they didn’t really value.
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AssesingThe Firms’s
Current Position
To assess the firm’s current position in the marketplace, it is useful to
begin with some standard tools of strategic analysis for analyzing the
external and internal environment of the firm.
External Analysis The two most commonly used tools for analyzing the
external environment of the firm include Porter’s five-force model and
stakeholder analysis.
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External Analysis
Porter’s Five-Force Model In this model, the attractiveness of an industry and a
firm’s opportunities and threats are identified by analyzing five forces While the
five-force model was originally developed to assess industry attractive- ness (i.e.,
“Is this a desirable industry in which to compete?”), in practice the model is often
used to assess a specific firm’s external environment (i.e., “What factors in the
firm’s external environment create threats and opportunities for the firm?”). The
dif- ference between these two approaches is subtle but important. In the former
approach, the analysis focuses on the industry level, treating all competitors as
roughly the same, and its objective is to ascertain whether the industry as a whole
will tend to be profitable.
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The five forces are
1. The degree of existing rivalry. An industry’s degree of rivalry is
influenced by a number of factors. First, the number and relative size of
competitors will shape the nature of rivalry.
2. Threat of potential entrants. The threat of potential entrants is
influenced by both the degree to which the industry is likely to attract
new entrants (i.e., is it profitable, growing, or otherwise alluring?) and
the height of entry barriers.
3. Bargaining power of suppliers. The degree to which the firm relies on
one or a few suppliers will influence its ability to negotiate good terms. If
there are few suppliers or suppliers are highly differentiated, the firm
may have little choice in its buying decision, and thus have little leverage
over the supplier to negoti- ate prices, delivery schedules, or other
terms.
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The five forces are
4. Bargaining power of buyers. Many of the same factors that influence the
bar- gaining power of suppliers have an analogous role with the
bargaining power of buyers. The degree to which the firm is reliant on a
few customers will increase the customer’s bargaining power, and vice
versa.
5. Threat of substitutes. Substitutes are products or services that are not
considered competitors, but fulfill a strategically equivalent role for the
customer. For exam- ple, Starbucks may consider other coffeehouses as
competitors, but other social destinations (such as bars or restaurants) or
beverages (such as soft drinks or beer) as substitutes. The more potential
substitutes there are, and the closer they are in function to the firm’s
product or service, the greater the threat of substitution.
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The five forces are
Recently, Porter has acknowledged the role of complements.5 As has been dis- cussed
in several of the earlier chapters, complements are products that enhance the
usefulness or desirability of a good. For example, software is an important comple-
ment for computers, and gasoline is an important complement for automobiles. The
availability, quality, and price of complements will influence the threats and oppor-
tunities posed by the industry. It is important to consider (1) how important comple-
ments are in the industry, (2) whether complements are differentially available for the
products of various rivals (impacting the attractiveness of their goods), and (3) who
captures the value offered by the complements. For example, desktop printer manu-
facturers such as Hewlett Packard and Lexmark make a considerable portion of their
desktop printing profits from the ink cartridges that consumers have to replace when
empty.
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Stakeholder Analysis
stakeholder Any entity that has an interest (“stake”) in the organization.
Stakeholder models are often used for both strategic and normative
purposes. A strategic stakeholder analysis emphasizes the stakeholder
management issues that are likely to impact the firm’s financial performance,
while a normative stakeholder analysis emphasizes the stakeholder
management issues the firm ought to attend to due to their ethical or moral
implications.
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Summary of Chapter
1. The first step in establishing a coherent strategy for the firm is assessing
the exter- nal environment. Two commonly used models of external
analysis are Porter’s five-force model and stakeholder analysis.
2. Porter’s five-force model entails assessing the degree of existing rivalry,
threat of potential entrants, bargaining power of suppliers, bargaining
power of customers, and threat posed by substitutes. Recently Porter
added a sixth force, the role of complements.
3. Stakeholder analysis involves identifying any entity with an interest in the
firm, what it wants from the company, and what claims it can make on the
company.
