Subject Code: BSTRAMA

Subject Title: STRATEGIC MANAGEMENT

Subject Description: This course provides students with opportunity to acquire

integrated perspective of general management, looking at the
business organization. Students will be properly guided to
effectively evaluate how policies in each functional area of
business (marketing, finance, human resource, and
production/operation) are integrated to develop an overall
competitive strategy to achieve the ultimate objective of the
business organization – sustainability. Topics include
developing strategic vision, analysis of industry and
competitive environment, evaluating core competencies, and
tools to evaluate strategy performance. Students will also
learn strategic options concerning managerial decisions that
affect their performance and survival in the battlefield.

No. of Units: 3

Class Schedule:

Course Learning Outcomes:

You will be able to do the following after successfully completing this course:
1. To develop critical mind in evaluating the industries through internal
and external environmental factors.
2. To analyze situations, identify problems, formulate alternatives, and
recommend strategies.
3. To develop competitive advantage that the company in a tourism and
hospitality industry may obtain through strategic management
decisions.
 4. To apply strategy performance indicators and make use of SWOT
and other models to analyze business performance.

5. To assess business ethics and the consequences of unethical

strategies and behavior.
6. To evaluate the relationships between functional areas of business
and strategy implementation.

About the Instructor: Prof. Ace M. San Gabriel, MBA

Contact Information: amsangabriel@national-u.edu.ph

09173567204

Topics:

Week 3

Module 3: Strategy and the tourism, hospitality, and events contexts

(Continuation)
To analyze external environment as a basis for strategy formulation and implementation
Analyzing the external environment
-Purpose of external analysis
-The External Environment
-The Macro Context
-STEEP Approach
SWOT Analysis

MODULE 5 :
Michael Porter’s generic strategies
I. Pre-Test/Activity
1. Grouping of section for synchronous and
asynchronous session.
2. Discussion of STEEP Analysis and its Sub Factors
3. Assignment.
4. Grading System

II. Learning Outcomes

At the end of the day, the students should be able to:
 Distinguish between micro and macro level external analyses;
 Explain the importance of industry and market analysis with regard to the sectors;
 Describe the construction and application to the of porter’s five forces framework;
 Explain the limitations of porter’s five forces framework;
 Define and distinguish between competitive and collaborative behaviour in
industries;

III. Content:

The micro-environment comprises those influences that the organization experiences

frequently. For most businesses, it concerns the industries in which they operate. Within
this arena businesses may compete with each other or, in some circumstances,
collaboration may be more appropriate. We discuss two models for industry analysis in
this chapter. We then go on to discuss the scope of collaborative behaviour, before
considering the way in which competitors in an industry fall into strategic groups.
Introduction and chapter overview

Industries and markets

The importance of industry and market identification

Some strategic management texts wrongly use the terms industry and market
interchangeably. Kay (1995) points out that to confuse the two concepts can result in a
flawed analysis of the competitive environment and, hence, in flawed strategy. Modern
organizations, such as vertically integrated travel companies, may operate in more than
one industry (or industrial sector) and in more than one market.
Industries are centred on the supply of a product or service while markets are concerned
with demand. It is important, therefore, to understand and analyse both industries and
markets to assist in the process of strategy selection.

It is sometimes difficult to define a particular industry precisely. Porter (1980) defines an

industry as a group of businesses whose products are close substitutes, but this definition
can be inadequate because some organizations and industries produce a range of
products for different markets. The importance of identifying the industry setting
successfully and understanding its implications is examined by Rumelt (1991) and
McGahan and Porter (1997).

Porter’s five forces model of industry analysis

Models that become widely accepted and utilized are generally simple and easy to recall.
Such is the case with Porter’s widely used ‘Five Forces’ model of industry analysis.
Furthermore the concept has been widely applied and critiqued in the THE academic
literature (see for example Lee and King, 2006; Benson and Henderson, 2011; and
Tavitiyaman et al., 2011).
Porter (1985) developed a framework for analysing the nature and extent of competition
within an industry. He argued that there are five competitive forces which determine the
degree of competition within an industry. Understanding the nature and strength of each of
the five forces within an industry assists managers in developing the competitive strategy
of their organization. The five forces are:

●● the threat of new entrants to the industry;

●● the threat of substitute products;
●● the power of buyers or customers;
●● the power of suppliers (to businesses in the industry); and
●● rivalry among businesses in the industry.

By determining the relative ‘power’ of each of these forces, an organization can identify
how to position itself to take advantage of opportunities and overcome or circumvent
threats. The strategy of an organization may then be designed to exploit the competitive
forces at work within an industry.
 Force 1: The threat of new entrants to the industry

The threat of entry to an industry by new competitors depends upon the ‘height’ of a number of
entry
barriers. Barriers to entry can take a number of forms.

The capital costs of entry

The size of the investment required by a business wishing to enter the industry (or industry sector)
will be an important determinant of the extent of the threat of new entrants. The higher the
investment required, the less the threat from new entrants is likely to be. The lower the required
investment, the greater the threat. In some areas of THE, such as the building of a hotel or a visitor
attraction, starting a cruise line or launching an airline, the capital costs are clearly quite high.
However, in some situations it might be possible to avoid or defer some capital costs by separating
ownership from the management of the assets or by leasing or franchising. Separating ownership
and management is common in the hotel sector where a property company may own the physical
assets but a hotel operator manages the hotel. Leasing aircraft and ships is common in the airline
and cruising sectors and allows high up-front costs to be spread out over a period of time.

In other areas of THE such as starting a tour operator, a travel agency, an internet intermediary or
an event management company, the capital costs might be relatively low since they do not normally
require the purchase of expensive assets.

Brand loyalty and customer switching costs

If the companies in an industry produce differentiated products and services and customers are
loyal to particular brands, then potential new entrants will encounter resistance in trying to enter the
industry.

Brand loyalty will also be an important factor in increasing the costs for customers of switching to
the products of new competitors.

Thus customers cannot switch to new entrants if they want to experience these attractions or events.
However, in many cases THE consumers are driven by price and exhibit little brand loyalty. Thus
consumers may switch from existing tour operators, travel agents, hotel groups, events and
attractions and airlines to new entrants on the basis of a more competitive offering

Economies of scale or scope available to existing competitors

If existing competitors are already obtaining substantial economies of scale it will give them an
advantage over new competitors who will not be able to match their lower unit costs of production.

For example – a new entrant offering package holidays to Spain from the major European markets
(Germany, the UK and Scandinavia) would face strong competition from large entrenched
operators such as Tui, Kuoni and Thomas Cook. These operators often have long-standing
arrangements with accommodation suppliers in Spain and other Mediterranean destinations. Given
their ability to contract bed spaces in bulk, they are able to negotiate highly favourable terms that
may not be available to a smaller new entrant.

Access to input and distribution channels

New competitors may find it difficult to gain access to channels of distribution, which will make it
difficult to provide their products to customers or obtain the inputs required.
For example – in the case of the tour operator cited previously, such is the shortage of some
categories of accommodation in some destinations that existing operators have sometimes
contracted all the available capacity, thereby excluding new entrants to access to the necessary
inputs. Furthermore the existing large tour operators have established distribution channels (such as
travel agents, call centres and the internet) in their major markets which they have developed over
the years in order to provide the most cost efficient means of distribution. A new entrant would
require heavy investment in order to secure such access.

The resistance offered by existing businesses

If existing competitors choose to resist strongly it will make it difficult for new organizations to
enter the industry.
For example – if existing businesses are obtaining economies of scale it will be possible for them to
undercut the prices of new entrants because of their cost advantage. In some cases, existing
competitors may make price cuts or increase marketing expenditure in order to deter new entrants.
It has sometimes been claimed that such predatory pricing behaviour has been undertaken by the
established ‘full-service’ airlines in order to deter new low-cost carriers (see for example: Forsyth et
al., 2006; Hanlon, 2007; Fageda et al., 2011).

If barriers to entry make it difficult for new competitors to enter the industry then this will limit the
amount of competition within it. As a result, competitors within the industry will attempt to seek to
strengthen the barriers to entry by cultivating brand loyalty, increasing the costs of entry and ‘tying
up’ input and distribution channels as far as is possible.
Conversely potential new entrants will lobby for the removal or reduction of such barriers in order
to allow them to enter the industry and compete for business. In other words they will try to make
the industry contestable as it is sometimes termed.

Government regulation
In some situations new competitors are prevented from entering the market by government or
intergovernmental regulation of the THE sectors.

For example – provision of accommodation and services for tourists by organizations is strictly
regulated within the internationally renowned national parks of the USA such as Yellowstone and
Yosemite. This is in marked contrast to the largely unregulated position outside the parks.
The institutional environment plays a very important role in regulating competition, particularly in
transition countries such as China.

For example – in China, the hotel sector has been open to foreign investment for over two decades
and has a diversified ownership structure, whereas the travel services sector has been dominated by
government- owned firms and relatively closed to foreign investment (Qu et al., 2005).
Government intervention is a typical characteristic of the institutional environment in these
transition
countries, Wang and Xu (2011) argue. In such circumstances the government intervenes not only in
the formulation of investment policy, but also in its implementation and even in firms’ operations,
particularly those of state-owned enterprises. A variety of approaches, including the provision of
favourable land, tax and financing policies, have been adopted to attract tourism investment (Wang
and Xu, 2011).

Force 2: The threat of substitute products

A substitute can be regarded as something which meets the same needs as the product of the
industry.
For example – an individual wishing to cross the English Channel between England and France can
choose to travel by cross-channel ferry or by the train service using the channel tunnel. These
products all provide the benefit to the customer of crossing to France, despite the fact the ferry and
rail services are provided by different industries.
The extent of the threat from a particular substitute will depend upon two factors. The extent to
which the price and performance of the substitute can match the industry’s product. Close
substitutes whose performance is comparable to the industry’s product and whose price is similar
will be a serious threat to an industry. The more indirect the substitute, the less likely the price and
performance will be comparable. Since most THE products are of relatively high cost and the
expenditure is usually seen as a luxury rather than a necessity, the products will compete for
disposable income with other high-cost items such as cars and ‘white goods’ (refrigerators and
washing machines).

The willingness of buyers to switch to the substitute

Buyers will be more willing to change suppliers if switching costs are low or if competitor products
offer lower price or improved performance. This is also closely tied in with the extent to which
customers are loyal to a particular brand. The more loyal customers are to one supplier’s products
(for whatever reason) then the threat from substitutes will be accordingly reduced.

Direct and indirect substitutes

There are very few products for which there is no substitute. A substitute can be defined as a
product that offers substantially equivalent benefits to another. This criterion – that of receiving
equivalent benefits – can be met in two ways: directly and indirectly.

Direct substitutes are those that are the same in substance. Direct substitutes may simply be
competitive brands or competing destinations. Singapore Airlines, Malaysia Airlines and Thai
Airways are direct competitors for air services to and from south east Asia, whilst Amsterdam, Paris
and London are directly competing destinations in the European international short-break market.

Indirect substitutes are those that are different in substance but which can, in certain
circumstances,
provide the same benefit. Thus international air travel and teleconferencing are different in
substance
but can provide similar benefits in certain circumstances. If a meeting is required to discuss new
product ideas the two indirect substitutes should be considered. If however the purpose of the
business trip is to meet potential suppliers or view new hotel or event facilities it is unlikely that
teleconferencing would provide an adequate substitute.

Force 3: The bargaining power of buyers

The extent to which the buyers (customers) of a product exert power over a supplying organization
depends upon a number of factors. Broadly speaking, the more power that buyers exert, the lower
will be the transaction price. This has obvious implications for the profitability of the supplier. The
factors that affect the relative power of buyers include:

The number of customers and the volume of their purchases

The fewer the buyers and the greater the volume of their purchases, the greater will be their
bargaining
power. A large number of buyers each acting largely independently of each other and buying only
small quantities of a product will be comparatively weak.

For example – the major cruise lines operating in the Caribbean (of which there are relatively few)
have power over the many competing small Caribbean island destinations when deciding on their
cruise schedules and negotiating port charges. On the other hand, individual travellers will have
limited bargaining power when dealing with large cruise lines since there are many such customers
but relatively few cruise lines.

The number of businesses supplying the product and their size

If the suppliers of a product are large in comparison to the buyers, then buying power will tend to
be
reduced. The number of suppliers also has an effect – fewer suppliers will tend to reduce the
bargaining power of buyers as choice and the ability to ‘shop around’ is reduced.
For example – individual airlines wanting to serve London, and wanting to serve the lucrative
business market in particular, are faced with a difficult situation. The three largest London airports
(Heathrow, Gatwick and Stansted) are no longer owned and operated by a single company, BAA
plc, as they were until 2013, when BAA plc relinquished control of Gatwick and Stansted.
Nevertheless, Heathrow is by far the largest, has the greatest number of business clients and has the
most connectivity with other destinations. This gives the London Heathrow airport operator a
strong position when negotiating landing rights with airlines.

Switching costs and the availability of substitutes

If the costs of switching to substitute products are low (because the substitutes are close in terms of
functionality and price), then customers will be accordingly more powerful.
For example – customers would not normally be financially penalized for moving their business
from one Spanish resort to another, or for moving a concert from one venue to another (unless
contractually bound).
It should be borne in mind that buyers are not necessarily those at the end of the supply chain. At
each stage of a supply chain, the bargaining power of buyers will have a strong influence upon the
prices charged and the industry structure.
For example – in the supply chain for hotel rooms at a particular destination the buyers include
individual business and leisure customers, tour operators, travel intermediaries (such as travel
agencies and internet comparison sites), airlines and other transportation groups, and event
promoters. The amount of power which each buyer exerts can differ substantially. Those buyers
which can buy in bulk and provide the accommodation provider with guaranteed occupancy levels
will be able to exert far greater pressure on the hotels in question than individual customers.

In summary, the relative power of buyers is likely to be most powerful when:

●● there are few of them and they purchase large quantities;
●● there are a large number of suppliers;
●● the size of the buyers is large relative to the size of the suppliers;
●● switching costs for buyers from one product supplier to another are low;
●● substitute products are available; and
●● switching costs between suppliers is low.

When the opposite conditions apply then buyers will be weak.

Force 4: The bargaining power of suppliers

Organizations must obtain the resources that they need to carry out their activities from resource
suppliers. These resources fall into the four categories we have previously encountered: human,
financial, physical
and intellectual.
Resources are obtained in resource markets where prices are determined by the interaction between
the organizations supplying a resource (suppliers) and the organizations from each of the industries
using the particular resource in question. It is important to note that many resources are used by
more than one industry. As a result, the bargaining power of suppliers will not be determined solely
by their relationship with one industry but by their relationships with all of the industries that they
serve.

The major factors determining the strength of suppliers are:

The uniqueness and scarcity of the resource that suppliers provide

If the resources provided to the industry are essential to it and have no close substitutes then
suppliers are likely to command significant power over the industry. If the resource can be easily
substituted by other resources, then its suppliers will have little power.
For example – it is for this reason that people with rare or exceptional skills can command higher
salaries than lesser-skilled people. The music artist or sports team represents the talent appearing at
a concert festival or major sports event, for instance. The power of the personal or team brand is
such that they provide the principal unique selling point (USP) for the event. Consequently the
artist or members of the sports team command high salaries since the event depends directly on
their participation for its success.
Similarly the limited number of aerospace suppliers gives them considerable power. The worldwide
suppliers of large jet aircraft are limited to two (Boeing of the USA and Airbus, a collaboration
between France, Germany and Spain with participation by the UK) whilst the large-scale suppliers
of jet engines are limited to four (General Electric and Pratt and Whitney of the USA, Rolls Royce
of the UK and SNECMA of France).

How many other industries have a requirement for the resource?

If suppliers provide a particular resource to several industries then they are less likely to be
dependent
upon one single industry. Thus, the more industries to which they supply a resource, the greater will
be their bargaining power.
For example – in some of the most developed accommodation markets such as London, Dubai and
New York, hotels often find it difficult to recruit an adequate supply of staff as they have to
compete for labour with many other industries. Consequently staff members are frequently supplied
from foreign countries with lower wage rates and/or higher unemployment levels.

Switching costs between suppliers

In some cases switching between suppliers may be difficult and costly. Close working relationships
may have been built up over a protracted period of time so that any new supplier would not have
the necessary knowledge or experience required or systems and services may have been tailored
towards the requirements of a particular supplier.
For example – an airline which operated an all-Boeing fleet of aircraft would find it difficult to
switch quickly to supply from Airbus since pilots would have been trained for Boeing aircraft,
capacity would have been calculated using Boeing seat configurations, engineers would have been
trained to maintain Boeing aircraft and spares would have been bought for the Boeing aircraft.

The number and size of the resource suppliers

If the number of organizations supplying a resource is small and the number of buyers is large, then
the power of the suppliers over the organizations will be greater in any industry. If the suppliers are
small and there are a large number of them, they will be comparatively weak, particularly if they
are small in comparison to the organizations buying the resource from them.

In summary, suppliers to an industry are likely to be most powerful when:

●● the resource that they supply is scarce;
●● there are few substitutes for it;
●● switching costs are high;
●● they supply the resource to several industries;
●● the suppliers themselves are large;
●● the organizations in the industry buying the resource are small.

When the opposite conditions apply then suppliers will be weak.

Force 5: The intensity of rivalry among competitors in the industry

Businesses within an industry will compete with each other in a number of ways. Broadly speaking,
competition can take place on either a price or a non-price basis.
●● Price competition involves businesses trying to undercut each other’s prices, which will, in turn,
be dependent upon their ability to reduce costs of production.
●● Non-price competition will take the form of branding, advertising, promotion, additional
services to customers and product innovation.
In some sectors of THE competitive rivalry is fierce, while in others it is less intense or even non-
existent since oligopolies or monopolies are formed.

In highly competitive markets companies engage in regular and extensive monitoring of key
competitors.
Four examples might be:
●● examining price changes and matching any significant move immediately;
●● examining any rival product change in great detail and regularly attempting new initiatives in
one’s own organization;
●● watching investment in new competing operations; and
●● attempting to poach key employees.

The relative size of competitors

When competitors in a sector are of roughly equal size there is a possibility that rivalry is increased
as the competing companies try to gain a higher degree of market dominance but profits fall as a
result of this increased rivalry.
Conversely in situations where there is a dominant organization, there may be less rivalry (and
consequently higher levels of profitability) because the larger organization is often able to stop or
curtail moves by smaller competitors.

The nature of costs in industry sectors

If sectors of an industry have high fixed costs in that they are capital intensive, rivalry amongst
competitors may become more intense as price-cutting becomes a way of filling capacity.

The maturity of the markets served

If the market is mature and thus only growing slowly competition is likely to be more intense than a
market that is still growing vigorously. This is because in a mature market the only way for an
organization to achieve higher sales is by taking market share from competitors and consequently
rivalry is increased. In markets which are still growing vigorously, however, new opportunities are
opening up for organizations and thus sales can be increased without taking market share from
competitors.

The degree of brand loyalty of customers.

If customers are loyal to brands then there is likely to be less competition and what competition
there is will be non-price. If there is little brand loyalty then competition will be more intense.

The degree of differentiation

Where products can be easily differentiated rivalry is likely to be less intense whereas where
differentiation is difficult rivalry is likely to be more intense.

Government regulation
The degree of government regulation will have an influence over the extent of competitive rivalry
in a sector.
The international airline industry was traditionally heavily regulated with governments taking direct
roles in setting inter-governmental agreements in order to exert control.

The height of exit barriers

The height of exit barriers (the ease with which organizations can leave the sector) will have an
impact upon competitive rivalry. Where high capital costs have been incurred as with the purchase
of aircraft, cruise liners or the construction of hotels or visitor attractions, it may be difficult to exit
from these sectors, as these assets cannot easily be put to other uses and may be difficult to sell
particularly in times of economic downturn. Consequently overcapacity may persist in such sectors
for a period of time leading to increased rivalry between competitors.

For example – issues in relation to over-capacity in some Asian hotel markets such as Hong Kong
and Shanghai are discussed by Tsai and Gu (2012) and Zheng and Gu (2011) respectively, while
Lee and Jang (2012) assess potential overcapacity issues in US lodging provision.

A high degree of rivalry will usually reduce the potential profitability of an industry and may lead
to innovations which serve to stimulate consumer demand for the THE products being offered. In
recent years, many sectors of THE have become more competitive as the result of the influence of
several factors including:

●● technology advances;
●● government deregulation;
●● government privatization;
●● economic slowdown in many economies;
●● removal of restrictions on foreign travel; and
●● removal of limits on supply.
IV. Evaluation / Assessment

1. Class Participation
2. Recitation