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SECTION 1 STUDENT TO COMPLETE: SECTION 2 TUTOR TO
Date From Student Nisreen Hatoum
ID # 060349 Date to Center
Course Code B300a Tutor’s Name
TMA # 04 Reason for late Submission
Date Sent to Tutor 9 /2/2007
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TUTOR’S GENERAL SUMMARY
Each firm has internal and external environment that should be taken into account when putting the strategy of their business. While talking about the industry, all the external influences which impact the decisions and performance of the firm should be considered. These external influences can be classified as micro environment and macro environment.
In my opinion, at the case of the difference of the strategies between the organizations, the external environment in its tow
classifications is more important than the internal one. The most important element of the external environment is the customer. Thus, the firm must understand they customer. They also should understand their suppliers and how to form good business relationships with them which help the firm to create the value of their goods and services. Also they should understand the competition to assess their ability in generating profitability from value creating activity. All these elements form the industry environment which these elements are the core of the business environment of the firm.
So that at my analysis I will discuss the external factors that affect the strategy of the firm and make it differ from another strategies of another firms at the same industry. As I mentioned above, the external factors may exist at the micro or macro environment which I will explain them also. I will also discuss the porter's five forces of competition framework, which these forces determine the industry structure and the strategy of each firm. Also the life cycle model of the industry can help in analyzing the different strategies of the firms, so that I will discuss this subject and give some illustrative examples about it. I will talk about airline and cement industry in Jordan and its strategy to compete their competitors around the world.
Since the profit is the key purpose of each organization, the strategy helps them to survive and to achieve this key purpose of making money. What makes the differentiation of the organization and distinguish it from the competitors is the creation of value for the customers which hence can
give the organization a monopolistic position at the market. This value can create to the customer by the production of the organization, and this requires from them a good strategy in pricing which should exceed the costs of the products. But this strategy can't translate the value created directly into profit. The forces of competition only can explain the exceeding of the value over the cost that distributed between customers and producers.
Thus this key purpose of the organization can be determined in the industry by three factors; the value of product and services that offered to the customer, the strong of competition and the bargaining power in the production chain. All these factors contribute in making strategy of business different and strong over the competitors.
These differences between firms' strategies are determined by two theories which they determine how the industry structure drives competitive behavior and determine the profit ability of the firm. These two theories are the theory of monopoly and the theory of perfect competition. By the monopoly the firm can protect themselves against new entry that it can be useful in gaining the full amount of the value it creates. At the perfect competition theory, the firm doesn't have any restrictions on the entry of the new product, and the level of the profit covers only the cost of the capital of the firm.*
A good example of changing the strategy because of competition is cement industry in Jordan. The Jordan Cement Factories Company (JCFC) has a monopolistic position inside Jordan in black cement industry. At last decades, environmental issues were took a big place within this industry because of its effect on the environment, since it cause huge air pollution and dangerous disease. They made an agreement with a French company (La Farge) to upgrade environmental protection measures according to international standards. The new administration (in 2004) announced the installation of new filters which were supposed to reduce the dust generated from 100 to 30 milligrammes per cubic meter of cement produced, which is more than the international standards stipulate. This shifting of strategy and changing of structures within cement factories had across the four phase of industry cycle life. The new filters that purchased were highly cost the company at the introduction stage of the industry. Then this new innovative technology had a great impact on the prosperity of cement industry, since it met all the international standards of environment and obey all the legislations of the government, thus, had increased sales at the growth stage. Although their monopolistic position, (JCFC) should stay at the maturity phase because of the
globalization of markets that force them to compete all over the world at cement industry not only locally.**
*Mazzucato, M. (2002), Strategy for Business, chapters (4,5,6) (pp.78-143), The Open University (2002). Sage Publications Ltd.
A.A. Al-Hamad, (2004), Jordan Cement Factories Company Ltd
ICON Press Release, http://ajloun.blogspot.com/2006/06/cement-factory-and-fuheis.html, date
The forces of competition that I mentioned earlier are five according to Michael Porter. These five forces of competition are used as a framework to classify and analyze the factors that affect the competition and profitability. Since the competition is a dynamic process of gaining competitive advantages, the five forces are determined by five forces of competitive pressure. They include; competition from substitutes, competition from entrants, competition established rivals, the bargaining power of buyers and the bargaining power of suppliers. These structural determinants of competition and profitability are determinants also of the strategy of each firm, which according to it; each firm will set different aims and hence different strategies.
The structural determinants of competition at the first threat, which is the substitutes, are the buyer prosperity to substitute and the relative price performance of these substitutes. At the second threat for the firm, which is the threat of entrants, the determinants are the economies of scale, capital requirements, product differentiation, and so on. Another force of competition is the industry rivalry. The determinants of this force are the concentration, diversity of competitors. . At the bargaining power of supplier and buyer, the structural determinants depending on the size and concentration of buyer relative to suppliers, the switching cost of buyers, cost of product relative to total cost. There are a lot of elements that are common within the five forces which mean that the competition process is the most important force that encourages the firm to differentiate themselves over their competitors.
Thus all these forces force the firm to establish superior strategy and strong structure to defend and differentiate itself from their competitors at the industry, and hence can gain the competitive advantages.
Since the industry structures driven both by the forces of competition
and by fundamental changes in technology and economic growth, the industry life cycle is a common pattern of industry development. The development of the capabilities and strategies help the firm to emerge industry circumstances prosper and grow. Thus, each industry can be classified according to their stage of development. This classification helps the firm to identify the key elements that determine the strategic character of their industry. So it is very useful to classify the stages of development to identify what is important about the industry and to assign it.
This classification of stages called life cycle model of industry. This model is the most important marketing concept and it is specific to product. First the product is porn, its sales grow, it reaches maturity, it goes into decline and finally the product will die.
The industry has life cycle as a product one, but it has longer duration than that of the product. This industry life cycle has four phases; introduction, growth, maturity, and decline. So that each firm should take into consideration two factors that are the basic forces of industry evolution, to know the characteristics of each stage at the life cycle. These factors are demand growth and creation and diffusion of knowledge.
At the introduction stage, which is the first step at the life cycle of product, the product is little known and customers are few. So that the sales are small and market access is low. At this stage there are lack of experience, small scale of production and novelty of technology. This means that the costs and prices at this stage are high with low quality.
At growth stage, the product technology becomes more standardized and market access is increased. Therefore, the scale of production is large and the cost average is low. Thus, the price is low. Increasing market saturation and slowing growth in demand cause maturity stage. The last stage is decline which is not preferred to reach this phase. At this stage, rising of new industries, that have superior substitute product with advanced technology, may challenge other industries and if these industries don’t have strong strategies, they will not have the opportunity
to prevent themselves from decline.
For that, these stages should encourage the firm to put good strategy to guarantee the superior over their competitors and to protect themselves from decline phase and hence the die.
Another key force of the industry life cycle is the creation and diffusion of knowledge. The innovation in the product is a form of new knowledge and it causes occurring of the industry. But both the creation
of knowledge and diffusion of it cause the evolution of the industry.
Each product in introduction stage has rapid development in its technology. So that, the competition will be between the alternative technologies and design configuration. To gain competitive advantages, firms must select the more successful approach with dominant technology and design configuration emerges. This lead to standardization. The increase in standardization encourage firm to reduce costs by large scale manufacturing process. This means that growth stage depending on the shifting from product innovation to process innovation. When the product technology and design are stabilize, the firm should start produce product with higher quality and acceptable price to stay at the maturity stage and protect and defend them from decline.
E-ticketing is the best innovation in technology at the airline industry. Royal Jordanian (RJ) airline faced a great competition from other airlines which force them to change their strategies to protect themselves from decline. The privatization of RJ help them to gain more competitive advantages by differentiate them through high quality process and services. E-ticketing is another innovation that forces them to shift their strategies. This new system reduces the costs associated with printing and mailing tickets to the ticket buyers. Also it reduces the need for ticket stock, envelopes and postage. Since the technology base in Jordan is very strong, International Air Transport Association (IATA) made an agreement between them, Royal Jordanian and the Jordanian Civil Aviation Authority to introduce common use self service check-in. through the huge competition within airlines sector RJ has successful applying for this new strategy that help them to survive.*
*Bisignani, G. (2007). IATA Issues ‘Last Call’ for Paper Tickets - 16.5 million tickets to fill need until
deadline, http://www.iata.org/pressroom/briefings/2007-08-27-01, date accessed25/1/2008.
To conclude, each firm should understand their environment very will
to guarantee the success and profitability within this globalization which
cause increase in competition. Some of the most important aspects that
they should identify within their industries are, the forces of competition,
the life cycle of their industries and the determinants of the industry. All
these issues help the firm to survive and protect them from decline.
Bisignani, G. (2007). IATA Issues ‘Last Call’ for Paper Tickets - 16.5 million tickets
to fill need until deadline, http://www.iata.org/pressroom/briefings/2007-08-27-01,
A.A. Al-Hamad, (2004), Jordan Cement Factories Company Ltd
ICON Press Release, http://ajloun.blogspot.com/2006/06/cement-factory-and-fuheis.html, date accessed25/1/2008. Barney, J. (2006), Arabian Cement firms up its Jordanian factory
_JO/PR.html, date accessed25/1/2008.
Mazzucato, M. (2002), Strategy for Business, chapters (4,5,6) (pp.78-143), The Open
University (2002). Sage Publications Ltd.