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  • 20 Marks

CSEG – May 2019 – L2 – Q3 – Strategic alternatives, analysis and selection

Analysis of competitive advantage bases and factors influencing industry rivalry, with application of Porter’s Five Forces model to the mobile money industry.

a) Asawasi Company, a relatively new company, is in the business of designing and building farm equipment and machinery. Whilst it has been successful in its first few years of operation, sales are now in decline as competition in the industry has intensified and there is greater rivalry between the competing organisations.

A review undertaken by consultants has recommended that in order to gain sustained competitive advantage, the company needs to establish the basis on which it can compete more effectively against its rivals in the future.

Required:

i) Describe the concept of competitive advantage and include references to the different bases Asawasi Company could use to achieve competitive advantage.
(5 marks)

ii) Describe the factors that can create competitive rivalry between organisations.
(5 marks)

b) An introduction of a new technology is an introduction of a new business. This is a statement of fact and evidence abounds in many African economies. The introduction of mobile phones came with space-to-space business and eventually gave rise to mobile money services.

Required:

Using Porter’s Five Forces model, identify the competitive forces that influence the state of competition in the mobile money industry and the profit potential of the industry as a whole.
(10 marks)

a) i) Concept of Competitive Advantage

Competitive advantage refers to any activity or factor which gives one organisation an edge over its rivals. The edge that an organisation has over its competitors may be viewed from three angles: superior position, superior skills, and superior resources. Organisations should adopt a strategy that is intended to achieve some form of competitive advantage. Doing something better or more efficiently than competitors should ultimately lead to profitability. If this can be done long-term, despite the efforts of competition, then the organisation possesses a sustainable competitive advantage.

(2 marks)

Bases of Competitive Advantage:

  1. Cost Leadership:
    • Being the lowest cost producer in the industry as a whole. By producing at the lowest cost, the company can compete on price with every other producer in the industry and earn higher unit prices.
  2. Differentiation:
    • Exploiting a product or service that the industry as a whole believes to be unique. This can be achieved via brand image, product special features, marketing techniques, etc.
  3. Focus:
    • Restricting activities to only part of the market (a segment). This is also known as a niche strategy. It can be achieved by providing goods/services at a lower cost to that segment (cost focus) or by providing a differentiated product/service to that segment (differentiation focus).

(3 points @ 1 mark each = Total of 3 marks)

ii) Factors Creating Competitive Rivalry

Organisations that provide a similar product/service aimed at the same target market will experience a certain degree of competitive rivalry. The intensity of competitive rivalry within an industry will affect the profitability of the industry as a whole, as price wars and advertising fees reduce the profits of the rivals.

Factors Creating Competitive Rivalry Include:

  1. Low Barriers to Entry:
    • Low barriers to entry increase the number of organisations in that industry, thus creating rivalry.
  2. Market Growth:
    • Rivalry is intensified when firms are competing for a greater market share in a total market where growth is slow or stagnant.
  3. Cost Structure:
    • High fixed costs can tempt firms to compete on price, as any contribution from sales is better than none at all.
  4. Switching Costs:
    • Low switching costs make it easier for customers to change suppliers, leading to increased competition.
  5. Uncertainty:
    • Uncertainty in the environment can increase rivalry as firms compete to secure their position.
  6. High Exit Barriers:
    • Difficulty in exiting the industry forces firms to fight for market share, intensifying competition.
  7. Strategic Importance:
    • When success in a particular market is a prime objective for many firms, competition is likely to be more intense.

(2 points @ 2.5 marks each = 5 marks)

b) Porter’s Five Forces Analysis of the Mobile Money Industry

1. Threat of New Entrants:

  • New entrants bring additional capacity and more competition to the industry. The strength of this threat depends on the barriers to entry, such as the amount of capital required to start the business and the likely response of existing competitors.

2. Availability of Substitutes:

  • A substitute product is one produced by another industry that satisfies the same customer needs. For example, online banking through mobile apps could serve as a substitute for mobile money services.

3. Bargaining Power of Customers:

  • Customers’ ability to force down prices or demand better quality affects profitability. Factors influencing this power include the cost of the service, its importance to the customer’s business, and switching costs.

4. Bargaining Power of Suppliers:

  • Suppliers of key inputs or services can exert pressure for higher prices. The strength of this power depends on the availability of substitute services, the importance of the supplier’s input to the mobile money industry, and the cost of switching suppliers.

5. Rivalry Among Existing Competitors:

  • The intensity of competitive rivalry affects overall profitability. Rivalry might take the form of price competition, advertising battles, or the introduction of new products and services. Increased competition can lead to market expansion or reduce profitability if demand remains unchanged.
  • 10 Marks

CSEG – May 2016 – L2 – Q6c – Analysing the external environment

Identify and explain five determinants of barriers to entry for new entrants into an industry, focusing on factors that protect existing firms from new competitors.

A new entrant into an industry will bring extra capacity and more competition and so could, in turn drive down profits. The strength of the threat posed by new entrants is likely to vary from one industry to another and depends on the strength of the barriers to entry and the likely response of existing competitors to the new entrant.

Required: Identify and explain FIVE determinants of barriers to entry to new entrants into an industry. (10 marks)

Determinants of barriers of entry to potential new entrants into an industry

i. Economies of scale: High fixed costs often imply a high breakeven point, and a high breakeven point depends on a large volume of sales. If the market as a whole is not growing, new entrants into the industry would have to capture a large slice of the market from existing competitors. This is expensive. Thus, if significant scale economies are already enjoyed by existing firms, potential new entrants experience strong barrier to entry into the industry.

ii. Product differentiation: The degree to which existing firms have succeeded in differentiating their respective products or services from the competition determines how strong the barrier to entry for potential new entrants. Existing firms may have built up a good brand image and strong customer loyalty over a long period of time. A few firms may promote a large number of brands to crowd out the competition.

iii. Capital requirements: The amount of capital required to enter an industry determines the extent of difficulty new entrants face in their quest to enter the industry. When investment requirements are high, the barrier against new entrants will be strong, particularly when the investment would possibly be high-risk.

iv. Knowledge requirements: As well as high capital requirements, knowledge and know-how are also a barrier to entry. It is much more difficult to enter an industry which requires significant specialist knowledge, and skills, than an industry where no specialist skills are required.

v. Switching costs: Switching costs refer to the costs that a customer would have to incur by switching from one supplier’s products to another’s. Switching costs is a composite of three costs namely: time, money and convenience. Switching costs are usually higher for industries with greater extent of product differentiation. If switching costs are high, new entrants into the industry experience a strong barrier to entry since they have to invest heavily in differentiating their product and also creating awareness for its products so as to build its own loyal customers. The barrier is even stronger where the market is saturated.

vi. Access to distribution channels: Distribution channels carry a manufacturer’s products to the final consumer. New distribution channels are difficult to establish and existing distribution channels hard to gain access to. Existing distributors are usually reluctant to accept new products to market since they are unsure of their acceptability and patronage by the final consumers. Thus, usually potential new entrants face significant barriers to entry where access to distribution channels is difficult.

vii. Cost advantage of existing producers, independent of economies of scale: Sometimes existing producers in the industry enjoy significant cost advantages which are independent of economies of scale such as patent rights, experience and know-how effects, government subsidies and regulations and favoured access to raw materials. If these advantages are significant for existing producers it contributes to the strength of barrier to entry for new entrants. Existing producers find it easier to engage in price wars to ward of potential new entrants.

  • 40 Marks

CSEG – May 2017 – L2 – Q1a – Strategic alternatives, analysis and selection

Analyze Gussie Perry Ltd's environmental policies, mission statement relevance, division performance, and market position using ROI, RI, and Porter's Five Forces.

CASE STUDY: GUSSIE PERRY LTD

Introduction:
Gussie Perry Ltd (GPL) is a long-established divisionalized company with its origins in shipping. The company has been in existence for nearly 120 years and has developed a reputation for reliability and quality service.

The shipping activities in which Gussie Perry Ltd (GPL) is engaged comprise four divisions – cruise, ferry, container, and bulk shipping. The cruise division is engaged entirely in the carriage of passengers, while the ferry division carries passengers and vehicles. The vehicles carried by the ferries range from motor cars to articulated trucks and buses. The container and bulk shipping divisions are engaged in the carriage of freight only.

Organizational Goals:
The company has stated over recent years that it aims to:

  1. Increase its international business to achieve long-term profitability.
  2. Provide the necessary capital investment to support its international operations.
  3. Train and develop the company’s employees.

Environmental and Safety Policy:
Environmental protection is now a key aspect of corporate social responsibility. Pressure on Gussie Perry Ltd (GPL) for better environmental performance is coming from many quarters. The company recently implemented an environmental and safety policy, which is monitored through an audit system, in an effort to ensure that its policies are being executed. It is the aim of the company to have operational standards that match the best industry standards. Training of management, staff, and specialist auditors is seen as a priority within the organization’s environmental and safety policy. This has become a major concern for the company because of customer anxiety about the safety of the ferries.

Financial Results:
In the last financial year, earnings per share were GH¢2.12, producing a dividend cover of 1.15 times. The dividend per share paid by Gussie Perry Ltd (GPL) has remained at the same level for five years. Comparative values for divisional revenue and operating profit are shown in Table 1.

Table 1: Divisional Financial Data

Division Cruise Ferry Container Bulk Shipping
Current year’s revenue (GH¢’000) 5,136 4,002 7,572 750
Previous year’s revenue (GH¢’000) 4,410 3,756 6,306 672
Current year’s operating profit (GH¢’000) 780 650 252 (30)
Previous year’s operating profit (GH¢’000) 528 480 240 (18)
Assets/Capital Employed (GH¢’000) 2,800 2,500 3,200 3,800

During the year, general inflationary levels in the shipping industry were 14% per annum. The company’s cost of capital is 25%.

Extract from the Chairman’s Statement for the Financial Year:
In his statement, Mr. Aaron Yeboah, the Chairman of Gussie Perry Ltd (GPL), commenting on revenue and profit before the inflation adjustment, said the company achieved encouraging results, particularly in the cruise division. The company had taken delivery of a new cruise liner, at a cost of GH¢1,200,000, and has two more on order. Aaron believed that this was an expanding market and considered the company to be in a good position to take advantage of the opportunity. With regard to the ferry division, Aaron expected continued growth, although there was an expectation of potential new entrants due to increased cargo volumes. This contrasted with his view of the declining performance of the container and bulk shipping divisions as shown in Table 1.

Market Information:
Gussie Perry Ltd (GPL) commissioned market research into its cruise and ferry operations. The results of this research indicated that, in recent years, within the cruise liner industry, there has been a change in customer appeal. Traditionally, the main customer base had comprised traders. In the last five years, the cruise division has experienced an increase in its clientele, especially holidaymakers. This stemmed from the promotion of domestic tourism.

Furthermore, the research showed a 15% increase in marine transport, but Gussie Perry Ltd’s market share actually reduced by 4%. The report indicates that the probability of the cruise market continuing to grow was bright. However, there were uncertainties about the future potential of the container and bulk shipping divisions.

Required:

a) Identify FOUR ways in which GPL’s concern for environmental and safety policy can impact on its performance. (4 marks)

b) The Chairman of the company has recently attended a short course on strategic planning. He was particularly interested in the relevance of mission statements to the strategic management process. Explain in FOUR ways how a mission statement is relevant in strategic management. (8 marks)

c) i) Calculate the current return on investment (ROI) and residual income (RI) for each division for the current year. (4 marks)
ii) Assess the performance of each division and advise the management of Gussie Perry Ltd (GPL). (8 marks)

d) With reference to Porter’s Five Competitive Forces model, assess the nature of the cruise and ferry shipping market in which Gussie Perry Ltd (GPL) is engaged. (16 marks)

a) Impact of Environmental and Safety Policy on Performance:

  1. Understanding and managing environmental costs: Environmental costs are often hidden in overheads, and environmental and energy costs are often not allocated to the relevant budgets.
  2. Minimizing accidents and long-term environmental effects: Accidents and long-term environmental effects can result in large financial liabilities.
  3. Cost of capital considerations: Companies with poor environmental performance may face increased costs of capital because investors and lenders demand a higher risk premium.
  4. Corporate reputation and social responsibility: Environmental protection and ethical labor practices are now key aspects of corporate social responsibility, contributing to both the company’s reputation and societal well-being.

(Total: 4 marks)

b) Relevance of Mission Statements in Strategic Management:

  1. Clarifying Organizational Purpose: A mission statement defines the reason why the firm exists, what it aims to achieve, and how it aims to achieve its purpose. This clarity helps guide decision-making and strategy development.
  2. Influencing Organizational Culture: A mission statement expresses the core values and beliefs of the company, shaping the attitudes and behaviors of employees and aligning them with the organization’s goals.
  3. Communicating with Stakeholders: The mission statement communicates the company’s intentions to both internal and external stakeholders, helping to build trust and align expectations.
  4. Guiding Strategic Planning: Mission statements provide a foundation for setting goals, objectives, and strategies. They ensure that the strategic direction of the company is consistent with its core purpose and values.

(Total: 8 marks)

c) i) Calculation of ROI and RI for Each Division:

Residual Income (RI):

ii) Assessment of the Various Divisions
APPENDIX: SUMMARY OF KEY RATIOS FOR THE ASSESSMENT OF THE DIVISIONS OF GUISIE PERRY LIMITED

Performance Assessment and Management Advice:

  • Cruise Division: The Cruise Division is performing well with a high ROI and positive RI. Management should consider further investment and capital allocation to this division.
  • Ferry Division: The Ferry Division also has a good ROI and a positive RI, indicating satisfactory performance. Management should continue to monitor this division for potential growth opportunities.
  • Container Division: The Container Division has a lower ROI and a negative RI, suggesting underperformance. Management should evaluate the reasons for this and consider restructuring or cost reduction strategies.
  • Bulk Shipping Division: The Bulk Shipping Division is underperforming with both negative ROI and RI. Management should consider whether to divest or significantly restructure this division.

d) Porter’s Five Forces Analysis of the Cruise and Ferry Shipping Market:

  1. Threat of New Entrants: The cruise and ferry market requires significant capital investment, which can act as a barrier to entry. However, the potential for profitability in this growing market could attract new competitors.
  2. Bargaining Power of Suppliers: Suppliers have moderate power due to the need for specialized vessels and the limited number of shipbuilders capable of meeting specific requirements.
  3. Bargaining Power of Buyers: Buyers in the cruise industry, particularly holidaymakers, have a wide range of options. This gives them higher bargaining power, especially if service quality does not meet expectations.
  4. Threat of Substitutes: The threat of substitutes is low as there are limited alternatives to marine transport for the specific services provided by Gussie Perry Ltd.
  5. Industry Rivalry: Competition is moderate, with a few established players in the market. However, as new entrants and expansions occur, the rivalry could intensify.

 

  • 10 Marks

BMIS – March 2024 – L1 – Q5b – Competitive forces and markets

Explain the components of Porter's Five Force Model used to analyze competitive environment and its impact on a company's profitability and strategy.

The Porter’s Five Force Model is regarded as a tool for driving industry competition. The model is used to analyse the competitive environment in terms of five key forces that impact a company’s profitability and influence its strategy.

Required: Explain the components of the Model. (10 marks)

Components of Porter’s Five Force Model

  • Rivalry among competing firms This is based on the assumption that there are many competing firms dealing in the same line of product with similar characteristics such as quality, prices, and attractions. When the rival firms are homogenous in terms of products and prices it reduces their competitiveness.
  • Threat of new entrants New entrants are firms entering an existing market. New entrants may come with new products that have advanced features which are preferred by buyers. New entrants may also enter the market with reduced prices. When such situations are not handled effectively new entrants can take the market share belonging to existing competing firms.
  • Availability of substitute products Substitute products are products provided by competing firms. These products offer similar services and satisfaction. Customers can easily switch to new products if the existing products are not meeting customer expectations.
  • Bargaining power of suppliers Suppliers provide the company with materials and components needed for manufacturing the company’s products. Suppliers can be powerful if they supply major components of the company’s products. Again fewer suppliers means limited choices and therefore they have the power to raise prices.
  • Bargaining power of customers Customers are the individuals and organisations that patronise the goods and services offered by the company. Customers can be powerful if they have alternatives to choose from. Powerful buyers can drive down the prices of products and services offered.
  • 15 Marks

BMIS – May 2017 – L1 – Q2a – Competitive forces and markets

Explain how Porter’s Five Forces can assess industry attractiveness.

a) Charis Shoes Ltd has been in existence for 5 years. The Board of Charis Shoes Ltd needs a report on examination of the industry’s attractiveness.

Attractiveness in this context according to the board refers to the overall industry profitability.

Required:
Explain how the Porters Five Forces model can be used to assess the attractiveness of the industry in which Charis Shoes Ltd operates. (15 marks)

Porter’s Five Forces is a model of analysis that helps to explain why different industries are able to sustain different levels of profitability. This model was originally published in Porter’s book, “Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980. The model is widely used, worldwide, to analyze the industry structure of a company as well as its corporate strategy. Porter identified five undeniable forces that play a part in shaping every market and industry in the world. The forces are frequently used to measure competition intensity, attractiveness, and profitability of an industry or market.

  1. Threat of New Entrants:
    • The importance of this force is the number of competitors and their ability to threaten a company. The larger the number of competitors, along with the number of equivalent products and services they offer, dictates the power of a company. Suppliers and buyers seek out a company’s competition if they are unable to receive a suitable deal.
  2. Potential of New Entrants into an Industry:
    • A company’s power is also affected by the force of new entrants into its market. The less money and time it costs for a competitor to enter a company’s market and be an effective competitor, the more a company’s position may be significantly weakened.
  3. Power of Suppliers:
    • This force addresses how easily suppliers can drive up the price of goods and services. It is affected by the number of suppliers of key aspects of a good or service, how unique these aspects are, and how much it would cost a company to switch from one supplier to another. The fewer the number of suppliers, and the more a company depends upon a supplier, the more power a supplier holds.
  4. Power of Customers:
    • This specifically deals with the ability customers have to drive prices down. It is affected by how many buyers, or customers, a company has, how significant each customer is, and how much it would cost a customer to switch from one company to another. The smaller and more powerful a client base, the more power it holds.
  5. Threat of Substitutes:
    • Competitor substitutions that can be used in place of a company’s products or services pose a threat. For example, if customers rely on a company to provide a tool or service that can be substituted with another tool or service or by performing the task manually, and this substitution is fairly easy and of low cost, a company’s power can be weakened.

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