Analysis On Competition Environment

Published Date: 02 Nov 2017

2.1 Overview of competitive strategy

2.1.1 Competition

Competition is the basic characteristic of nature happing in all living field. It is "when the immediate supply of a single necessary factor fall below the combined demand of the plants, competition begins" (Frederic Clements, 1929, p.317). The definition here was not covered the economic prospective only, but the whole system of the nature interface cycle. However, there are key words that make any economist or businessman concern as "supply" and "demand". They are the essential ingredients in need of analysis to gain the success in any market. As the basis of nature, competition concept is extremely also foundational in economy.

So, what is the competition in respect of economy and business field? The answer here would be given by Michaël E. Porter: "… managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well… The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry". (Michaël E. Porter ,, 3)So the competition definition in general is not quite specific but must rely on the industry. It can be conducted from the number of customer, the level of productivity, the brand recognition among competitors… But, when there are five competitive forces –customers, suppliers, potential entrants, substitute product and rivalry- so would competition appear.

2.1.2 Competitive strategy

Concept of competition is just the navigation to achieve the value creation that allows them to gain as much profit as possible. It is only achievable when companies can establish a difference that it can preserve. The arithmetic of superior profitability then comes by: delivering greater value that give a company allowance to charge higher average unit prices; better efficiency results in lower average cost. And competitive strategy is about being different.

"Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations" said Johnson and Scholes (Johnson and Scholes, 2002, 15). In other words, Strategy is simply an outline of how a business intends to achieve its goals and objections and constrained by the company’s capabilities.

An effective strategy gives a firm three benefits. First, it is a source of economic gain. Second, it provides a frame work for resource allocation. And third, it guides the firm’s decisions regarding management and organization. (Gordon Walker, ,3) In general it is the guide for companies’ decision regarding their management and organization. And it is more practical when the company need to draw a competitive strategy that focus to overcome its competitors. "Competitive strategy is the search for a favorable competitive position in an industry, the fundamental arena in which competition occurs. Competitive strategy aims to establish a profitable and sustainable position against the forces that determine industry competition." (Michael E. Porter, 1, 1998)

Because of the limitation of topic, competitive strategy here would be analyzed at the corporation level rather than other lower level. After defining five forces of competition as mentioned above, the next step here is to formulate the competitive strategy to become different in the industry.

2.2 Analysis on competition environment

Competition as above is very abstract definition that we cannot point it out but only describe it through five competitive forces as customers, suppliers, potential entrants, substitute product and rivalry. However, five of them are just not enough to fulfill the blank page of competitive strategy. In consideration of effective strategy, any company need to understand both internal and external factor but in different level respect to kind of strategy it currently focuses on. This involves an analysis of the general environment and the competitive environment. Undertaking of strategy analysis by the organization is useful starting points to not only evaluate the current situation of firms’ strategic management process but also to plan a further strategy. The organization is face with a constantly changing external environment and needed to ensure that its own internal and capabilities are more than sufficient to meet the needs of the external environment. Any of them do not exist simply to survive in the market place but want to grow and prosper in a competitive environment. In order to make sense of what is going on around them, the strategy analysis is very crucial.

For analysis on competitive strategy of Trung Nguyen Corporation, there are many way to encounter the results. Here we only concentrate on 3 analysis tools: Value chain, PESTEL analysis and Porter’s Five Force analysis.

2.2.1 Value chain

A firm is a collection of activities that are performed to design, produce, and market, deliver and support its product. All these activities can be represented using a value chain. Firms’ value chain and the way it performs individual activities are reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves.

Value chain analysis was devised by Porter (1985) is a technique which helps us assess an organization’s resource and in so doing determine its strengths and possible weakness. Value chain analysis looks at the activities that go to make up a product or service with a view to ascertaining how much value each activity adds. If we desire to increase the value an organization adds for the consumers of its products, be they the end consumer or an intermediate such as distributor, we need to know where and how much value each activities set, and, importantly, how we might enhance this value added further by reconfiguring parts (or all) of the value-added process. This process is referred to as the value chain system and recognizes that an organization‘s own value chain will interact with the value chain prevalent in other organizations.

The relevant level for constructing value chain is a firm’s activities in a particular industry (the business unit). An industry- or sector-wide value chain is too broad, because it may obscure important sources of competitive advantage. Though firms in the same industry may have similar chains the value chains of competitors often differ. Trung Nguyen and Starbuck can be considered in the coffee beverage industry, for example, but they have absolutely different value chains embodying significant differences in boarding gate operations, crew policies, and aircraft operations. Differences among competitor value chain in an industry may avry somewhat for different items in its product line, or different buyers, geographic areas, or distribution channels. The value chains for such subsets of a firm are closely related, however, and can only be understood in a context of the business unit chain.

An analysis of the value chain rather than value added is the appropriate way to examine competitive advantage. Value added (selling price less the cost of purchased raw materials) has sometimes been used as the focal point for cost analysis because it was viewed as the area in which a firm can control costs. Value added is not a sound basis for cost analysis, however, because it incorrectly distinguishes raw materials from the many other purchased inputs used in a firm’s activities. Also, the cost behavior of activities cannot be understood without simultaneously examining the costs of the inputs used to perform them. Moreover, value added fails to highlight the linkages between a firm and its suppliers that can reduce cost or enhance differentiation.

Identifying value activities requires the isolation of activities that are technologically and strategically distinct. Value activities and accounting classification are rarely the same. Accounting classifications group together activities with disparate technologies, and separate costs that are all part the same activity. The activities contained within the value chain are classified by Porters as primary activities and support activities, Figure . These primary and support activities provide the link between an organization’s strategy and its implementation. This is because once the organization is seen as a collection of activities, and every employee is involved in an activity, it becomes apparent that everyone has a role to play in strategy implementation. Therefore it becomes crucial that an organization’s strategy is clearly communicated throughout the organization so that individuals understand why they are involved in particular activities, and how this is related to other activities.

2.2.1.1 Primary activities

Primary activities are those activities which are directly involved in the creation and sales of a product or service. They include the following five generic, categories: inbound logistics, operations, outbound logistics, marketing and sales, and services. Each primary activity can be subdivided into a number of distinct activities to reflect a particular industry and the organization.

Inbound logistics

These are the value chain activities that cover receiving, storing, and distributing inputs to the product. It includes material handling, warehousing, inventory control, vehicle scheduling and returns to suppliers.

Operations

Those activities deal with transforming an organization’s inputs into final product such as machining, packaging, assembly, testing, printing and facility operations

Outbound logistics

These activities are associated with collecting, storing, and distributing the product or service to buyers. Outbound logistics includes warehousing, material handling, delivery, order processing, and scheduling

Marketing and Sales

This includes activities that makes a product available for buyers purchase and induces them to buy. It includes advertising promotion, sales force, quoting, channel selection, channel relations, and pricing.

Services

These activities enhance or maintain the value of products, such as installation, repair, training, parts supply, and product adjustment.

2.2.1.2 Support activities

Support activities are there to ensure that the primary activities are carried out efficiently and effectively. The four generic support activities are procurement, technology development, human resource management, and firm infrastructure. The first three support activities may be associated with specific activities in addition to supporting the entire value chain, while firm infrastructure supports the entire value chain. As we saw with primary activities, each support can be divided into a number of distinct activities to reflect a particular industry.

Procurement

This value chain activity deals with the process of purchasing resource inputs to support any of the primary activities. Inputs to the organization’s productive process include such things as raw materials, office supplies, and building.

Technology development

This activities covers an organization’s "know-how", its procedures, and any uses of its technology that has an impact upon product, process, and resource development

Human resource Management

These activities include selection, recruitment, training, development, and remuneration of employees. They may support individual primary and support activities, as occurs when an organization hires particular individuals such as economists. They may also support the entire value chain, as occurs when an organization engages in company-wide pay negotiations.

Firm Infrastructure

This consists of activities which usually support the entire value chain, such as general management, planning, finance, accounting, and quality management. An organization’s infrastructure is usually used to support entire value chain.

2.2.1.3 Evaluating the Value Chain

The value chain activities will involve an element of judgment and subjective. Value chain analysis is more than an evaluation of the discrete activities within the value chain. To be effective, value chain analysis needs to recognize and understand the relationship linkages between these activities which will not always be apparent. The aim is to see if a given activities can be undertaken differently and thereby improved, which might also provide some form of competitive advantage. In addition, an organization must understand the relationship between its own value activities and those activities outside firms which including five forces of competition.

The linkages can lead to competitive advantage in two ways: optimization and coordination. This is a recognition that linkages will often involve trade-offs between its activities or the relationship of interdependent activities as well as individual activities in order to achieve competitive advantage. Moreover, how an organization manages the linkages between its own and other value chain will have an impact on how value is created within the value chain system. For example, if an organization can change the configuration of a supplier’s value chain to optimize the performance of their respective activities, it will benefit its self and the supplier, leading to a win-win situation. In the same way, by improving the coordination between its own value chain and a supplier’s value chain, both benefits. This provides an opportunity for the organization to improve its competitive advantage. The organization needs to undertake analysis on other channel such as distributors, customers… to lower cost and enhance its differentiation.

Value chain analysis looks at the activities that go to make up a product or service with a view to ascertaining how much value each activity adds. It assistants to identify the linkages between value activities within the organization to see if these can be improved. This involves assessing how these activities are best optimized and coordinated with a view to reducing the cost impact of one activity upon another or enhancing its performance. At the same time, the organization should consider if there is further value to be added by more effective management of the links with its suppliers, distributors, and customers within its value chain systems. The end result allows an organization to ascertain if it possesses a strategic capability or core competence within its activities, or more likely within its configuration of activities, which can be used as the basis for sustainable competitive strategy.

2.2.2 PESTEL analysis

These external factors can have an influence on a range of aspects of a project including its customers or users, the industry or marketplace including competitors, the technology its uses, the staff building or running the projects as well as on other key stakeholders such as the sponsor as well as on the organization itself. Failure to consider external factors can lead to project overrun of time and budget; it may even lead to complete project failure. However, sometimes a project may appear to be fatally flawed in terms of project management, but due to external factors it ultimate outcome may be a resourcing success. A project supplying an alternative energy supply (to oil) may have dramatically gone over time and budget, but because of equally dramatically increases in oil cost may still eventually be judged a success. Analysis of the external environment links in with project risk management.

PESTEL (Political, Economic, Social, Technical, Legal and Environmental) Analysis along with other tools (such as Porter’s Fiver Forces Analysis) is used for scanning the present and especially future external factors that impact on the various aspects of an organization that will ultimately find its way into the competitive environment. When conducting a PESTEL there must be a sound knowledge of the industry in need to cover. PESTEL would provide a link between the general environment and competitive environments in those weak signals in the general environment can become key forces for change in the competitive environment. Although each factor will be dealt in turn, it should be noted that interrelationships between the factors exist.

2.2.2.1 Political Factor

Political factor of PESTEL deals with the effects of government policy. In as much as government policy is worked out through legislation, it encompasses all legal elements of this analysis. This includes items such as government stability, taxations policy and government regulation.

The P in PESTLE stands for political factors, both current and future. These range from global and supra-national (such as the Europion Union) through to national, regional, and local. The more public and controversial the project (especially if it is in the media spotlight), the more likely it is to be influenced by political factors, especially if the project duration pans possible changes in government. This provides a greater uncertainty. For example, in the health care field, closing even part of a hospital can be considered a political "hot potatoFor example if the government considers raw coffee material a pointing exporting goods in a year, suddenly all coffee farms and factories shall have more attention from local offices and also incentive in taxes and exporting procurement. While Vietnam is just a developing country which many companies are in or related to agricultural industries that depends a lot on climate and short-term demand of the market, the support from government through political issues is very important. Moreover, nowadays, real estate and construction firms are looking for the decision of the National Bank for the financial relief package at 30.000 billion VND. Because of the financial crisis, many building projects are under contracting or no lease and the contractor are in debt for thousand billions VND in rate of more than 18% bank interest. That decision of the Vietnamese government would decide the fate of them whether they can be saved from the increase in demand of real property for support from government or death as a sacristy to make market stable itself. The government roles in recession period is very important, not only Vietnam but all over the world.

The political instability of a country and poor relations with its neighbors will increase the uncertainty. Countries undergoing civil unrest while possibly providing higher returns make firms uncertain, increasing costs and risks. Countries which join a large supra-national organization will be effected by it, possibly enjoying greater long-term stability at the expense of short-term problems in adjusting to the new regimes imposed by it. Countries that have a problems consensus amongst political parties are less likely to cause serious problems for companies during changes of government than those move from a wholesale embrace of free market reform to a centrally controlled, interventionist and de-privatized economy. It must be noted that while a particular party that has a negative view of a company or company’s project, its influence may be felt should it experience difficulties and therefore provide political ammunition to embarrass the party or authority in control. Finally, in the political arena we must not forget that other key stakeholders (such as Trade Unions and Non-Governmental Organizations) in a project might exert considerable influence.

The head of the company as well as forecasting and accounting for such influences will also want to try to manage them. There will be a greater requirement for more effective consultation with all the stakeholders at the outset of the project. A proactive public relations and communications strategy, for example, will continuously promote the benefits of a politically sensitive situation. It will also respond appropriately when problems are encountered through the projects life-cycle. Managers will need to be given the appropriate training in all these areas.

2.2.2.2 Economic Factors

Key economic indicators include interest rates, disposal income, unemployment rates, retail price index (inflation), gross domestic product (GDP), and exchange rate. However, economic data can be notoriously fickle and ambiguous. In addition, an economic indicator can never provide a complete picture, but rather provides a snapshot and simplification of complex economic phenomena. This makes scanning and monitoring the general environment for signs of economic shifts which might impact an organization’s industry a little difficult. The strength of an economy will general benefit industries, but the extent of its effect will vary according to which economic factors are most affected.

In addition, the state of the economy affects people’s ability to satisfy their needs and wants by acquiring goods and services. In times of recessions like now, many people may want to buy- but are unable to afford to do so. Economic conditions also affect the organization’s ability to supply the products and services that customers want. When interest rates are high, for instance, the cost of borrowing is likely to mean that organizations cut down on investment in new plant and equipment, while individual consumers postpone acquiring items which would involve taking out of loan. All these stories can be easily seen through the current situation of real estate and baking market in Vietnam.

The role of state in trade and business activities is linked to the dimension of the participation of citizens in government. A developing country like Vietnam usually has a controlled economic system that the state plays a crucial role in the management of trade and business.

2.2.2.3 Social Factors.

Social factors include cultural changes within the environment and are often referred to as socio-cultural. Just a consumer purchasing power ultimately determines the magnitude of demand of all goods and services, so consumers taste ultimately determine where that demands is directed. Sometimes these tastes are manifested in what consumers themselves actually buy. In other cases they are expressed through voting, lobbying, and political processes, which influence the decision of politicians and civil servants. Some social trends have a life of only a few years and/ or affect few people and societies, others have a life of several decades and widespread relevance across many developed economics, such as Iphone or Apple phenomenon.

Many social trends are linked to economic factors. As individuals become wealthier, their social aspirations change, which generates other changes. For example, the increase in disposable income overall has facilitated more foreign travel, which has made foreign food and drinks more acceptable and popular in Vietnam and in turn facilitated the dramatic increase in consumption of import food and goods.

Tracking and predicting the chances can be time-consuming and few organizations have the need or the resources to carry out detailed research. It is often sufficient to use publicly available information and to draw conclusion from this.

2.2.2.4 Technological factors

The applications of information and communication technologies in the first decade of the twenty-first century are having a dramatic impact on business. Without doubt some of major changes taking place in the general environment that are impacting the competitive environment are technological. One merely has to think about Amazon and Dell have used the Internet to change traditional retailing within their respective industries.

Technological factors include the rates if obsolescence, i.e. the speed with which technological discoveries’ supersede established technologies. The rate of change in technology and innovation has effect of causing new industries to emerge and also changes the ways in which existing industries compete. Technological advances including the internet, the uses of sophisticated software (increasingly being used in the design and testing of automobiles), genetic engineering and nano technology. More people than ever before are buying on-line, forcing most large business to develop strategies involving e-commerce. Other technological changes involve the product of new research initiatives, level of expenditure on research and development, and government support of new technologies.

The rapid rate of change of technology has changed the dynamics of industries such as banking, financial services, and insurances. This has allowed new entrances to enter the market as lower cost base than incumbents, thereby offering more competitively priced products and services and gaining market share in the process. The internet has been compared to the Industrial Revolution in terms of the change it has brought about. The pace of change of technology is increasing. Its unpredictability is increasing. Markets are becoming increasingly turbulent. This makes it important to try to detect the weak signals which grow into discernible patterns that have the potential to change how industries operate. Moreover, if tipping points are unexpected, we need to change our thinking via the use of scenario planning to expect the unexpected. Organizations may not be able to predict these events but they will be stronger competitive position to respond to them once they have occurred.

2.2.2.5 Environmental factors

Environment, all of the external factors affecting an organism. These factors may be other living organisms (biotic factors) or nonliving variables (abiotic factors), such as water, soil, climate, light, and oxygen. All interacting biotic and abiotic factors together make up an ecosystem. Organisms and their environment constantly interact, and both are changed by this interaction. Additionally, environmental factors, singly or in combination, ultimately limit the size that any population may attain. This limit, a population's carrying capacity, is usually reached because needed resources are in short supply. Occasionally, carrying capacity may be dictated by the direct actions of other species, as when predators limit the number of their prey in a specific area. Like all other living beings, humans have clearly changed their environment, but they have done so generally on a grander scale than have other species. Some of these changes-such as the destruction of the world's tropical rain forests to create grazing land for cattle or the drying up of almost three-quarters of the Aral Sea, once the world's fourth-largest freshwater lake, for irrigation purposes-have led to altered climate patterns, which in turn have changed the distribution of species of animals and plants. Scientists are working to understand the long-term consequences that human actions have on ecosystems, while environmentalists-professionals in various fields, as well as concerned citizens in the United States and other countries-are struggling to lessen the impact of human activity on the natural world.

2.2.2.6 Legal Factors

Legal PESTLE factors, described by JISC infoNet as European and national proposed and passed legislation (JISC infoNet 2009), have also been impacting upon HE and FE. As JISC Legal (JISC Legal 2009) advise, areas of consideration include: Copyright / IPR, Data Protection, Freedom of Information, Human Rights e-Commerce, Accessibility Law, Defamation, Harassment, Computer Misuse, Terrorism, Interception and Monitoring, Hosting Liability, Employment Law. Factors emerging from the Work-with-IT PES(T)LE investigation in general correlate with this, the addition being the identification of more general consumer rights issues arising from the increasing trend of ‘students as consumers’. The PES(T)LE investigation suggested that the "fear of litigation" relating to compliance and consumer rights is of significant concern to many institutions.

There has always been an awareness of rules, standards and legal compliance within HE and FE institutions and as the provision of education evolves through the introduction of technology or other new approaches, the need to fulfil legal requirements and adhere to regulations grows. Traditionally, compliance with health and safety regulations, disability legislation or indeed the provision of an appropriate "fit for purpose" infrastructure were the dominant issues for institutions. Like any other business or corporation these rules and regulations were perhaps easier to understand and indeed translate than some of the new challenges facing institutions today. More recent legislation surrounding compliance with regard to information storage, reuse and data management and consumer rights and laws surrounding the quality of service (in this case education and research) provision are creating a new legal dynamic that has yet to be fully understood or indeed guarded against.

Legal factors will also probably become more prevalent at North West Regional College. Equality and learner diversity will become very important and this will need to be formalized.

A growth in technology has led to the opportunity to store, reuse and manage data in a number of new ways and in a number of new places. Together with a general demand for better access to better information this has resulted in a marked movement away from traditional information management (in-house, paper based) and towards a diversity in approach that utilizes technology and relies upon collaboration and shared solutions. This shift has brought new legal challenges particularly with regards to security, data protection, increased responsibility and indeed liability. Growth in technology has afforded collaboration opportunities that encourage open source solutions and shared information platforms, while requiring regulation and moderation to ensure standards and guard against legal challenge. Sharing information across communities of practice and indeed across the globe also brings challenges as regulations can vary between institutions and countries making it difficult to establish accountability, enforce best practice and ensure compliance.

The increasing move towards students as consumers also exposes institutions to many issues relating to consumer rights which were not of prime concern in the past. Perceived lack of duty of care or quality of provision can bring complaints and could potentially lead to institutions or individual staff being sued or at the very least to a damaged reputation.

The University of Bristol made the headlines in May 2009 when it was hit by a rebellion from hundreds of angry undergraduates of Economics, Finance and Management, who submitted a series of complaints expressing dissatisfaction with the quality of teaching. Since then, protests about teaching hours, class sizes and facilities have followed.

The lack of knowledge surrounding the existence of legal precedents and the small number of legal challenges to date may lead to out of court settlements as institutions lack confidence in decision-making on consumer rights issues e.g. students who challenge the "quality" of teaching at an institution; as it is difficult to predict the outcome of the litigation it may seem better to limit the damage than to charter unknown territories.

2.2.2.7 Limitations of PESTEL analysis

The economic example illustrates some of the limitations of dealing with macro environmental analysis. First, PEST analysis is not simply writing a "shopping list"- the use of disparate bullet points without any consideration of their wider ramifications. In listing of the economic factors, for example, one must clearly draw out the implications of each factor on the organization’s environment. In addition, the rate of change of PESTEL factor in the general environment and their increasing unpredictability acts to limit the use of PESTEL analysis. Some have argued that the competitive environment is the only true arena for the organization to analyze since it is the competitive environment that has the greatest impact on a firm’s markets and products (Porter 1985, Chapter 13). Whilst there is agreement that the competitive environment has the greatest effect on an organization’s ability to achieve competitive advantage, it would be unwise to refrain from analyzing the general environment.

2.2.3 Porter’s Five force analysis

The roots of Porter’s five forces can be traced back to the 1950s, when Bain (1956) presented the Structure Conduct Performance (SCP) framework that he used to examine the relationship between industry structure and performance. Based on this framework, Porter in1980 developed his industry analysis framework, widely known as Porter’s five forces. Porter developed this framework in order to assess industry profitability and the competitive forces because he argued that competitive forces play a primary role in determining competitive strategy (Porter, 2008, p.80). As the tool focuses on the industry, it is an external analysis tool that helps collect data along the given five forces and structure this data.

The five forces framework is undertake from the perspective of an incumbent organization, an organization already operating in the industry. The analysis is best used at the level of an organization’ strategic business units. Although each organization in an industry is unique, the forces within the industry which affects its performance, and hence its profitability, will be common to all organizations in the industry It is sense that Porter’s contribution is pervasive –the ability to generalize these five forces to all organizations within the industry. Although the five forces analysis is undertaken from the perspective of an incumbent firm, it can be used to determine whether a firm outside an industry should enter the industry. An organization thinking of entering an industry will need to know that it can successfully compete with incumbents in the industry. This will require it to adopt a distinctive positioning.

As a analytical tool for assessing the competitive environment, the five forces enables an organization to determine the attractiveness or profit potential of a particular industry by examining the interaction of five competitive forces. It is the combined strength of these five forces which will ultimately determine an organization’s return on investment or the potential for profits within a given industry. The five forces are (1) threat of new entrance –bring new capacity and a desire to gain market share; (2) bargaining power of buyers –demand of lower prices, better quality, or more services; (3) bargaining power of suppliers –capture more of the value themselves; (4) threat of substitutes products or services –perform the same or a similar function as an industry’s product by a different means; (5) intensity of rivalry among firms in an industry –lead to price dumping, new products, advertising campaigns, or service improvements.

2.2.3.1 The threat of New Entrance

Threat of new entrants is the extent to which new competitors may decide to enter an industry and reduce the level of profits being earned by incumbent firms. Where organizations in an industry earn profits will in excess of their cost of capital, the more likely it is to attract new entrants. The threat of entry will depend on the existence of barriers to entry and the reaction of existing competitors. The main barriers to entry include economic of scale, capital requirement, brand loyaly, access to distribution channels, cost advantages independent of size, and switching cost.

Economies of scale occur when the cost of each individual unit produced falls as the total number of units produced increases. Sources of economies of scale include cost reductions gained through mass-producing a standardized output; discounts on bulk purchases of raw material inputs and components parts; the advantages gained by spreading fixed production costs over a large production volume; and the cost savings associated with spreading marketing and advertising costs over a large volume of output. Economies of scale tend to be associated with manufacturing organizations since the high capital costs of their plant need to be recovered over a high volume of output. In industries such as chemicals, automobiles, and aerospace large-scale production is imperative to achieve efficiency. The effect of economies of scale is to deter new entrants because it forces them to choose between two undesirable options: either they enter the industry at high volume of output and risk strong reaction (retaliation) from existing organizations, or they enter industry at a small scale, avoiding a reaction from existing organizations but operating at a cost disadvantage. In general, the threat of entrants is reduced when the established companies have economies of scale.

Capital requirements occur when organizations need to invest substantial financial resources to compete in an industry, this create a barrier to entry.

Switching costs arises when it costs a customer time, energy, and money to switch from the product offered by one established company to the ones by a new entrant. When switching costs are high, customers can be locked into the product offerings of existing firms, even if new entrant provides better price and conditions. New entrants must offer a product that is greatly improved or comes at a lower cost if the buyer is to switch that the gap is big enough to cover the switching costs.

Access to distribution channels: A new entrant will need to have access to distribution for its product in order to compete successfully in the industry. The agreement with distributors will provide a space displaying to customers to new product from small producers who may lack resources to advertise their product effectively. This can create a barrier to entry.

Brand loyalty exists when consumers have a preference for the products of established companies. A company can create brand loyalty through continuous advertising of its brand-name products and company name, patent protection of products, product innovation achieved through company R&D programs, an emphasis on high product quality, good after-sales services. Significant brand loyalty makes it difficult for new entrants to take market share away from established companies. Thus it reduces the threat of entry by potential competitors because they may see task of breaking down well-established customer preferences as too costly. Hence, most of new entrants have focused on the premium segment of the industry, where established brands have less of a hold (For example, TH true Milk Company has gained over 30% of the market for investing in economies of scale and also a new/ premium segment of milk industries that only imported foreign products have held).Or new entrants will have to spend disproportionately on advertising and promotion to establish their product

Cost advantages independent of size: Sometimes competitors have absolute cost advantages that are independent of size or economies of scale relative to potential entrants, meaning that entrants cannot expect to match the established companies ‘lower cost structure. Those advantages arise from three main sources: superior production operations and process due to accumulated experience, patents or secret processes; control of particular inputs required for production, such as labor, materials, equipment or management skills, that are limited in their supply; access to cheaper funds because existing companies represent lower risks than new entrance. If established companies have cost advantage independent of size, the threat of entry as competitive forces is weak.

2.2.3.2 The bargaining power of Buyers

Buyers can affect an industry through their ability to force down prices, bargain for higher-quality of more services, to play competitors off against each other. This power of buyer will reflect the extent to which their purchase represents a sizable proportion of the organization’s overall sales. The power of buyers is increasing in the following circumstances:

There is a concentration of buyers and buying volumes are high. Where there is a concentration of buyer in relation to the number of suppliers, and the volume purchase of any one buyer is high, the importance of the buyer’s business to the supplier increases.

The products it purchases from the industry are standard or undifferentiated. When they are dealing with the standard or undifferentiated product, buyers are confident that they can always find alternative suppliers. Because the product is standard, buyers exert pressure on price rather than product features as they play one competitor off against its rival.

Switching cost are low: Where the costs to buyers if switching supplier is low or involves few risk, the buyer’s bargaining power is enhanced.

There is a threat of backward integration when buyers have the ability to integrate backwards, i.e. to supply the product or service themselves, they threat to supplier which will strengthen their bargaining position.

The industry’s product is unimportant to the quality of the buyer’s products or services When the quality of the buyer’s product is affected by the industry’s product, the buyer will be less price sensitive. Where the quality of the buyer’s product is not affected by the industry’s product, the buyer will be more price sensitive and therefore in a better bargaining position.

The buyer earns low profits A buyer’s low profits will motivate him to lower the purchasing costs charged by suppliers in an effort to secure his margins. When buyers are highly profitable they will generally be less price sensitive.

The buyer has full information. Where buyers have full information on demand and cost they will be in a stronger position. The internet has greatly reduced the expense of finding out the costs of comparative products.

2.2.3.3 The bargaining power of supplier

The fourth of Porter’s five forces is the bargaining power of suppliers; the organizations that provide inputs into the industry, such as materials, services, and labor (which may be individuals, organizations such as labor unions, or companies that supply contract labor). The bargaining power of suppliers refers to the ability of suppliers to exert bargaining power over participants in an industry by raising prices or reduce the quality of purchased goods and services. The factors that increase supplier power are the mirror of those that increase buyer power. In this case the buyer is the firm in the industry and the supplier is the producer of input. The suppliers are powerful under the following circumstances.

The supplier’s industry is dominated by a few companies and is more concentrated than the industry it sells to. This is especially the case where a supplier is selling to many fragmented buyers.

Suppliers are faced with few substitutes. Where there are few or no substitute suppliers available the supplier will be in a powerful position.

The industry is not an important customer of the supplier When supplier sells to several industries, and any given industry does not represent a significant proportion on its sales, suppliers will be in a more powerful position.

The supplier’s product is an important input to the buyer’s business, especially affects to buyer’s manufacturing process or its product quality, the bargaining power of suppliers will be high.

The supplier’s products are differentiated or it has built up switching costs for the buyer, which would prevent the buyers playing one supplier off against another. This may arise because a buyer’s product specifications tie it to a particular supplier.

There is a threat of forward integration. When suppliers have the ability to integrate forwards into the buyer’s industry and compete with their buyers, this will act to reduce profitability in the buyer’s industry. It also provides a means of stemming the industry’s ability to improve the terms on which it buys.

2.2.3.4 Threat of substitute Products and Services

This is not competition from new entrants, but from products and services which can meet similar needs. By placing a ceiling on the prices organizations in the industry can profitably charge, substitutes limit the potential returns of an industry. The existence of substitutes means that customers can switch to these substitutes in response to a price increase. The more attractive is the price –performance ratio of substitute products the greater the restraint on an industry’s profit. An attractive price –performance ratio could be a substitute product that is of a lesser quality but comes at a cheaper price.

2.2.3.5 The intensity of Rivalry among Competitors in an industry

A determinant of the competitive state of the most industries and their overall profitability is competition among the organizations within the industry. When organization in an industry exhibits a high degree of rivalry, this causes industry profits to be reduced. Such rivalry may take the form of incumbents competing aggressively on price. Price cuts can easily be matched by rivalry and ultimately lower profits for all organizations in the industry. In contrast, advertising, product innovations, and improved customer service may act to expand overall demand in the industry Rivalry can increase when competitors in an industry see an opportunity to improve their market position. However, this will invariably be met by retaliatory moves from other organizations in the industry. The following factors affect competitive rivalry:

Numerous or equally balanced competitors exist in an industry. Where there are many competitors in an industry, some organizations may believe that they can make moves without attracting attention. Where there are few competitors but similar size, there is likely to be intense competition as each competitor fights for market dominance.

Slow industry growth. When an industry is characterized by slow growth an organization can only increase its market share at the expense of competitors in that industry.

High fixed costs in an industry create pressure for organizations to increase their capacity to gain economies of scale. Where the demand conditions will allow only some firms in the industry to reach the volume of sales required to achieve economies of scale, this will engender a fight for market share. The excess capacity in the industry usually results in a price war.

Lack of differentiation or switch costs in products and services of the industry, competition will be more intense, driven by customer choice based on price and service. Organizations there cannot prevent customers from going to their rivals.

Extra capacity in large increments are added, that may disrupt the industry’ supply-demand balance and create periodic excess capacity leading to price competition.

High exit barriers The existence of high exit barriers may hider firm needing to exit industry.

2.2.3.6 Limitation of Porter’s five forces analysis

The first question is whether a relationship between firm performance and industry structure exists. Otherwise, Porter’s idea that industry structure shapes industry attractiveness in terms of profitability would not hold. Several studies (e.g McGahan & Poter, 1997; Powell, 1996) analyzed this relationship and came to the result that industry factors explain between 19 and 20 percent of the overall performance variance (McGahan & Porter, 1997, p.30; Powell 1996, p.324). These findings are in accordance with several previous studies (Powell, 1996, p. 324). Additionally, McGahan and Porter (1997, p. 30) concluded that rapid changes in the economy have not reduced the influence of industry on performance, while Powell found that only entry barriers and the existing rivalry seem to have major influence on the performance. This means, however, that 80 percent of firm performance is not explained by industry. Industry structure should be considered during the strategic analysis but it should not be the only factor. The extent of influence that industry structure exerts in dynamic environments is still questionable because no study so far specifically examines dynamic environments.

Coyne and Subranamiam (1996) analyzed the three assumptions that are underlying Porter’s five forces. First, it assumed that " an industry consists of a set of unrelated buyers, sellers, substitutes, and competitors that interact at arm’s length" (Coyne & Subramaniam, 1996, p.16). They, however, point out that in today’s industries this is often not correct anymore as there are, for example, co-dependent systems such as alliances or networks and privileged relationships (Coyne & Subramaniam, 1996, p.17). Second, it is assumed that the source of value of an industry is a structural advantage and sources of structural advantages are, for example, barriers against competitors and potential entrants (Coyne & Subramaniam, 1996, p.16). Nevertheless, frontline execution, the execution of day-to-day tasks, and foresight, having insight into the future, can be sources of competitive advantage as well (Coyne & Subramaniam, 1996, p.18). Many companies practically outperform their competitors only on the basis of day-to-day tasks, such as administrative processes. Finally, uncertainty needs to be low enough to "accurately predict participants" behavior and choose a strategy" (Coyne & Subramaniam, 1996, p.16). To craft strategy in uncertain environments, a new frameworl is proposed by Coyne & Subramaniam that implements those three points of criticism. Therefore, Porter’s five forces appear unsitable for deriving a strategy in dynamic environments, but the framework still might be useful to collect data.

That is the reason why, besides using Porter’s five forces analysis as the main tools, the paper also use value chain analysis and PESTEL analysis to cover the shortage of Porter’s achievement. They all are widely used in many researches and when coming together shall give a profound research, analysis and recommendation on Trung Nguyen Corporation’s competitive strategy.

2.3 IMPLEMENTATION OF COMPETITIVE STRATEGY