chiến lược kinh doanh- nghiên cứu tình huống dịch vụ bảo hiểm doanh nghiệp qua môi giới và tái bảo hiểm nước ngoài của bảo hiểm bảo vi

vietnam national university, HANOI
school of business







Nguyen Huyen Trang





Business strategies:
The case of baoviet’s fronting and
broking corporate insurance



master of business administration thesis








Hanoi - 2011

vietnam national university, HANOI
school of business





Nguyen Huyen Trang





BUSINESS STRATEGIES:
THE CASE OF BAOVIET’S FRONTING AND
BROKING CORPORATE INSURANCE





Major: Business Administration
Code: 60 34 05



Master of business administration thesis

Supervisor: PhD. Nguyen Viet Anh




Hanoi - 2011
vi


TABLE OF CONTENTS

ACKNOWLEDGMENTS

i

ABSTRACT

ii

TÓM T
T


iv

TABLE OF CONTENTS

vi

LIST OF TABLES


viii

LIST OF FIGURES


ix

LIST OF ABBREVIATION


x

INTRODUCTION


1
1. The problem


1
2. Scope of work


1
3. Objectives and aim

1
4. Research questions


2
5. Research methods and data sources


2
6. Significance


3
7. Limitations


3
8. Expected results


3
9. Thesis structure


4
CHAPTER 1:

THEORETICAL FOUNDATION

5
1.1 Business strategy


5
1.1.1. Strategy


5
1.1.2 Concepts of business strategy


6
1.2 Strategic management


8
1.2.1. Vision and Mission statement


9
1.2.2 Strategy formulation

9
1.2.3 Strategy implementat
ion


22

CHAPTER 2:

FORMULATION OF BUSINESS STRATEGIES

24

2.1. The concept of service area


24

2.1.1 Insurance
in general


24

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2.1.2 Characteristics of fronting and broking corporate insurance

28

2.2
Introduction to Bao Viet Insurance


30

2.2.1

Introduction to Bao Viet
Holdings

30

2.2.2

Bao Viet Insurance Corporation (Bao V
iet Insurance)

34

2.3 Vision and Mission statement


36

2.4 Strategy formulation


37

2.4.1

Externa
l
analysis

.
37

2.4.2 Industry analysis

.
48

2.4.3 Internal environment analysis


58

2.4.4 Choice of strategies


69

CHAPTER 3:

IMPLEMENTATION OF CHOSEN STRATEGIES

72

3.1.
Choosing
strategic solutions

72

3.1.1. SWOT m
atrix for
strategic solutions

72

3.1.2 The GREAT


75

3.2. Performing compon
ents of strategy implementation


75

3.2.1 Communication


75

3.2.2 Su
pport


76

3.2.3 Tactics


76

3.3 Actions plan


76

3.3.1

Activities t
o
strategic solution
01
-
Improving clients discovery and
services



76

3.3.2

Activities to
strategic solution
02
-

developing professional underwriting

78

3.3.3 Actions plans (for strategy of 5 years from 2011 to 2015)

80

3.4 Recommendations to Bao Viet Insurance

82

3.5 Recommendations to the Government


83

CONCLUSION


85

REFERENCES


87

APPENDICES

89

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LIST OF TABLES



Table 1.1: Sample SCA identification process


20

Table 1
.2: A complete SWOT analysis


20

Table 1.3: SWOT matrix


21

Table 2.1: 5
-
year base
-

line forecasting


37

Table 2.2: Vietnam Economic Activity


38

Table 2.3: Real GDP growth


39

Table 2.4: Foreign di
rect investment projects licensed in period 2000
-
2009

39

Table 2.5: Numbers of enterprises (2008
–
2009)


44

Table 2.6: Some fi

gures of non
-
life insurers


50

Table 2.7: Competencies comparison


52

Table 2.8: Identification of sustainable competitive advanta
ge

68

Table 2.9: Assessment of Weaknesses


68

Table 2.10: SWOT profile


69

Table 2.11: SWOT matrix for generic strategy

69

Table 2.12: GREAT model for generic strategy
-
1


70

Table 2.13: GREAT m
odel for generic strategy
-
2


71

Table 3.1: SWOT matrix for
strategic solutions


72

Table 3.2: GREAT model for
strategic solution
s


75

Table 3.3: Actions plan for 5
-
year strategies


80







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ix


LIST OF FIGURES



Figure 1.1: Generic stra
tegies matrix


7
Figure 1.2: Strategic management process


9

Figure 1.3: Business environment


11

Figure 1.4: Five forces model


12

Figure 1.5: Value chain model


18

Figure 2.1: Structure chart
–
B
ao Viet Holdings


32

Figure 2.2: Structure chart
-
Bao Viet Insurance Corporation

36

Figure 2.3: Baseline forecasting for 5 years

38

Figure 2.4: Exchange rate VND/USD


41

Figure 2.5: Interbank USD/VND


42

Figure 2.6: Typhoons and storms


47

Figure 2.7: Non
-
life insurers divided by owners


49

Figure 2.8: Market share
-
2009

51

Figure 2.9: Financial figures of 4 giants
–
2009


61











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x



LIST OF ABBREVIATION



1.

SWOT

Strengths, Weaknesses, Opportunities, Threat

2.

GREAT

Gain, Ri
sk, Expense, Achievability, Time bound

3.

PEST

Political, Economic, Social, Technological

4.

SCA

Sustainable Competitive Advantage

5.

SCIC

State Capital Investment Corporation

6.

CEO

Chief Executive Officer

7.

GDP

Gross Domestic Price

8.

IT

Informati
cs Technology

9.

R & D

Research & Development

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INTRODUCTION


1.

The
problem

“Tomorrow always arrives. It is always different, and then even the mightiest
company is in trouble if it has not worked on the future”
-
Peter Drucker, the
legendary man
agement theorist, writer and consultant.

Business strategies help organizations figure out the right ways to increase
their competitiveness
and
compete successfully
, especially in the under
-
systematic
and changing market
. As the saying above, companies who
applying appropriate

strategies will create sustainable development. On the contrary, companies with
unsuitable strategies or without strategies will come to an end.

Bao Viet Insurance is a big insurer in Vietnam at the moment. However,
nothing is ever b
uilt to last without its own
vision and efforts
, especially in doing
business with foreigners
. In
fast
-
changing environment, right strategies are of
much
more importance. The study will help formulate and implement appropriate
strategies for Bao Viet’s fro
nting and broking corporate insurance with the hope
that this service will get and maintain its sustainable development.

2.
Scope
of work

This research f
ocus
es
on the
strategic analysis, business strategy formulation
and implementation
; and applying the a

nalysis and suggestions to
fronting and
broking corporate insurance of Bao Viet
in order to
suggest
suitable business
strategies
for
the co
mpany
in terms of fronting and broking corporate insurance

until
201
5
.

3.
O
bjectives
and aim

In terms of objectives,
the research helps r
eview the theor
y of business

strateg
ies
and

helps
give
a clear view on industry and service area
. And then it
will

ap
ply
the
theory
of business strategies formulation
, selection
and implementation

into
the case
of Bao Viet
in order to f
igure out appropriate business strategies for
Bao Viet’s fronting and broking corporate insurance
.

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In terms of a
im
, t
he

suggested
appropriate

business
strategy can help Baoviet
remain the
sustainable
leading insurance company in increasingly complicated
an
d
challenging
Vietnam insurance market
.

4.
Research questions

For getting suggested business strategies for Bao Viet’s fronting and broking
corporate in
surance, it is vital to answer
and make clear of the following research
questions:

-
What are business str
ategies?

-
What is the way/process to formulate, select and implement the business

strategies
?

-
What is the nature of industry and service area?

-
How should Bao Viet do to formulate suitable business strategies for fronting
and broking corporate insurance?

-
How

should Bao Viet
do to implement the selected strategies into business
and operation reality?

-
What are recommendations to the company as well as Government in terms
of strategic performance?

5.
Research methods and data sources

The qualitative (descriptive
) methodology is applied to this thesis through
specific case study. A review of theoretical foundation is carried out to understand
the process to formulate
, and choose
the right strategies; and then know how to

apply them into reality.

Both secondary an
d primary data collection are used for this research. The
theoretical foundation part deals with studying books, articles,
online documents
and other sources. The secondary data are also collected from Bao Viet Insurance
and
its
d
ifferent departments
;
from
State’s administration offices,
from other
insurance companies’
, brokers’
and partners’ reports and websites (both local and
foreign
ones
). The primary data are collected though interviews of managers, staffs,
clients and partners from Bao Viet Insurance
as well as from other insurance
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companies, insurance brokers and partners.
Some in
-

dept interviews have been
conducted with experts and managers from several companies regarding non
-
life
insurance in order to complete the assessment, ranking, comparison an
d so on
(the
detailed results show
in
tables of
chapter 2 and chapter 3
and the detailed list of
interviewees shown in Appendix C
).

6.

Significance

In terms of
theory
, the thesis will help understand more about business strategies
formulation and implemen
tation (vision and mission statement; external and
internal environment analysis; recognition of opportunities, threats, strengths and
weaknesses
; and selection and implementation of the right business strategies in
order to achieve company’s goals).

In

te
rms of
practice
, the thesis should help suggest business strategic analysis

and business strategies selection and implementation
for
Bao Viet, especially for
fronting
and broking
corporate
insurance.
This is also the reference for other firms
and products/
services, especially for insurance companies and insurance
products/
services, which need
suitable business strategies for their development.

7.

Limitations

The thesis is directly applied to the case of Bao Viet
Insurance, especially
fronting and
broking c
orporate insurance
. In so as to be applied to the cases of other
products/services and other firms, it is necessarily required further researches.

In addition, the thesis is also applied to the case of Bao Viet’s fronting and broking
corporate insurance in
the period of 5 years from 2011 to 2015. For different
period’s appropriate business strategies
formulation
and implementation
, further
researches are also required.

8.
Expected results

The study reviews the process to formulate
, select
and implement suit
able
business strategies for the company. And then the study successfully formulates and
selects right business strategies for Bao Viet in terms of fronting and broking
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corporate insurance. Furthermore, the study suggests some appropriate measures for
the
company to implement the chosen strategies into business and operation reality.

9.
Thesis structure

The thesis includes Introduction part, then
the
three chapters, and the
Conclusion part as following:

Introduction part deals with the research methodology
for the thesis to be
carried out.

Chapter 1,
Theoretical foundation
, provides a fundamental review on
strategic management theory. It focuses on the business strategies formulation
,
selection
and implementation.

Chapter 2
, Formulation of business strategi
es, presents the specific process to
formulate the suitable business strategies for Bao Viet’s fronting and broking
corporate insurance.

Chapter 3, Implementation of chosen strategies, suggests recommendations
on the
business
strategies implementation.

An
d,

Conclusion
part draws some significant points and results of the thesis.


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CHAPTER 1:

THEORETICAL FOUNDATION


“Without a strategy the organization is like a ship without a rudder,
going around in circles.” [Joel Ross and Michael Kami]


In the world of
business,
there
always remains the question: why some
firms/businesses succeed while others fail
, or why some firms succeed in some
times but still fail in the future
. Strategy and strategic manageme
nt shall answer the
above. The today’s highly competitive
pressures have put managers and employees
on the special attention
to

strategic responsibilities. Thus, it is very important for
them to master the strategic management, both
theory
and practices.

Thi
s chapter is born to provide

a whole
and general
pictu
re
on strategy,
business strategy, and strategic management.

1.1
Business s
trategy

1.1.1. Strategy

The word “strategy” derives from an ancient Greek word “strategos”, which
is the combination of the two: stratos (for army) and ago (for leading).
A strate
gy
may be accepted as a leadership plan.

The concept of strategy can be said to borrow from the military with the birth
of
“

The Art of War
”
.
Coming back to the date somewhere around 320

BC when the
Chinese military strategist
S
u
n Tzu wrote The Art of War,
a work influence
d
not
only on war
-
strategic mind
s
but also on the thinking of many modern businesses,
and then led to the thoughts of “art” being applied on modern business. We can
regard The Art of War
as
the
start
of
strategy and strategic management
an
d
a
serious subject, the publication of overall framework and methodology for the
formulation of strategy.

There are a plenty of strategy concepts and views. Some of them are
commonly accepted and used as follows:

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“A company’s strategy is the “game plan” m
anagement has for positioning the
company in its chosen market arena, competing successfully, pleasing customers,
and achieving good business performance. Strategy consists of the whole array of
competitive moves and business approaches that manag
ers emplo
y in running a
company
”
.
It can be known that strategy is both proactive (intended) and reactive
(adaptive); is partly visible and partly hidden to outside view.

According to Michael Porter, the essence of strategy is choosing to perform
activities
more
d
ifferently than the rivals do. Another term that Michael Porter
mentioned is “strategic positioning”. In the Article
named
“What is strategy”, he
said that Strategic positioning attempts to achieve sustainable competitive

advantage by preserving what is di
stinctive about a company. It means performing
different activities from rivals, or performing similar activities in different ways.


1.1.2
Concepts
of business strategy

The concepts of business strategy may have origins from strategy at different
levels
of business
–
ranging from overall business through to individuals working in
it: corporate strategy, business unit strategy, and operational strategy. There still
exist a lot of definitions on business strategy.

-
Johnson and Scholes (Exploring Corporate
Strategy): Business Unit
Strategy is concerned more with how a business competes successfully in a
particular market. It concerns strategic decisions about choice of products, meeting
needs of customers, gaining advantage over competitors, exploiting or cr
eating new
opportunities etc.

-
Oxford English Dictionary: Business strategy is a plan for how a firm will
compete, what its goals should be and what policies will be needed to achieve goals.

From the two definitions above, we can define that
business str
ategy is a
combination of strategic decisions and sustainable competitive advantage
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establishment.
This is a master plan on how a firm will compete with others, on its
goals and policies to achieve the set goals.

In Michael Porter’s opinion, competition oc
curs at the business leve
l.
The
figure
1.1
shows Michael Porter’s three generic strategies. They are called business
-
unit
-
level strategies: cost leadership, differentiation, and focus (cost focus and
differentiation focus).

Figure 1.1: Generic strategies
matrix


Source:

/>-
store/lesson
-
generic
-
strategies.html

·
Cost leadership

Firms tend to manufacture
or create
the same products at a lower cost than their
rivals. By applying more and more effective methods in production,
management,
distribution… than others, firms can sell their products at a lower price
and
therefore, can gain profits.
However, according to Michael Porter, “rivalry is
especially destructive to profitability if it gravitates solely to price because price

competition transfers profits directly from an industry to its customers”.


·
Differentiation

Instead of low pricing, firms tend to produce the same products at a higher
quality and differentiation than their rivals do. Thus, they can set different, most of

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the time higher price than others.

Differentiation strategy can focus on: attribute,
customer
s
service, or image
s
.

·
Focus

In a small market or segment of market
or fragmented market
, we need to know
about
f
ocus strategy. A focus (or niche) strategy is wide
ly used by small
scale
-
of
-
economy
companies. However, the use of niche strategy is not only limited for
small but also for all kinds of firms which neither follow a wide scope cost

-
leadership nor differentiation strategy. Using cost focus, firms try to be
the cheapest
cost setter in their segment.
The same goes on with differentiation focus
.

Michael Porter also warned about strategy pursuit. He mentioned that only one
generic strategy
should be followed for specific products/segment. By not
implementing so
me different types of strategies, firms can use only one
best
kind of
it and make use of their specific advantages or competencies, avoiding waste
s
for
niche segment or market.

1.2
Strategic management

In its widest sense, strategic management is
about ho
w the strategy is
managed,
about taking “strategic decisions”
. In theory, strategic management is the
process by which
leading

management determines the long term direction and
performance of the organization by ensuring that careful formulation, effective

implementation
of the strategy
to be performed
in order for the firms to obtain their
goals
.
Therefore, strategic management is a process, not an event
.

One popular way to understand strategic management is to see the strategy
picture from the overall to
the detail
s
. The figure
1.2
below will help.









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Figure 1.2: Strategic management process


1.2.1.
Vision and Mission statement

Vision
is
an overall strategic view on
what the future business will become
and where the organ
ization is headed. It also means the provision of long term
and
overall
direction
/achievement
with a sense of purposeful actions.
It does not
specifically mention how to gain the long
-
term achievement.

Mission statement is a more visible kind of vision. Mo
re detailed,
mission
statement should be a clear representation of the organization’s purpose for
existence. It can contain meaningful and measurable criteria translating concepts
such as moral position, social image, targets, core value… The intent of mis

sion
statement should be the first consideration for any strategic decision.

1.2.2
Strategy formulation

Strategy formulation indicates
an organization’s macro
-
environmental
(overall) and micro
-
environmental (industry) threats and opportunities; identifies

internal s
trengths and weaknesses, ranks
these above; basing on ranked and priory
1.
1
Vision / Mission Statement

1.
2
. External Analysis

=> Real Opportunities
& Threats

=> Strengths & Weakness
es

1.
3
.1.
Internal analysis

1.
3
.2. S
ustainable
Competitive
Advantages

Identification


Process

1.
2
.1. Macro Analysis



Model: PEST + DN

=>

Opportunities & Threats

1.
2
.2. Micro Analysis



Model: 5 Forces

=>
Opport
unities & Threats

1.
4
. Formulations &
Choices of Strategies

Model:

1.
4
.1. SWOT

1.
4
.2. GREAT

1.

5
. Strategy Implementation



Possible Chosen
Strategies


1.
3
. Internal Analysi
s

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ones to generate alternati
ve strategies; and then decide
the best strategies to
apply
in
specific period
.

1.2.2.1
External environment analysis

In terms of symbol, external

environment is like the surroundings or the
atmospheres of the firms. It contains things in different circles around and the firms
have no or little influence on it.

In terms of theory, external environment includes macro environment and
micro environment
. Macro environment is the larger circle, in which all kinds of
firms survive and develop.
Micro environment, accordingly, is the smaller circle
inside the larger circle.

For particular industry, there are various factors affecting
the operations of compan
y.

External
environment analysis would help
firms see their own threats and
opportunities in the market.

To look into and understand macro environment,
it is known to apply PEST
model. PEST model is the model that analyzes macro fact
ors, including but not
limited factors such as
Political, Economic, Social, Technological
and Legal
fact
ors
.

Going with more and more sophisticated economy, more and more factors have
influence on companies.
With micro environment, it is known to apply Five
Competitive Forces mo
del of Michael Porter. Five Forces divide industry into five
different factors: Rivalry, among existing firms, Potential entrants, Suppliers,
Buyers, and Substitutes. Sometimes Government
is also mentioned as an additional
factor.

·
PEST analysis

The circle
below shows the four major forces of external environment.
For
being the overall environment, it is obvious that there are a large number of macro
factors.
In fact, there are
also including but not limited
others such as
natural forces,
demographic forces
…



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Figure 1.3: Business environment



Source: wikipedia

PEST analysis details:

-
Firms need to consider the state of a trading economy in both short
and long terms.

Economic
Analysis

-
Some sub
-
factors that need looking at:
economic growth, long
-
term
prospects for the economy, nation comparative advantages, government
intervention,
income,
exchange rate,
inflation, labor forces and costs,
monetary/fiscal policies, infrastructure, interest rates, employment

level
, openness le
vel
…


-
This kind of arena has a great impact on the overall business.

Political/
Legal

Analysis

-
Firms should consider issues such as
:
political environment stability,
government policy, legal framework, taxation and tariffs, government
involvement,
intellectual property protection…


-
The influence of social/ cultural forces on business varies from country
to country, from area to area. This is especially true in terms of doing
business with global
players
.

Social/
Cultural

Analysis

-
Factors inc
lude
:
living conditions, awareness to safety,
social attitude,
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integration mind
-
set, culture, social acceptations green issues…

-
T
echnology is essential for competitive advantage, especially in the era
of globalization and integra
tion.

Techno
-
logical
Analysis

-
Points need to be paid attention
:
technology to a better standard of
quality, new way to communication due to technology, new research and
development, speed of technology
-
transferring
, customization level,
application level
…


·
Industry analysi
s:

The key figure of
business
strategy formulation is sticking a company or a
business with its environment. Seeing the figure below, we can find out the five
forces
originated by Michael Porter, which
influence on the state of industry
competition. They a
re: intensity of rivalry among existing c
ompetitors, potential
entrance,
pressure from substitute products, bargaining power of buyers, and
bargaining power of suppliers. According to Michael Porter, the collective strength

of these forces determines the u
ltimate profit potential in the industry. The goal of
business
strategy for a
n organization
in an industry is to find a position in the
industry where the company can best defend itself against these forces or c
an
influence them in its favor.

Figure 1.4:
Five forces model


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Source:
/>
ü
Intensity of rivalry among existing competitors

In most industries, companies are “mutually independent”.

Therefore, there
comes
rivalry
. However, it is not constant but
ca

n and do
es
change
. The changing
moves can be due to
industry maturity
, acquisition, and technological innovation
.
To deal with fluctuating
rivalry, firms can improve matters through strategic shifts.
Intense existing rivals depend
on the interacting struct
ural industry characteristics
such as:

-
When there are a few firms in the industry, companies will have
relative power. Therefore, it is better for them to impose discipline or
play a coordinative role like price leadership.

-
When a plenty of competitors exist in the industry (or there are pretty
few companies with relative balance in size and resources), stability will
be created.

The
existing
number
of rivals

-
The problems of foreign versus national rivals: unequal treatment from
authorities, cult
ure difference, legal framework, local understanding…


-
Slow growth will push expansion because of volatile market share
competition.

Industry
growth

-
Fast growth makes firms to improve results or effectiveness.


-
High fixed cost wil
l push companies to fill capacity, this will,
therefore, lead to price cutting.

-
In fact, it is value added, not the absolute proportion in fixed cost,
which affects on fixed cost.

High
fixed
cost

-
High fixed cost also leads to increasing storage to ensure sale. He
nce,
profits are keeping low.


Differ
-
-
When
product is considered as commodity, buyers’ options will base
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on price and service.

-
When
there is differentiation, buyers have various likings and loyalties
to particular provid
ers. So, product is less competitive.

entiation
level
s
in
products

-

The
matter of switching cost: if switching cost is high,
companies will
improve cost or performance to attract more customers.


-
Capacity additions can disturb the balance of supply and demand.

Capacity

-
Ris
ks of capacity additions can be mentioned such as overcapacity,
price cutting, and so on…


-
Specia
lized assets,
fixed cost of exit
, strategic interrelationships,
emotional barriers, and government and social restrictions
result in low

liquidation values.

High
exit
barriers

-
High exit barriers can cause companies’ applying extreme tactics to
maintain excess capacity. This may lead to industry destruction.


-
Four kind of combinations:


Exit barriers

Low


High

Low returns
but safe

Worst

Entry
Low

Barriers

High

Best

High returns but risky


Barriers
on exit
and
entry

-
The most usual case is that entry and exit barriers go together. This
case may show the su
bstantial economies of
scale, proprietary
technology, and so on.


ü
Threat of entry

Besides rivalry among existing firms, companies also deal with threat of new
entrants. The elements that influence on threat of new entrants are: barriers to entry,
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expected retaliation, the entr
y deterring price, properties of entry barriers, and
experience and scale as entry barriers.
And then we can go to each element in

details.

-
Economies of scale decreases unit costs, thus, it causes the increase in
volume produ
ced per period. Economies of scale entry barriers appear at
economies to vertical integration, or operating of successive stages of
production or distribution.

-
Product differentiation forces newcomers to invest on building a brand
name, which are risk
y because of being unrecoverable.

-
Capital requirements, especially if it is for costly, risky and
unrecoverable up
-
front advertising and R&D

-
Access to distribution channels: new firm must convince channels to
accept its products through favors, wh
ich reduce profits.

-
Cost dis
advantage independent of scale, which
can be
the following

factors: proprietary product technology, favorable access to raw
materials, favorable locations, government subsidies, and experience
curve.

Sources
of
barriers
to entry

-
Government policy


-

Properties of e
ntry barriers
:

there are two kinds of properties of entry
barriers: entry barriers change beyond company’s control; and entry
barriers that are influenced by strategic decisions.

-

Entry barriers in view of economies of s
cale:

+ Large scale; and then low costs will lead to tradeoffs with other valued
barriers as well as actions of developing proprietary technology.

+ Technological change that can create less flexibility in adapting to
modern technology.

E
ntry
barriers

-

Experience: i
s a more ethereal entry barrier than economies of scale.
Experience is through copying, attracting rival’s staffs, investing on the
latest technology/know
-
how. Some limits to experience: new experience
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curve due to new technology; pursuit of low cost…

ü
Pre
ssure from substitutes:

Substitutes are other products that can perform the similar function as the
product in the industry.

It is often downstream or indirect, as a substitute product replaces a

buyer industry’s one.

-
It is the matter of collective industry actions with similar arguments

-
Threat of substitutes is high if:

+ it improves price
-
performance tradeoff with industry products

+ buyer’s switching cost to substitutes is low

+ substitute products are manufactured by industries earning high profits

The
threat of
substitute
products

-
Industry profitability can suffer from high threat of substitutes (by
placing a ceiling on price).


ü
Bargaining power of buyers:

-

Powerful customers can create competition by fo
rcing to reduce prices,
demanding better quality, and playing rivals off against each other.

-
Customers are powerful when they have negotiation leverage.

-
The buyer power goes the same rules with wholesalers and retailers. It
is all about influenc
ing purchasing decisions.

-
Bargaining power of clients is high in case:

+ Few purchasers or each one who buys a large volume

+ The purchased products express a significant fraction of their costs or
purchases, or standardization, or undifferentiating.

+ Few switching costs

+ Low profits

+ Threat of backward integration

+ Customers are less price concerning when buyers’ product quality is
affected by industry’s product.

The

threat of
substitute
products

-
Companies can use strategic decision to make segments selection
in
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order
to get l
ess powerful clients.

ü
Bargaining power of suppliers:

-
Suppliers have power by increasing prices or reducing quality.


-
What cause high bargaining power of providers is opposite to those
creating powerful customers, in details
:

+
S
uppliers providing to more buyers with less fragmentation.

+
Sellers do not need to compete much with their own substitutes.

+
The industry is an unimportant buyer of the seller group.

+ Products are differentiated or contain switching costs.

+ Threat of
forward integration.

Powerful
providers

-
Factors influencing on seller power
are usually uncontrolled; however,
companies can also impact on this
to some extent
through strategy.


1.
2
.2.2.
Internal
environment
analysis:

Besides understanding the external environment, it
is vital for firms to
understand themselves as a whole through internal environment analysis. Therefore,
internal analysis helps companies evaluate factors of all
belonging
relevant areas in
order to extract the firms’ strengths and weaknesses.

In order
to get internal environment analysis, it is commonly known for us to use
the model of value chain.

·
Value chain









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Figure 1.5: Value chain model

Fir
st suggested by Michael Porter, value chain is described as the internal
processes and/or activities a company performs in order to create, market, distribute
and support for its products/services. There are two major categories of value chain:
primary act
ivities and supporting activities.
Therefore, value chain analysis needs to
be seriousl
y considered in way of determining the organization’s
strengths and
weaknesses.

Primary activities directly impact on creating outputs and on sales and after
-
sales supp
orts.

Supporting activities:

Organi
-
zational
infra
-
structure

: dealing with activities to operate every organization, organizational
infrastructure duly impacts on an organization’s operation with a
wide range of support systems and functions such as pla
nning,

organization, planning, leading, financing, quality control…

Human
resource
mana
-
: dealing with activities relating to workforces of firms (choosing,
recruiting, training, leading, motivating…). All organizations’
activities are seriously in
fluenced by their own human, especially in
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