Luận văn thạc sĩ xây dựng chiến lược phát triển kinh doanh công ty cổ phẩn nước khoáng thiên nhiên VITAL

LUẬN VĂN
Xây dựng chiến lược phát triển kinh doanh công ty cổ phẩn nước
khoáng thiên nhiên VITAL

THESIS MBA

BUILDING DEVELOPMENT STRATEGY FOR VITAL
MINERAL WATER PRODUCT OF VITAL JOINT STOCK
COMPANY


TABLE OF CONTENTS
...................................................................................................................................................................1
LUẬN VĂN..................................................................................................................................................1
Xây dựng chiến lược phát triển kinh doanh công ty cổ phẩn nước khoáng thiên nhiên VITAL...................1
THESIS MBA................................................................................................................................................1
BUILDING DEVELOPMENT STRATEGY FOR VITAL MINERAL WATER PRODUCT OF VITAL JOINT STOCK
COMPANY...................................................................................................................................................1
...................................................................................................................................................................1
................................................................................................................................................................... 2
TABLE OF CONTENTS..................................................................................................................................2
LIST OF FIGURES.........................................................................................................................................5
LIST OF TABLES...........................................................................................................................................6
ABBREVIATIONS.........................................................................................................................................7
INTRODUCTION..........................................................................................................................................8
I. Background.........................................................................................................................................8
II. Purposes of the research..................................................................................................................10
III. Objective, scale and methodology..................................................................................................10
IV. Structure of the report....................................................................................................................10
CHAPTER 1: LITERATURE REVIEW OF STRATEGY AND STRATEGIC MANAGEMENT...................................11
1.1. Overview of strategy and strategic management..........................................................................11

1.1.1. Fundamental definitions.........................................................................................................12
1.1.1.1. Definition of strategy.......................................................................................................12
1.1.1.2. Definition of strategic management................................................................................12
1.1.2. Roles of strategic management..............................................................................................13
1.1.3. Levels of strategic management.............................................................................................15
1.2. Strategic management process.....................................................................................................16

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1.2.1. Defining mission & objectives................................................................................................16
1.2.2. External environment analysis................................................................................................18
1.2.2.1. Macro-environment........................................................................................................18
1.2.2.2. Micro- environment.........................................................................................................21
1.2.2.3. External Factor Evaluation EFE.........................................................................................24
Total weighted score of 2.46 indicates that the business has slightly less than average ability to
respond to external factors..............................................................................................................26
Source: External factor evaluation, Maxi-Pedia Directory, 2008.......................................................26
1.2.3. Internal environment analysis................................................................................................26
1.2.3.1. Resource evaluation........................................................................................................27
1.2.3.2. Evaluation of functional departments.............................................................................28
1.2.3.3. Internal Factor Evaluation IFE..........................................................................................31
1.2.4. Strategy formulation...............................................................................................................33
1.2.4.1. Strategy formulation process...........................................................................................33
1.2.4.2. SWOT Matrix...................................................................................................................33
1.2.5. Strategy implementation........................................................................................................35
1.2.6. Strategy evaluation and control..............................................................................................36
CHAPTER II: THE REAL SITUATION OF PRODUCTION-BUSINESS ACTIVITIES OF VITAL JOINT STOCK
COMPANY.................................................................................................................................................37
2.1. General information of Vital Joint Stock Company........................................................................37

2.1. History and development..........................................................................................................38
2.1.2. Operation sectors...................................................................................................................39
2.1.3. Personnel structure................................................................................................................40
2.2. Situation of production and business of Vital mineral water Company in the period of 2005 –
2009.....................................................................................................................................................42
2.2.1. Productivity growth................................................................................................................42
At the present, mineral water source of the company is exploited from drilling well and put into
operation from 2003 and a new one has be used form 2009. With the current exploiting capacity, the
company has produced some kinds of products: carbonated bottled mineral water, non-carbonated
bottled mineral water, purified mineral water. The company’s output has increased steadily over the
years, especially in the 2009 with the amount of 10.66 million liter, by 158% comparing to 2008. The
growth rate is different according to each specific product, varies from 147% to 163.7% (Table 2.1). 42
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2.2.2. Business performance and market share of Vital...................................................................43
2.3. Analysis of factors affecting on operations of Vital Joint Stock Company......................................47
2.3.1. External environment.............................................................................................................47
2.3.1.1. Macro-environment........................................................................................................47
2.3.1.2. Micro-environment.........................................................................................................51
2.3.1.3. External factor evaluation matrix EFE..............................................................................55
2.3.2. Internal environment..............................................................................................................56
2.3.2.1. Human resource..............................................................................................................56
2.3.2.2. Marketing activity............................................................................................................56
2.3.2.3. Research & Development................................................................................................57
2.3.2.4. Finance and investment...................................................................................................58
2.3.2.5. Internal factor evaluation matrix IFE...............................................................................59
2.4. Analysis on the status of creating and performing strategy for Vital mineral water product of Vital
Joint Stock Company............................................................................................................................60
2.4.1. Market expanding strategy.....................................................................................................60

Expansion of market share is the ultimate objective of almost enterprises and Vital Joint Stock
Company is not an exception. Over the last few years, the company has tried to expand the market
and market share as well by many different ways............................................................................60
2.4.2. The strategy of investing in infrastructure development........................................................63
2.4.3. Product development strategy...............................................................................................64
2.4.4. Marketing strategy.................................................................................................................65
Promotion is considered to be an important activity that promotes sales of enterprises in FMCG
field like Vital natural miner water....................................................................................................65
2.4.5. Strategy of developing human resources...............................................................................67
2.5. General review on practical results of performing strategy...........................................................68
CHAPTER 3: SOME SOLUTIONS TO BUILD DEVELOPMENT STRATEGY FOR VITAL JOINT STOCK COMPANY
................................................................................................................................................................. 70
3.1. Developing objectives of Vital Joint Stock Company by the year of 2005......................................70
3.1.1. Vision, mission and core value of the company......................................................................70

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More than 10 years of performing, Vital Joint Stock Company always keeps vision, mission and core
value. These factors are the guideline to all of long-term and short-term strategy of the company.
.........................................................................................................................................................70
3.1.2. Development objectives.........................................................................................................71
Be aware of challenges opportunities of the natural mineral water market and with the hope of
continuing building and developing Vital brand sustainable, Vital Joint Stock Company set
developing objectives as following directions:.................................................................................71
3.2. Using SWOT Matrix to making strategy of the Vital Joint Stock Company.....................................72
3.2.2. Choosing developing strategy.................................................................................................75
3.3. Solutions to build development strategy for Vital JSC 2010-2015.................................................77
3.3.1. Market expansion solution.....................................................................................................77
3.3.2. Marketing solutions................................................................................................................78

Marketing is perhaps the most important activity in a business because it has a direct effect on
profitability and sales. Larger businesses will dedicate specific staff and departments for the
purpose of marketing. It is important to realize that marketing cannot be carried out in isolation
from the rest of the business. For example: The marketing section of a business needs to work
closely with operations, research and development, finance and human resources to check their
plans are possible. Operations will need to use sales forecasts produced by the marketing
department to plan their production schedules. Sales forecasts will also be an important part of
the budgets produced by the finance department, as well as the deployment of labor for the
human resources department. A research and development department will need to work very
closely with the marketing department to understand the needs of the customers and to test
outputs of the R&D section..............................................................................................................79
3.3.3. Research & Development solutions........................................................................................80
3.3.4. Personnel solutions................................................................................................................81
3.3.5. Financial solutions to invest in new technology and equipments...........................................82
CONCLUSION............................................................................................................................................85
LIST OF REFERENCES................................................................................................................................86
APPENDIX.................................................................................................................................................87
Vital natural mineral water factory project in Dong Nai.......................................................................87

LIST OF FIGURES
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Figure 1.1 Five-force model of M. Porter.................................................................................................24
Source: Comparative advantage theory, M. Porter (1990).......................................................................24
Figure 2.1 Structure of Vital product........................................................................................................40
Figure 2.2 Personnel Structure of Vital Joint Stock Company...................................................................41
Figure 2.3 Marketing department structure.............................................................................................42
Figure 2.4 Turnover growth of Vital in Hanoi, 2009..................................................................................45
Figure 2.5 Turnover of Vital mineral water in term of regions (2009)......................................................46

Figure 2.6 Market shares of various brands in Vietnam market (2009)....................................................46
Figure 2.7 GDP growth of Vietnam over years.........................................................................................48
Figure 2.8 The income growth in Vietnamese rural and urban area........................................................49
Figure 2.9 Changes in consumption belief of Vietnamese........................................................................50
Figure 2.12 Percentage of indirect sales channel (in percentage)............................................................62
Source: Vital Joint Stock Company (2009)................................................................................................62
Figure 2.13 Volume of direct sales channel..............................................................................................63
Source: Vital Joint Stock Company (2009)................................................................................................63
Figure 2.14 New packaging of Vital (2009)...............................................................................................65

LIST OF TABLES
The sum of all weighted score is equal to the total weighted score; final value of total weighted score
should be between ranges from 1.0 (low) to 4.0(high). The average weighted score for EFE matrix is 2.5
any company total weighted score fall below 2.5 consider as weak. The company total weighted score
higher then 2.5 is consider as strong in position......................................................................................25
Table 1.1 An example of External Factor Evaluation.................................................................................25
Table 1.2 An example of IFE matrix..........................................................................................................32
Table 2.1 Vital mineral water output over the years tank........................................................................43
Table 2.2 Consumption of natural Vital mineral water.............................................................................44
Table 2.3 Mineral water turnover in term of brands................................................................................44
Table 2.4 SWOT analysis of competitors...................................................................................................52
Table 2.5 Five-force analysis model..........................................................................................................54

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Table 2.6 External Factor Evaluation matrix.............................................................................................55
Table 2.7 Vital’s internal factor evaluation matrix....................................................................................59
Table 2.5 Monthly bonus income to distributors (2009)..........................................................................66
Table 3.1 SWOT analysis of Vital natural mineral water...........................................................................72

Table 3.2 GREAT analysis..........................................................................................................................75

ABBREVIATIONS

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Terms

Description

ATL

Above the line

BTL

Below the line

CEO

Chief Executive Officer

FAO

Food and Agriculture Organization

SBU

Strategic Business Unit

UNIDO
Vital JSC

United Nations Industrial Development
Organization
Vital Joint Stock Company

INTRODUCTION
I. Background
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Vietnam has approached the market economy for over 20 years. This duration is not too
long as well as too short for Vietnamese enterprises to apply management methods of
the market economy procedure. Strategic management has been considered as one of the
most useful business theories which can help enterprises to achieve successes in a long –
term. The way they are using these theories, however, should be re-considered in almost
all organizations in Vietnam.
In 1996, with the approval of Thai Binh People Committee, Vital Joint Stock Company
was established and started to build the most modern natural mineral water production
factory in Vietnam by a technology chain from Italy. All equipments of the factory are
also controlled and checked by experts from FDT – Italy. Through many years of
developments, Vital natural mineral water - its main product - has achieved a certain
position step by step in the market as well as in consumers’ mind.
In comparison with other products in the bottled market, however, the awareness of
Vital natural mineral water is not really clear. If consumers know about Aquafina as one
of the most quality pure water products or Lavie as an absolute part of life, they still
confuse about Vital’s image due to its dull position and scattered appearance in
communication vehicles. Moreover, the company often encounters with the situation of

lacking products for sales because the production capacity of its unique factory in Thai
Binh cannot meet the increasing demand of customers. In addition, there are more and
more bottled water products and the market is becoming so competitive. It is clear that
Vital product is sort of clear and effective strategies, especially marketing strategy or
financial strategy to stay stable in the bottled water which is on its way to be saturated.
Therefore, we decided to choose the topic “Building development strategy for Vital
mineral water of Vital Joint Stock Company 2010- 2015” for our capstone project. This
topic does not only apply knowledge of strategic management but also contributes

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significant practical recommendations for the development of Vital JSC as well as Vital
brand.

II. Purposes of the research
The research focused on following issues:
-

Fundamental theories of strategy and strategic management.

-

Useful models to analyze the process of establishing and choosing strategy.

-

The real situation in which Vital JSC has been implementing its strategy.

-

Analyze factors of the external and internal environment which affect on

-

company’s strategy
Appropriate solutions to build the development strategy for Vital natural mineral
water brand of Vital Joint Stock Company.

III. Objective, scale and methodology
-

Objective and scale: The research focuses on current strategic management
activities of Vital JSC and provides some solutions for the period of 2010-2015.

-

Methodology: The research used two kinds of information sources: Primary and
secondary information. The secondary information came from various sources.
However, a major percentage of them were from reports about current business
situations of Vital natural mineral water brand which were provided by Bitexco
and Vital JSC. Besides, they were also gathered from many opened sources such
as internet and books. In addition, the research took uses of information from
reports of market researches of famous international research companies such as
AC Nielsen or TNS.

IV. Structure of the report

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CHAPTER 1: LITERATURE REVIEW OF STRATEGY AND
STRATEGIC MANAGEMENT
1.1. Overview of strategy and strategic management

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1.1.1. Fundamental definitions
1.1.1.1. Definition of strategy
“Strategy” is the term which has been widely and long standing used in many fields.
“Strategy” was firstly used in military then in political field. From 1950s to 1960s of XX
century, the concept of “strategy” was used in economic and social field. Generally,
“strategy” was understood as trend and method to resolve long term and overview
mission. According to UNIDO definition: “Generally, a development strategy can be
described as an outline of developing process to reach intended targets for a period from
10 to 20 years, it instruct strategic managers in attracting and allocating resources. It can
be said that, strategy provides a vision for development process and the consistence for
implement solutions. Strategy also can be basics for overview developing plan in long
term and short term or can be general awareness of related people about prospects and
willingness and challenges in a specific period”
There are many definition of “strategy”. To Fred R. David (2003), strategy includes
numbers of method to reach long term target. To Michael E. Porter (1996), strategy is
the creation of special and valuable positions include variable activities.
In general, there are some differences in expression of concepts and definitions of
strategy. They still have some common content:
• Define company’s short term and long term targets
• Bring out solutions and methods to choose these solutions
• Deploy and allocate resource to implement these targets.
1.1.1.2. Definition of strategic management

Besides understanding concept of strategy managers of company also need to know the
way to manage these strategies and make right decisions to reach company’s target, this
process is called strategic management. I can be generally said that: “Strategic
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management is defined as a set of decisions and actions expressed via results of
planning, implement and evaluating strategies, created to reach corporation’s long-run
targets”
Strategic management is the art and science of formulating, implementing and
evaluating cross-functional decisions that will enable an organization to achieve its
objectives. It involves the systematic identification of specifying the firm's objectives,
nurturing policies and strategies to achieve these objectives, and acquiring and making
available these resources to implement the policies and strategies to achieve the firm's
objectives. Strategic management, therefore, integrates the activities of the various
functional sectors of a business, such as marketing, sales, production etc., to achieve
organizational goals. It is generally the highest level of managerial activity, usually
initiated by the board of directors and executed by the firm's Chief Executive Officer
(CEO) and executive team. Strategic management hopes to provide overall direction to
the company has ties to the field of organization studies.
Strategic management includes these following specific steps:
• Strategic planning
• Strategic implement
• Strategic checking and evaluation.
1.1.2. Roles of strategic management
Characteristics of business environment have a big affect to existence and development
of company. They can create new opportunities and challenges for corporation. And the
company which wants to exist has to find out a new management method, it is exactly
“strategic management” - strategy is the basis of this management method. In model
business environment, strategy becomes more and more important to existence of

company. These roles are:

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• Strategy is the tool that generally shows the long-term goals of the organization
or enterprise. Enterprise’s goals are special targets which it wants to reach during
its operation process. Specialization and making documents these targets via
strategies will help members of enterprise or organizations when finding the
targets which they want to reach so, they will know what they have to do. It will
help the enterprise easier in reaching its goals.
• Strategy connects short term targets closely in long run conditions. In model
business situation, every enterprise has to flexibly move to adapt to changing of
environment. Sometimes this movement will make the enterprise be separated
from its long term goals. In this case, strategy with strategic goals will help
managers of enterprise a long run direction. So, resolving short term matters in
long run conditions can bring enterprise a stable development. Long run goals
also are basics for short term goals.
• Strategy helps to ensure unification and make plans for enterprise’s activities. In
existence and development process, strategy provides a comprehensive and
logical point of view in resolving problems which arises in business performance.
Strategy also helps to associate different sections in a company and orient them to
reach to a unit goal, it is enterprise’s goal.
• Strategy helps enterprises and organizations to catch up with market opportunities
and create comparative position in the market. Strategy unifies the enterprise’s
operation process in order to reach to enterprise’s strategic goals. It means that
enterprise will have to use its resource in most efficient way. So, enterprises have
to choose fastest way to catch up with market opportunities and deploy its
available abilities to create new comparative advantages.
From below analysis we can see very important roles of strategy in enterprise’s

performance so; strategic management becomes one of the most necessary keys which

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help enterprise open the door to advance toward success. Strategic management brings
theses following advantages:
More efficient in making plans by using more reasonable and logical approach method
when choosing strategies
• Widely take care of related beneficiaries of enterprises (stock holders)
• Connect short term development in long term development.
• Take care of both efficiency and effectiveness.
1.1.3. Levels of strategic management
In most (large) corporations there are several levels of management. Strategic
management is the highest of these levels in the sense that it is the broadest - applying to
all parts of the firm - while also incorporating the longest time horizon. It gives direction
to corporate values, corporate culture, corporate goals, and corporate missions. Under
this broad corporate strategy there are typically business-level competitive strategies and
functional unit strategies.
Corporate strategy
Corporate strategy refers to the overarching strategy of the diversified firm. Such a
corporate strategy answers the questions of "which businesses should we be in?" and
"how does being in these businesses create synergy and/or add to the competitive
advantage of the corporation as a whole?"
Business Strategy
Business strategy refers to the aggregated strategies of single business firm or a strategic
business unit (SBU) in a diversified corporation. According to Michael Porter, a firm
must formulate a business strategy that incorporates cost leadership, differentiation or
focus in order to achieve a sustainable competitive advantage and long-term success in
15

its chosen areas or industries. Alternatively, according to W. Chan Kim and Renée
Mauborgne, an organization can achieve high growth and profits by creating a Blue
Ocean Strategy that breaks the previous value-cost tradeoff by simultaneously pursuing
both differentiation and low cost.
Functional Strategy
Functional strategies include marketing strategies, new product development strategies,
human resource strategies, financial strategies, legal strategies, supply-chain strategies,
and information technology management strategies. The emphasis is on short and
medium term plans and is limited to the domain of each department’s functional
responsibility. Each functional department attempts to do its part in meeting overall
corporate objectives, and hence to some extent their strategies are derived from broader
corporate strategies.

1.2. Strategic management process
We are now going to analyze more deeply about the process of strategic management in
an organization from the perspective of general model of strategic management.
1.2.1. Defining mission & objectives
A strategic plan starts with a business mission which has been defined clearly.
Mintzberg defined a mission as “A mission describes the organization’s basic function
in society, in terms of the products and services it produces for its customers”. A clear
business mission needs to include following factors:
• Objective
Why does the business exist? Is it to create wealth for shareholders? Does it exist to
satisfy the needs of all stakeholders (including employees, and society at large?)

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• A Strategy and Strategic Scope
A mission statement provides the commercial logic for the business and so defines two
things:
-

The products or services it offers (and therefore its competitive position)

-

The competences through which it tries to succeed and its method of competing

A business’ strategic scope defines the boundaries of its operations. These are set by
management. For example, these boundaries may be set in terms of geography, market,
business method, product etc. The decisions management make about strategic scope
define the nature of the business.
• Policies and Standards of Behavior
A mission needs to be translated into everyday actions. For example, if the business
mission includes delivering “outstanding customer service”, then policies and standards
should be created and monitored that test delivery.
These might include monitoring the speed with which telephone calls are answered in
the sales call centre, the number of complaints received from customers, or the extent of
positive customer feedback via questionnaires.
• Values and Culture
The values of a business are the basic, often un-stated, beliefs of the people who work in
the business. These would include:
-

Business principles (e.g. social policy, commitments to customers)

-

Loyalty and commitment (e.g. are employees inspired to sacrifice their personal
goals for the good of the business as a whole? And does the business demonstrate
a high level of commitment and loyalty to its staff?)

-

Guidance on expected behavior – a strong sense of mission helps create a work
environment where there is a common purpose

In practice, a strong mission statement can help in three main ways:
-

It provides an outline of how the marketing plan should seek to fulfill the mission
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-

It provides a means of evaluating and screening the marketing plan; are
marketing decisions consistent with the mission?

-

It provides an incentive to implement the marketing plan

1.2.2. External environment analysis
No organization can exist in a vacuum; each is set in a particular country and region to
which it is inextricably linked. This setting provides multiple contexts that influence
how the organization operates and how and what it produces. Thus, the concept of

"external environment" is an important consideration for organizations as it attempts to
understand the research institutions it supports. An analysis of the external environment
is an attempt to understand the forces outside organizational boundaries that are helping
to shape the organization.
Forces outside the institution's walls clearly have considerable bearing on that which
transpires within. The external environment can provide both facilitating and inhibiting
influences on organizational performance. Multiple influences in the immediate or
proximal environment form the boundaries within which an organization is able to
function; these influences likewise shape how the organization defines itself and how it
articulates what is good and appropriate to achieve.
External environment is divided into 2 following perspectives: Macro and Micro
1.2.2.1. Macro-environment
Political environment
This is the factor which has affection to all industries in a country, factors like:
regulations and legal system can affect to every industries. When doing business in
administrative unit, enterprise has to follow its legal system.

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-

Stability: when study the political factor of enterprise we will take care of
stability of conflict political factors with legal systems. The country which has
high stability in political condition will give a better environment for enterprise to
expand its activities. On the contrary, instability in political conditions will give

-

bad affection to enterprise’s performance.

Related law: investment law, enterprise law, labor law, anti monopoly and

-

dumping.
Regulations: Government’s regulations also can create favorability or challenges
for enterprises. These regulations are: commercial regulations, industry
development regulations, tax, tariff, adjusting competition regulations, consumer
protection regulations, etc.

Legal environment
The administrative and legal environment in a country provides a framework within
which an organization operates. In some countries this environment is very restrictive
and has significant impact on all aspects of the organization; in other countries the
administrative/legal context is more permissive. Understanding the administrative/legal
environment is essential to determining if organizational change can take place. The
administrative context within which the organization operates may be shaped by a
unique combination of forces, including international, governmental, nongovernmental
policy, legislative, regulatory, and legal frameworks. An organization is affected by the
policy or regulatory context that gave rise to it. This includes specific laws and
regulations that support or inhibit the institution's development.
Economic factor
Enterprise needs to take care of economic factors both in short term and long term. It
also has to take care of intervention of Government into economy. In general, enterprise
will base on economic factor to decide which industry or section to invest in.
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-

Economic situation: Any economy also has different cycles; in a specific period

-

of a cycle enterprise will have different decisions for its development.
Factors which affect to economy: Interest rate, inflation.
Economic regulators of Government: Basic salary law, Government’s economic
development strategy, favorable regulation for a specific industry, increase tax or

-

subsidiary, etc.
Orientation of economy: Growth rate, GDP growth, GDP per capital.

Social-culture
Any country or region has its own specific characteristics. These characteristics affect to
consumer’s opinion here. Valuable traditions can make a basic for a society and support
for development of this society. So, tradition factors are strictly protected, especially
moral cultures. However, we cannot deny that there is interfering in culture between
counties. This interfering will change life style, psychology and create development
prospect for industry. Besides culture, social factors and social characteristics also attract
enterprise when making market research. Social characteristics device society into many
groups each group has different income, psychology characteristics. Other social
characters like:
-

Average longevity, health situation
Average income, income allocation
Life style, life psychology, knowledge level
Living conditions.

Natural environment
Natural condition is one of the most important factors in human life and it also provide
raw materials for many industries. Recently, natural condition is much changed because
of human destruction. It also can affect to development trend of enterprises.
Technology

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Recently, the whole world is still in technological revolution, list of model technologies
are implied and they are integrated into goods and services. Thirty years ago, computer
is only a tool used for calculation, now it is a tool with full functions and can work as a
person. Especially, in information technology section, model communication helps us to
shorten geographical distance.
1.2.2.2. Micro- environment
To analyze the micro-environment, organizations often use five-force model of M.
Porter – Father of competitive theories. Michael Porter provided a framework that
models an industry as being influenced by five forces. The strategic business manager
seeking to develop an edge over rival firms can use this model to better understand the
industry context in which the firm operates.
Potential entrants
It is not only incumbent rivals that pose a threat to firms in an industry; the possibility
that new firms may enter the industry also affects competition. In theory, any firm
should be able to enter and exit a market, and if free entry and exit exists, then profits
always should be nominal. In reality, however, industries possess characteristics that
protect the high profit levels of firms in the market and inhibit additional rivals from
entering the market.
Buyer power
The power of buyers is the impact that customers have on a producing industry. In

general, when buyer power is strong, the relationship to the producing industry is near to
what an economist terms a monopoly - a market in which there are many suppliers and
one buyer. Under such market conditions, the buyer sets the price. In reality few pure

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monopolies exist, but frequently there is some asymmetry between a producing industry
and buyers.
Buyers are powerful if:
-

Buyers are concentrated - there are a few buyers with significant market share

-

Buyers purchase a significant proportion of output - distribution of purchases or if
the product is standardized

-

Buyers possess a credible backward integration threat - can threaten to buy
producing firm or rival

Supplier power
A producing industry requires raw materials - labor, components, and other supplies.
This requirement leads to buyer-supplier relationships between the industry and the
firms that provide it the raw materials used to create products. Suppliers, if powerful,
can exert an influence on the producing industry, such as selling raw materials at a high
price to capture some of the industry's profits. The following tables outline some factors

that determine supplier power.
Suppliers are powerful if:
•
•
•
•

Credible forward integration threat by suppliers
Suppliers concentrated
Significant cost to switch suppliers
Customers Powerful

Threat of substitutes
In Porter's model, substitute products refer to products in other industries. To the
economist, a threat of substitutes exists when a product's demand is affected by the price
change of a substitute product. A product's price elasticity is affected by substitute

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products - as more substitutes become available, the demand becomes more elastic since
customers have more alternatives. A close substitute product constrains the ability of
firms in an industry to raise prices. The competition engendered by a Threat of
Substitute comes from products outside the industry. The price of aluminum beverage
cans is constrained by the price of glass bottles, steel cans, and plastic containers. These
containers are substitutes, yet they are not rivals in the aluminum can industry. To the
manufacturer of automobile tires, tire retreads are a substitute. Today, new tires are not
so expensive that car owners give much consideration to retreading old tires. But in the
trucking industry new tires are expensive and tires must be replaced often. In the truck
tire market, retreading remains a viable substitute industry. In the disposable diaper

industry, cloth diapers are a substitute and their prices constrain the price of disposables.
Competitive Rivalry
And last but not least, this describes the intensity of competition between existing firms
in an industry. Highly competitive industries generally earn low returns because the cost
of competition is high. A highly competitive market might result from:
•

Many players of about the same size, no dominant firm.

•

Little differentiation between competitor’s products and services.

•

A mature industry with very little growth.

•

Companies can only grow by stealing customers away from competitors.

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Figure 1.1 Five-force model of M. Porter
Source: Comparative advantage theory, M. Porter (1990)
1.2.2.3. External Factor Evaluation EFE
External Factor Evaluation (EFE) matrix method is a strategic-management tool often
used for assessment of current business conditions. The EFE matrix is a good tool to
visualize and prioritize the opportunities and threats that a business is facing. Five steps

to create EFE matrix:
• Step 1: The first step is to gather a list of external factors. Divide factors into two
groups: opportunities and threats.
• Step 2: Assign a weight to each factor. The value of each weight should be
between 0 and 1 (or alternatively between 10 and 100 if you use the 10 to 100
scale). Zero means the factor is not important. One or hundred means that the
factor is the most influential and critical one. The total value of all weights
together should equal 1 or 100.

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• Step 3: Assign a rating to each factor. Rating should be between 1 and 4. Rating
indicates how effective the firm’s current strategies respond to the factor. 1 = the
response is poor. 2 = the response is below average. 3 = above average. 4 =
superior. Weights are industry-specific. Ratings are company-specific.
• Step 4: Multiply each factor weight with its rating. This will calculate the
weighted score for each factor.
• Step 5: Add all weighted scores for each factor. This will calculate the total
weighted score for the company.
The sum of all weighted score is equal to the total weighted score; final value of total
weighted score should be between ranges from 1.0 (low) to 4.0(high). The average
weighted score for EFE matrix is 2.5 any company total weighted score fall below 2.5
consider as weak. The company total weighted score higher then 2.5 is consider as
strong in position.

Table 1.1 An example of External Factor Evaluation

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