Business strategies: the case of Bao Viet''''''''s fronting and broking corporate insurance

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

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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 implementation .................................................................................... 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 Viet Insurance) ............................. 34

2.3 Vision and Mission statement .................................................................................. 36
2.4 Strategy formulation .................................................................................................. 37
2.4.1 External 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 matrix for strategic solutions .............................................................. 72
3.1.2 The GREAT......................................................................................................... 75
3.2. Performing components of strategy implementation ........................................... 75

3.2.1 Communication................................................................................................... 75
3.2.2 Support ................................................................................................................. 76
3.2.3 Tactics .................................................................................................................. 76
3.3 Actions plan ................................................................................................................ 76
3.3.1

Activities to 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 direct investment projects licensed in period 2000 - 2009..... 39
Table 2.5: Numbers of enterprises (2008 – 2009).................................................... 44
Table 2.6: Some figures of non-life insurers............................................................. 50
Table 2.7: Competencies comparison ........................................................................ 52
Table 2.8: Identification of sustainable competitive advantage ............................. 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 model for generic strategy - 2................................................. 71
Table 3.1: SWOT matrix for strategic solutions....................................................... 72
Table 3.2: GREAT model for strategic solutions ..................................................... 75
Table 3.3: Actions plan for 5-year strategies ............................................................ 80

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LIST OF FIGURES

Figure 1.1: Generic strategies 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 – Bao 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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LIST OF ABBREVIATION

1.

SWOT

Strengths, Weaknesses, Opportunities, Threat

2.

GREAT

Gain, Risk, 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

Informatics 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 management 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 built 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 fronting and broking corporate insurance with the hope
that this service will get and maintain its sustainable development.
2. Scope of work
This research focuses on the strategic analysis, business strategy formulation
and implementation; and applying the analysis and suggestions to fronting and
broking corporate insurance of Bao Viet in order to suggest suitable business
strategies f o r the company in terms of fronting and broking corporate insurance
until 2015.
3. Objectives and aim
In terms of objectives, the research helps review the theory of business
strategies and helps give a clear view on industry and service area. And then it will
apply the theory of business strategies formulation, selection and implementation
into the case of Bao Viet in order to figure out appropriate business strategies for
Bao Viet’s fronting and broking corporate insurance.
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In terms of aim, t he suggested appropriate business strategy can help Baoviet
remain the sustainable leading insurance company in increasingly complicated and
challenging Vietnam insurance market.
4. Research questions
For getting suggested business strategies for Bao Viet’s fronting and broking
corporate insurance, it is vital to answer and make clear of the following research
questions:
-

What are business strategies?

-

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 and 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 and so on (the
detailed results show i n 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 implementation (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 terms of practice, the thesis should help suggest business strategic analysis
and business strategies selection and implementation f o r 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 corporate 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 suitable
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 strategies, 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.
And, 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 management 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.
This chapter is born to provide a whole and general picture on strategy,
business strategy, and strategic management.
1.1 Business strategy
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 strategy
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 Sun Tzu wrote The Art of War, a work influenced not

only on war-strategic minds 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 o f strategy and strategic management and 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” management 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 managers employ 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 differently 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 distinctive 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 creating 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 strategy 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 occurs at the business level. The
figure 1.1 shows Michael Porter’s three generic strategies. They are called businessunit-level strategies: cost leadership, differentiation, and focus (cost focus and
differentiation focus).
Figure 1.1: Generic strategies matrix

Source: />
· 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 a n d
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,
customers service, or images.
· Focus
In a small market or segment of market or fragmented market, we need to know
about focus strategy. A focus (or niche) strategy is widely used by small scale-ofeconomy 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 costleadership 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 some different types of strategies, firms can use only one best kind of
it and make use of their specific advantages or competencies, avoiding wastes for
niche segment or market.
1.2 Strategic management
In its widest sense, strategic management is about how 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 details. The figure 1.2 below will help.

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Figure 1.2: Strategic management process
1.1 Vision / Mission Statement

1.2. External Analysis
1.2.1. Macro Analysis
Model: PEST + DN
=> Opportunities & Threats
1.2.2. Micro Analysis
Model: 5 Forces
=> Opportunities & Threats

1.3. Internal Analysis
1.3.1. Internal analysis
1.3.2. Sustainable
Competitive
Advantages
Identification
Process

1.4. Formulations &
Choices of Strategies
Model:

1.4.1. SWOT
1.4.2. GREAT

=> Real Opportunities
& Threats

=> Strengths & Weaknesses
Possible Chosen
Strategies

1.5. Strategy Implementation

1.2.1. Vision and Mission statement
Vision is an overall strategic view on what the future business will become
and where the organization 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. More 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 mission
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 strengths and weaknesses, ranks these above; basing on ranked and priory
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ones to generate alternative 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 company.
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 factors, including but not
limited factors such as Political, Economic, Social, Technological and Legal factors.
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 model 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 level…

Political/
Legal
Analysis

- This kind of arena has a great impact on the overall business.
- Firms should consider issues such as: political environment stability,
government policy, legal framework, taxation and tariffs, government
involvement, intellectual property protection…

Social/

Cultural
Analysis

- 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.
- Factors include: living conditions, awareness to safety, social attitude,

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integration mind-set, culture, social acceptations green issues…
- Technology is essential for competitive advantage, especially in the era
Techno-

of globalization and integration.
- Points need to be paid attention: technology to a better standard of

logical
Analysis

quality, new way to communication due to technology, new research and
development, speed of technology-transferring, customization level,
application level…

· Industry analysis:
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 are: intensity of rivalry among existing competitors, 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 ultimate profit potential in the industry. The goal of
business strategy for an organization in an industry is to find a position in the
industry where the company can best defend itself against these forces or can
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 can and does 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 structural 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
The

play a coordinative role like price leadership.

existing

- When a plenty of competitors exist in the industry (or there are pretty

number

few companies with relative balance in size and resources), stability will

of rivals

be created.
- The problems of foreign versus national rivals: unequal treatment from
authorities, culture difference, legal framework, local understanding…

Industry
growth

- Slow growth will push expansion because of volatile market share
competition.
- Fast growth makes firms to improve results or effectiveness.

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

- In fact, it is value added, not the absolute proportion in fixed cost,
which affects on fixed cost.
- High fixed cost also leads to increasing storage to ensure sale. Hence,
profits are keeping low.

Differ-

- When product is considered as commodity, buyers’ options will base

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on price and service.
entiation

- When there is differentiation, buyers have various likings and loyalties

levels i n

to particular providers. So, product is less competitive.

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

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

- Specialized assets, fixed cost of exit, strategic interrelationships,
High

emotional barriers, and government and social restrictions result in low

exit

liquidation values.

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

Barriers
on exit
and

Entry

Low

Barriers

High

Low returns but safe

Worst

Best

High returns but risky

High

entry

- The most usual case is that entry and exit barriers go together. This
case may show the substantial 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 entry 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 produced 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
Sources
of
barriers
to entry

name, which are risky 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, which reduce profits.
- Cost disadvantage independent of scale, which can be the following
factors: proprietary product technology, favorable access to raw
materials, favorable locations, government subsidies, and experience
curve.
- Government policy

- Properties of entry 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 scale:
Entry
barriers

+ 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.
- Experience: is 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 Pressure 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.
The
threat of
substitute
products

- 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
- 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 forcing 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 influencing purchasing decisions.
The
threat of
substitute
products

- 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.
- Companies can use strategic decision to make segments selection in

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order to get less 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:
+ Suppliers providing to more buyers with less fragmentation.

Powerful

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

providers + The industry is an unimportant buyer of the seller group.
+ Products are differentiated or contain switching costs.
+ Threat of forward integration.
- 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

First 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 activities and supporting activities. Therefore, value chain analysis needs to

be seriously considered in way of determining the organization’s strengths and
weaknesses.
Primary activities directly impact on creating outputs and on sales and aftersales supports.
Supporting activities:
Organi-

: dealing with activities to operate every organization, organizational

zational

infrastructure duly impacts on an organization’s operation with a

infra-

wide range of support systems and functions such as planning,

structure

organization, planning, leading, financing, quality control…

Human

: dealing with activities relating to workforces of firms (choosing,

resource

recruiting, training, leading, motivating…). All organizations’

mana-

activities are seriously influenced by their own human, especially in

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