Chapter 9: Competitive factors

Competitive Advantage
As part of external analysis, a firm assesses the level and sources of competition in its industry.

Competitive advantage means being better than competitors in a way that is hard to copy.
If a firm has competitive advantage, it can:

• attract more customers

• charge better prices
• earn higher profits
• survive longer in the market

Example:
Daraz Nepal has a competitive advantage because:

• large number of sellers and buyers

• strong delivery network
• brand trust
New online platforms find it hard to compete with Daraz.

The main issue is whether the firm has a sustainable competitive advantage

Sustainable competitive advantage means the advantage lasts for a long time, not just short-term.

The ‘VRIN’ characteristics – valuable, rare, inimitable, non-substitutable – are the four factors
which determine if a resource is a source of sustainable competitive advantage for a company.

Analysing Competitive Advantage – Three Steps

1. Main competitive forces in the industry

The firm examines how intense competition is, such as the number of competitors, threat from new
entrants, substitute products, and bargaining power of customers and suppliers.

Example:
In Nepal, the cement industry is highly competitive:

• many cements brands

• similar products
• price competition is high
So competitive pressure is strong.

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2. Ways to achieve competitive advantage

A firm can gain advantage by:

• being the lowest-cost producer

Example: Wai Wai Noodles produces at large scale → lower cost → affordable price

• differentiating its products or services

Example:

Apple: premium design and brand image

Himalayan Java: quality coffee and café experience in Nepal

• focusing on a specific market segment

Example: An ACCA tuition provider focuses only on ACCA students, not CA or CMA students.

3. Contribution of internal activities and departments

Competitive advantage depends on how well different activities and departments (such as operations,
marketing, finance, HR, and IT) work together to support efficiency, quality, and customer value.

2 Porter’s Five Forces Analysis

2.1 Introduction

PEST analysis shows whether a market is likely to grow, but growth does not guarantee profit.
Porter’s Five Forces analysis examines the competitive environment of an industry by analysing five
forces.

2.2 Porter’s Five Forces Model

Michael Porter developed this model to analyse the level of competition in an industry and to assess
whether the industry is attractive and profitable.

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The Five Forces
1. Threat of new entrants
2. Threat of substitutes
3. Bargaining power of customers
4. Bargaining power of suppliers
5. Competitive rivalry (existing competitors)

1. Threat of New Entrants

(How easy is it for new firms to enter the market?)

Meaning

If entry is easy, competition increases and profits fall.

The threat depends on the strength of barriers to entry and the response of existing firms.

Factors affecting this force

• High start-up / capital cost → low threat

• Licences and regulation → low threat
• Strong brand loyalty / product differentiation → low threat
• Economies of scale → low threat
• High switching costs → low threat
• Restricted access to distribution channels → low threat
• Cost advantages independent of scale (patents, expertise, subsidies)

Examples

• Small grocery shops

o Low investment, little regulation
High threat of new entrants
• Hydropower projects

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o Very high capital, government approval required
Low threat of new entrants

2. Threat of Substitute Products

(Are there alternative products customers can switch to?)

Meaning

Substitutes place a limit on prices firms can charge.

The better the price–performance of substitutes, the higher the threat.

Examples

• Taxis vs Pathao / InDrive (Nepal)

High threat of substitutes
• Electricity vs solar panels
Solar is a substitute

Exam Tip

• Many substitutes → high competition

• Few substitutes → low competition

3. Bargaining Power of Customers

(Can customers demand lower prices or better quality?)

Customer power is high when:

• Few buyers but many sellers

• Products are similar or undifferentiated
• Switching costs are low
• Buyer purchases form a large share of supplier sales
• Buyer earns low profit

Examples

• Mobile phone buyers

o Many brands, easy switching
High customer power
• Specialised medical services
Low customer power

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4. Bargaining Power of Suppliers

(Can suppliers raise prices or reduce quality?)

Supplier power is high when:

• Few or dominant suppliers

• No close substitutes
• High switching costs
• Supplier product is unique or specialised

Examples

• Fuel supply in Nepal (Nepal Oil Corporation)

o Single dominant supplier
High supplier power
• Vegetable suppliers to restaurants
o Many farmers
Low supplier power

5. Competitive Rivalry
(How intense is competition among existing firms?)

Rivalry is high when:

• Many competitors of similar size

• Slow market growth
• Price competition is intense
• Low product differentiation
• High exit barriers

Examples

• Banking sector in Nepal

o Many banks, similar services
High competitive rivalry
• Luxury trekking company
Lower rivalry

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3 Porter’s Generic Strategies

This model was developed by Michael Porter and explains the different ways an organisation can
achieve competitive advantage in its market.

Porter argued that a business should choose one of three generic strategies, depending on its
circumstances. Failing to do so may leave the business “stuck in the middle” and unable to compete
effectively.

The Three Generic Strategies

1. Cost Leadership

Meaning
The business produces goods or services of similar quality to competitors but at a lower cost, mainly
through internal efficiencies.

Benefits

• Sell at lower prices to increase sales volume, or

• Sell at market price and earn higher profits

Example

Wai Wai Noodles follows a cost leadership strategy by:

• producing at a very large scale

• using efficient production and distribution

This allows Wai Wai to sell noodles at affordable prices across Nepal.

2. Differentiation

Meaning
The business makes its product appear superior or unique compared to competitors, either through:

• added features, or

• branding, advertising, and customer experience

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Benefit

• Ability to charge a premium price

Example

Himalayan Java Coffee differentiates itself by:

• premium coffee quality

• strong brand image

• café-style experience
Customers are willing to pay higher prices compared to local tea shops.

3. Focus

Meaning
The business targets a specific market segment instead of the whole market, offering tailored
products or services.

Benefit

• Better customer satisfaction

• Ability to charge a premium price

Example

A luxury trekking company in Nepal focuses only on high-end international tourists, offering:

• personalised guides

• luxury accommodation

• customised trekking experiences

This narrow focus allows the company to charge premium prices.

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4 Porter’s Value Chain

4.1 Introduction

Michael Porter developed the value chain to explain how a business creates value and how it gains
competitive advantage.

Every business performs many activities.

Some activities reduce cost.

Some activities improve quality or customer satisfaction.

The value chain helps managers answer:

• Which activities make us cheaper than competitors?

• Which activities make us better than competitors?

4.2 The Value Chain

Porter divided business activities into two groups:

1. Primary activities – directly involved in making and selling the product

2. Support activities – help primary activities work smoothly

Each activity can give:

• Cost advantage (lower cost), or

• Quality advantage (better product or service)

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4.2.1 Primary Activities

1. Inbound Logistics

Meaning:
Activities related to receiving, storing, and handling raw materials.

Examples:

• storing raw materials in a warehouse

• managing inventory

How it creates advantage:

• Cost advantage:
Using a Just-in-Time (JIT) system reduces storage cost.

• Quality advantage:
Proper storage prevents damage to materials.

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2. Operations

Meaning:
Activities that transform raw materials into finished goods or services.

Examples:

• manufacturing goods

• preparing food in a restaurant

How it creates advantage:

• Cost advantage:
Mass production, standardisation, efficient machines.

• Quality advantage:
Skilled workers, quality checks, advanced technology.

3. Outbound Logistics

Meaning:
Activities involved in storing, distributing, and delivering finished goods to customers.

Examples:

• delivery trucks

• warehouses for finished goods

How it creates advantage:

• Cost advantage:
Outsourcing delivery to third-party logistics companies.

• Quality advantage:
Fast and reliable delivery improves customer satisfaction.

4. Marketing and Sales

Meaning:
Activities used to promote, price, and sell the product.

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Includes:

• market research

• product, price, place, promotion (4Ps)

How it creates advantage:

• Cost advantage:
Word-of-mouth promotion, online direct selling.

• Quality advantage:
Strong branding, sponsorship, premium pricing.

5. Service

Meaning:
Activities after the sale, such as:

• installation

• training

• repairs

• returns

How it creates advantage:

• Cost advantage:
Limited service or outsourced service.

• Quality advantage:
Friendly and efficient customer support.

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4.2.2 Support (Secondary) Activities

Support activities do not directly produce the product, but they support primary activities.

1. Firm Infrastructure

Meaning:
How the business is organised and managed.

Includes:

• management structure

• finance

• planning

• legal systems

Example:

• Buying land outside the city reduces rent → cost advantage

2. Technology Development

Meaning:
Use of technology to improve processes and products.

Examples:

• automated machinery

• computer-controlled systems

Advantage:

• Better consistency

• Ability to customise products

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3. Human Resource Management

Meaning:
Recruiting, training, and motivating employees.

Advantage:

• Skilled and motivated staff → better quality and efficiency

4. Procurement

Meaning:
Purchasing all inputs needed by the business (not just raw materials).

Examples:

• buying machinery

• buying buildings

• selecting suppliers

Advantage:

• Bulk buying → lower cost

• Expert buyers → better quality inputs

4.3 How Departments Create Competitive Advantage

Purchasing Department

• Cost: bulk discounts, cheaper suppliers

• Quality: sourcing better materials

Production Department

• Cost: mass production, low stock levels

• Quality: skilled labour, quality control, technology

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Marketing Department

• Cost: direct selling, online promotion

• Quality: strong branding, market research, sponsorship

Service Department

• Cost: outsourcing service

• Quality: skilled service staff, good customer support

4.4 Value Networks

A value network is a group of connected organisations working together.

A firm’s value chain does not operate alone.

It is connected with:

• suppliers

• distributors

• customers

Example:
A manufacturer’s inbound logistics are linked to the supplier’s outbound logistics.

5 Corporate Appraisal – SWOT Analysis

Meaning

SWOT analysis examines:

• Strengths – what the organisation does well

• Weaknesses – what it does badly

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• Opportunities – external chances for growth

• Threats – external risks

Internal vs External

Internal External

Strengths Opportunities

Weaknesses Threats

Why SWOT is Important

SWOT helps management:

• Match strengths with opportunities

• Reduce weaknesses

• Prepare for threats

SWOT uses information from:

• PEST analysis

• Porter’s Five Forces

• Value Chain analysis

Exam Summary

Porter’s value chain analyses internal activities to identify cost and quality advantages, while SWOT
analysis combines internal and external factors to support strategic planning.

THE END
This summary is meant only for reference and quick revision. Please make sure you read your main
study text for detailed understanding and examples before exams.

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Key Vocabulary

Word / Phrase Meaning

Profit potential Ability of an industry to generate profits
Profit margins Difference between selling price and cost
Fixed costs Costs that do not change with output level
Marginal cost Cost of producing one extra unit
Exit barriers Costs or difficulties involved in leaving a market
Strategic need Reason a firm must stay in a market
Patents Legal rights protecting inventions
Substitute products Alternative products that satisfy the same need
Price-performance Relationship between price and quality
Ceiling price Maximum price customers are willing to pay
Undifferentiated products Products with little or no difference
Internal efficiencies Cost savings from better operations
Premium price Higher price charged due to added value
Stuck in the middle No clear competitive strategy
Operations Converting inputs into finished goods
Service After-sales support activities
Just-in-time system Inventory system reducing stock levels
Procurement Purchasing goods and services
Strategic planning Long-term decision-making process

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