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What are the 5 Competitive Forces
Threat of New Entrants
Threat of Subtitute Products or Services
Bargaining Power of Suppliers
Bargaining Power of Buyers
Zero-Sum Competition
Companies getting into a price war, and the only real winner is the consumer since prices go down.
Positive-Sum Competition
Companies competing on different attributes and features that is actually relevant to particular groups of customers.
#1 purpose of strategy?
Alignment within the company
Value Chain Activities
The steps a company takes to create and sell a product or service, from conception to end use.
Value Chain Activities General Steps
Production, marketing, packaging, distribution
Fundamental Characteristics of the External Context
The factors that are relevant to firm performance at a given point in time.
Two major components of the external environment
Macro Environment & Industry Environment
Macro Environment
Political, economic, social, technical, environmental, & legal issues that confront the firm.
PESTEL Analysis
Tool for assessing the political, economic, socioculture, technological, environmental, and legal context in which a firm operates.
Examples of political factors
Stability of political environment, government policies, trade treaties, trade blocks.
Examples of economic factors
Inflation rates, interest rates, tariffs, exhcange rates, growth of local & foreign national economies.
Examples of socioculture factors
Local languages, dominant relgiioins, leisure time, age & lifespan demographics, attitude toward consumerism, environmentalism, roles of men & women
Examples of technological factors
Technology enabling products & services to be made more cheaply, more innovation, affect distribution?
Examples of environmental factors
Waste management practices, recyclable/biodagradable packaging.
Examples of legal factors
Reflect the laws & regulations relevant to the region or organization, how well established is the rule of law, how easily/quickly laws & regulations could change.
Cost of regulatory compliance
Following laws & regulations set by the government.
Globalization
Evolution of distinct geographic product markets into a state of globally independent product markets.
4 categories that reveal whether an industry has globalized or is in the process of globalization
Markets, Costs, Governments, & Competition
Features in a Market that favor globalization for a firm
Similar markets in different regions, globalized distribution channels, similar market approaches are transferable across geographic markets.
Features in Cost that favor globalization for a firm
Extremely high fixed costs, abillity to move manufacturing operations to locations outside of home country to somehwere with lower wages, improvement in logistics & transportation capabilities within companies.
Features in Government that favor globalization for a firm
Favorable trade policies, regulating tech standards.
Features in Competition favoring globalization for a firm
Globalize simply because competitors are doing it.
Industry Environment
Groupings of firms that seem more similar in certain ways than other members of the larger industry.
Perfect Competition
Numerous sellers and buyers (no monopolies), perfect information, reletively the same products offered by different firms, no barriers to entry or exit.
Industry Analysis (3 points)
Helps managers determine the nature of the competition, possible source of imperfect competition in the industry, and the possiblity of the firm earning above normal returns.
Imperfect Competition
Few competitors, numerous suppliers and buyers, asymmetric information, different products, and barriers that make entry into an industry difficult.
Result of Imperfect Competition
A firm could have an inherent advantage and above-normal returns are possible.
I/O Economics
The study of how firms operate in a market.
Key Success Factor (KSF)
Key asset or required skill that all firms in an industry must possess in order to be a viable competitor (dictated by industry characteristics).
Industry
A firm or group of firms that produce or sell the same or similar products to the same market.
Monopoly
Only one seller in the market (one firm industry).
Duopoly or Oligopoly
Market is dominated by 2 or a few large firms (ex. soft drinks)
“Concentrated” market
Small number of companies control a large portion of industry’s sales or output (affects the intensity of competition in an industry).
Fragmented Industry
No Clear Leader
Concentration Ratio
Represents the combined revenues of the largest industry participants as a ratio of total industries.
How is Concentration Ratio Represented?
C4, C8, C20, C50 based on the number of firms treated as the industry’s largest.
Are Fragmented or Concentrated Markets more competitive?
Fragmented
Are fragmented or concentrated markets harder to enter?
Concentrated
Five-Forces Model
Framework for evaluating industry structure
Rivalry
Intensity of competition within in an industry (affected by number of firms & how similar those firms are).
When is price competition increased?
Competitors are same size & power, industry is a key business for the major firms in that industry (ex. cereal for food industry), slow growing industries, low product switching cost (low brand loyalty).
When is price competition reduced?
Product seems unique (high brand loyalty)
Exit Barriers
Barriers that impose a high cost on the abandonment of a market or product (tends to increase rivalry & competition).
Threat of New Entry
Degree to which new competitors can enter an industry & intensify rivalry.
Barier to Entry
Condition under which it is harder to join or compete in an industry
Contributers to Barriers of Entry
Strong brands, proprietary (owned by company) tech, restricted access to investment capital or distribution channels, difficulty in getting the resources necessary to compete in an industry.
Result of high barriers to entry
Lower competition ( & limitng supply)
Supplier Power
Degree to which firms in the supply industry are able to dictate terms to contracts & therefore get some of the profit that would otherwise be available to competitors in the industry.
When are suppliers powerful?
When they control prices, delivery lead times, minimum orders, post purchase services,payment terms, concentrated suppliers, control a scarce input, are bigger then their customers, and when firms in the industry face high switching costs when changing suppliers.
Forward integration
When it’s possible for a supplier to manufacture finished products rather than just sell components to manufacturers (ex. Coke started bottling their own drinks instead of selling concentrate to a bottler).
Buyer Power
Degree to which firms in the buying industry are able to dictate terms on purchase agreements that extract some of the profit that would otherwise go to competitors in the industry. (mirror image of supplier power).
When does a buyer have high power?
When their purchases represent a significant portion of the seller’s sales, lots of options to buy from & easy to compare them.
Backward Integration
Buyers could move backwards and produce their own supplies & move backward into a supplier’s industry.
Threat of Substitutes
Degre to which products of one industry can satisfy the same demand as those of another (no substitues = higher consumer prices).
Complimentors
Players who provide complementary rather than competing products & services.
Complimentor
Any factor that enhances the attractiveness for suppliers to offer favorable terms or encourages buyers to purchase products at higher prices than it would absent the complimentor.
Examples of complimentors
A car manufacturer and a tire company, a gaming console and game developers, or an airline and a hotel chain, Microsoft and Intel
Five Forces Purpose vs. Complimentors Purpose
Five forces typically work to decrease industry profitability, strong complimentors increase demand & profit.
Goals of a good strategy (hint 5 forces)
Minimuize buyer power, offset supplier power, avoid excessive rivalry, raise the barriers to entry, & reduce the threat of substitution
Resources
All inputs used to create products & services
Capabilities
Skill at using resources
Example of resources
Raw materials, labor, money
Examples of Capabilities
Marketing, Innovation, logisitics, training
Competitive Advantage
When one firm enjoys an advantage over other firms in its industry, above-average performance is possible.
Tangible Resources (def & example)
Concrete, quanitfiable (factory, labor, money)
Intangible Resources (def & examples)
Immaterial, hard to quantify (knowledge, reputation, culture)
“V” in VRINE Model
Valuable
“R” in VRINE Model
Rare
“IN” in VRINE Model
Inimitable & Non-Substitutable
“E” in VRINE Model
Exploitable
Value Chain Analysis vs. VRINE Model
Value Chain Analysis focuses on activities vs. VRINE Model focuses on resources & capabilities
Primary Activities Definition
Activities that are involved with a product’s physical creation, its sale and distrubtion to buyers, and its service after the sale
How is the value added for primary activities
left to right
Support Activities
Not part of the primary logistics involved but they assist primary activities
What are the primary activities categories
Inbound logistics (raw materials, Operations (production), Outbound Logistics (dsitribution), Marketing & Sales, Service (customer support)
What are the support activities
Firm infrastructure, Human Resource Management, Technology Development, Procurement
Key to competitve advantage in Value Chain Analysis
Finding better or different ways to develop/perform the same activities as rivals.
Outsourcing
Activity performed for a company by people other than its full-time employees.
Distinctive Competence (capability)
Capability that sets a firm apart from other firms: something that a firm can do which competitors cannot.
Core Competence (capability)
Capability which is central to a firm’s main business operations and which allow it to generate new products and services
Causual Abimiguity
Condition whereby the difficulty of identifying or understanding a resource or capability makes it valuable, rare, inimitable
Dynamic Capabilities
A firm’s ability to modify, reconfigure,and upgrade resources and capabilities in order to strategically respond to or generate environmental changes.
Asset Turnover
Measures the firm’s efficiency at generating revenue
Profit Margin
Measures the firm’s ability to garner higher prices to generate the revenues
Formula for Firm Profitability
ROA = net profit margin x asset turnover
