Ch 3: External Analysis- Industry Structure, Competitive Forces, and Strategic Groups

What percent of firm performance is based on firm effects

55%

What percent of firm performance is based on Industry Effects

20%

What percent of firm performance is based on Other Effects

25%

groups environmental factors into six segments to determine the threats and opportunities in the external environment

PESTEL

What are the 6 factors of PESTEL

Political
Economic
Sociocultural
Technological
Ecological
Legal

Processes and actions of government bodies

political factors

While political factors are hard to control, firms can shape this through:

lobbying
public relations
contributions
litigation

economic factors are largely ___ economic

macro

What are some examples of economic factors

Growth rates
Levels of employment
Price stability
Currency exchange rates

In periods with growth rates, competition ___, businesses ___, and are ___ profitable

Competition decreases
Businesses expand
More profitable

When in periods of economic expansion, levels of employment are ___

low

When in periods of economic expansion, interest rates are:

Low

When in periods of economic expansion, price stability means

rising prices that result in inflation

When in periods of economic expansion, currency exchange rates tend to mean

the dollar can appreciate

What are the factors to consider when in economic expansion?

High growth rates
Low unemployment
Low interest rates
Rising prices resulting in inflation
Currency exchange rates mean dollar can appreciate

When in periods of economic contraction, growth rates tend to:

businesses retract and are less profitable

When in periods of economic contraction, levels of employment tend to:

high unemployment

When in periods of economic contraction, interest rates tend to:

high interest rates

When in periods of economic contraction, price stability tends to:

falling prices lead to deflation

When in periods of economic contraction, currency exchange rates tend to

decrease in value against other currencies

When in periods of economic contraction, what are the expected economic factors?

Low growth rates
High unemployment
High interest rates
Falling prices leading to deflation
Currency exchange rates mean depreciation of dollar

society’s cultures, norms, and values, and demographic trends, which are constantly in flux and differ in countries

sociocultural factors

application of knowledge to create new processes and products

technological factors

what are the innovations in process technology

Lean manufacturing
Six Sigma quality
Biotechnology

What are the innovations in product technology

Smartphones
Computer tablets
High performing electric cars

What are the environmental issues covered under ecological factors

Natural environment
Global Warming
Sustainable economic growth

Official outcomes of political processes (laws, mandates, regulations, court decisions)

legal factors

What are the political processes that are included under legal factors

Laws
Mandates
Regulations
Court Decisions
Industry deregulations

group of incumbent companies, relatively the same set of suppliers and buyers, tend to offer similar products and services

industry

a method to identify an industry’s profit potential and derive implications for a firm’s strategic position

industry analysis

a firms strategic profile that reflects choices regarding the kind of value it will create and how that value will be different from rivals

strategic positioning

What is the goal of strategic positioning

Generate large gaps between value of firm product/service and the cost required to produce it
Capture a significant share of the value created in an industry to gain and sustain competitive advantage

Economic value (according to strategic positioning)=

V-C

used to determine the profit potential or overall attractiveness of an industry and shape a firms competitive strategy

Five Forces Model

What are the Five Forces

Rivalry among Existing Competitors (middle)
Threat of New Entrants
Bargaining Power of Buyers
Threat of Substitute Products or Services
Bargaining Power of Suppliers

The stronger the 5 sources, the ___ the industry’s profit potential

lower (less attractive industry to competitors)

A good strategic leader positions the firm to ___ (how to use the five forces to their advantage)

Relax constraints of strong forces and leverage weak forces

risk that potential competitors will enter an industry, which lowers industry profit potential (incumbents lower prices)

Threat of New Entrants

obstacles that block others from entering and a significant predictor of industry potential

entry barriers

What are the types of entry barriers?

Economies of scale
Network effects
Customer switching costs
Capital requirements
Advantages independent of size
Government policy
Credible threat of retaliation

Cost advantages that accrue to firms because they can spread fixed costs across more units, employ technology more efficiently, and demand better terms from supplier

Economies of scale

Positive effect one user of a product or service has on the value of that product or service for others (when having one user adds value based on each user that joins)

Network effects

Costs incurred by moving from one supplier to another (ex: retraining employees, alter product specifications)

Customer switching costs

The amount of capital (cash, property, equipment, etc) needed to compete; Can be thought of as price of entry ticket

capital requirements

Cost and quality advantages not based on firm size (ex: reputation, favorable geographic location)

Advantages independent of size

Extent to which firms in industry will retaliate to a new competitor or competitor actions; Incumbents less likely to retaliate against entrants if industry has high profit potential

Credible threat of retaliation

pressures that industry suppliers can exert on an industries profit potential that lowers indeustry profit if: Suppliers demand higher prices for their inputs or suppliers reduce quality

power of suppliers

Bargaining power of suppliers is high when:

Concentrated (or limited) supplier industry
Suppliers not dependent on industry for majority of revenue
Incumbent firms face supplier switching costs
Supplier offer differentiated products
There are no viable supplier substitutes
Suppliers can forward-integrate into the industry

Bargaining power of buyers is high when:

There are few buyers and each buyer purchases large quantities
The industry’s products are standardized or undifferentiated commodities
Buyers face low or no switching costs
Buyers can backwardly integrate into the industry

Products or services inside or outside an industry meeting the needs of current customers

Threat of substitutes

The threat of substitutes are high when:

The substitute offers an attractive price-performance tradeoff
The buyers cost of switching to substitute it low

Substitutes can extend beyond the: (2)

direct competitors
focal industry

The intensity with which companies in the same industry jockey for market share and profitability

Rivalry among Competitors

The other 4 forces put pressure on competitive rivalry but intensity is determined by: (4)

Competitive industry structure
Industry growth
Strategic commitments
Exit barriers

What factors determine competitive industry structure?

Number and size of competitors
Firms degree of pricing power
Tryp of product or service (commodity or differentiated products)
Height of entry barriers

What are the main industry competitive structures? (4)

Perfect competition
Monopolistic competition
Oligopoly
Monopoly

During periods of high industry growth within an industry:

customer demand rises
price competition among firms decrease

Why is there less price competition among firms during periods of high growth?

Focus on capturing new customers
Not focused on taking profitability away from each other

During periods of negative growth within an industry:

Rivalry is fierce
Rivals can only gain at the expense of another

firm actions that affect intensity of rivalry among competitors because the actions are:

costly, long term oriented, and difficult to reverse

obstacles that determine how easily a firm can leave that industry because it affects intensity of rivalry among competitors

exit barriers

What are some examples of exit barriers?

Contractual obligations
Emotional attachments

In nearly every cases, __ force is dominant in determining the relative power structure in an industry

NO SINGLE FORCE

set of companies that pursue a similar strategy in a specific industry

strategic group

What is the strategic group model (framework): (2) - It is used to analyze strategic groups

Clusters different firms into groups
Is based on key strategic dimensions

Strategic groups differ in terms of:

RD exps
technology
product differentiation
Product and service offering
pricing
market segment
Distribution channels
customer services

How do you create a strategic group map?

Identify important strategic dimensions
Chose two key dimensions (horizontal and vertical axes that are not highly correlated)
Graph the firms in strategic groups

within the strategic group map, the firms market share is indicated by the:

size of the bubble

what insights are gained from strategic group mapping?

Competitive rivalry
External environment
Five competitive forces
Profitability

What are the shortcomings of the models discussed?

They are static (snapshot)
Do not consider black swan events
Information can become obsolete
Models dont explain why performance differences occur within an industry

How do you determine WHY performance differences occur WITHIN an industry?

internal analysis