Quiz 1: External Analysis

Industry

Firms that share a similar set of buyers and suppliers.

External Analysis

Analysis of the external environment to identify opportunities and threats.

PESTEL

A starting point for identifying threats and opportunities from macro-external factors.

PESTEL Macro-external Factors

Political, Economic, Sociocultural, Technological, Ecological, and Legal factors.

Porter’s Five Forces Model

Framework used to assess an industry’s profit potential based on five competitive forces.

Industry Profit Potential

Increases when supplier power, buyer power, substitute threat, entry threats, and rivalry are weak; decreases when they are strong.

Bargaining Power of Suppliers

Powerful suppliers reduce an industry’s potential for profits.

Factors Affecting Supplier Power

Supplier concentration/size, dependence on the industry, product specificity, switching costs, and forward integration threat

Forward Vertical Integration

The threat of suppliers moving forward into the focal industry; greater threat increases supplier power.

Bargaining Power of Buyers

Powerful buyers reduce an industry’s potential for profits.

Factors Affecting Buyer Power

Buyer concentration/size, dependence, product specificity, switching costs, and backward integration threat

Backward Vertical Integration

The threat of buyers moving backward into the focal industry; greater threat increases buyer power

Threat of Substitutes

The threat from products or services in other industries that satisfy a similar need; viable substitutes reduce profit potential.

Substitute Viability

Increases with an attractive price-performance trade-off and low switching costs.

Threat of Entry

The risk of new competitors entering an industry

Entry Barriers

Factors that make entry more difficult; high entry barriers mean a lower threat of entry.

Factors Affecting Threat of Entry

Economies of scale, network effects, switching costs, capital needs, regulation, resource scarcity, brands, retaliation, and experience.

Rivalry Among Existing Competitors

Intense rivalry among existing competitors reduces an industry’s potential for profits.

Factors Affecting Rivalry

Other industry forces, industry growth rate, strategic commitments, exit barriers, and competitive industry structure

Competitive Industry Structure

Elements and features common to all industries, including the number and size of competitors, the firms’ degree of pricing power, the type of product or service offered, and the height of entry barriers.

Perfect Competition

• Many small firms

• Firms are price takers

• Commodity product

• Low entry barriers

Monopolistic Competition

• Many firms

• Some pricing power

• Differentiated product

• Medium entry barriers

Oligopoly

• Few (large) firms

• Some pricing power

• Differentiated product

• High entry barriers

Monopoly

• One firm

• Considerable pricing power

• Unique product

• Very high entry barriers

Complement & Complementor

• A product, service, or competency that adds value to the focal product.

• A company that provides a complementary product.

Strategic Role of Complements

When a complement performs better or becomes cheaper, demand for the focal good increases.

Strategic Groups

Clusters of firms within an industry that reflect different strategic types or business-level strategies.

Rivalry Within Strategic Groups

Rivalry is strongest among firms within the same strategic group.

Mobility Barriers

Barriers that separate strategic groups.

Strategic Group Mapping

Mapping firms using two important, not strongly correlated dimensions to identify strategic groups.

Strategic Group Map Circle Size

Indicates market share.