CH 3. Evaluating a Company's Resources, Capabilities, and Competitiveness

Six components of the Macro-Environment included in a PESTEL Analysis Component 4

Technological Factors: include the pace of technological change and technical developments that have the potential for wide ranging effects on society, such as genetic engineering and nano technology. They include institutions involved in creating knowledge and controlling the use of technology such as R&D consortia, university-sponsored technology incubators, patent and copyright laws, and government control over the internet. Technological change can encourage the birth of new industries, such as those based on nano technology, and disrupt others, such as the recording industry.

Manufacturing Related KSFs

ability to achieve scale economies and/or capture experience curve effects (important)

Select all that apply Which of the following are examples of industry driving forces? a. changes in currency valuation around the globe b. product innovation c. increasing globalization d. changes in who buys the product and how they use it

b. product innovation c. increasing globalization d. changes in who buys the product and how they use it

A ______ is a cluster of industry rivals that have similar competitive approaches and market positions. a. macro-environment b. strategic group c. market share indicator d. distribution channel

b. strategic group

The competitive force of substitute products is strong when a. end-users face high costs when switching to substitutes. b. acceptable substitutes are not available. c. substitutes are attractively priced. d. substitutes are more highly-priced relative to the performance they deliver.

c. substitutes are attractively priced.

The leverage that buyers have in negotiating favorable terms of the sale can range from weak to strong. Individual consumers, for example,

rarely have much bargaining power in negotiating price concessions or other favorable terms with sellers. The primary exceptions involve situations in which price haggling is customary, such as the purchase of new and used motor vehicles, homes, and other big ticket items such as jewelry and pleasure boats. For most consumer goods and services, individual buyers have no bargaining leverage - there option is to pay the seller's posted price, delay their purchase until prices and terms improve, or to take their business elsewhere.

Which of the following is NOT a likely key success factor? a. rivals' assumptions b. product attributes c. strategy elements d. competitive capabilities

rivals' assumptions

When consumers view the products of two companies as, _______ the companies engage in competition. (Remember to fill the blank with only one word.)

substitutes

Rivalry Among Competitors

•The intensity with which companies in the same industry jockey for market share and profitability •Other 4 forces put pressure on this rivalry -The stronger the forces, the higher the intensity. •Intensity determined by (covered next): 1.Competitive industry structure 2.Industry growth 3.Strategic commitments 4.Exit barriers

The most powerful industry change agents are called a. driving forces. b. key success factors. c. dominant economic characteristics. d. five forces.

a. driving forces.

When firms are clustered together on a strategic group map, they generally a. have a strong extra-group rivalry. b. have a strong cross-group rivalry. c. enter into weak partnerships. d. enter into strong partnerships.

b. have a strong cross-group rivalry.

Power of Suppliers

•Pressures that industry suppliers can exert on an industry's profit potential •Lowers industry profit potential if: -Suppliers demand higher prices for their inputs -Suppliers reduce quality

How to Create a Strategic Group Map

1.Identify important strategic dimensions. 2.Choose two key dimensions -For horizontal and vertical axes -Not highly correlated 3.Graph the firms in the strategic group. -Each firm's market share indicated by the size of the bubble

Technology Related KSF

Expertise in a particular technology or in scientific research (important in pharmaceuticals internet applications, mobile communications, and most high tech industries) Proven ability to improve production processes (important in industries where advancing technology opens the way for higher manufacturing efficiency and lower production costs)

Which of the following are factors in a company's macro-environment? a. Economic Conditions b. regulatory factors c. technological factors d. internal employee relations

a. Economic Conditions b. regulatory factors c. technological factors

True or false: Evaluating the collective impact of driving forces requires looking at each force separately, since driving forces may not all be pushing in the same direction.

True

When buyer demand drops off suddenly, rivals a. seek a smaller share of volume. b. concede volume losses to each other. c. battle for market share. d. often close temporarily.

c. battle for market share.

The threat of entry is also low when entry barriers are high. The most widely encountered barriers that entry candidates must hurdle include:

1. The presence of sizable economies of scale in production or other areas of operation. When incumbent companies enjoy cost advantages associated with large scale operations, outsiders must either enter on a large scale (a costly and perhaps risky move) or accept a cost disadvantage and consequently lower profitability. 2. Cost and Resource Disadvantages not related to scale of operation. Aside from enjoying economies of scale, industry incumbents can have cost advantages that stem from the possession of proprietary technology partnerships with the best and cheapest suppliers, low fixed costs (because they have older facilities that have been mostly depreciated), and experience/learning curve effects. Manufacturing units costs for microprocessors tend to decline about 20% each time cumulative production volume doubles. With a 20 % experience curve effect, if the first 1 million chips cost $100 each, once production volume reach 2 million, the unit costs would fall to $80 (80% of $100), and by a production volume of 4 million, the unit cost would be $64 (80% x $80). The bigger the learning or experience curve effect, the bigger the cost advantage of the company with the largest cumulative production volume. 3. Strong Brand Preferences and High Degrees of Customer Loyalty: The stronger the attachment of buyers to establish brands, the harder it is for a new comer to break into the marketplace. 4. High Capital Requirements: The larger the total dollar investment needed to enter the market successfully, the more limited the pool of potential entrants. The most obvious capital requirements for new entrants related to manufacturing facilities and equipment, introductory advertising and sales promotion campaigns, working capital to finance inventories and customer credit, and sufficient cash to cover start- up costs. 5. The difficulties of building a network of distributors - retailers and securing adequate space on retailer's shelves: A potential entrant can face numerous distribution channel challenges. Wholesale distributors may be reluctant to take on a product that lacks buyer recognition. Retailers have to be recruited and convinced to give a new brand ample display space and an adequate trail period. Potential entrants sometimes have to "buy" their way into wholesale or retail channels by cutting their prices to provide dealers and distributes with higher markups and profit margins or by giving them big advertising and promotional allowances. 6. Patents and other forms of intellectual property protection: In a number of industries, entry is prevented due to the existence of intellectual property protection laws that remain in place for a given number of years. Often companies have a "wall of patents" in place to prevent other companies from entering with a "me too" strategy that replicates a key piece of technology. 7. Strong "Network Effects" in customer demand: In industries where buyers are more attracted to a product when there are many other users of the product, there are said to be "network effects." Video game system are an example, since many users prefer multiplayer games and sharing games. When incumbents have a large existing base of users, new entrants with otherwise comparable products face a serious disadvantage in attracting buyers. 8. Restrictive Regulatory Policies. Government agencies can limit or even bar entry by requiring licenses and permits. Regulated industries such as cable TV, telecommunications, electric and gas utilities, and radio and television broadcasting entail government controlled entry. 9. Tariffs and international trade restrictions: national governments commonly use tariffs and trade restrictions (anti-dumping rules, local content requirements, local ownership requirements, quotas, etc.) to raise entry barriers for foreign firms and protect domestic producers from outside competition. 10. The ability and willingness of industry incumbents to launch vigorous initiviates to block a newcomer's successful entry. Even if a potential entrant has or can acquire the needed competencies and resources to attempt entry, it must still worry about the reaction of existing firms. Sometimes. There's little that incumbents can do to throw obstacles in an entrant's path. But there are times when incumbents use price cuts, increase advertising, introduce product improvements, and launch legal attacks to prevent the entrant from building a clientele. Taxicab companies across the world are aggressively lobbying local governments to impose regulations that would bar ride-sharing services such as Uber or Lyft.

Six components of the Macro-Environment included in a PESTEL Analysis Component 5

Environmental Forces: These include ecological and environmental forces such as weather, climate, climate change, and associated factors such as water shortages. These factors can directly impact industries such as insurance, farming, energy production, and tourism. They may have an indirect but substantial effect on other industries such as transportation and utilities.

Take Away Concepts (3 of 6)

LO 3-3 Explain how competitive industry structure shapes rivalry among competitors. •The competitive structure of an industry is largely captured by the number and size of competitors in an industry, whether the firms possess some degree of pricing power, the type of product or service the industry offers (commodity or differentiated product), and the height of entry barriers. •A perfectly competitive industry is characterized by many small firms, a commodity product, low entry barriers, and no pricing power for individual firms. •A monopolistic industry is characterized by many firms, a differentiated product, medium entry barriers, and some pricing power. •An oligopolistic industry is characterized by few (large) firms, a differentiated product, high entry barriers, and some degree of pricing power. •A monopoly exists when there is only one (large) firm supplying the market. In such instances, the firm may offer a unique product, the barriers to entry may be high, and the monopolist usually has considerable pricing power.

Select all that apply Which of the following are examples of marketing-related key success factors? a. clever advertising b. fast, accurate technical assistance c. access to financial capital d. breadth of product line and product selection

a. clever advertising b. fast, accurate technical assistance & d. breadth of product line and product selection All firms in the industry must pay close attention to them or risk an eventual exit from the industry. Key Success Factors: are the strategy elements, product attributes, competitive capabilities, or intangible assets with the greatest impact on future success in the marketplace.

The strength or weakness of the potential entry of rivals as a competitive force is a. strongly correlated with the level of supplier power and with the number of suppliers that may seek to integrate forwards into the industry. b. contingent upon the strength of buyer loyalty to existing brands. c. contingent upon whether the industry's growth and profit prospects are strongly attractive to potential entry candidates. d. contingent upon whether the strategies of industry members are well matched to the industry's key success factors. e. strongly correlated with the degree to which the industry's driving forces make it harder or easier for new entrants to be successful.

c. contingent upon whether the industry's growth and profit prospects are strongly attractive to potential entry candidates.

Shortcomings of Models Discussed

•They are static -Just a snapshot -But black swan events happen suddenly -Information can become obsolete •Models don't explain why performance differences occur in an industry. -Internal analysis is required (next chapter.)

As the collective impact of the five competitive forces increases, the combined profitability of industry participants a. stabilizes. b. decreases. c. grows substantially. d. begins to equalize across a sector.

B. Decreases As a rule, the stronger the collective impact of the five competitive forces, the lower the combined profitability of industry participants. The most extreme case of "competitively unattractive" industry is when all five forces are producing strong competitive pressures; Rivalry among sellers is vigorous, low entry barriers allow new rivals to gain a market foothold, competition from substitutes is intense, and both suppliers and customers are able to exercise considerable bargaining leverage. Fierce to strong competitive pressures coming from all five directions nearly always drive industry profitability to unacceptably low levels, frequently producing losses for many industry members and forcing some out of business. But an industry can be competitively unattractive without all five competitive forces being strong. Fierce competitive pressures from just one of the five forces, such as brutal price competition among rival sellers, may suffice to destroy the conditions for good profitability.

Based upon the strategic group map in Concepts & Connections 3.1, briefly explain which companies/strategic groups seem destined to struggle. a. Pizza Hut is not destined to struggle because it is the largest competitive force and has cost advantage due to economies of scale, experience, and low fixed costs. b. Cici's, Sbarro, and Hungry Howie's seem destined to struggle. Two factors that determine the success of new entrants into a market are the expected reaction of incumbent firms to new entry and barriers to entry. Moving into a competitive space where larger competitors are well established, have strong customer loyalty, and are prepared to defend their market share will make it difficult to compete. c. Papa John's is not destined to struggle because it has established itself as a moderately priced product with moderate to high service and ambiance. It has a cost advantage due to economies of scale, experience, and low fixed costs. d. Domino's is not destined to struggle because it is the second most dominant pizza chain and is well positioned to fend off any new entrants into the market. e. California Pizza Kitchen and Mellow Mushroom are not destined to struggle because they each have a loyal customer base and a strong product differentiation.

Cici's, Sbarro, and Hungry Howie's seem destined to struggle. Two factors that determine the success of new entrants into a market are the expected reaction of incumbent firms to new entry and barriers to entry. Moving into a competitive space where larger competitors are well established, have strong customer loyalty, and are prepared to defend their market share will make it difficult to compete.

Strategic Group Mapping Read the overview below and answer the questions that follow. In this exercise, you will be asked to assess the positioning of key competitors using the Strategic Group Mapping. Please review Chapter 3 before completing this exercise. A strategic group consists of industry members with similar competitive approaches and positions in the market. Companies in the same strategic group can resemble one another in several ways: they may have comparable product-line breadth, sell in the same price/quality range, emphasize the same distribution channels, use essentially the same product attributes to appeal to similar types of buyers, depend on identical technological approaches, or offer buyers similar services and technical assistance. Concepts & Connections 3.1 presents a two-dimensional diagram reflecting the positioning of rivals in selected U.S. pizza chains. Strategic group mapping is a valuable tool for understanding the similarities, differences, strengths, and weaknesses inherent in the market positions of rival companies. Rivals in the same or nearby strategic groups cautiously, if at all, look for opportunities in other industries. A competitively weak company in an unattractive industry may see its best option as finding a buyer, perhaps a rival, to acquire its business. The lesson of strategic group mapping is that some positions on the map are more favorable than others. The profit potential of different strategic groups varies because of strengths and weaknesses in each group's market position. Often, industry competitive pressures and change drivers favor some strategic groups and hurt others. Read the overview below and complete the activities that follow. The strategic group map presented here and in Concepts & Connections 3.1 displays the comparative market positions of companies in selected U.S. pizza chains. The following assignment questions require your analysis of the strategic group map. Hint: Use the five-forces model to help determine competitive pressures from the different competitive strategic groups. Based upon the strategic group map in Concepts & Connections 3.1, briefly explain which pizza chain is Little Caesar's closest competitor and why. a. Mellow Mushroom is not Little Caesar's biggest competitor because it is located farthest away from Little Caesar's on the Strategic Map. b. Pizza Hut would not be Little Caesar's biggest competitor because it does not overlap with Little Caesar's, has more locations, and is higher priced. Domino's is Little Caesar's closest competitor because it is the next closest rival. The closer strategic groups are to each other on the map, the stronger the cross-group competitive rivalry tends to be. Cici's would not be Little Caesar's biggest competitor because although it has slightly fewer geographic locations, it scores higher on the price/service/ambiance axis and is further away from Little Caesar's than other competitors.

Domino's is Little Caesar's closest competitor because it is the next closest rival. The closer strategic groups are to each other on the map, the stronger the cross-group competitive rivalry tends to be.

True or false: A driving forces analysis is useful in understanding the macro-environment of an industry but not in directly influencing strategic choices.

False Determining strategy Changes needed to prepare for the impact of driving forces: The 3rd step of driving forces analysis - where the real payoff for strategy making comes - is for managers to draw some conclusions about what strategy adjustments will be needed to deal with the impact of driving forces. Without understanding the forces driving industry change and the impacts these forces will have on the industry environment over the next one to three years, managers are ill prepared to craft a strategy tightly matched to emerging conditions. Similarly, if managers are uncertain about the implications of one or more driving forces, or it their views are off base. it will be difficult for them to craft a strategy that is responsive to the consequences of driving forces. So driving forces analysis is not something to take lightly; it has practical value and is basic to the task of thinking strategically about where the industry is headed and how to prepare for the changes ahead. The real payoff of driving forces analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces.

Technological change, marketing innovation, and innovation in manufacturing processes are all types of the industry driving _______.

Note: Identifying an Industry's Driving Forces: An upsurge in buyer demand triggers a race among established firms and newcomers to capture the new sales opportunities. A slowdown in the growth of demand nearly always brings an increase in rivalry and increased efforts by some firms to maintain their high rates of growth by taking sales and market share away from rivals.

Required information A PESTEL Analysis This video reviews the generation of a PESTEL analysis to evaluate the impact of external factors on an industry. This activity is important because PESTEL is a framework used to remind us of important areas where trends can influence industry performance. To use PESTEL well, you must address how the trend is likely to sift an underlying dynamic of the industry. The goal of this activity is to demonstrate your understanding of how industry level trends will impact firms differently due to differences in strategies and resources. Click the ► button to watch the video. Then, answer the questions that follow. The impact of baby boomers getting older on an industry would be classified in which PESTEL factor? a. Technological b. Socio-cultural c. Political d. Economic e. Legal

b. Socio-cultural

A PESTEL Analysis This video reviews the generation of a PESTEL analysis to evaluate the impact of external factors on an industry. This activity is important because PESTEL is a framework used to remind us of important areas where trends can influence industry performance. To use PESTEL well, you must address how the trend is likely to sift an underlying dynamic of the industry. The goal of this activity is to demonstrate your understanding of how industry level trends will impact firms differently due to differences in strategies and resources. Click the ► button to watch the video. Then, answer the questions that follow. a. changes in the average age of different consumer groups. b. changes in the speed of internet communication capabilities. c. changes in disposable income per capita. d. judicial outcomes that impact product liability within an industry. e. the election of a conservative congress.

c. changes in disposable income per capita.

The most important revelation to be gleaned from strategic group maps is identifying a. the firms who have gone out of business. b. the number of firms in a given country. c. close and distant rivals. d. near and far suppliers.

c. close and distant rivals.

Which of the following is not a reason that industry rivals are often motivated to enter into strategic partnerships with key suppliers? a. to enhance the quality of parts and components being supplied and/or to reduce defect rates b. to speed the availability of next-generation components c. to reduce the bargaining power they face from buyers of their products d. to squeeze out important cost savings for both themselves and their suppliers e. to reduce inventory and logistics costs

c. to reduce the bargaining power they face from buyers of their products

The best technique for identifying the market position of industry rivals is a a. driving forces analysis. b. SWOT analysis. c. five-forces analysis. d. strategic group map.

d. strategic group map. Note why Not: b. SWOT analysis. Reason: This is a structured method that companies use for planning. c. five-forces analysis. Reason: This shows industry profitability.

Buyer bargaining power is moderate-to-weak in which of the following scenarios? a. Apple designs and manufactures its own microprocessors for mobile devices rather than buying them from Intel or Qualcomm. b. Yoghurt and products made from yogurt are highly differentiated by origin and by price. c. Buyers tend to delay purchases of luxury goods, such as OLED and 4K television sets, until they are on sale. d. Consumers can easily compare different fitness clubs and gyms over the Internet before signing up for memberships. e. The supply of soccer balls increases during the World Cup season.

e. The supply of soccer balls increases during the World Cup season.

In Periods of Economic Expansion...

•Growth rates: -Businesses expand, are more profitable. •Levels of employment -Unemployment is low. •Interest rates -Credit is cheap because interest rates are low. •Price stability -Rising prices result in inflation. •Currency exchange rates The dollar can appreciate.

What Is a Mobility Barrier?

•Industry-specific factors •Separate one strategic group from another

The Five Forces Model of Competition

1. Competitive pressures stemming from buyer bargaining power. 2. Competitive pressures coming from companies in other industries to win buyers over the substitute products. 3. Competitive pressures stemming from supplier bargaining power. 4. Competitive pressures associated with the threat of new entrants into the market. 5. Competitive pressures associated with rivalry among competing sellers to attract customers. This is usually the strongest of the five competitive forces.

Insights from Strategic Group Mapping

1.Competitive rivalry: -Strongest between firms in the same strategic group 2.External environment: -Affects strategic groups differently 3.Five competitive forces: -Affect strategic groups differently 4.Profitability: -Some strategic groups are more profitable than others

When suppliers have sufficient ______ power, they can influence the terms and conditions of what they supply to producers.

BARGANING Whether the suppliers of industry members represent a weak or strong competitive force depends on the degree to which suppliers have sufficient bargaining power to influence the terms and conditions of supply in their favor. Suppliers with strong bargaining power can erode industry profitability by charging industry members higher prices, passing consts on to them, and limiting their opportunities to find better deals.

Competitive Industry Structure

-The number and size of its competitors -The firms' degree of pricing power -The type of product or service (commodity or differentiated product) -The height of entry barriers

five competitive forces affecting industry attractiveness

1. Firms in other industries offering substitute products (Competitive pressures coming from the market attempts of outsiders to win buyers over to their products.) to Rivalry Among Competing Sellers (Competitive pressures created by the jockeying of rival sellers for better market position and competitive advantage To Buyers (Competitive pressures Stemming from seller- buyer collaboration and bargaining) To Suppliers of Raw Materials, Parts, Components, or Other Resource Inputs (Competitive pressures stemming from supplier seller collaboration and bargaining) To Potential New Entrants (Competitive Pressures coming from the threat of entry of new rivals.)

A Sixth Force: Complements

•A product, service, or competency •Adds value when used with the original product •Complementor: -A company that provides a good or service that leads customers to value your firm's offering more when the two are combined

Strategy Highlight 3.2 (1 of 2)

Five Forces in the Airline Industry •Competitive rivalry: intense -Consumers make decisions based on price. -Price comparisons are easy. •Power of buyers: high -Switching costs are low. -Large corporate contracts •Entry barriers: low -Example: Virgin America entered in 2007 Five Forces in the Airline Industry •Power of suppliers: strong -Providers are highly specialized •Power of substitutes: high -Substitutes are readily available. -Alternatives: train, bus, car •Result: -Mega airline carriers struggle. -Service providers are quite profitable (catering, etc.). -Customers pay low prices.

A PESTEL analysis can be used to assess the strategic relevance of the components of a company's a. competitive environment. b. industry environment. c. internal environment. d. macro-environment.

d. macro-environment.

What are the "The Three Tests of a Winning Strategy":

1. How well does the strategy fit the company's situation: Must be well matched to the company's external and internal situations, must fit competitive conditions in the industry and other aspects of the enterprise's external environment. It should also be tailed to the company's collection of competitively important resources and capabilities. It is unwise to build a strategy upon the company's weaknesses or pursue a strategic approach that required resources that are deficient in the company. Unless a strategy exhibits a tight fit with both the external and internal aspects of a company's overall situation, it is unlikely to produce respectable, first-rate business results. 2. Is the strategy helping the company achieve a sustainable competitive advantage: Strategies that enable a company to achieve a competitive advantage over key rivals that is long lasting. The bigger and more durable the competitive edge that the strategy helps build, the more powerful it is. Strategies that fail to achieve a durable competitive advantage over rivals are unlikely to produce superior performance for more than a brief period of time. 3. Is the strategy producing good company performance: Two kinds of performance improvements tell the most about the caliber of a company's strategy: (1) gains in profitability and financial strength. (2) advances in the company's competitive strength and market standing. Strong company performance shows a winning strategy is at play. Strategies that come up short on one or more of these tests are plainly less appealing than strategies passing all three tests with flying colors. Managers should use the same questions when evaluating either proposed or existing strategies. New initiates that don't seem to math the company's internal and external situation should be scrapped before they come to fruition, while existing strategies must be average performance or performance improvements.

Analytical spotlight on the five questions are:

1. How well is the company's strategy working? 2. What are the company's competitively important resources and capabilities? 3. Are the company's cost structure and customer value proposition competitive? 4. Is the company competitively stronger or weaker than key rivals? 5. What strategic issues and problems merit front-burner managerial attention? These five questions complete management's understanding of the company's overall situation and position the company for a good strategy situation fit required by the "The Three Tests of a Winning Strategy"

4 Main Competitive Industry Structures

1.Perfect competition 2.Monopolistic competition 3.Oligopoly 4.Monopoly

Six components of the Macro-Environment included in a PESTEL Analysis Component 1

Political Factors: These factors include political policies and processes, including the extent to which a government intervenes in the economy. They include such matters as tax policy, fiscal policy, tariffs, the political climate, and the strength of institutions such as the federal banking system. Some political factors, such as bailouts, are industry specific. Others, such as energy policy, affect certain types of industries (energy producers and heavy users of energy) more than others.

Six components of the Macro-Environment included in a PESTEL Analysis Component 3

SocioCultural Forces include the societal values, attitudes, cultural factors, and lifestyles that impact businesses, as well as demographic factors such as the population size, growth rate, and age distribution. SocioCultural forces vary by locale and change over time. An example is the trend toward healthier lifestyles, which can shift spending toward exercise equipment and health clubs and away from alcohol and snack foods. Population demographics can have large implications for industries such as health care, where costs and service needs vary with demographic factors such as age and income distribution.

The competitive Forces of Buyer Bargaining Power

Whether seller buyer relationships represent a minor or significant competitive force depends on: 1. Whether some or many buyers have sufficient bargaining leverage to obtain price concessions and other favorable terms, and 2. the extent to which buyers are price sensitive. Buyers with strong bargaining power can limit industry profitability by demanding price concessions, better payment terms or additional features and services that increase industry members' costs. Buyer price sensitivity limits the profit potential of industry members by restricting the ability of seller to raise prices without losing volume or unit sales.

Select all that apply Assessing a rival's assumptions entails which of the following? a. considering its assumptions about itself b. reviewing available information issued by the rival c. considering assumptions about the industry in which the rival competes d. revising the definition of "assumption" to make it broader

a. c. considering assumptions about the industry in which the rival competes b. reviewing available information issued by the rival c. considering assumptions about the industry in which the rival competes

All members of an industry are able to grow when a. demand is high. b. competition is fierce. c. market share shrinks. d. volume gains slide.

a. demand is high.

My Strategy Exercise (2 of 2)Is My Job the Next One Being Outsourced?

•Some accounting jobs moving to India -Specifically, tax returns •Accountants in Bangalore, India: -Are much cheaper -Work longer hours

How to Apply the Five Forces Model

•Define the relevant industry. •Identify the key forces - group them. •Identify the drivers of each force. -Are they strong or weak? •Assess overall industry structure. -Profit potential

Competitive force of Potential New Entrants

New entrants into an industry place additional competitive pressure on existing firms since they are likely to compete fiercely to establish market share and will add to the industry's production capacity. But even with the threat of new entry can be an important competitive force. This is because a credible threat of entry often prompts industry members to lower their prices and initiate defensive actions in an attempt to deter new entrants. Just how serious the threat of entry is in a particular market depends on two classes of factors: 1. The expected reaction of incumbent firms to new entry 2. Barriers to entry. The threat of entry is low in industries where incumbent firms are likely to retaliate against new entrants with price discounting and other moves designed to make entry unprofitable.

Which of the following scenarios does not exemplify the impact of the macro-environment on a company's strategic opportunities? a. Whole Foods introduces stores that are comprised solely of generic products, traffic increases. b. FitBit introduces a new feature that monitors users' blood pressure and their sales surge. c. Because of Volkswagen's falsified emissions data, consumer confidence in Volkswagen drops precipitously. d. Sales of Stolichnaya Vodka in the United States dwindle as a result of a boycott of Russian products. e. Netflix squares off with Amazon Prime as its most potent rival in the streaming television and film industry.

e. Netflix squares off with Amazon Prime as its most potent rival in the streaming television and film industry.

Strategic Commitments

•Affects intensity of rivalry among competitors •Firm actions that are: -Costly -Long-term oriented -Difficult to reverse •Example: airline industry -Hub and spoke model requires significant investment Significant strategic commitments are required to compete in the airline industry when using a hub-and-spoke system to provide not only domestic but also international coverage. U.S. airlines Delta, United, and American have large fixed costs to maintain their network of routes that affords global coverage, frequently in conjunction with foreign partner airlines. These fixed costs in terms of aircraft, gate leases, hangars, maintenance facilities, baggage facilities, and ground transportation all accrue before the airlines sell any tickets.

Chapter Case 3: Consider This... (2 of 3)

•Factor 1: price for crude oil dropped steeply •Factor 2: tax credits for alternative vehicles being phased out •Factor 3: Lithium-ion battery packs -Are in short supply -Are very expensive -Tesla initiating a lithium-ion battery production facility

Analysis of the External Environment Is Key to Strategic Management

•First step: PESTEL Analysis -How external factors affect the industry •Next step: Porter's Five Forces -The overall industry environment •Final step: Draw a Strategic Group Map -Explains performance differences in an industry

Bargaining Power of Buyers Is High When:

•There are a few buyers & 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. The retail giant Walmart provides perhaps the most potent example of tremendous buyer power. Walmart is not only the largest retailer worldwide (with over 11,000 stores and 2.2 million employees), but it is also one of the largest companies in the world (with $485 billion in revenues in 2014). Walmart is one of the few large big-box global retail chains and frequently purchases large quantities from its suppliers. Walmart leverages its buyer power by exerting tremendous pressure on its suppliers to lower prices and to increase quality or risk losing access to shelf space at the largest retailer in the world. Walmart's buyer power is so strong that many suppliers co-locate offices directly next to Walmart's headquarters in Bentonville, Arkansas, because such proximity enables Walmart's managers to test the supplier's latest products and negotiate prices.

Industry Convergence

•When unrelated industries satisfy the same need •Example: Media Industries -Progress in IT, telecommunications, digital media -Has united computing, communications, content •Content providers are adapting: -Newspapers, magazines, TV, movies, radio, music •New forms of content media: -Amazon's Kindle -Apple's iPad -Google's Chromebook

Chapter Case 3: Consider This... (3 of 3)

•Which PESTEL factors are the most salient? •What is the profit potential of the U.S. car industry? -Use Porter's Five Forces •How should Tesla Motors compete in the U.S. car industry? •Strategic group map - draw & discuss •Discuss Tesla's market cap vs. GM's revenue

My Strategy Exercise (1 of 2)Is My Job the Next One Being Outsourced?

•Which aspects of accounting are less susceptible to out-shoring? •What are the best domestic/global job opportunities? •How do industry trends affect your job search?

Of the following questions, which would not be used to assess a company's industry and competitive environment? a. What forces are driving industry change? b. What kinds of competitive forces are industry members facing, and how strong is each force? c. Which financial objectives should be used to measure company performance? d. Do industry characteristics offer sellers opportunities for growth and attractive profits?

c. Which financial objectives should be used to measure company performance?

Threat of Substitutes is High When:

•The substitute offers an attractive price-performance trade-off. •The buyer's cost of switching to the substitute is low. The movie rental company Redbox, which uses 44,000 kiosks in the United States to make movie rentals available for just $1.50, is a substitute for buying movie DVDs.

Question 2: How strong are the industry's competitive forces: recognize the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak.

After an understanding of the industry's general economic characteristics is gained, industry and competitive analysis should focus on the competitive dynamics of the industry. The nature and subtleties of competitive forces are never the same from one industry to another and must be wholly understood to accurately assess the company's current situation. Far and away the most powerful and widely used tool for assessing the strength of the industry's competitive forces is the five forces model of competition. This model, as depicted in below figure holds that competitive forces affecting industry attractiveness go beyond rivalry among competing sellers and include pressures stemming from four coexisting sources. The five competitive forces affecting industry attractiveness are listed below.

The greatest strategy-shaping impact on emerging on-demand transportation providers, such as Uber and Lyft, is most likely to be a. Apple launching a global network of driverless cars, buses, and trucks on demand via mobile app. b. Greyhound developing and marketing a mobile app for customers to purchase inter-city bus tickets. c. Tesla and ZipCar announcing a joint venture for electric automobile sharing services. d. Amazon launching a mobile delivery service via drones. e. Yellow Cab company launching mobile app campaigns for community-connectivity and awareness.

Apple launching a global network of driverless cars, buses, and trucks on demand via mobile app.

Based upon the strategic group map in Concepts & Connections 3.1, briefly explain between which two strategic groups is competition strongest. a. Competition is not strongest between Cici's and Little Caesar's because although the product offerings are similar, and they are not equal in size or competitive strength. b. Competition is not strongest between Cici's and Little Caesar's because although the product offerings are similar, and they are not equal in size or competitive strength. c. Competition is not strongest between Hungry Howie's and Mellow Mushroom because they differ in the services they provide, the price of the products they offer, and the number of locations. d. Competition is the strongest between Pizza Hut and Domino's. Rivalry is stronger when products of industry members are commodities or else weakly differentiated, competitors are numerous or are roughly equal in size, and competitive strength and firms in the industry have high fixed costs. e. Competition is the strongest between Pizza Hut and Domino's. Rivalry is stronger when products of industry members are commodities or else weakly differentiated, competitors are numerous or are roughly equal in size, and competitive strength and firms in the industry have high fixed costs.

Competition is the strongest between Pizza Hut and Domino's. Rivalry is stronger when products of industry members are commodities or else weakly differentiated, competitors are numerous or are roughly equal in size, and competitive strength and firms in the industry have high fixed costs.

Strategic group maps are revealing in several respects. The most important has to do with identifying which rivals are similarly positioned and are thus close rivals and which are distant rivals.

Generally, the closer strategic groups are to each other on the map, the stronger the cross group competitive rivalry tends to be. Although firms in the same strategic group and the closest rivals, the next closest rivals are in the immediately adjacent groups. For instance, Walmart's clientele, merchandise selection, and pricing points are much too different to justify calling Walmart a close competitor of Neiman Marcus or Saks Fifth Avenue in retailing. For the same reason, Timex is not a meaningful competitive rival of Rolex, and Kia is not a close competitor of Porsche or BMW. Some strategic groups are more favorably positioned than others because they confront weaker competitive forces and/or because they are more favorably impacted by industry driving forces. The second thing to be gleaned from strategic group mapping is that not all positions can be more attractive than others. 1. Industry driving forces may favor some strategic grops and hurt others. Driving forces in an industry may be acting to grow the demand for the products of firms in some strategic grops and shrink the demand for the products of firms in other strategic groups - as is the case in the news industry where internet news services and cable news networks are gaining ground at the expense of newspapers and network television. The industry driving forces of emerging internet capabilities and applications, changes in who buys the product and how they use it, and changing societal concerns, attitudes, and lifestyles are making it increasingly difficult for traditional media to increase audiences and attract new advertisers. 2. Competitive pressures may cause the profit potential of different strategic groups to vary. The profit prospects of firms in different strategic groups can vary from good to poor because of differing degrees of competitive rivalry within strategic groups, differing degrees of exposure to competition from substitute products outside the industry, and differing degrees of supplier or customer bargaining power from group to group. For instance, the competitive battle between Walmart and Target is more intese (with consequently smaller profit margins) than the rivalry among Tory Burch, Carolina Herrera, Dolce & Gabbana, and other high end fashion retailers. Thus part of the strategic group analysis always entails drawing conclusions about where on the map is the "best" place to be and why. Which companies or strategic groups are in the best positions to prosper, and which might be expected to struggle? And equally important, how might firms in poorly positioned strategic groups reposition themselves to improve their prospects for good financial performance.

Which companies/strategic groups face the weakest competition from members of other strategic groups? a. California Pizza Kitchen and Mellow Mushroom are less likely to face strong rivals because they have a loyal customer base and broad product differentiation. When competitive forces are weak, most companies in the industry are relatively satisfied with their sales growth and market shares, rarely undertake offensives to steal customers away from one another, and earn consistently good profits and returns on investment. b. Domino's and Pizza Hut face strong rivalry. Both strategic groups are similar in revenue size and number of locations, and compete with low to moderate pricing, service, and ambience. c. Papa John's faces competition from Little Caesar's as they are similar in revenue size and number of locations, and both compete with low to moderate pricing, service, and ambiance. d. Dominos could face competition from Pizza Hut. Pizza Hut could decide to lower its prices to attract new customers, thus making the switching costs for the buyer low. e. Hungry Howie competes with Cici's, which has a slightly larger strategic group in both number of locations and overall revenue. Buyer switching costs would be low.

a. California Pizza Kitchen and Mellow Mushroom are less likely to face strong rivals because they have a loyal customer base and broad product differentiation. When competitive forces are weak, most companies in the industry are relatively satisfied with their sales growth and market shares, rarely undertake offensives to steal customers away from one another, and earn consistently good profits and returns on investment.

Select all that apply Which of the following steps are part of driving forces analysis? a. Determine what strategy changes are needed to prepare for the impact of the driving forces b. Evaluate the current characteristics of the industry environment c. Identify what the driving forces are d. Assess whether the drivers of change are acting to make the industry more or less attractive

a. Determine what strategy changes are needed to prepare for the impact of the driving forces c. Identify what the driving forces are & d. Assess whether the drivers of change are acting to make the industry more or less attractive

Porter's Five Competitive Forces How can you apply Porter's five competitive forces to explain the profit potential of the average firm for different industries? This video reviews industry analysis using Porter's five forces framework as applied to the air travel industry and the soft drink industry. Click the ► button to watch the video. Then, answer the questions that follow. Industry competitive forces are not permanent, changing as firms evolve to compete more effectively. So, why has the profitability of the soft drink industry declined? a. Increased health concerns have led consumers to substitute healthier products. b. The number of new entrants into the soft drink market has confused consumers. c. Prices of soft drinks have increased substantially. d. The customer base has expanded, but the beverage selection has not. e. Zero and low calorie drinks have become increasingly popular.

a. Increased health concerns have led consumers to substitute healthier products.

Select all that apply Which of the following statements are true about evaluating an industry for profit potential? a. Some potential entrants to an industry may consider it attractive while others do not. b. A company needs to analyze prevailing driving forces to determine if they will affect profitability favorably. c. An industry's growth potential is an important factor in its profitability. d. A particular industry will be equally attractive or unattractive to all industry participants.

a. Some potential entrants to an industry may consider it attractive while others do not. b. A company needs to analyze prevailing driving forces to determine if they will affect profitability favorably. & c. An industry's growth potential is an important factor in its profitability.

Select all that apply Which of the following are guidelines that should be followed in creating a strategic group map? a. The two variables selected for the map axes should not be highly correlated. b. The sizes of the map circles should be proportional to the combined sales of firms in each strategic group. c. The variables used as map axes should always be quantitative and continuous. d. Creating multiple maps should be considered if there are more than two good competitive variables.

a. The two variables selected for the map axes should not be highly correlated. b. The sizes of the map circles should be proportional to the combined sales of firms in each strategic group. & d. Creating multiple maps should be considered if there are more than two good competitive variables. Using strategic group maps to assess the positioning of key competitors: A strategic group consists of those industry members with similar competitive approaches and positions in the market. Companies in the same strategic group can resemble one another in any of several ways: They may have comparable product-line Breadth, sell in the same price/quality range, emphasize the same distribution channels, use essentially the same product attributes to appeal to similar types of buyers, depend on identical technological approaches, or offer buyers similar services and technical assistance.

Select all that apply When a company has good information about the strategic direction of key competitors, the company can do which of the following? a. exploit opportunities provided by the competitors' actions b. file preemptive lawsuits against competitors c. craft an effective strategy of its own d. prepare defensive countermoves

a. exploit opportunities provided by the competitors' actions c. craft an effective strategy of its own & d. prepare defensive countermoves

The first step in drawing a strategic group map is a. identify the variables based on strategic approaches used in the industry. b. draw circles around each strategic group that are proportional to the group's share of industry revenues. c. plot firms on a two-variable map based on the strategic variables. d. assign firms occupying the same map location to a common strategic group.

a. identify the variables based on strategic approaches used in the industry.

Most driving forces originate a. in the company's competitive environment. b. in the outer ring of the macro-environment. c. outside the margins of the micro-environment. d. within the employee pool.

a. in the company's competitive environment.

When analyzing driving forces, it is important to determine whether the driving forces are making the industry environment a. more or less attractive. b. local or global. c. bigger or smaller. d. more or less technical.

a. more or less attractive.

Which of the following factors can determine if a company has strong prospects for attractive profits? a. the company's position compared to that of rivals b. whether competition will grow stronger or weaker c. the industry's growth potential d. the number of employees per dollar of overhead

a. the company's position compared to that of rivals b. whether competition will grow stronger or weaker c. the industry's growth potential

Select all that apply Which of the following are strongly influenced by driving forces? a. the competitive conditions b. the number of employees in a firm c. the industry landscape d. the route of transportation vehicles

a. the competitive conditions & c. the industry landscape Note: Industry and competitive conditions change because forces are enticing or pressuring certain industry participants (competitors, customers, suppliers) to alter their actions in important ways. The most powerful of the change agents are called Driving Forces because they have the biggest influences in reshaping the industry landscape and altering competitive environment, but most originate in the company's more immediate industry and competitive enviornment.

Select all that apply According to Michael Porter, which of the following are likely indicators of a rival's strategic moves? a. the rival's assumptions b. the rival's market share footprint c. the rival's objectives d. the rival's capabilities

a. the rival's assumptions c. the rival's objectives & d. the rival's capabilities Unless a company pays attention to the strategies and situations of competitors and has some inkling of what moves they will be making, it ends up flying blind into competitive battle. As in sports, scouting the business opposition is an essential part of the game plan development. Having good information about the strategic direction and likely moves of key competitors allows a company to prepare defensive countermoves, to craft its own strategy moves with some confidence about what market maneuvers to expect from rivals in response, and to exploit any openings that arise from competitors' missteps. The question where to look for such information, since rivals rarely reveal their strategic intentions openly. If information is not directly available, what are the best indicators?

Select all that apply Which of the following benefit from a driving forces analysis? a. thinking strategically about where the industry is headed b. preparing for business changes ahead c. identifying who the key "players" are in an industry d. crafting a responsive strategy

a. thinking strategically about where the industry is headed b. preparing for business changes ahead d. crafting a responsive strategy

From one industry to another, competitive forces a. can be understood piecemeal instead of holistically. b. are never the same. c. are either very strong or very weak. d. are consistent.

b. are never the same.

The goal of the strategy formulation is craft a strategy that a. puts rivals out of business through negotiations. b. produces a competitive edge. c. allows the company to not have to compete. d. tricks rivals into thinking the company has left the market.

b. produces a competitive edge.

Which of the following is not among the most common types of driving forces? a. product innovation, marketing innovation, and increasing globalization of the industry b. changes in the long-term industry growth rate, changes in who buys the product and how they use it, and growing buyer preferences for differentiated products c. changes in interest rates, changes in the number of seller-supplier collaborative alliances, and changes in overall industry profitability d. emerging new Internet applications and capabilities, technological change, and the diffusion of technical know-how across more companies and more countries e. changes in cost and efficiency, the entry or exit of major firms, and changing societal concerns, attitudes, and lifestyles

c. changes in interest rates, changes in the number of seller-supplier collaborative alliances, and changes in overall industry profitability

The strategy elements that most affect industry members' ability to prosper in the marketplace are known as a. dominant economic characteristics. b. driving forces. c. key success factors. d. the "five forces."

c. key success factors. Why not: b. driving forces. Reason: These are the agents of change in a given industry, not specific factors for getting ahead. d. the "five forces." Reason: This is an analytical tool used to assess the strength of competitive forces, not a specific factor for getting ahead.

Based on an analysis of the five competitive forces, in which of the following industries is profitability likely to be lowest? a. delivery services using drones b. wireless lighting systems c. pizza restaurants d. patented pharmaceuticals e. wearable fitness and health monitors

c. pizza restaurants

Factors that weaken rivalry among competing sellers include a. low buyer switching costs. b. slow growth in buyer demand. c. rapid growth in buyer demand, high buyer costs to switch brands, and so many industry rivals that any one company's actions have little impact on the businesses of its rivals. d. standardized or else weakly differentiated products among rival sellers. e. the presence of one or more rivals that are dissatisfied with their current position and market share.

c. rapid growth in buyer demand, high buyer costs to switch brands, and so many industry rivals that any one company's actions have little impact on the businesses of its rivals.

An industry's key success factors: a. are best determined by studying the strategies of those companies in the industry's best strategic group and those in the worst strategic group. b. concern the particular product attributes, competencies, competitive capabilities, and intangible assets with the greatest impact on future success in the industry. c. are mainly a function of an industry's macro-environment and dominant economic features. d. involve identifying the similarities in the strategies of rival companies; those strategy elements that are most commonly found in the strategies of rivals can be considered key success factors. e. usually relate to technology and manufacturing-related capabilities and rarely to distribution or marketing capabilities.

concern the particular product attributes, competencies, competitive capabilities, and intangible assets with the greatest impact on future success in the industry.

Chapter 3: Exercises for Simulation Participants If you are participating in a strategy simulation exercise during the academic term, you may be instructed to complete the following exercise. Which of the five competitive forces is creating the strongest competitive pressures for your company? a. There is not one competitive force that is strong enough to require a strategy change. b. Rivalry almost always becomes stronger when buyer costs to switch brands are high. c. Companies should not be concerned with entry barriers; these are always strong enough to prevent new entrants. d. Any one of the competitive forces can impact a company. The stronger the collective forces, the lower the combined profitability of industry participants.

d. Any one of the competitive forces can impact a company. The stronger the collective forces, the lower the combined profitability of industry participants.

The rivalry among competing sellers in an industry intensifies a. when buyer demand for the product is growing rapidly. b. when customers are brand loyal and their costs to switch to competing brands or substitute products are relatively high. c. when buyer demand is strong and sellers have little or no excess capacity and only minimal inventories. d. as the number of rivals increases and as they become more equal in size and competitive capability. d. when the products of rival sellers are highly differentiated products and the industry consists of so many rivals that any one company's actions have little direct impact on rivals' business.

d. as the number of rivals increases and as they become more equal in size and competitive capability.

The competitive force of new entrants into an industry is strong when a. the industry's outlook is risky or uncertain. b. buyer demand is growing slowly or is stagnant. c. entry barriers are high. d. entry barriers are low or can be readily hurdled by entry candidates.

d. entry barriers are low or can be readily hurdled by entry candidates.

Which of the following conditions generally raise the barriers to entering an industry? a. low levels of brand loyalty on the part of customers and the presence of more than 20 rivals in the industry b. rapid market growth, low buyer switching costs, and weak brand preferences and customer loyalty c. product offerings that are pretty much standardized from rival to rival d. high capital requirements, difficulties in building a network of distributors-retailers and securing adequate space on retailers' shelves, and the likelihood that industry incumbents will strongly contest the efforts of new entrants to gain a market foothold e. The industry is not characterized by scale economies and/or sizable learning or experience curve effects, and few firms in the industry hold key patents and/or possess significant proprietary technology not readily available to a newcomer.

d. high capital requirements, difficulties in building a network of distributors-retailers and securing adequate space on retailers' shelves, and the likelihood that industry incumbents will strongly contest the efforts of new entrants to gain a market foothold

A good example of a manufacturing key success factor is a. patent protection. b. strong e-commerce capabilities. c. national or global distribution capabilities. d. high labor productivity.

d. high labor productivity. Note why not: c. national or global distribution capabilities. Reason: This factor is associated with skills-and capability-related KSFs.

Which of the following is not an important factor for company managers to consider in drawing conclusions about whether the industry presents an attractive opportunity? a. Which of the following is not an important factor for company managers to consider in drawing conclusions about whether the industry presents an attractive opportunity? b. the industry's growth potential c. whether industry profitability will be affected favorably or unfavorably by the prevailing driving forces d. how many of the industry's key success factors do companies in the industry typically incorporate into their strategies e. the company's competitive position in the industry relative to rivals

d. how many of the industry's key success factors do companies in the industry typically incorporate into their strategies

The collective strength of the five forces can help determine a. a broad view of the industry's macro-environment. b. the strengths and weaknesses of each company in the industry. c. what specific strategy each industry participant should pursue. d. if companies in the industry can reasonably expect to earn decent profits.

d. if companies in the industry can reasonably expect to earn decent profits.

With the aid of a strategic group map for the pizza segment of the food service industry, one can a. identify easily the entry and exit barriers for each strategic group and intersegment competition with other casual restaurants. b. measure accurately whether across-group rivalry among pizza establishments is stronger than within-group rivalry, and vice versa. c. identify which competitive forces are strong and which are weak for pizza restaurants. d. reveal which pizza establishments are close competitors and which are distant rivals, and that not all positions on the map are equally attractive. e. pinpoint precisely which pizza restaurants are in profitable strategic groups and which are not.

d. reveal which pizza establishments are close competitors and which are distant rivals, and that not all positions on the map are equally attractive.

The task of driving forces analysis is to a. identify all the underlying factors that can cause industry profitability to rise or fall in the years ahead. b. predict what new forces of competitive and market change will emerge next. c. determine which of the five competitive forces is the biggest driver of industry change. d.identify which companies are being driven to move from one strategic group to another strategic group. e. collectively (1) identify the driving forces, (2) assess whether the drivers of change are acting individually or in concert to make the industry more or less attractive, and (3) determine what strategy changes are needed to prepare for the impact of the driving forces.

e. collectively (1) identify the driving forces, (2) assess whether the drivers of change are acting individually or in concert to make the industry more or less attractive, and (3) determine what strategy changes are needed to prepare for the impact of the driving forces.

Porter's Five Competitive Forces How can you apply Porter's five competitive forces to explain the profit potential of the average firm for different industries? This video reviews industry analysis using Porter's five forces framework as applied to the air travel industry and the soft drink industry. Click the ► button to watch the video. Then, answer the questions that follow. Porter's Five Forces Model helps explain why different industries can sustain different levels of profitability. Which elements have the greatest impact on profitability? a. threat of substitutes and power of buyers b. suppliers working together to maintain prices c. a strong leadership team and power of suppliers d. threat of entry and threat of substitutes e. power of suppliers and power of buyers

e. power of suppliers and power of buyers

Porter's Five Competitive Forces How can you apply Porter's five competitive forces to explain the profit potential of the average firm for different industries? This video reviews industry analysis using Porter's five forces framework as applied to the air travel industry and the soft drink industry. Click the ► button to watch the video. Then, answer the questions that follow. Is the threat of substitutes greater in the airline industry or the soft drink industry? a. the soft drink industry because all carbonated beverages are the same b. the airline industry because people value their time c. the airline industry because we have so many alternate means of transportation d. the soft drink industry because customers would incur high costs in switching e. the soft drink industry because people can choose other beverages, such as water, tea, or coffee

e. the soft drink industry because people can choose other beverages, such as water, tea, or coffee

This video reviews the generation of a PESTEL analysis to evaluate the impact of external factors on an industry. This activity is important because PESTEL is a framework used to remind us of important areas where trends can influence industry performance. To use PESTEL well, you must address how the trend is likely to sift an underlying dynamic of the industry. The goal of this activity is to demonstrate your understanding of how industry level trends will impact firms differently due to differences in strategies and resources. Click the ► button to watch the video. Then, answer the questions that follow. Effective use of the PESTEL framework can help us identify" a. how a trend is changing buyer behavior in an industry. b. only a few effective trends. c. emerging opportunities and threats within an industry. d. new competitors. e. emerging substitute products.

emerging opportunities and threats within an industry.

Of the five competitive forces, the strongest is almost always a. the demand curve. b. the rivalry of competing sellers. c. the supply curve. d. the market's tendency to grow over time.

b. the rivalry of competing sellers.

Buyer bargaining power is strong when a. demand is weak. b. buyers place high importance on brand reputation. c. buyers make purchases in small quantities. d. the cost of switching to a competing brand is high.

a. demand is weak.

Select all that apply Buyers with strong bargaining power can limit the industry profitability by a. demanding better payment terms. b. demanding a high volume of products. c. demanding price concessions. d. demanding additional features and services.

a. demanding better payment terms. c. demanding price concessions. & d. demanding additional features and services.

After graduating from college, Jake is considering starting a business, either a pizza restaurant or a commercial airline. Compared to the airline industry, the pizza restaurant industry likely has __________ entry barriers. a. lower b. higher c. equal d. non-existent

a. lower

To sift through information and construct strategic profiles of rivals, some firms form a competitive ______ unit.

intelligence or inteligence The nature and subtleties of competitive forces are never the same from one industry to another and must be wholly understood to accurately assess the company's current situation. Far and away the most powerful and widely used tool for assessing the strength of the industry's competitive forces is the five forces model of competition.

The impact of outer right macro-environmental factors on a company's choice of strategy can be big or small. But even if the factors of the macro-environment change slowly or are likely to have a low impact on the company's business situation, they still merit a watchful eye. Changes in socio-cultural forces and technological factors have begun to have strategy shaping effects on companies competing in industries ranging from news and entertainment to taxi services.

As company managers scan the external environmental, they must be alert for potentially important outer ring developments, assess their impact and influence, and adapt the company's direction and strategy as needed. However, the factors and forces in a company's external environment that have the biggest strategy shaping impact typically pertain to the company's immediate inner ring industry and competitive environment- the competitive pressures brought about by the actions of rival firms, the competitive effects of buyer behavior, supplier related competitive considerations, the impact of new entrants to the industry, and availability of acceptability of acceptable or superior substitute for a company's products or services. The inner ring industry and competitive environment is fully explored using Porter's Five Forces Model of Competition in the next section of this chapter.

To shift through information and construct strategic profiles of rivals, some firms form a competitive _____ unit

Blank 1: intelligence or intelligence After an understanding of the industry's general economic characteristics is gained, industry and competitive analysis should focus on the competitive dynamics of the industry

Six components of the Macro-Environment included in a PESTEL Analysis Component 2

Economic Conditions: Economic conditions include the general economic climate and specific factors such as interest rates, exchange rates, the inflation rate, the unemployment rate, the rate of economic growth, trae deficits or surpluses, savings rates, and per capita domestic product. Economic factors also include conditions in the markets for stocks and bonds, which can affect consumer confidence and discretionary income. Some industries, such as construction, are particularly vulnerable to economic downturns but are positively affected by factors such as low interest rates. Others, such as discount retailing, may benefit when general economic conditions weaken, as consumers become more price conscious. Economic characteristics of the industry such as market size and growth rate are also important to evaluate when assessing an industry's prospects for growth and attractive profits.

The stronger the forces of competition, the harder it becomes for industry members to earn attractive profits.

In contracts, when the collective impact of the five competitive forces is moderate to weak, an industry is competitively attractive in the sense that industry members can reasonably expect to earn good profits and a nice return on investment. The ideal competitive environment for earning superior profits is one in which both suppliers and customers are in weak bargaining positions, there are no good substitutes, high barriers block further entry, and rivalry among present sellers generates only moderate competitive pressures. Weak competition is the best of all possible worlds for companies with mediocre strategies and second rate implementation because even they can expect a decent profit..

Take Away Concepts (1 of 6)

LO 3-1 Generate a PESTEL analysis to evaluate the impact of external factors on the firm. •A firm's macroenvironment consists of a wide range of political, economic, sociocultural, technological, ecological, and legal (PESTEL) factors that can affect industry and firm performance. These external factors have both domestic and global aspects. •Political factors describe the influence government bodies can have on firms. •Economic factors to be considered are: growth rates, interest rates, levels of employment, price stability (inflation and deflation), and currency exchange rates. •Sociocultural factors capture a society's cultures, norms, and values. •Technological factors capture the application of knowledge to create new processes and products. •Ecological factors concern a firm's regard for environmental issues such as the natural environment, global warming, and sustainable economic growth. •Legal factors capture the official outcomes of the political processes that manifest themselves in laws, mandates, regulations, and court decisions.

Take Away Concepts (2 of 6)

LO 3-2 Apply Porter's five competitive forces to explain the profit potential of different industries. •Competition must be viewed more broadly to encompass not only direct rivals but also a set of other forces in an industry: buyers, suppliers, the potential new entry of other firms, and the threat of substitutes. •The profit potential of an industry is a function of the five forces that shape competition: (1) threat of entry, (2) power of suppliers, (3) power of buyers, (4) threat of substitutes, and (5) rivalry among existing competitors. •The stronger a competitive force, the greater the threat it represents. The weaker the competitive force, the greater the opportunity it presents. •A firm can shape an industry's structure in its favor through its strategy.

Take Away Concepts (4 of 6)

LO 3-4 Describe the strategic role of complements in creating positive-sum co-opetition. •Co-opetition (co-operation among competitors) can create a positive-sum game, resulting in a larger pie for everyone involved. •Complements increase demand for the primary product, enhancing the profit potential for the industry and the firm. •Attractive industries for co-opetition are characterized by high entry barriers, low exit barriers, low buyer and supplier power, a low threat of substitutes, and the availability of complements.

Take Away Concepts (5 of 6)

LO 3-5 Appraise the role of industry dynamics and industry convergence in shaping the firm's external environment. •Industries are dynamic—they change over time. •Different conditions prevail in different industries, directly affecting the firms competing in these industries and their profitability. •In industry convergence, formerly unrelated industries begin to satisfy the same customer need. Such convergence is often brought on by technological advances.

Take Away Concepts (6 of 6)

LO 3-6 Generate a strategic group model to reveal performance differences between clusters of firms in the same industry. •A strategic group is a set of firms within a specific industry that pursue a similar strategy in their quest for competitive advantage. •Generally, there are two strategic groups in an industry based on two different business strategies: one that pursues a low-cost strategy and a second that pursues a differentiation strategy. •Rivalry among firms of the same strategic group is more intense than the rivalry between strategic groups: intra-group rivalry exceeds inter-group rivalry. •Strategic groups are affected differently by the external environment and the five competitive forces. •Some strategic groups are more profitable than others. •Movement between strategic groups is restricted by mobility barriers—industry-specific factors that separate one strategic group from another.

Six components of the Macro-Environment included in a PESTEL Analysis Component 6

Legal and Regulatory Factors: These factors include the regulations and laws with which companies must comply such as consumer laws, labor laws, antitrust laws, and occupational health and safety regulations. Some factors, such as banking deregulation, are industry- specific. Others, such as minimum wage legislation, affect certain types of industries (low wage, labor intensive industries) more than others.

What are the Strategically Relevant Components of the Macro Environment?

Macro Environment encompasses all of the relevant factors making up the broad environmental context in which a company operates; by relevant: the factors are improtant enought hat they should shape management's decisions regarding the company's long term direction, objectives, strategy, and business model. The relevance of macro environmental factors can be evaluated using PESTEL analysis, an acronym for the six principal components of the macro environment, sociology-cultural forces, technological factors, environmental forces, and legal/regulatory factors.

The collective strengths of the Five Competitive Forces and Industry Profitability:

Scrutinizing each of the five competitive forces one by one provides a powerful diagnosis of what competition is like in a given market. Once the strategist has gained an understanding of the competitive pressures associated with each of the five forces, the next step is to evaluate the collective strength of the five forces and determine if companies in this industry should reasonably expect to earn decent profits. As a rule, the stronger the collective impact of the five competitive forces, the lower the combined profitability of industry participants. The most extreme case of "competitively unattractive" industry is when all five forces are producing strong competitive pressures; Rivalry among sellers is vigorous, low entry barriers allow new rivals to gain a market foothold, competition from substitutes is intense, and both suppliers and customers are able to exercise considerable bargaining leverage. Fierce to strong competitive pressures coming from all five directions nearly always drive industry profitability to unacceptably low levels, frequently producing losses for many industry members and forcing some out of business. But an industry can be competitively unattractive without all five competitive forces being strong. Fierce competitive pressures from just one of the five forces, such as brutal price competition among rival sellers, may suffice to destroy the conditions for good profitability.

Assessing the Company's Industry and Competitive Environment:

Thinking strategically about a company's industry and competitive environment entails using some well validated concepts and analytical tools to get clear answers to seven questions: 1. Do macro environmental factors and industry characteristics offer sellers opportunities for growth and attractive profits. 2. What kinds of competitive forces are industry members facing, and how strong is each force? 3. What forces are driving industry change, and what impact will these changes have on competitive intensity and industry profitability? 4. What market positions do industry rivals occupy, who is strongly positioned and who is not? 5. What strategic moves are rivals likely to make next? 6. What are the key factors of competitive success? 7. Does the industry outlook offer good prospects for profitability? Analysis based answers to these questions are prerequisites for a strategy offering good fit with the external situation.

Select all that apply: Which of the following strategic questions can be used to assess a company's industry and competitive environment? a. What strategic moves should the company make to reduce overhead in the short term? b. Does the industry outlook offer good prospects for profitability? c. What strategic moves are rivals likely to make next? d. What are the key factors of competitive success?

b. Does the industry outlook offer good prospects for profitability? c. What strategic moves are rivals likely to make next? & d. What are the key factors of competitive success?

From one industry to another, competitive forces a. are either very strong or very weak. b. are never the same. c. can be understood piecemeal instead of holistically. d. are consistent.

b. are never the same. Note: The Nature and subtleties of competitive forces are never the same from one industry to another and must be wholly understood to accurately assess the company's current situation. Far and away the most powerful and widely used tool for assessing the strength of the industry's competitive forces is the five forces model of competition.

Select all that apply As suppliers gain strong bargaining power, they can undermine industry profitability by doing which of the following? a. reporting industry members to regulators for invented violations b. charging industry members higher prices c. passing on costs to industry members d. limiting industry member access to better deals

b. charging industry members higher prices c. passing on costs to industry members & d. limiting industry member access to better deals

According to the five-forces model of competition, the competitive forces affecting industry attractiveness a. do not include rivalry among competing firms. b. are only important for the five different kinds of customers. c. go beyond rivalry among competing sellers. d. do not include outside pressures.

c. go beyond rivalry among competing sellers.

Technological Factors

•Application of knowledge -To create new processes -To create new products •Innovations in process technology: -Lean manufacturing, Six Sigma quality, and biotechnology •Innovations in product technology: -Smartphones, computer tablets, and high-performing electric cars such as the Tesla Model S

Strategic Positioning

•A firm's strategic profile •Based on value creation and cost •The goal -Generate a large gap between •The value the firm's product or service creates •The cost required to produce it

Industry Growth

•Affects intensity of rivalry among competitors •During periods of high growth: -Consumer demand rises -Price competition among firms decreases •They focus on capturing new customers •They are not focused on taking profitability away from each other •During periods of negative growth: -Rivalry is fierce -Rivals can only gain at the expense of one another

Exit Barriers

•Affects intensity of rivalry among competitors •Obstacles that determine how easily a firm can leave that industry •Examples: -Contractual obligations -Emotional attachments In Michigan, entire communities still depend on GM, Ford, and Chrysler. If any of those carmakers were to exit the industry, communities would suffer.

Strategy Highlight 3.1

•Blackberry -Pioneer in smartphones -Increased productivity -A status symbol •Market cap of Blackberry: -In 2008: $75 Billion -In 2015: $8 Billion •Lacked awareness of Sociocultural Factors -People began to use their own phones at work for communication. -IT departments had to incorporate other devices. •Lacked awareness of Technological Factors -Apple's release in '07 included a camera, touch-screen, and had Wi-Fi. -Was dismissed as a toy with low security features

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 •Suppliers offer differentiated products •There are no supplier substitutes. •Suppliers can forward-integrate into the industry. Example: For the airline industry, Boeing and Airbus offer differentiated products. This fact becomes clearer when considering the most recent models from each company. Boeing introduced the 787 Dreamliner to capture long-distance point-to-point travel (close to an 8,000-mile range, sufficient to fly non-stop from Los Angeles to Sydney), while Airbus introduced the A-380 Superjumbo to focus on high-volume transportation (close to 900 passengers) between major airport hubs (e.g., Tokyo's Haneda Airport and Singapore's International Airport). When considering long-distance travel, there are no readily available substitutes for commercial airliners, a fact that strengthens supplier power. Boeing and Airbus, the makers of large commercial jets.

Industry Consolidation

•Consolidated industries are more profitable. •Mergers and acquisitions make this possible. -Results in higher industry profitability •Example: U.S. Airline Industry mergers -Delta and Northwest -United and Continental -Southwest and AirTran -American and U.S. Airways The merger activity in the airline industry provides one example of how firms can proactively reshape industry structure in their favor. A more consolidated airline industry is likely to lead to higher ticket prices and fewer choices for customers, but also more profitable airlines.

Types of Entry Barriers

•Economies of scale •Network effects •Customer switching costs •Capital requirements •Advantages independent of size •Government policy •Credible threat of retaliation Network effects: For example, Facebook, with over 1.2 billion active users worldwide, enjoys tremendous network effects, making it difficult for more recent entrants such as Google Plus to compete effectively. We will discuss network effects in more detail in Chapter 7. Capital requirements: Tesla Motors made a sizable capital investment of roughly $150 million when it purchased the Fremont, California, manufacturing plant from Toyota and upgraded it with a highly automated production process, using robots to produce cars of the highest quality at large scale.

Oligopoly

•Few (large) firms •Some pricing power •Differentiated product •High entry barriers •Firms are interdependent •Resulting industry: firm actions often coordinated

The PESTEL Model

•Groups environmental factors into six segments: -Political -Economic -Sociocultural -Technological -Ecological -Legal •These factors can create: -Opportunities -Threats

In Periods of Economic Contraction...

•Growth rates: -Businesses retract, are less profitable. •Levels of employment -Unemployment is high. •Interest rates -Credit is expensive because interest rates are high. •Price stability -Falling prices result in deflation. •Currency exchange rates -The dollar can depreciate.

Industry & Industry Analysis

•Industry: -Group of incumbent companies -Relatively the same set of suppliers and buyers -Tend to offer similar products and services •Industry Analysis, a method to: -Identify an industry's profit potential Derive implications for a firm's strategic position

Ecological Factors

•Involve environmental issues, such as: -Natural environment -Global warming -Sustainable economic growth •Also provide business opportunities Negative examples come readily to mind, as many business organizations have contributed to the pollution of air, water, and land, as well as depletion of the world's natural resources. BP's infamous oil spill in the Gulf of Mexico destroyed fauna and flora along the U.S. shoreline from Texas to Florida. This disaster led to a decrease in fish and wildlife populations, triggered a decline in the fishery and tourism industries, and threatened the livelihood of thousands of people. It also cost BP more than $40 billion and one-half of its market value (see Strategy Highlight 1.2).

Economic Factors

•Largely macro-economic •Examples include: -Growth rates -Levels of employment -Interest rates -Price stability -Currency exchange rates

Importance of Analyzing the External Environment

•Managers can mitigate threats. •Managers can leverage opportunities. •Gain understanding of potential impacts. •Understand the source / proximity of factors.

Monopolistic Competition

•Many firms •Some pricing power •Differentiated product •Medium entry barriers •Resulting industry: niches are established

Perfect Competition

•Many small firms •Firms are price-takers •Offer commodity products •Low entry barriers •Resulting industry: profitability is typically low

Industry Dynamics

•Models discussed are only a snapshot. •Leaders need information about: -Changing speed of an industry -Rate of innovation •Industries aren't stable over time.

Legal Factors

•Official outcomes of political processes: -Laws -Mandates -Regulations -Court decisions •Industry de-regulations affect multiple industries: - Airlines, telecom, energy, and trucking •Governments can achieve desired outcomes: -To buy zero-emission vehicles, the U.S. government offers a $7,500 federal tax credit

Monopoly

•One firm •Considerable pricing power •Unique product •Very high entry barriers •Resulting industry: profit extracted

Power of Buyers (Customers)

•Pressure customers put on an industry by demanding: -A lower price or -Higher product quality

Political Factors

•Processes & actions of government bodies •Firms can shape this factor through: -Lobbying -Public Relations -Contributions -Litigation •Example: Tesla -Has a build-to-order sales model -Cuts out dealers -Dealers are lobbying for new legislation Traditional car dealers have been challenging Tesla's build-to-order sales model that allows customers to purchase a Tesla vehicle online and have it delivered to their home anywhere in the United States. Traditional car dealers, which often benefit from geographic monopolies, are not so much concerned about Tesla Motors as they are that their own brand names, such as GM or Ford, will also adopt an online, direct-to-consumer sales model, thus cutting out the dealers. Auto dealers and their associations are powerful lobbying forces that are influencing the political process to invoke decade-old laws and regulations or to craft new legislation in most states to prevent Tesla from selling directly to consumers. Ramsey, M. "Tesla closer to being able to have New Jersey dealerships," The Wall Street Journal, March 17, 2015.

Threat of Substitutes

•Products or services outside an industry meeting the needs of current customers •Examples: -H&R Block vs. TurboTax -Energy drinks vs. coffee -E-mail vs. express mail -Wireless telephone vs. VOIP -Videoconferencing vs. business travel Examples: many software products are substitutes to professional services, at least at the lower end. Tax preparation software such as Intuit's TurboTax is a substitute for professional services offered by H&R Block and others. LegalZoom, an online legal documentation service, is a threat to professional law firms. Other examples of substitutes are energy drinks versus coffee, videoconferencing versus business travel, e-mail versus express mail, gasoline versus biofuel, and wireless telephone services versus Voice over Internet Protocol (VoIP), offered by Skype or Vonage.

Strategic Groups Differ From Other Strategic Groups In Terms Of...

•R&D expenditures •Technology •Product differentiation •Product and service offerings •Pricing •Market segments •Distribution channels •Customer service

Socio-cultural Factors

•Society's cultures, norms, and values -Are constantly in flux -Differ across groups •Demographic trends -Present opportunities and threats -Population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class Example: growing health consciousness Boom for Chipotle, Subway, and Whole Foods McDonalds and Burger King had to adjust.

Strategic Groups

•Strategic groups are: -A set of companies -That pursue a similar strategy -In a specific industry •The strategic group model (framework): -Clusters different firms into groups -Is based on key strategic dimensions

Chapter Case 3: Consider This... (1 of 3)

•Tesla Motors: -Successfully entered U.S. automotive market -Uses innovative new technology •Future success will depend on industry forces -Lowered profit potential -Reduced attractiveness •Other non-traditional competitors -Google and Apple

Threat of Entry

•The risk that potential competitors will enter an industry •Lowers industry profit potential: -Incumbents lower prices •Incumbents spend more to satisfy existing customers. •Entry barriers: -Obstacles blocking others from entering -A significant predictor of industry profit potential