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

5 macroeconomic factors

- growth rates - levels of employment - interest rates - price stability (inflation and deflation) - currency exchange rates

PESTEL model's six segments

- political - economic - sociocultural - technological - ecological - legal

PESTEL model

A framework that categorizes and analyzes an important set of external factors (political, economic, sociocultural, technological, ecological, and legal) that might impinge upon a firm. These factors can create both opportunities and threats for the firm.

industry analysis

A method to (1) identify an industry's profit potential and (2) derive implications for a firm's strategic position within an industry.

competitive industry structure

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

industry convergence

a process whereby formerly unrelated industries begin to satisfy the same customer need

complement

a product, service, or competency that adds value to the original product offering when the two are used in tandem

economies of scale

cost advantages that accrue to firms with larger output because they can spread fixed costs over more units, employ technology more efficiently, benefit from a more specialized division of labor, and demand better terms from their suppliers

capital requirements

describe the "price of the entry ticket" into a new industry

industry effects

describe the underlying economic structure of the industry; firm performance attributed to the structure of the industry in which the firm competes

currency exchange rate

determines how many dollars one must pay for a unit of foreign currency

strategic commitments

firm actions that are costly, long-term oriented, and difficult to reverse

Firm Effects

firm performance attributed to the actions managers take

perfect competition

fragmented and has many small firms, a commodity product, ease of entry, and little or no ability for each individual firm to raise its prices

5 forces model

framework that identifies 5 forces that determine the profit potential of an industry and shape a firm's competitive strategy

legal factors

include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions—all of which can have a direct bearing on a firm's profit potential.

switching costs

incurred by moving from one supplier to another

monopolistic competition

industry has many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers

mobility barriers

industry-specific factors that separate one strategic group from another

ecological factors

involve broad environmental issues such as the natural environment, global warming, and sustainable economic growth

examples of non-market strategies

lobbying, public relations, contributions, litigation, etc

entry barriers

obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential

exit barriers

obstacles that determine how easily a firm can leave an industry

political factors

result from the processes and actions of government bodies that can influence the decisions and behavior of firms

price stability

the lack of change in price levels of goods and services (rare)

threat of entry

the risk that potential competitors will enter an industry

strategic group

the set of companies that pursue a similar strategy within a specific industry

network effects

the value of a product or service for an individual user increases with the number of total users

inflation

too much money chasing too few goods and services

monopoly

when there is only one, often large firm supplying the market, unique product, and the challenges to moving into the industry tend to be high

industry

a group of incumbent companies that face more or less the same set of suppliers and buyers

co-opetition

cooperation by competitors to achieve a strategic objective

steps for applying Porter's 5 force model

1. define the relevant industry 2. identify the key players in each of the 5 forces and attempt to group them into different categories 3. determine the underlying drivers of each force 4. assess the overall industry structure

4 Main Competitive Industry Structures

1. perfect competition 2. monopolistic competition 3. oligopoly 4. monopoly

5 key competitive forces

1. threat of entry 2. power of suppliers 3. power of buyers 4. threat of substitutes 5. rivalry among existing competitors

economic value

= value-cost

complementor

a company that provides a good or service that leads customers to value your firm's offering more when the two are combined

deflation

a decrease in the overall price level

strategic position

a firm's strategic profile based on the difference between value creation and cost (V-C)

strategic group model

a framework that explains differences in firm performance within the same industry

sociocultural factors

capture a society's cultures, norms, and values

technological factors

capture the application of knowledge to create new processes and products

Oligopoly

consolidated with a few large firms, differentiated products, high barriers to entry, and some degree of pricing power