MAN 4720 ch.3

monopolistically competitive 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

The threat of new entry may cause incumbent firms to:

- lower prices to make entry appear less attractive to the potential new competitors - spend more to satisfy their existing customers.

Advantages independent of size:

-brand loyalty -proprietary technology -preferential access to raw materials and distribution channels

Porters 5 forces

Threat of substitute Products or services

Example of Backward integration

Walmarts private-label brands such as Equate health and beauty items

Deflation

a decrease in the overall price level, caused by a sudden and pronounced drop in demand.

Most rigorous means of analyzing profit potential in a specific industry is to conduct:

a five forces analysis

Industry convergence

a process whereby formerly unrelated industries begin to satisfy the same customer need. -it is often brought on by technological advances

Strategic group

a set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage

Near monopolies

are firms that have accrued significant market power, for example, by owning valuable patents or proprietary technology.

Switching costs:

are incurred by moving from one supplier to another

Economic factors

are largely macroeconomic, affecting economy-wide phenomena

external factors in the firm's task environment:

are ones that managers do have some influence over, such as the composition of their strategic groups (a set of close rivals) or the structure of the industry.

external factors in the firm's general environment:

are ones that managers have little direct influence over, such as macroeconomic factors (e.g., interest or currency exchange rates)

government policies

can restrict or prevent new entrants

Demographic trends

capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class

Technological factors

capture the application of knowledge to create new processes and products

Co-opetition

cooperation by competitors to achieve a strategic objective EX.) Samsung and Google VS Apple

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.

Sociocultural factors capture a society's:

cultures, norms, and values.

A company is a complementor to your company if:

customers value your product or service offering more when they are able to combine it with the other company's product or service.

Capital requirements:

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

Network effects

describe the positive effect that one user of a product or service has on the value of that product or service for other users

Rivalry among existing competitors:

describes the intensity with which companies within the same industry jockey for market share and profitability.

To temper price wars initiated by established rivals, firms:

differentiate product and/or diversify products

Companies in the same strategic group are:

direct competitors

Strategic groups differ from one another along important dimensions such as:

distribution channels customer service.

PESTEL External Environment

ecological

Exit barriers are comprised of:

economic and social factors

Exit barriers comprise both:

economic and social factors

To scare off new entrants, firms:

elevate the costs of entry (increase R&D)

To neutralize customer power, firms:

expand services so it is harder for customer to leave for a rival (iCloud)

Strategic groups differ from one another along important dimensions such as:

expenditures on research and development technology

By making industries more consolidated through horizontal mergers and acquisitions:

firms can change the industry structure in their favor

Deflation

forces sellers to lower prices to motivate buyers

The PESTEL model

groups the factors in the firm's general environment into six segments and a way to scan, monitor, and evaluate the important external factors and trends that might impinge upon a firm.

An oligopolistic industry:

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

A perfectly competitive industry is:

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

Michael Porter developed the highly influential five forces model to:

help managers understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage

A credible threat of retaliation:

incumbent firms are able to retaliate quickly, through initiating a price war, for example.

Organizations and the natural environment coexist in an

interdependent relationship

Ecological factors

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

an Industry:

is a group of incumbent companies facing more or less the same set of suppliers and buyers

a Monopoly:

is an industry where there is only one, often large firm supplying the market.

deflation is a serious threat to economic growth because:

it distorts expectations about the future and companies will not invest in new production capacity or innovation

Major innovations in process technology include:

lean manufacturing Six Sigma quality biotechnology

PESTEL External Environment

legal

nonmarket strategies

lobbying, public relations, contributions, litigation.

To limit the threat of substitutes, firms:

offer better value (product accessibility or infrastructure)

Strategic groups differ from one another along important dimensions such as:

pricing market segments

Strategic groups differ from one another along important dimensions such as:

product differentiation product and service offerings

Threat of substitutes is the idea that:

products or services available from outside the given industry will come close to meeting the needs of current customers.

Powerful suppliers can:

raise the cost of production by demanding higher prices for their inputs

Powerful suppliers can:

reduce the quality of the input factor or service level delivered

mobility barriers

restrict movement between groups. These are industry-specific factors that separate one strategic group from another.

Political factors

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

rivalry among competitors becomes fierce during:

slow or negative industry growth.

PESTEL External Environment

socio-cultural

To neutralize supplier power, firms:

standardize specifications for parts so the company can switch more easily among vendors (part #)

many players in the media industries have been converging due to:

technological progress in IT telecommunications digital media

Interest rates

the amount that creditors are paid for use of their money and the amount that debtors pay for that use, adjusted for inflation

Price stability

the lack of change in price levels of goods and services

The closer firms are on the strategic group map:

the more directly and intensely they are in competition with one another.

Exit barriers are:

the obstacles that determine how easily a firm can leave that industry.

Legal factors

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

The power of buyers:

the pressure an industry's customers can put on the producer's margins in the industry by demanding a lower price or higher product quality.

The key take-away from the five forces model:

the stronger the forces, the lower the industry's ability to earn above-average profits, and correspondingly, the lower the firm's ability to gain and sustain a competitive advantage.

Near monopolies

they have accomplished product differentiation to such a degree that they are in a class by themselves,

Porters 5 forces

threat of new entrants

Backward integration occurs:

when a buyer moves upstream in the industry value chain, into the seller's business

Competitive rivalry is strongest between firms that are:

within the same strategic group.

Entry barriers

▪ Advantages independent of size. ▪ Government policy.

The intensity of rivalry among existing competitors is determined largely by

▪ Competitive industry structure. ▪ Industry growth. ▪ Strategic commitments. ▪ Exit barriers.

Entry barriers

▪ Credible threat of retaliation.

Entry barriers

▪ Customer switching costs. ▪ Capital requirements.

Entry barriers

▪ Economies of scale. ▪ Network effects.

The 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.

Powerful Buyers:

- Credible threat of backward integration - Buyer knowledgeable of costs - Component quality not important

Powerful Suppliers have:

- Few firms in industry - Limited substitutes (Oil) - Buyers that are not important to supplier

Powerful Suppliers have:

- Product that is an important input to buyer's product - Component has high switching cost - Credible threat of forward integration

Powerful Buyers:

- Purchase accounts for significant amount of sales - Standardized/Commodity item - Limited component switching costs

Advantages independent of size:

- favorable geographic locations - cumulative learning and experience effects.

Factors that help determine The competitive industry structure

The type of product or service (commodity or differentiated product).

Competitive rivalry based solely on cutting prices:

-most or all of the value created is transferred to the customer -firms struggle to make profits -investments from firms drop off

monopolistically competitive industry

Apple, ASUS, Dell, HP, or Lenovo

Porters 5 forces

Bargaining power of buyers

Porters 5 forces

Bargaining power of suppliers

PESTEL External Environment

Economic

Entry Barriers

Economies of Scale Product differentiation Capital requirements

Entry Barriers

Expected retaliations Government Policy Retaliation

oligopolistic industry

FedEx and UPS.

macroeconomic factors can affect firm strategy:

Growth rates. Levels of employment. Interest rates. Price stability (inflation and deflation). Currency exchange rates.

PESTEL External Environment

Political

Porters 5 forces

Rivalry among existing competitors

Entry Barriers

Switching costs Distribution channels Dealer networks

PESTEL External Environment

Technological

Factors that help determine The competitive industry structure

The firms' degree of pricing power.

Factors that help determine The competitive industry structure

The height of entry barriers

Factor that help determine The competitive industry structure

The number and size of its competitors.