4490 - 2: External Analysis, Industry Structure, Competitive Forces

Rivalry among existing competitors is largely determined by the following factors:

- competitive industry structure - industry growth - strategic commitments - exit barriers

Airbnb

- handles more accommodations than the three biggest hotel chains combined - developed a successful business of peer-to-peer rental space by: ----presenting a well-designed website ----developing a smooth transaction between hosts and guests ----fortuitous timing that led to growing demand note:Airbnb was not a first mover in the peer-to-peer rental space

The power of suppliers is high when

- suppliers' industry is more concentrated than the industry it sells to - suppliers do not depend heavily on the industry for their revenues - incumbent firms face significant switching costs when changing suppliers - suppliers offer products that are differentiated - there are no readily available substitutes for the products or services that the suppliers offer - suppliers can credibly threaten to forward-integrate into the industry

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.

Competition in the Five Forces Model

Competition describes the struggle among the forces to capture as much of the value created as possible. -- the stronger the five forces, the lower the industry's profit potential, making the industry less attractive for competitors (the reverse is also true)

Complement Complementor Co-opetition

Complement: A product, service, or competency that adds value to the original product offering when the two are used in tandem. Complementor: A company that provides a good or service that leads customers to value your firm's offering more when the two are combined. Co-opetition: Cooperation by competitors to achieve a strategic objective.

Rivalry among existing competitors: industry growth During periods of positive growth: - price competition among firms _______ During periods of negative growth: - rivalry...

During periods of positive growth: - consumer demand rises - price competition among firms decreases During periods of negative growth: - rivalry is fierce - rivals can only gain at the expense of one another

Analysis of the External Environment Is Key to Strategic Management - what are the 3 steps?

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

Rivalry among existing competitors: exit barriers - are comprised of both ________ and ________ factors

Obstacles that determine how easily a firm can leave an industry. Are comprised of both economic and social factors: --Economic factors such as fixed costs that must be paid (contracts with suppliers) --Social factors such as emotional attachments to certain geographic locations (autos)

Strategic group Strategic group model

Strategic Group - The set of companies that pursue a similar strategy within a specific industry. Strategic Group Model - A framework that explains differences in firm performance within the same industry.

When a firm in an oligopoly cuts prices,

a price war is likely to result

Legal - regulatory changes tend to...

affect entire industries at once

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 more specialized division of labor, and demand better terms from their suppliers.

New firms have established in the airline and telecommunications industries after

deregulation

Which of these is a way to reconfigure a value chain?

entering an industry by offering sporting events on streaming video when competitors are offering them through cable hookups

_______ coordination such as price fixing is illegal in the U.S., but ______ coordination is not

explicit, tacit

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.

customer switching costs

incurred by moving from one supplier to another. Changing vendors may require the buyer to alter product specifications, retrain employees, and/or modify existing processes.

mobility barriers

industry-specific factors that separate one strategic group from another

High exit barriers lead to

intense rivalry

The relationship between the natural environment and business organizations can best be described as __________

interdependent

Ecological factors

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

Which of the following statements is true of an oligopoly?

it is often analyzed using game theory, which attempts to predict strategic behaviors by assuming that moves and reactions of competitors can be anticipated

Key takeaways: the stronger the forces, the _______ the industry's ability to earn above-average profits, and the _______ the firm's ability to gain and sustain competitive advantage. Managers need to craft a strategic position that leverages _______ forces into __________ and mitigates _______ forces because they are potential _________ to the firm's ability to gain and sustain competitive advantage.

lower, lower weak, opportunities, strong, threats

The computer hardware industry is an example of

monopolistic competition

In the restaurant industry, a large number of restaurants cater to similar customer needs. However, each restaurant makes its product unique by offering a different cuisine, a different ambience, organic ingredients, or different services like home delivery. This differentiation allows each restaurant to set its own prices. Thus, the restaurant industry best illustrates a(n)

monopolistically competitive structure

If the US dollar depreciates compared to the euro, it will take _________ dollars to buy one euro

more

the power of buyers

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

competitive industry structure

refers to elements and features common to all industries - the number and size of its competitors - the firms' degree of pricing power - the type of product or service - the height of entry barriers

A consolidated industry turns into a fragmented industry when

restrictive government policies are introduced in the industry.

Political factors

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

Draw industry competitive structures diagram

slide 40

The Five Forces Model is ___________, meaning it doesn't take __________ into account.

static, industry dynamics

Threat of Substitutes threat is high when:

substitutes meet same basic customer needs as industry product but in different way threat is high when: - substitute offers attractive price-performance tradeoff - buyer's cost of switching to substitute is relatively low

Rivalry among existing competitors

the other four forces all exert pressure on this the stronger the forces, the stronger the competitive intensity, which in turn limits the industry's profit potential

Economic factors

largely macroeconomic, affecting economy-wide phenomena. Managers need to consider how the following five macroeconomic factors can affect firm strategy: Growth rates. Levels of employment. Interest rates. Price stability (inflation and deflation). Currency exchange rates.

entry barriers

obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential (economies of scale, network effects, customer switching costs, capital requirements, etc.)

Threat of Entry - potential new entry depresses industry profit in two major ways: 1. 2.

the risk that potential competitors will enter an industry - potential new entry depresses industry profit in two major ways: 1. Incumbent firms may lower prices to make entry appear less attractive, which lowers profit potential 2. threat of new entry may force incumbent firms to spend more to satisfy existing customers

network effects - threat of entry is ______ when network effects present

the value of a product or service for an individual user increases with the number of total users - when present, value increases w/ number of users - threat of entry reduced when network effects present

credible threat of retaliation

•Price war (industry profit may fall below cost of capital) •Increased product and service innovation •Advertising and sales promotions •Litigation

Rivalry among existing competitors: strategic commitments

- Firm actions that are costly, long-term oriented, and difficult to reverse. - Strategic commitments to a specific industry can stem from large, fixed cost requirements.

strategic groups differ from one another along important dimensions such as...

- R&D - technology - product differentiation - product and service offerings - market segments - distribution channels - customer service

Power of buyers is high when:

-Few buyers, and each purchases large quantities relative to single seller -Industry's products are standardized or undifferentiated commodities --Buyers face low or no switching costs -Buyers can credibly threaten backward integration (buyer moves upstream)

Which of the following statements about the five forces in the U.S. airline industry is true?

The competitive forces taken together are quite unfavorable for generating a profit potential in the airline industry.

Industry

a group of incumbent companies that face more or less the same set of suppliers and buyers ---Firms competing in the same industry offer similar products and services to meet specific customer needs.

Five forces model represents

a snapshot in time

Sociocultural factors

capture a society's cultures, norms, and values. **Demographic trends are also important sociocultural factors

Technological Factors

capture the application of knowledge to create new processes and products

Industry structures can become more or less consolidated industry convergence is a process whereby...

consolidated - airline industry not consolidated - brokerage industry convergence is a process whereby formerly unrelated industries begin to satisfy the same customer needs

The strategic group model: insights

- Competitive rivalry is strongest between firms that are within the same strategic group. - The external environment affects strategic groups differently. - The five competitive forces affect strategic groups differently. - Some strategic groups are more profitable than others.

Follow these five steps to apply the five forces model

1) Define the relevant industry. 2) Identify the key players in each of the five forces and attempt to group these into different categories. 3) Identify the underlying drivers of each force. 4) Assess the overall industry structure.

the power of suppliers

This force reduces a firm's ability to obtain superior performance for two reasons: 1. Powerful suppliers can raise the cost of production by demanding higher prices for their inputs or by reducing the quality of input or service level delivered 2. Powerful suppliers are a threat to firms because they reduce the industry's profit potential by capturing part of the economic value created

strategic position

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

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 **see picture slide 51

PESTEL Framework

A framework that categorizes and analyzes an important set of external factors that might impinge upon a firm. These factors can create both opportunities and threats for the firm. Political Economic Sociocultural Technological Ecological Legal

Five Forces Model

A framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy. - COMPETITIVE RIVALRY - threat of entry - threat of substitution - supplier power - buyer power

government policy

Frequently government policies restrict or prevent new entrants. -Threat of entry is high when restrictive government policies do not exist or when industries become deregulated.

Which of the following statements best supports the fact that even during a period of low demand in the U.S. automotive industry, excess capacity remained?

GM and Chrysler, despite their bankruptcy, restructured instead of exiting the industry.

advantages independent of size

Incumbent firms often possess cost and quality advantages that are independent of size. -brand loyalty -proprietary technology -preferential access to raw materials and distribution channels -favorable geographic locations -cumulative learning and experience effects

capital requirements - threat of entry is _____ when capital requirements are low

describe the "price of the entry ticket" into a new industry - threat of entry is high when capital requirements are low

Industry structures are

dynamic