Ch 3

Pestel E (local to worldwide)

economic factors

macroenvironment

encompasses the broad environmental context in which a company's industry is situated that includes strategically relevant components over which the firm has no direct control

economic conditions

include the general economic climate and specific factors such as interest rates, exchange rates, the inflation rate and the unemployment rate, the rate of economic growth, trade deficits, or surpluses, savings rates and per capital GDP

Pestel P

political factors

Responsibility of the BOD today

represent stakeholders

Pestel T

technological factors

What determines the strongest of the 5 competitive forces?

the extent of the downward pressure of an industry's profitability

Driving forces

the major underlying causes of change in industry and competitive conditions.

moore's law

the observation that computing power roughly doubles every two years.

Porter's 5 forces model allows us to

think through the immediate forces on our firm

Buyer bargaining power is stronger when

· Buyer demand is weak in relation to available supply · Industry goods are standardized or differentiation is weak · Buyers costs of switching to competing brands or substitutes are relatively low · Buyers are large and few(not many) in number relative to the number of sellers · Buyers pose a credible threat of integrating backward into the business of sellers · Buyers are well informed about the product offerings of sellers and the cost of production · Buyers have the discretion to delay their purchases or perhaps even not make a purchase at all

Buyer Price Sensitivity

· Customers grow more price sensitive as price tag increases · Price sensitivity also grows among businesses as the cost of an item becomes a bigger fraction of their cost structure · Price sensitivity of all types of buyers decreases the more that the quality of the product matters

Supplier bargaining power is stronger when

· Demand for suppliers; products is high and the products are in short supply · Suppliers provide differentiated inputs that enhance the performance of the industry's product · It is difficult or costly for industry members to switch their purchases from one supplier to another · The supplier industry is dominated by a few large companies and it is more concentrated than the industry it sells to · Industry members are incapable of integrating backward to self-manufacture items they have been buying from suppliers · Suppliers provide an item that accounts for no more than a small fraction of the costs of the industry's product · Good Substituted are not available for the suppliers products · Industry members are not major customers of the supplier

Whether buyers are able to exert strong competitive pressures on industry members depends on

(1) the degree to which buyers have bargaining power (2) the extent to which buyers are price sensitive

Apple Squeezes Suppliers

- Apple told many suppliers to price even even though its though its volume forecasts were shrinking for next gen iPhone - A few component suppliers have strong positions but but many do not (Processor supplier, Camera, Glass Front) - Threatened to cultivate Chinese sources if they didn't comply

Competitive Pressures that increase rivalry among competitors

- Buyer demand is growing slowly or declining. - It is becoming less costly for buyers to switch brands. - Industry products are becoming less differentiated. - There is unused production capacity, and\or products have high fixed costs or high storage costs. - The number of competitors is increasing and\or they are becoming more equal in size and competitive strength. - The diversity of competitors is increasing. - High exit barriers keep firms from exiting the industry.

· The expected reaction of industry members in defending against new entry

- Existing firm's may use competitive weapons to hamper a newcomer's attempt to gain a market foothold - Can raise entrants cost of entry and risk of failing - no action

Competitive pressures associated with the threat of new entrants - Entry threat considerations

- Expected defensive reactions of incumbent firms - Strength of barriers to entry - Attractiveness of a particular market's growth in demand and profit potential --> VP high - Capabilities and resources of potential entrants - Entry of existing competitors into new market segments in which they have no current presence

strategic group consists of those industry members with similar competitive approaches and positions in the market:

- Having comparable product-line breadth - Emphasizing the same distribution channels - Depending on identical technological approaches - Offering the same product attributes to buyers - Offering similar services and technical assistance

indicators of substitutes' competitive strength

- Increasing rate of growth in sales of substitutes - Substitute producers adding new output capacity - Increasing profitability of substitute producers

High Market Entry Barriers Facing New Entrants

- Incumbent cost advantages related to learning and experience, proprietary patents and technology, favorable locations, and lower fixed costs - Strong brand preferences and customer loyalty - Strong "network effects" in customer demand - High capital requirements - Building a network of distributors or dealers and securing adequate space on retailers' shelves - Restrictive government policies - sizeable economies of scale

TYPICAL VARIABLES USED IN CREATING GROUP MAPS

- Price/quality range (high, medium, low) - Geographic coverage (local, regional, national, global) - Product-line breadth (wide, narrow) - Degree of service offered (no frills, limited, full) - Distribution channels (retail, wholesale, Internet, multiple) - Degree of vertical integration (none, partial, full) - Degree of diversification into other industries (none, some, considerable)

Signals of the likelihood of strategic moves

- Rivals under pressure to improve financial performance - Rivals seeking to increase market standing - Public statements of rivals' intentions - Profiles developed by competitive intelligence units

Buyer bargaining power considerations

- Strength of buyers' demand for sellers' products - Degree to which industry goods are differentiated - Buyers' costs for switching to competing sellers or substitutes - Number and size of buyers relative to number of sellers - Buyers' knowledge of products, costs and pricing - Threat of buyers' integration into sellers' industry - Buyers' discretion in delaying purchases - Buyers' price sensitivity due to low profits, size of purchase, and consequences of purchase

Supplier Bargaining power depends on

- Strength of demand for and availability of suppliers' product - Whether suppliers provide a differentiated input that enhances the performance of the industry's product. - Industry members' costs for switching among suppliers - Size of suppliers relative to size of industry members - Fraction of the cost of the supplier's product relative to the total cost of the industry's product - Number of suppliers relative to the number of industry members - Possibility of backward integration into suppliers' industry - Availability of good substitutes for suppliers' products - Whether industry members are major customers of suppliers.

technological factors

- Technological factors include the pace of technological change and technical developments that have the potential for wide-ranging effects on society - They include institutions involved in creating new 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,

High Entry Barriers When

- There are sizeable economies of scale in production, distribution, advertising, or other activities - Incumbents have other hard to replicate cost advantages over new entrants - Customers have strong brand preferences and high degrees of loyalty to seller - Patents and other forms of IP are in place - Strong network effects in customer demand - Capital requirements are high - Difficulties in building a network of distributors/dealers or in securing adequate space on retailer's shelves - There are restrictive regulatory markets

Useful Questions to help predict the likely actions of important rivals

- Which competitors' strategies are achieving good results? - Which competitors are losing in the marketplace or badly need to increase their unit sales and market share? - Which rivals are likely to make major moves to enter new geographic markets or to increase sales and market share in a particular geographic region? - Which rivals can expand product offerings to enter new product segments where they do not have a presence? - Which rivals can be acquired? Which rivals are financially able and looking to make an acquisition?

Some political factors such as ______ are industry specific. Others such as _______ can affect certain industries

- bailouts - energy policy

How to KSFs vary

- from industry to industry - over time within the same industry

The ideal competitive environment for earning profits is one where suppliers and buyers have

- limited power - no good substitutes - high barriers block further entry - rivalry among sellers is muted - Weak competition is best of all

Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability?

- most unattractive industry occurs when all 5 forces are producing strong competitive pressures - Rivalry among sellers is vigorous, low entry barriers, allow new rivals to gain market foothold, competition from substitutes is intense, and both suppliers and buyers are able to exert considerable leverage.

Qualities of a strong, independent board of directors

- well informed about the firm's performance. - Guides and judges the CEO and other executives. - Can curb management actions the board believes are inappropriate or unduly risky. - Can certify to shareholders that the CEO is doing what the board expects. - Provides insight and advice to top management. - Is actively involved in debating the pros and cons of key strategic decisions and actions.

Porter's Five Forces Steps

1) For each of the five forces, identify the different parties involved, and the specific factors that bring about competitive pressures. 2) Evaluate how strong the pressures stemming from each of the five forces are (strong, moderate, or weak). 3) Determine whether the collective strength of all five competitive forces is conducive to earning attractive profits in the industry..

Just how serious the threat of entry is in a market depends on

1) whether entry barriers are high or low and 2) the expected reaction of existing industry members to the entry of newcomers

Steps to Identify KSFs

1. On what basis do buyers of the industry's product choose between the competing brands of sellers? - (what product attributes and service characteristics are crucial to competitive success? 2. what resources and competitive capabilities must a firm have to be competitively successful? 3.What shortcomings are almost certain to put a firm at a significant competitive disadvantage? --> Easiest to ID

Porter's 5 Competitive Forces

1. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitute products or services 5. Rivalry among competitors

Most Common Drivers of Industry Change

1.Changes in the long-term industry growth rate 2.Increasing globalization 3.Emerging new Internet capabilities and applications 4.Changes in who buys the product and how they use it 5.Technological change and manufacturing process innovation 6.Product and marketing innovation 7.Entry or exit of major firms 8.Diffusion of technical know-how across firms and countries 9.Changes in cost and efficiency 10.Reductions in uncertainty and business risk1 1.Regulatory influences and government policy changes 12.Changing societal concerns, attitudes, and lifestyles

Obligations of the board of directors

1.Critically appraise the firm's direction, strategy, and business approaches. 2.Evaluate the caliber of senior executives' strategic leadership skills. 3.Institute a compensation plan that rewards top executives for actions and results that serve stakeholder interests—especially shareholders. 4.Oversee the firm's financial accounting & reporting practices compliance with the Sarbanes-Oxley Act.

Steps to Constructing a strategic group map:

1.Identify the competitive characteristics that delineate strategic approaches used in the industry. 2.Plot the firms on a two-variable map using pairs of the competitive characteristics. Size circles proportional to the relative size of revenue. 3.Assign firms occupying about the same map location to the same strategic group. 4.Draw circles around each strategic group, making the circles proportional to the size of the group's share of total industry sales revenues.

Three Steps of Driving force analysis

1.Identifying what the driving forces are. 2.Assessing whether the driving forces are, on the whole, acting to make the industry more or less attractive. 3.Determining what strategy changes are needed to prepare for the impact of the driving forces.

Why are not all map positions are equally attractive:

1.Prevailing competitive pressures from the industry's five forces may cause the profit potential of different strategic groups to vary. 2.Industry driving forces may favor some strategic groups and hurt others.

Substitute Products of Considerations

1.Readily available and attractively priced? 2.Comparable or better in terms of quality, performance, and other relevant attributes? 3.Offer lower switching costs to buyers?

Guidelines for Creating Group Maps

1.Variables selected as map axes should not be highly correlated. 2.Variables should reflect important (sizable) differences among rival approaches. 3.Variables may be quantitative, continuous, discrete and\or defined in terms of distinct classes and combinations. 4.Drawing group circles proportional to the combined sales of firms in each group will reflect the relative sizes of each strategic group. 5.Drawing mapsusing different pairs of variables will show the different competitive positioning relationships present in the industry's structure.

Key Success Factors

Are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry.

In identifying an industry's key success factors, strategists should: A.try to single out all factors that play a major role in shaping whether buyer demand grows rapidly or slowly. B.consider on what basis customers choose between competing brands, what resources and competitive capabilities firms need to be competitively successful, and what shortcomings are almost certain to put a company at a significant competitive disadvantage. C.consider whether the number of strategic groups is increasing or decreasing and whether the five competitive forces are powerful or relatively weak. D.consider what it will take to overtake the company with the industry's overall best strategy. E.focus their attention on what it will take to capitalize on the impacts of the industry's driving forces.

B. consider on what basis customers choose between competing brands, what resources and competitive capabilities firms need to be competitively successful, and what shortcomings are almost certain to put a company at a significant competitive disadvantage.

Information regarding the four components of the framework for Competitor Analysis can NOT: A.be gleaned from company press releases. B.gathered from rivals internal proprietary strategic information. C.assembled from website data (especially management reports and presentations given to financial analysts). D.observed from public information (especially annual reports and 10K financial reports). E.garnered from competitive intelligent departments assigned the task to monitor rivals.

B.gathered from rivals internal proprietary strategic information.

The article with the Chapter 3 slides on Canvas was The article with the Chapter 3 slides on Canvas was primarily about:primarily about: A.Apple's strategy for releasing new technology B.Mylan's strategy for selling Epipen C.Apple's strategy for purchasing components D.Champion's strategy for making spark plugs E.Apple announcing the iPhone 9

C.Apple's strategy for purchasing components

The task of driving forces analysis is to: A.develop a comprehensive list of all the potential causes of changing industry condition B.predict which new driving forces will emerge next. C.determine which one of the five competitive forces is the biggest driver of industry change. D.identify the driving forces, assess whether their impact will make the industry more or less attractive, and determine what strategy changes are needed to prepare for the impacts of the driving forces. E.learn what the industry key success factors are and how they might change in the future.

D.identify the driving forces, assess whether their impact will make the industry more or less attractive, and determine what strategy changes are needed to prepare for the impacts of the driving forces.

Every corporation should have a strong independent board of directors that: A. is well informed about the company's performance and exercises their fiduciary duty to protect shareholders responsibly. B. guides management in choosing a strategic direction and to make independent judgments about the validity and wisdom of managements proposed strategic actions. C. evaluates the leadership skills of the CEO and other senior executives promote management actions the board believes are inappropriate or unduly risky. D. has the courage to curb management actions deemed inappropriate or unduly risky, curtails insight and advice to management. E. All of these.

E. All of these.

Which of the following is NOT one of the principal components of strategic significance in the PESTEL analysis? A.Political factors including the extent to which government intervenes in the economy B.Economic conditions that include the general economic climate and specific factors such as interest rates, inflation rate, and unemployment rate, as well as conditions in the stock and bond markets that can affect consumer confidence C.Socio-cultural forces including societal values, attitudes, cultural factors, and lifestyles that impact business D.Technological factors includes the pace of change and technical developments that have the potential for impacting society E.Environmental forces that include the competitive structure, the degree of industry fragmentation, and the mobility barriers that inhibit business.

E. Environmental forces that include the competitive structure, the degree of industry fragmentation, and the mobility barriers that inhibit business.

The 5 Forces model does not include: A.Rivalry- Competing Sellers B.Suppliers & Buyers C.New Entrants D.Substitutes E.Foreign competition

E. Foreign Competition

With the aid of a strategic group map, one can: identify easily the entry and exit barriers for each strategic group. B.pinpoint precisely which firms are in profitable strategic groups and which are not. C.identify which competitive forces are strong and which are weak. D.measure accurately whether across-group rivalry is stronger than within-group rivalry, and vice versa. E.reveal which companies are close competitors and which are distant rivals, and that not all positions on the map are equally attractive.

E.reveal which companies are close competitors and which are distant rivals, and that not all positions on the map are equally attractive.

Pestel E (the natural environment)

Environmental factors

Are some of the competitive forces sufficiently powerful to undermine industry profitability?

Even one powerful force may be enough to make the industry unattractive in terms of its profit potential

T/F sociocultural forces do not change over time

F they change over time and vary by locale

PESTEL analysis

Focuses on principal components of strategic significance in the macro-environment - immediate environment is more significant but can't ignore macro-environ

political factors

Include political policies and processes, including the extent to which a government intervenes in the economy. They include matters such as tax policy, fiscal policy, tariffs, the political climate, and the strength of institutions such as the federal banking systems.

Competitive Intelligence

Information about rivals that is useful in anticipating their next strategic moves.

Pestel L

Legal/ regulatory conditions

What is the value of the strategic group maps

Maps are useful in identifying which industry members are close rivals and which are distant rivals.

Traditional Responsibility of the Board of Directors

Represent shareholder interest

Pestel S

Sociocultural forces

socio cultural forces

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

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 regulation - may be industry specific or can affect the whole economy

Environmental Forces

This includes ecological and environmental forces such as weather, climate, climate change, and associated factors like water shortages. - impacts some industries directly and others indiretcly

strategic group

a cluster of industry rivals that have similar competitive approaches and market positions.

strategic group mapping

a technique for displaying the different market or competitive positions that rival firms occupy in the industry.

what does studying competitor's past behavior and preferences provide?

a valuable assist in anticipating what moves rivals are likely to make next and outmaneuvering them in the marketplace.

When the overall impact of the five competitive forces is moderate to weak, an industry is

attractive in the sense that the average industry member can reasonably expect to earn good profits and a nice return on investment