Chapter 3: External Analysis: Industry Structure, Competitive Forces, and Strategic Groups
Managers need to consider how the following five macroeconomic factors can affect firm strategy
1. Growth rate 2. Levels of employment 3. Interest rates 4. Price stability 5. Currency exchange rates
How to map industry competitors into strategic groups
1. Identify the most important strategic dimensions 2. Choosing two key dimensions for the horizontal and vertical axes, Which expose important differences among the competitors 3. Graphing the firms in the strategic group, indicating each firm's market share by the size of the bubble With which it is represented
When analyzing a firm's external environment, it is critical to apply
1. PESTEL 2.Porters five forces 3.Strategic group mapping
The power of suppliers 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 inputOr by reducing the quality of the input factor service level delivered 2. Powerful suppliers are a threat to firms because they reduced the industry's profit potential by capturing part of the economic value created
Shortcomings of the three models
1. They provided a snapshot Of what is actually a moving target and do not allow for consideration of industry dynamics 2. Do not allow should teaches leaders to fully understand why there are performance differences among firms in safe and she works strategic group
Porters five forces model
1. Threat of entry 2. Power of suppliers 3. Power of buyers 4. Threat of substitutes 5. Rivalry among existing competitors
To increase the profitability of successful entry, strategic leaders need to consider the following five questions
1. Who are the players? -Identify the players:Incumbents, entrance, suppliers, customers, other stakeholders 2. when to enter? -entry timing -stage of industry life cycle - order of entry 3. How to enter? -leverage existing assets -reconfigure value chains -establish niches 4. What type of entry? -scale, commitment, product and/or service, business model 5. Where to enter? -leverage existing assets -reconfigure value chains -establish niches
The weaker the five forces the higher the industry's
Profit potential ---making the industry more attractive for competitors
Consolidated industry tends to be more
Profitable than a fragmented one
Industry analysis
Provides a more rigorous basis not only to identify an industries profit potential but also to derive implications for one firm's strategic position within an industry
Powerful buyers are threat to the producing firms because they
Reduce the industry's profit potential by capturing part of economic value created
Strategic position
Relates to its ability to create value for customers all containing the cost to do so
Mobility barriers
Restrict movement between groups 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
The PESTEL model provides a relatively straightforward way to
Scan, monitor, and evaluate the important external factors and trends that might impinge upon affirm
Demographic trends are also important to
Sociocultural factors
Industry convergence is often brought on by
Technological advances
It is it important for managers to consider industry dynamics because
The five forces plus complement model only provides a point in time snapshotOf a moving target
At the start of the strategic management process, it is critical for managers to conduct a thorough analysis of the firms external environment to identify threats and opportunities
The initial step is to apply a PESTEL analysis to scan monitor and evaluate changes and trends in the firms macro-environment
Complements increased demand for
The primary product
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
By analyzing the factors in the external environment strategic leaders can mitigate
Threats and leverage opportunities
Economic value equals
V - C
Competitive advantage flows to the firm that is able to create as large a gap as possible between the
Value the firm's product or service generates and the cost required to produce it
Strategic group
the set of companies that pursue a similar strategy within a specific industry
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 --Michael Porter
The intensity of rivalry among existing competitors is determined largely by the following factors
1. Competitive industry structure 2. Industry growth 3. Strategic commitments 4. exit barriers
Strategic group mapping provides additional insights
1. Competitive rivalry is strongest between firms that are within the same strategic group 2. The external environment affects strategic groups differently 3. The five competitive forces affect strategic groups differently 4. Some strategic groups are more profitable than others
Follow these 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 them into different categories 3. Identify the underlying drivers of each force 4. Assess the overall industry structure
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.
The power of buyers is high when
-There are a few buyers and each buyer purchases large quantities relative to the size of a single seller -The industry's products are standardized or undifferentiated commodities -Buyers face low or no switching costs -Buyers can credibly threaten to backwardly integrate into the industry
Potential new entry depresses industry profit potential into major ways
1. With the threat of additional capacity coming into an industry,Incumbent firms may lower prices to make entry of pure less attractive to the potential new competitors,Which would in turn reduce the overall industries profit potential,Especially in industries with slower no overall growth in demand 2. The threat of entry by additional competitors may force incumbent firmsTo spend more to satisfy their existing customers.This spending reduces and industry's profit potential, Especially if firms can't raise prices
Incumbent firms can benefit from several important sources of entry barriers
1. economies of scale 2. Network effects 3. Customer switching costs 4.Capital requirements 5. Advantages independent of size 6. Government policy 7. Credible threat of retaliation
The four main competitive industry structures are
1. perfect competition -Many small firms -Firms are price takers -Commodity product -Low entry barriers 2. monopolistic competition -Many firms -Some pricing power -Differentiated product -Medium entry barriers 3. oligopoly -A few large firms -Some pricing power -Differentiated product -High entry barriers 4. monopoly -One firm -Considerable pricing power -Unique product -Very high entry barriers
The five forces model allows strategic leaders to analyze
All players using a wider industry lens, which in turn enables a deeper understanding of industry's profit potential
Economic factors
Are largely macroeconomic affecting a economy wide phenomena
Sociocultural factors
Capture a societies cultures norms and valuesYou left yet
Technological factors
Capture the application of knowledge to create new processes and products
Buyers are the
Customers of an industry
Companies in the same strategic group are
Direct competitors
External factors in the firms task environment or ones that managers
Do have some influence over
Strategic groups differ from one another along important dimensions such as
Expenditures on research and development, technology, product of differentiation nation, product and service offerings, market segments, distribution channels, and customer service
External environment consists of all the factors that can affect its potential to
Gain and sustain a competitive advantage
Industry
Group of incumbent companies facing more or less the same set of suppliers and buyers
PESTEL model
Groups the factors In the firms general environment into six segments -political -economic -sociocultural -technological -ecological -legal
A company is a complementor to your company if:
If customers value your product or service offering more when they are able to combine it with the other companies product or service
Legal factors
Include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions
Switching costs
Incurred by moving from one supplier to another
Firm performance is determined primarily by two factors
Industry and firm effects
To better understand differences and firm performance we must look
Inside the firm to study its resources capabilities and core competencies
Intra group rivalry exceeds
Inter group rivalry
Ecological factors
Involve broad environmental issue such as the natural environment, global warming, and sustainable economic growth
Major innovations in process technology include
Lean manufacturing,Six sigma quality, and biotechnology
Political pressure often result in changes in
Legislation and regulation
External factors in the firm's general environment or ones that managers have
Little direct influence over
The threat of potential entry is reduced when
Network effects are present
In many instances, to strategic groups are in an industry based on two different business strategies
One that pursues a low cost strategy and a second that pursues a differentiation strategy
The power of buyers concerns the
Pressure an industry's customers can put on the producers margins in the industry by demanding a lower price or higher product quality
The threat of substitutes is the ideas that
Products or services available from outside the given industry will come close to meeting the needs of current customers
The stronger the five forces the lower the industry's
Profit potential ---making the industry less attractive for competitors
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
Firm effects
attribute firm performance to the actions managers take
Strategic group model
clusters different firms into groups based on a few key strategic dimensions
co-opetition
cooperation by competitors to achieve a strategic objective
Capital requirements
describe the "price of the entry ticket" into a new industry
Industry Effects
describe the underlying economic structure of the industry
Threat of entry
describes the risk that potential competitors will enter the industry
The final step in industry analysis is to
draw a strategic-group map. --Allows you to explain performance differences within the same industry
Entry barriers
obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential
Competitive industry structure
refers to elements and features common to all industries - number And size of its competitors -Firm's degree of pricing power -Type of product or service -Hate of entry barriers