ch 3

Industy Analysis

A METHOD TO (1) IDENTIFY AN INDUSTRY PROFIT POTENTIAL AND 92) DERIVE IMPLICATIOSN FOR A FRISM STRATEGIC POSTION WITHIN AN INDUSTY

Generate a PESTEL analysis to evaluate the impact of external factors on the firm.

A firm's macroenvironment consists of a wide range of political, economic, sociocultural, technological, ecological, and legal (PESTEL) factors that can affect industry and firm performance. These external factors have both domestic and global aspects. Political factors describe the influence governmental bodies can have on firms. Economic factors to be considered are growth rates, interest rates, levels of employment, price stability (inflation and deflation), and currency exchange rates. Sociocultural factors capture a society's cultures, norms, and values. Technological factors capture the application of knowledge to create new processes and products. Ecological factors concern a firm's regard for environmental issues such as the natural environment, global warming, and sustainable economic growth. Legal factors capture the official outcomes of the political processes that manifest themselves in laws, mandates, regulations, and court decisions.

Differentiate the roles of firm effects and industry effects in determining firm performance.

A firm's performance is more closely related to its managers' actions (firm effects) than to the external circumstances surrounding it (industry effects). Firm and industry effects, however, are interdependent. Both are relevant in determining firm performance.

complement

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

Describe the strategic role of complements in creating positive-sum co-opetition.

Co-opetition (cooperation among competitors) can create a positive-sum game, resulting in a larger pie for everyone involved. Complements increase demand for the primary product, enhancing the profit potential for the industry and the firm. Attractive industries for co-opetition are characterized by high entry barriers, low exit barriers, low buyer and supplier power, a low threat of substitutes, and the availability of complements.

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.

Appraise the role of industry dynamics and industry convergence in shaping the firm's external environment.

Industries are dynamic—they change over time. Different conditions prevail in different industries, directly affecting the firms competing in these industries and their profitability. In industry convergence, formerly unrelated industries begin to satisfy the same customer need. Such convergence is often brought on by technological advances.

LO 3-8 / Generate a strategic group model to reveal performance differences between clusters of firms in the same industry.

LO 3-8 / Generate a strategic group model to reveal performance differences between clusters of firms in the same industry. A strategic group is a set of firms within a specific industry that pursue a similar strategy in their quest for competitive advantage. Generally, there are two strategic groups in an industry based on two different business strategies: one that pursues a low-cost strategy and a second that pursues a differentiation strategy. Rivalry among firms of the same strategic group is more intense than the rivalry between strategic groups: intra-group rivalry exceeds inter-group rivalry. Strategic groups are affected differently by the external environment and the five competitive forces. Some strategic groups are more profitable than others. Movement between strategic groups is restricted by mobility barriers—industry-specific factors that separate one strategic group from another.

PESTEL MODEL

Political Economic Sociocultural Technological Ecological Legal

Examine how competitive industry structure shapes rivalry among competitors.

The competitive structure of an industry is largely captured by the number and size of competitors in an industry, whether the firms possess some degree of pricing power, the type of product or service the industry offers (commodity or differentiated product), and the height of entry barriers. A perfectly competitive industry is characterized by many small firms, a commodity product, low entry barriers, and no pricing power for individual firms. A monopolistic industry is characterized by many firms, a differentiated product, medium entry barriers, and some pricing power. An oligopolistic industry is characterized by few (large) firms, a differentiated product, high entry barriers, and some degree of pricing power. A monopoly exists when there is only one (large) firm supplying the market. In such instances, the firm may offer a unique product, the barriers to entry may be high, and the monopolist usually has considerable pricing power.

Explain the five choices required for market entry.

The more profitable an industry, the more attractive it becomes to competitors, who must consider the who, when, how, what, and where of entry. The five choices constitute more than parts of a single decision point; their consideration forms a strategic process unfolding over time. Each choice involves multiple decisions including many dimensions. Who includes questions about the full range of stakeholders, and not just competitors; when, questions about the industry life cycle; how, about overcoming barriers to entry; what, about options among product market, value chain, geography, and business model; and where, about product positioning, pricing strategy, and potential partners.

/ Apply Porter's five competitive forces to explain the profit potential of different industries.

The profit potential of an industry is a function of the five forces that shape competition: (1) threat of entry, (2) power of suppliers, (3) power of buyers, (4) threat of substitutes, and (5) rivalry among existing competitors. The stronger a competitive force, the greater the threat it represents. The weaker the competitive force, the greater the opportunity it presents. A firm can shape an industry's structure in its favor through its strategy.

Threat of Entry

The risk that potential competitors will enter an industry.

complementor

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

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

INDUSTY

a group of firms producing products that are close substitutes

strategic commitments

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

co-opetiton

cooperation by competitors to achieve a strategic objective

FIRM EFFECTS

firm performance attributed to the actions managers take

INDUSTRY EFFECTS

firm performance attributed to the structure of the industry in which the firm competes

mobility barriers

industry-specific factors that separate one strategic group from another

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

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