MGMT 5560 Exam 1: Industry Analysis + The 5 Competitive Forces that Shape Strategy

competitors

A company's closest rivals are those that serve the same basic customer needs

Threat of substitutes Threat of entry Power of suppliers

In the airline industry, what 3 forces are benign?

customer switching costs

One of the 7 barriers to entry. fixed costs that buyers face when they change suppliers. The larger this barrier is, the harder it will be for a new entrant to gain customers

restrictive government policies

One of the 7 barriers to entry. governments can make entry easier or harder through policies

true

true or false? Over time, companies in different strategic groups will develop different cost structures, skills, and competencies that give them different pricing options and choices.

bargaining power of suppliers

Which of the 5 forces is this describing · # and size of suppliers · Uniqueness of each supplier's product · Focal company's ability to substitute

Rivalry among existing competitors

Which of the 5 forces is this describing · # of competitors · Diversity of competitors · Industry concentration · Industry growth · Quality differences · Brand loyalty · Barriers to exit · Switching costs

Bargaining power of buyers

Which of the 5 forces is this describing · # of customers · Size of each customer order · Differences between competitors · Price sensitivity · Buyers ability to substitute · Buyer's information availability · Switching costs

threat of substitute products

Which of the 5 forces is this describing · # of substitute products available · Buyer propensity to substitute · Relative price performance of substitute · Perceived level of product differentiation · Switching costs

Threat of new entrants

Which of the 5 forces is this describing · Barriers to entry · Economies of scale · Brand loyalty · Capital requirements · Cumulative experience · Government policies · Access to distribution channels · Switching costs

price competition

________ _________ is most likely to occur when... 1. Products or services of rivals are nearly identical and there are few switching costs for buyers 2. Fixed costs are high and marginal costs are low 3. Capacity must be expanded in large increments to be efficient 4.The product is perishable

industry structure

_________ __________, as demonstrated by the 5 forces, can predict medium- and long-term profitability

intermediate

__________ (B2B/Retail/Intermediate) customers gain significant buying power if they can influence the purchasing decisions of customers downstream

industry

a group of companies offering products or services that are close substitutes for each other, that is, products or services that satisfy the same basic customer needs

price sensitive

A buyer group is ________ _________ if... 1. The product it purchases from the industry represents a significant fraction of the buyer's cost structure or procurement budget 2. The buyer group earns low profits, is strapped for cash, or is otherwise under pressure to trim its purchasing costs 3. The quality of buyer's products or services is little affected by the industry's product 4. The industry's product has little effect on the buyer's other costs

Threat of Entry

New entrants to an industry bring new capacity and a desire to gain market share that puts pressure on prices, costs, and rate of investment necessary to compete Puts a cap on profit potential.

low cost strategy

One of the 5 strategy options for declining industries. Cost reductions may take the form of dropping less essential business-activities, outsourcing some functions to outside companies who can perform those activities cheaply but in a better way, redesigning internal business processes, consolidating unutilized production facilities, closing high-cost retail outlets, and pruning marginal products

differentiation strategy

One of the 5 strategy options for declining industries. can rejuvenate demand through alluring customers to the firm's products innovation-based differentiation is also helpful for a firm in a stagnant/declining industry to survive easy imitation by the competitors

harvesting strategy

One of the 5 strategy options for declining industries. cut down the budget substantially, use existing facilities to extract much cash flow in the short term without much consideration for loss of market position

Niche/Focus Strategy

One of the 5 strategy options for declining industries. look for niche markets where a firm can operate a business profitably. Some of these niche markets may be growing despite stagnation in the industry.

divesture strategy

One of the 5 strategy options for declining industries. sell the business

demand side benefits of scale

One of the 7 barriers to entry. a buyer's willingness to pay for a company's product increases with the number of other buyers who also patronize the company. Discourage new entrants by limiting the willingness of customers to buy from a newcomer and reducing the price they can charge until it builds up a large base of customers

supply side economies of scale

One of the 7 barriers to entry. firms that produce at larger scales enjoy lower costs per unit because they can spread fixed costs over more units. Deter entry because newcomers must come in at a large scale or accept a cost disadvantage

unequal access to distribution channels

One of the 7 barriers to entry. new entrants must secure distribution channels which can be tied up by incumbents. Sometimes overcoming this is so difficult, new entrants must make their own distribution channels or bypass it all together.

Incumbency advantages independent of size

One of the 7 barriers to entry. regardless of size, incumbents may have cost or quality advantages that are not available to potential rivals Examples: proprietary technology, access to best raw materials, etc.

capital requirements

One of the 7 barriers to entry. the need to invest large financial resources in order to compete can deter new entrants This alone does not typically deter entry usually because they can get money from investors

strengths and weaknesses

Porters 5 forces has implications for strategy because it can provide a baseline for sizing up a company's __________ and _____________

price

Rivalry is especially destructive if it is solely based on ________ because this type of competition transfers profits directly from an industry to its customers. Highest risk for zero-sum

actual

THREAT of entry, not _______ entry holds down profitability

benign

The more _________ (benign/intense) the 5 forces are, it is more likely that companies are profitable

less

The more intense Porter's 5 forces are, the ________ (less/more) likely it is that companies in that industry earn attractive returns on investment

Strategic Group Analysis

These are the advantages of ________ ________ ________: · Assesses strategic dynamics and shifts the industry · Defines the nearest competitors of the company and assists in evaluating the differences ins strategies of these competitors · Helps assess current and potential strategic movements of the competitors in the market · Helps understand the underlying determinants of a firm's profitability

first mover

These are the advantages of being a _________ _________. · Opportunity to exploit the positive feedback loop · Establishing brand loyalty · Reducing total costs through control of new technologies, supply, and distribution channels · Creating high switching costs for customers, thus making it more difficult for new firms to enter the market (raising barriers to entry) · Accumulation of valuable knowledge related to needs of customers, distribution channels, manufacturing, technologies, etc.

1. barriers to entry are LOW 2. entrants expect little retaliation from incumbent competitors

Threat of entry is high when what 2 conditions occur?

False. pretty stable over time but constantly experiences modest changes

True or False? changes in industry structure happen rapidly and are constantly changing.

1. Incumbents have previously responded vigorously to new entrants 2. Incumbents possess substantial resources to fight back 3. Incumbents seem likely to cut prices 4. Industry growth is slow

What are 4 conditions where newcomers are likely to fear expected retaliation from existing competitors?

1. industry growth rate 2. technology and innovation 3. government 4. complementary products/services

What are 4 industry factors but not forces

1. Identify important strategic dimensions 2. Select two key dimensions, which expose pivotal differences among the competitors 3. Graph the firms in their strategic groups, indicating each firm's market share by the size of the bubble with which it is represented

What are the 3 steps for how to map strategic groups?

1. positioning the company 2. exploiting industry change 3. shaping industry structure 4. defining the industry

What are the 4 broad strategy implications for porter's 5 forces?

1. Introduction 2. growth 3. maturity 4. decline

What are the 4 industry life cycle stages?

1. Is difficult to enter 2. Limited rivalry 3. Buyers are relatively weak 4. Suppliers are relatively weak 5. There are few substitutes

What are the 5 characteristics of a high profitability industry according to porter's 5 forces?

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

What are the 5 forces that shape industry competition?

1. harvesting strategy 2. divesture strategy 3. differentiation strategy 4. niche/focus strategy 5. low cost strategy

What are the 5 strategy options in declining industries?

1. supply side economies of scale 2. demand side benefits of scale 3. customer switching costs 4. capital requirements 5. incumbency advantages 6. unequal access to distribution channels 7. restrictive government policies

What are the 7 barriers to entry?

high

When threat of new entrants is ________ (low/high), incumbents must hold down their prices or boost investment to deter new competitors

prices investment

When threat of new entrants is high, incumbents must hold down their _______ or boost _________ to deter new competitors

high

When threats of substitutes are ________ (low/high), industry profitability and growth potential suffers because it places a ceiling on prices

ceiling

When threats of substitutes are high, industry profitability and growth potential suffers because it places a ________ (floor/ceiling) on prices

expected retaliation

How potential entrants believe incumbents may react will influence their decision to enter or stay out of an industry

Rivalry among existing competitors bargaining power of buyers

In the airline industry, what 2 forces are intense?

low

Industries with ________ (low/high) capital requirements: short-haul trucking, tax preparation services, etc.

1. Porter's 5 Forces 2. Industry Life Cycle 3. Strategic Groups

Industry Analysis can be evaluated by what 3 frameworks?

The 5 forces OR Porter's 5 Forces

Industry structure, as demonstrated by ________ ________ ________, can predict medium- and long-term profitability

external analysis

Consists of the Opportunities & Threats of SWOT analysis

negotiating power price sensitive

Buyers are powerful if they have high _________ _________ and are ________ ________

Buyer power INCREASED Supplier power DECREASED Threat of entrants DECREASED Threat of substitutes INCREASED Degree of rivalry INCREASED

COVID 19 and the US travel and tourism industry (hotels, restaurants, air travel). How did COVID-19 affect the 5 forces? Answer using INCREASED or DECREASED: Buyer power? Supplier power? Threat of entrants? Threat of substitutes? Degree of rivalry?

zero-sum

Competing on the same dimensions results in ________ __________ competition where one firm's gain is another one's loss

1. CAGE 2. PESTEL 3. Hofstede

Country analysis (at an industry level) can be evaluated by what 3 frameworks?

strategic group

Each ________ ________ can face different sets of opportunities and threats within an industry

intensity basis

How much rivalry among existing competitors limits profitability of an industry is dependent on ________ of competition and the _________ by which they compete

1. It is more concentrated than the industry it sells to 2. The supplier group does not depend heavily on the industry for its revenues 3. Industry participants face switching costs in changing suppliers 4. Suppliers offer products that are differentiated 5. There is no substitute for what the supplier group provides 6. The supplier group can credibly threaten to integrate forward into the industry if the industry is too profitable

a supplier group is powerful under what 6 conditions?

Barriers to entry

advantages incumbents have relative to new entrants

short

criteria like whether an industry is high tech or low tech, emerging or mature market, regulated or unregulated, product or service, etc. these are more _________ (short/medium/long) -term measures of profitability

strategic groups

groups of companies in which each company follows a strategy that is like that pursued by other companies in the group, but different from the strategies followed by companies in other groups

1. Competitors are numerous or roughly equal in size and power 2. Industry growth is slow. Creates fights for market share 3. Exit barriers are high 4. Rivals are highly committed to the business and aspire for leadership 5. Firms cannot read each other's signals well because of lack of familiarity with one another

intensity of rivalry is greatest when what 5 things occur?

Substitute

performs the same or similar function as an industry's product by a different means threat of this is high when 1. It offers an attractive price-performance trade off to the industry's product 2. The buyers cost of switching to the substitute is low

negotiating power

these are conditions that give a buyer high ___________ __________ 1. There are few buyers, or each one purchases in volumes that are large relative to the single vendor 2. The industries products are standardized or undifferentiated 3. Buyers face few switching costs in changing vendors 4. Buyers can credibly threaten to integrate backwards and produce the industry's product themselves if vendors are too profitable

intense

these are examples of industries with ________ (benign/intense) forces: ex: airline industry, textiles, hotels, etc.

benign

these are examples of industries with ________ (benign/intense) forces: ex: toiletries, software, soft drinks, etc.

the power of suppliers

this force can become more powerful when capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants Can squeeze profitability out of an industry that is unable to pass on costs increases in its profits

the power of buyers

this force can become more powerful when they can capture more value by forcing down process, demanding better quality or more service, and generally playing industry participants against one another, all at the expense of industry profitability

· The use of "free-riding" · Market and technological uncertainty · Unexpected changes in technology or customer needs

what are 3 disadvantages of being a first mover?

price competition

what type of competition is highest risk for zero sum?

decline stage

which industry life cycle stage does this describe? · Falling sales · Cost per customer low · Profits fall · Customer base contracts · # of competitors fall

growth stage

which industry life cycle stage does this describe? · Increasing sales · Cost per customer falls · Profits rise · Increasing # of customers · More competitors · Shake out happens at the end of this stage

Introduction stage

which industry life cycle stage does this describe? · Low sales · High cost per customer · Financial losses · Innovative customers · Few (if any) competitors · Takeoff happens at the end of this stage

maturity stage

which industry life cycle stage does this describe? · Peak sales · Cost per customer lowest · Profits high · Mass market · Stable # of competitors · Market saturation occurs in this stage