Strategic Management - Chapter 3 (External Analysis: Industry Structure, Competitive Forces, and Strategic Groups)

Exit Barriers

Affects intensity of rivalry among competitors Obstacles that determine how easily a firm can leave that industry low --> better cauuse easier to exit and can reduce competitive pressure on remaining firms Examples: Contractual obligations Emotional attachments

Technological Factors

Application of knowledge -To create new processes -To create new products Innovations in process technology: -Lean manufacturing, Six Sigma quality, and biotechnology Innovations in product technology: -Smartphones, computer tablets, and high-performing electric cars such as the Tesla Model S Bring threats and opportunities

Industry Consolidation

-Consolidated industries are more profitable. Mergers and acquisitions make this possible. -Results in higher industry profitability Example: U.S. Airline Industry mergers -Delta and Northwest -United and Continental -Southwest and AirTran -American and U.S. Airways

Importance of Analyzing the External Environment

-Managers can mitigate threats. -Managers can leverage opportunities. -Gain understanding of potential impacts. -Understand the source / proximity of factors.

Five Forces Model

A framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy: 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 existing competitors Competition must be viewed more broadly, defined by other forces such as buyers, suppliers, potential new entry and threat of substitutes profit potential is not random and is shaped the 5 forces analyze all players using a wider industry lens and result in a deeper understanding

complement

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

4 Main Competitive Industry Structures

Perfect competition Monopolistic competition Oligopoly Monopoly

My Strategy Exercise (2 of 2) Is My Job the Next One Being Outsourced?

Some accounting jobs moving to India -Specifically, tax returns Accountants in Bangalore, India: -Are much cheaper -Work longer hours

Oligopoly

Few (large) firms Some pricing power Differentiated product High entry barriers Firms are interdependent Resulting industry: firm actions often coordinated in order to maximize join performance

Threat of Entry

The risk that potential competitors will enter an industry Lowers industry profit potential: -Incumbents lower prices will reduce overall industry's profit potential, especially in industries with slow or no overall growth in demand Incumbents spend more to satisfy existing customers.

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 substitutes may offer higher value proposition

Structure-Conduct-Performance (SCP) model

a framework that explains differences in industry performance. It identifies four different industry types: 1. perfect competition 2. monopolistic competition 3. oligopoly 4. monopoly

Strategic Group

set of companies that pursue a similar strategy within a specific industry in their quest for competitve advantage differ along important dimensions such as expenditures on research and development, technology, product life differentiation, product and service offerings, pricing, market segments, distribution channels and customer service

Industry Convergence

When unrelated industries satisfy the same need Example: Media Industries -Progress in IT, telecommunications, digital media -Has united computing, communications, content Content providers are adapting: -Newspapers, magazines, TV, movies, radio, music New forms of content media: -Amazon's Kindle -Apple's iPad -Google's Chromebook

My Strategy Exercise (1 of 2) Is My Job the Next One Being Outsourced?

Which aspects of accounting are less susceptible to out-shoring? What are the best domestic/global job opportunities? How do industry trends affect your job search?

Task environment

environment in which managers have some influence over (composition of strategic groups - set of close rivals)

Types of Entry Barriers

--Economies of scale (Good for larger firms b/c spread fixed costs over more units, employ technology more efficiently) --Network effects(positive effect one user of a product or services has on a value of the product or service for other users) --Customer switching costs (usually one time cost) --Capital requirements (Price to enter) --Advantages independent of size: cost or quality advantages, patents and trademarks, access to raw material, locations, cumulative learning from long periods of time --Government policy --Credible threat of retaliation --Access to distribution channels --Product differentiation --Cost disadvantages (independent of size)

Bargaining Power of Buyers Is High When:

-Buyer concentration (few buyers) -Substitutes -Price/total purchases -Importance of quality - Product differentiation -Backwards integration -Intermediate buyers vs. end users -The industry's products are standardized or undifferentiated commodities. -low or no switching costs.

Bargaining Power of Suppliers Is High When

-Concentrated (or limited) supplier industry -Suppliers not dependent on industry for majority of revenue -Incumbent firms face high supplier switching costs -Suppliers offer differentiated products -There are no supplier substitutes. -Suppliers can forward-integrate into the industry.

Intensity of Rivalry

-Concentration among competitors -Level of fixed costs -Capacity utilization -Industry growth - Product differentiation -Brand identities - Products are perishable - Basis of competition - Exit barriers

Threat of entry is high when...

-Customer switching costs are low -Capital requirements are low -Incumbents do not possess proprietary technology or established brand equity -New entrants expect that incumbents cannot / will not retaliate

The PESTEL Model

-Groups environmental factors into six segments: --Political --Economic --Sociocultural --Technological --Ecological --Legal relatively straightforward way to scan, monitor and evaluate These factors can create: --Opportunities --Threats

The power of suppliers is high when

-Incumbent firms face significant switching costs when changing suppliers -Suppliers offer products that are differentiated -There are no readily available substitutes for the products/services offered by the supplier -Suppliers can credibly threaten to forward-integrate

Economic Factors

-Largely macro-economic Examples include: --Growth rates (change in amount of goods and services produced by a nation's economy. real - adjusted for inflation and tells business cycle) --Levels of employment (boom means less unemployment and human resources expensive) --Interest rates (real) --Price stability (deflation vs. inflation) --Currency exchange rates

Political Factors

-Processes & actions of government bodies -Firms can shape this factor through: --Lobbying --Public Relations --Contributions --Litigation Example: Tesla -Has a build-to-order sales model -Cuts out dealers -Dealers are lobbying for new legislation related to legal factors because can cause changes in legislation and regulation

The rivalry among existing competitors is high when...

-There are many competitors in the industry -Competitors are roughly the same size -Industry growth is slow, zero, or even negative -Exit barriers are high -Products/ services are direct substitutes - that is little to no differentiation among product offerings

Strategic Positioning

A firm's strategic profile Based on value creation and cost containment The goal -Generate a large gap between (V-C) --The value the firm's product or service creates --The cost required to produce it

A Sixth Force: Complements

A product, service, or competency that adds value to the original product offering when the two are used in tandem -can increase demand for the primary product Leaders need information about: -Changing speed of an industry -Rate of innovation Industries aren't stable over time.

Legal Factors

Official outcomes of political processes: -Laws -Mandates -Regulations -Court decisions Industry deregulations affect multiple industries: - Airlines, telecom, energy, and trucking Governments can achieve desired outcomes: -To buy zero-emission vehicles, the U.S. government offers a $7,500 federal tax credit

Monopoly

One firm Considerable pricing power Unique product Very high entry barriers Resulting industry: profit extracted

Porter's Five Forces Model: A 6th missing force?

Presence of complementary products! Complements are helpful if: Their price-performance tradeoff is improving Buyer switching costs for the complement is high The complement-producing industry earns high profits

Power of Buyers (Customers)

Pressure customers put on an industry by demanding: -A lower price or -Higher product quality low switching costs products non differentiated threaten backward integration - buyer moves upstream in industry value chain

Power of Suppliers

Pressures that industry suppliers can exert on an industry's profit potential Lowers industry profit potential if: -Suppliers demand higher prices for their inputs -Suppliers reduce quality

Threat of Substitutes

Products or services outside an industry meeting the needs of current customers Examples: -H&R Block vs. TurboTax -Energy drinks vs. coffee -E-mail vs. express mail -Wireless telephone vs. VOIP -Videoconferencing vs. business travel

Strategic group insights

Rivalry is strongest among firms within the same strategic group Strategic groups are affected differently by the external environment the competitive forces

Mapping Strategic Groups

Set of companies that pursue a similar strategy within an industry -Identify most important strategic dimensions (R&D, technology, product differentiation, offerings, pricing, market segments, distribution channels, customer service) -Choose two key dimensions for the horizontal and vertical axes -Position the firms in the strategic groups, indicating each firm's market share by the size of the bubble by which it is represented

Sociocultural Factors

Society's cultures, norms, and values -Are constantly in flux -Differ across groups Demographic trends -Present opportunities and threats -Population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class

Threat of substitutes is high when

Substitute offers an attractive price-performance trade-off Buyer's cost of switching to the substitute is low

Rivalry Among Existing Competitors

The intensity with which companies in the same industry jockey for market share and profitability Other 4 forces put pressure on this rivalry -The stronger the forces, the higher the intensity. Intensity determined by (covered next): -Competitive industry structure -size of rivalry -Industry growth -Strategic commitments -high fixed costs and low marginal costs -excess capacity exists in the industry -Exit barriers

The power of buyer is high when

There are a few large buyers Each buyer purchases large quantities relative to the size of a single seller Industry's products are standardized / undifferentiated commodities Buyers face little or no switching costs Buyers can credibly threaten to backward-integrate

Shortcomings of Models Discussed

They are static -Just a snapshot -But black swan events happen suddenly -Information can become obsolete from revolution and innovation Models don't explain why performance differences occur among firms in same industry. -Internal analysis is required (next chapter.)

Why conduct an industry analysis?

Identify drivers and sources of industry profitability Devise strategies for changing industry structure

Five forces model

1. threat of entry 2. power of suppliers 3. power of buyers 4. threat of substitutes 5. rivalry among existing competitors

Destructive competitve price competition

Competitive rivalry based solely on cutting prices

Strategic group mapping gives us additional insights

Competitive rivalry are strongest between firms that are within the same strategic group external environment affects strategic groups differently 5 competitive forces affect strategic groups differently some more profitable than others

How to Apply the Five Forces Model

Define the relevant industry. Identify the key forces - group them. - assess relative strength of each force. Segmenting allows you to assess each force at a fine-grained level Identify the drivers of each force. -Are they strong or weak? why? Assess overall industry structure. Profit potential draw a strategic group map - different performance differences within the same industry

Industry Dynamics

Consolidated industries are more profitable. Mergers and acquisitions make this possible. Results in higher industry profitability Example: U.S. Airline Industry mergers Delta and Northwest United and Continental Southwest and AirTran American and U.S. Airways consolidated may break up and become more fragmented - when there are external shocks to an industry industry convergence - a process whereby formerly unrelated industries begin to satisfy the same customer need. - brought by technological advances

Industry & Industry Analysis

Industry: -Group of incumbent companies -Relatively the same set of suppliers and buyers -Tend to offer similar products and services Key aspects: industry analysis can provide a glimpse of profitability level expected for the average firm Structural attractiveness of the industry Relative position of the firm within the industry Shape industry structure and boundaries

Ecological Factors

Involve environmental issues, such as: -Natural environment -Global warming -Sustainable economic growth Also provide business opportunities

General environment

Managers have little direct influence over (Macroeconomic factors)

Monopolistic Competition

Many firms Some pricing power Differentiated product Medium entry barriers Resulting industry: niches are established

Perfect Competition

Many small firms (Fragmented) Firms are price-takers Offer commodity products Low entry barriers Resulting industry: profitability is typically low

Industry Growth

Affects intensity of rivalry among competitors During periods of high growth: -Consumer demand rises -Price competition among firms decreases --They focus on capturing new customers --They are not focused on taking profitability away from each other / trying to capture market share During periods of negative growth: -Rivalry is fierce -Rivals can only gain at the expense of one another -trying to take business away from competitors

Strategic Commitments

Affects intensity of rivalry among competitors Firm actions that are: -Costly -Long-term oriented -Difficult to reverse Example: airline industry -Hub and spoke model requires significant investment sometimes unlikely to exit industry due to high cost

Porter's Five Forces Model

Groundwork for a strategic agenda of action -Highlights the critical strengths & weaknesses of the industry -Helps with the positioning of the firm in its industry -Clarifies the changes that yield the greatest payoff -Identifies most significant opportunities & threats In short, helps the firm deal with competition Defining the industry to analyze is critical Not too narrow, not too broad

Strategic Group Model

Custers different firms into groups based on a few key strategic dimensions. 1. Identify the most important strategic dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service 2. choose 2 key dimensions for horizontal and vertical aces 3. graph and cluster

Competitive Industry Structure

Elements and features common to all industries, captured by: --The number and size of its competitors --The firms' degree of pricing power --The type of product or service (commodity or differentiated product) --The height of entry barriers Fragmented vs. Consolidated structures

Analysis of the External Environment Is Key to Strategic Management

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

Entry Barriers

advantageous for incumbent firms Obstacles that determine how easily a firm can enter an industry

co-opetition

cooperation by competitors to achieve a strategic objective cooperates as complementors to compete against another company while also increasing competition with one another

Power of Buyers

extent to which buyers influence market rivals Pressure an industry's customers can put on the producer's margins int he industry by demanding a lower price or higher product quality

Competitive Advantage

flows to those that are able to generate large (V-C)

mobility barriers

industry-specific factors that separate one strategic group from another restrict movement between groups

competition

the stronger the 5 forces are, the lower the industry's profit potential and not as attractive for competitors