BUSMGT4490 - Chapter 3 - External Analysis: Industry Structure, Competitive Forces, and Strategic Groups

Which of the following are ways in which the power of buyers affects producers?

- by demanding higher quality - by obtaining price discounts - by requesting more services

Which of the following are important sources of entry barriers?

- capital requirements - economies of scale - government policy - network effects - credible threat of retaliation

Which of the following are important factors in determining the intensity of rivalry among existing competitors?

- exit barriers - competitive industry structure - industry growth

Economic Factors

- growth rates - levels of employment - interest rates - price stability - currency exchange rates

Which of the following are examples of commonly encountered capital requirements?

- managing a production process - setting up production facilities - paying for start-up losses

Which of the following is an example of a demographic factor?

- sexual orientation - age - gender

Which of the following are characteristics of a nationalistically competitive industry?

- the ability to raise prices for differentiated products - a differentiated product - obstacles to entry

The expected competitive intensity is ______, when the other four forces are _______.

- weaker, weaker - stronger, stronger

PESTEL Model

A framework that categorizes and analyzes an important set of external factors (political, economic, sociocultural, technological, ecological, and legal) that might impinge upon a firm. These factors can create both opportunities and threats for the firm. Political, Economic, Sociocultural, Technological, Ecological, Legal

Deflation

a decrease in the general level of prices

Strategic Position

a firm's strategic profile based on the difference between value creation and cost (v-c)

Five Forces Model

a framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy

Inflation

a general increase in prices and fall in the purchasing value of money

Industry

a group of incumbent companies that face more or less the same set of suppliers and buyers

Industry Anaylsis

a method to (1) identify an industry's profit potential and (2) derive implications for a firm's strategic position within an industry

When a firm in an oligopoly cuts prices, ________

a price war is likely to result

Complement

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

In a perfectly competitive industry, forms have difficulty ______

achieving competitive advantage

The positive effect that one user of a product or service has on the value of the product or service for other users is known as the _____

network effect

The structure of an industry is largely captured by

- The number and size of its competitors. - The firm's degree of pricing power. - The type of product or service (commodity or differentiated product). - The height of entry barriers

When Samsung and Google cooperate as complementors to compete against Apple's strong position in the mobile device industry, while at the same time becoming increasingly competitive with each other, this is referred to as ______

co-opetition

Perfectly Competitive

fragmented and has many small firms, a commodity product, ease of entry, and little or no ability for each individual firm to raise its prices

The weaker the five forces in Porter's model, the _____ industry's profit potential

greater

Monopolistically Competitive

has many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers

Managers have ____ direct influence over external forces in the firm's general environment than those in the firm's task environment

less

The stronger the five forces in Porter's model, the _____ the industry's profit potential

lower

Which of the following are factors in a firm's legal environment?

mandates, regulations, laws

New firms have been established in the airline and telecommunications industries after

deregulation

Currency Exchange Rate

determines how many dollars one must pay for a unit of foreign currency

When companies seek ways to recharge car batteries in a sustainable way, it is an example of ______ factors creating business opportunities

ecological

Exit barriers are composed of _____ factors

economic and social

Competitive Industry Structure

elements and features 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

Michael Porter developed the fives forces model to help firms do which of the following?

gain and sustain a competitive advantage determine the profit potential of different industries

PESTEL Model provides a straightforward way to

scan, monitor, and evaluate

Price Discounts, frequent new product releases with minor modifications, and intense promotional campaigns are all tactics indicative of an industry with ______ growth

slow or negative

When restrictive government policies do not exist or when industries become deregulated, the ________ of entry is high

threat

The risk that potential competitors will enter an industry

threat of entry

The cultures, norms, and values of the society in which a firm competes are considered

sociocultural

Monopoly

when there is only one, often large firm supplying the market

Governments sometimes set up a natural monopoly when a venture _______

would otherwise not be profitable

The threat of _________ is one of the five forces and can be exemplified by the threat that videoconferencing presents to business travel

substitutes

If a business considers vendors, but doing so would require that business to alter product specification, retain employees, and/or modify existing processes, we would say the business faces significant _______

switching costs

Advantages based on brand loyalty, proprietary technology, preferential access to raw materials, and favorable geographic locations are examples of _____

advantages independent of size

A company is a complementor to your company if ______

customers value your product more when they can use it with the other company's product

It might be a good idea to expand or upgrade a firm's human capital base during a ______ because unemployment is high and therefore human capitol is abundant and wages usually _______

downturn, fall

The NASDAQ peaked at its all-time high of 5,130 points on March 10, 2000. Hundreds of dot-com businesses were founded and funded during this time, but very few survived. This example shows that

economic boom periods can overheat and lead to speculative bubbles

When buyers can credibly threaten to backwardly integrate into the industry, the power of buyers is

high

Which of the following statements is likely to be true about a fragmented industry

it consists of small firms

The economic factors that affect a firm's external environment are ________

largely macroeconomic

Global warming would be an example of _____ factor in a firm's external environment

an ecological

The power of ______ is the pressure they can put on the margins of producers in the industry by demanding a lower price or higher product quality

buyers

Sociocultural Factors

capture a society's cultures, norms, and values

Technological Factors

capture the application of knowledge to create new processes and products

In an oligopoly, which of the following conditions exist?

- a few large firms - differentiated products - high barriers to entry

Which of the following are forces in Porter's five forces model

- bargaining power of buyers - threat of substitute products or services - threat of new entrants

According to Porter's model, which of the following should be considered when analyzing a firm's competition

- buyers - suppliers - the threat of substitutes

Complementor

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

Price Stability

the lack of change in price levels of goods and services

Four Main Competitive Industry Structures

1. Perfect Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly

True or False: The stronger the five forces, the greater the industry's ability to earn above average competitive advantage

False

True or False: High exit barriers lead to intense rivalry

True

True or False: In the case of a monopoly, one firm is in the industry

True

If the US dollar depreciated compared to the euro, it will take _____ dollars to buy one euro

more

An example of a recent innovation in PROCESS technology is ________

nanotechnology

A ______ occurs when a firm has accrued significant market power and is changing the industry structure in its favor

near monoploy

In order to influence chnages in their political environment, firms pursue _________

nonmarket strategies

True or False: Airlines that are strategically committed to the hub-and-spoke model face high fixed costs to maintain their network of routes that affords global coverage. Such strategic commitment leads to high fixed costs and therefore decreased rivalry.

False

True or False: the only legal means of retaliation against new entrants is price competition

False

______ factors result from the processes and actions of government bodies that influence the decisions and behavior of firms

Political

In the group of external factors that form the PESTEL model, the "P" stands for _______ and the "L" stands for

Political; Legal

Key Insight #1

Rather than defining competition narrowly as the firm's closest competitors to explain and predict a firm's performance, competition must be viewed more broadly, to also encompass the other forces in an industry: buyers, suppliers, potential new entry of other firms, and the threat of substitutes

Key Insight #2

The profit potential of an industry is neither random nor entirely determined by industry-specific factors. Rather, it is a function of the five forces that shape competition: threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing firms.

The amount that savers are paid for use of their money and the amount that borrowers pay for that is known as _______

an interest rate

Economies of Scale

are cost advantages that accrue to firms with larger output because they can spread fixed costs over more units, employ technology more efficiently, benefit from a more specialized division of labor, and demand better terms from their suppliers

Walmart producing private-label brands such as Equate health and beauty items and Parent's choice baby products, is an example of ______

backward integration

The pressures that industry suppliers can exert on an industry's profit potential, is also called the ______

bargaining power of suppliers

Level of Employment

boom times, unemployment is low, and skilled human capital becomes a scarce and more expensive resource economic downturns, unemployment rises as more people search for employment, skilled human capital is abundant and wages usually fall

A rise in economic growth is reflected by

businesses expanding operations to satisfy demand

When suppliers offer products that are differentiated, the power of suppliers is ______

high

Legal Factors

include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions—all of which can have a direct bearing on a firm's profit potential

The pace of technological change seems to be _______

increasing

In general, a firm improves its strategic position by ______

increasing its competitive advantage

The most rigorous means of analyzing the profit potential within a specific industry is to conduct _____

industry analysis

An increase in the overall price level is also called

inflation

Ecological Factors

involve broad environmental issues such as the natural environment, global warming, and sustainable economic growth

Economic Growth Rate

is a measure of the change in the amount of goods and services produced by a nation's economy

Oligopolistic

is consolidated with a few large firms, differentiated products, high barriers to entry, and some degree of pricing power Key Feature: the competing firms are interdependent

Task Environment

ones that managers do have some influence over, such as the composition of their strategic groups (a set of close rivals) or the structure of the industry

General Environment

ones that managers have little direct influence over, such as macroeconomic factors (e.g., interest or currency exchange rates)

There is a(n)______ relationship between competitive intensity and the power of buyers and suppliers

positive

Which of the following statements about legal factors as an external force is true

regulatory changes tend to affect entire industries at once

Political Factors

result from the processes and actions of government bodies that can influence the decisions and behavior of firms

The intensity with which companies in an industry jockey for market share and profitability is known as

rivalry

The cost advantages that a firm obtains by increasing output, such as by spreading fixed costs over more units, are called economies of _____

scale

Interest Rates

the amount that creditors are paid for use of their money and the amount that debtors pay for that use, adjusted for inflation

Treat of Entry

the risk that potential competitors will enter an industry

The fact that tax preparation software such as Intuit's Turbo Tax is a valid alternative for professional services offered by H&R Block and other, is an example of ______

the threat of substitutes

Demographic

these trends capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class

The online auction site eBay has more than 100 million active users, so buyers are more likely to find what they are looking for while sellers are more likely to find buyers for the items they are offering. This is an example of

network effects

Two Major Ways

1. With the threat of additional capacity coming into an industry, incumbent firms may lower prices to make entry appear less attractive to the potential new competitors, which would in turn reduce the overall industry's profit potential, especially in industries with slow or no overall growth in demand. Consider the market for new microwaves. Demand consists of the replacement rate for older models and the creation of new households. Since this market grows slowly, if at all, any additional entry would likely lead to excess capacity and lower prices overall. 2. The threat of entry by additional competitors may force incumbent firms to spend more to satisfy their existing customers. This spending reduces an industry's profit potential, especially if firms can't raise prices. Consider how Starbucks has chosen to constantly upgrade and refresh its stores and service offerings. Starbucks has over 13,000 U.S. stores and more than 25,000 globally. By raising the value of its offering in the eyes of the consumers, it slows others from entering the industry or from rapidly expanding. This allows Starbucks to hold at bay smaller regional competitors, such as Peet's Coffee & Tea, with fewer than 200 stores mostly on the West Coast, and prevents smaller national chains, such as Caribou Coffee, with 415 stores nationally, from increasing the level of competition. Starbucks is willing to accept a lower profit margin to maintain its market share.