Capstone Chapter 3

Industry attractiveness, in terms of profit potential, is therefore determined by Three Distinct Paris of Two Forces

(1) Supplier and buyer power (2) Entry and exit barriers (3) Available complements and the threat of substitutes

Five Forces Model (Porters Five Forces)

1. Threat of Entry 2. Power of Suppliers 3. Power of Buyers 4. Threat of Substitutes 5. Rivalry among existing competitors

Complementor

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

Five Forces Model Definition

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

PESTEL Model

A framework that categorizes and analyzes an important set of external forces - political, economic, technological, ecological, and legal - that might impinge upon a firm. These forces are embedded in the global environment and can create both opportunities and threats for a firm

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, and (4) monopoly. Fragmented industries tend to less profitable than consolidated ones

Strategic Group Model

A framework that explains firm differences in performance in the same industry by clustering different firms into groups based on a few key strategic dimensions

Industry

A group of companies offering similar products or services. It makes up the supply side of the market, while customers make up the demand side

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

Socialcultural Factors (PESTEL)

Capture a society's cultures, norms and values

Technological Factors (PESTEL)

Capture the application of knowledge to create new processes and products

The Power of Suppliers

Captures pressers that industry suppliers can exert on an industry's, and therefore a company's profitability

Legal Factors (PESTEL)

Captures the official outcomes of the political processes as manifested in laws, mandates, regulations and court decisions

Monopolistic Competition

Characterized by many firms, a differentiated product, some obstacles to entry, and the basis for raising prices for a relatively unique product while retaining customers

Ecological Factors (PESTEL)

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

Economic Factors (PESTEL)

Economic Factors that effect the macroeconomics, affecting economy wide phenomena

Opportunity:

Events and trends that create chances to improve an organization's performance level.

Threat

Events and trends that may undermine an organization's performance.

Industry Structure determines:

Firm Conduct

Strategic Commitments

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

Perfect Competition

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

Oligopoly

Greek word "few sellers" A few large firms, differentiated products, high barriers to entry, and some degree of pricing power

Five Economic Factors that affect firm strategy (PESTEL)

Growth Rates Interest Rates Levels of employment Price stability (inflation and deflation) Currency exchange rates

Mobility Barriers

Industry specific factors that separate one strategic group from another

Forward vertical integration strategy

Involves a supplier entering the industry to which it supplies product.

If Porters Five Forces are strong does that make the industry attractive or unattractive

Less Attractive (and vise versa)

Industry

Multiple organizations that collectively compete with one another by providing similar goods, services, or both.

Entry Barriers (Threat of Entry)

Obstacles that determine how easily a firm can enter an industry. Entry barriers are often one of the most significant predictors of industry profitability

Exit Barriers

Obstacles that determine how easily a firm can leave an industry

Firm Conduct

The firm's ability to differentiate its goods and services and thus to influence the price it can charge

Threat of Substitutes

The idea that products or services available from OUTSIDE the given industry will come close to meeting the needs of current customers

External Environment

The industry in which the firm operates and the competitive forces that surround the firm from the outside

Rivalry among Existing Competitors

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

Power of Buyers

The pressure buyers can put on the margins of producers in the industry, by demanding a lower price or higher product quality

Political Factors (PESTEL)

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

Intra group rivalry exceeds inter group rivalry

The rivalry among firms of the same strategic group is generally more intense than the rivalry between strategic groups

Strategic Group

The set of companies that pursue a similar strategy within a specific industry

The key takeaway from the five forces model

The stronger (weaker) the forces, the lower (greater) the industry's ability to earn above average profits, and correspondingly, the lower (greater) the firm's ability to gain and sustain a competitive advantage

The lower the industry's profit potential

The stronger the Five Forces:

Potential Competitors

Those that are not yet competing in the industry but have the capability to do so if they choose

Industry Analysis:

a method to identify an industry's profit potential and derive implications for a firm's strategic position.

Industry Dynamics

a weakness of other models is that they are static (point-in-time snapshot)

Co-opetition

cooperation among competitors to achieve a strategic objective.

Backward Vertical Integration

o strategy that involves a buyer entering the industry that it purchases goods or services from

Monopoly

one firm, considerable pricing power, unique product, very high entry barriers

macroecnomic factors

what is the general environment

Industry Concentration

· the extent to which a small number of firms dominate an industry