Chapter 3

Five forces

A _______ analysis provides the basis for how a firm should position itself to gain and sustain a competitive advantage. 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.

Strategic position

A firm's strategic profile based on the difference between value creation and cost (V - C).

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.

Strategic group model

A framework that explains differences in firm performance within the same industry.

Industry

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

Industry analysis

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

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.

Monopoly

An industry is a ____________ when there is only one, often large firm supplying the market. The firm may offer a unique product, and the challenges to moving into the industry tend to be high. The monopolist has considerable pricing power. As a consequence, firm and thus industry profit tends to be high. The one firm is the industry.

Co-opetition

Cooperation by competitors to achieve a strategic objective.

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: Economies of scale. ■ Network effects. ■ Customer switching costs. ■ Capital requirements. ■ Advantages independent of size. ■ Government policy. ■ Credible threat of retaliation.

Exit barriers

Obstacles that determine how easily a firm can leave an industry.

Competitive Industry Structure

Refers to elements and features common to all industries. The structure of an industry is largely 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

Political Factors

Result from the processes and actions of government bodies that can influence the decisions and behavior of firms. In the general environment where firms have little influence, but they work to shape and influence this realm by applying non market strategies (lobbying, PR, litigation, etc.). Closely related to legal.

Factors of the PESTEL Model

The PESTEL model groups the factors in the firm's general environment into six segments: ■ Political ■ Economic ■ Sociocultural ■ Technological ■ Ecological ■ Legal

Stronger

The _______ the five forces, the lower the industry's profit potential—making the industry less attractive for competitors.

Structures in the Competitive Industry

The four main competitive industry structures are (1) perfect competition, (2) monopolistic competition, (3) oligopoly, and (4) monopoly.

Strategic group

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

Strategic Group Model How-To

To understand competitive behavior and performance within an industry, we can map the industry competitors into strategic groups. We do this as shown: ■ 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. ■ Choose two key dimensions for the horizontal and vertical axes, which expose important differences among the competitors. The dimensions chosen for the axes should not be highly correlated. ■ Graph the firms in the strategic group, indicating each firm's market share by the size of the bubble with which it is represented.39

Switching Costs

______ are incurred by moving from one supplier to another. Changing vendors may require the buyer to alter product specifications, retrain employees, and/or modify existing processes. Switching costs are onetime sunk costs, which can be quite significant and a formidable barrier to entry.

Perfect Competition

_______ is 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 firms competing in this type of industry are approximately similar in size and resources. Consumers make purchasing decisions solely on price, because the commodity product offerings are more or less identical. Low Profitability.

Ecological Factors

________ involve broad environmental issues such as the natural environment, global warming, and sustainable economic growth. Managing these relationships in a responsible and sustainable way directly influences the continued existence of human societies and the organizations we create. Managers can no longer separate the natural and the business worlds; they are inextricably linked. (pollution, BP)

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.

Sociocultural Factors

_________ capture a society's cultures, norms, and values. Because sociocultural factors not only are constantly in flux but also differ across groups, managers need to closely monitor such trends and consider the implications for firm strategy. Also demographic trends.

Economic Factors

__________ in a firm's external environment are largely macroeconomic, affecting economy-wide phenomena. Managers need to consider how the following five macroeconomic factors can affect firm strategy: ■ Growth rates. ■ Levels of employment. ■ Interest rates. ■ Price stability (inflation and deflation). ■ Currency exchange rates.

Technological Factors

___________ capture the application of knowledge to create new processes and products. Major innovations in process technology include lean manufacturing, Six Sigma quality, and biotechnology. Offers opportunities and threats.

Network effects

____________ describe the positive effect that one user of a product or service has on the value of that product or service for other users. When network effects are present, the value of the product or service increases with the number of users. The threat of potential entry is reduced when network effects are present.

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. In fact, regulatory changes tend to affect entire industries at once. •Governments especially can directly affect firm performance by exerting both political pressure and legal sanctions, including court rulings and industry regulations.

Monopolistic Competition

has many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers. The key to understanding this industry structure is that the firms now offer products or services with unique features. Firms selling a product with unique features tend to have some ability to raise prices. When a firm is able to differentiate its product or service offerings, it carves out a niche in the market in which it has some degree of monopoly power over pricing, thus the name "monopolistic competition"

Oligopoly Industry

is consolidated with a few large firms, differentiated products, high barriers to entry, and some degree of pricing power. The degree of pricing power depends, just as in monopolistic competition, on the degree of product differentiation. A key feature of an oligopoly is that the competing firms are interdependent because their actions influence the others) Companies in an oligopoly tend to have some pricing power if they are able to differentiate their product or service offerings from those of their competitors. Non-price competition, therefore, is the preferred mode of competition. This means competing by offering unique product features or services rather than competing based on price alone.

Strategic Group Learning Objective

■ 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.