BUSMHR 4490

Industry Dynamics

-A 5 Forces analysis is static, providing a snapshot of the profitability of an industry -Because of this, a company should repeat the 5 forces analysis over and over 1. Identify trends in consolidation 2. Identify emerging substitutes 3. Identify external shocks 4. Identify industry convergence

6th Force: Complements

-A complement is a product, service, or competency that adds value to the original product offering when the two are used in tandem -Complements can increase demand and boost the profit potential for the industry and the firm -Incumbents should encourage or cooperate with complementors

Oligopoly

-A more consolidated industry with few large firms, differentiated products, high barriers to entry, and some degree of pricing power -High profits captured by firms -Fierce rivalry among the big players, and an interdependence of actions between the firms -Rivalry among non-price competition

The Threat of substitutes

-A substitute performs the same or similar function as an industry's product by a different means -High threat of substitutes means the industry' profits suffer -Think AVE vs. Spanish airlines for transportation

Customer switching costs

-Additional costs when consumers switch products -Inconvenience and paperwork are both switching costs -Makes it tough for a new competitor to break into the market

Perfect competition

-An industry that is very fragmented with many small firms, firms are price takers, the product is a commodity, and there are low entry barriers -Consumers make decisions mainly based on price -Hard to gain competitive advantage

Network effects

-As the number of users of a product go up, buyers become more willing to pay for the product -If a more extensive network possessed by incumbents increases willingness to pay, a new entrant will face a disadvantage during entry -Cell phone, the internet, ATM networks, ebay

Unequal access to distribution channels

-Better access to distribution. This is very tough to get. -Beer distributors, shelf space, long-term contracts

Incumbency advantages independent of size

-Brand loyalty, location, cumulative experience, trade secrets, preferential access to raw materials

Threat of entry

-Describes the risk that potential competitors will enter an industry -Incumbents may lower price to make entry appear less attractive, especially in industries with slow or no growth -Threat of entry may also require incumbents to spend more to satisfy existing customers -Entry barriers increase the cost to enter

Restrictive government policies

-Governments may restrict entry into an industry, and this can slow or make it difficult for new entrants to set up business in the industry -Lengthy approval process, government contracts, etc.

Rivalry among existing competitors

-High rivalry limits the profitability of an industry -Depends on the intensity of the rivalry and also the basis -Can take the form of price discounting, new product introduction, advertising campaigns, service improvements -Price competition is ESPECIALLY destructive -Rivalry is greatest when numerous competitors with equal size and power, slow industry growth, exit barriers are high, and ego

The power of buyers

-If each purchase is very large and lengthy, customer have high power -If the industry's products are undifferentiated, buyer power is high -Are there low switching costs? -Buyers can integrate backwards and become competitors -Is there price sensitivity? If so high buyer power

Capital requirements

-If entry is costly, the risk of new entrants is lower -Soda industry, natural gas

Monopolistic competition

-Industry characterized by many firms, a differentiated product, some barriers to entry, and the basis for raising prices for a relatively unique product while retaining customers -Profits are higher than perfect competition -Products with unique features are being offered -Firms emphasize product differentiation

When is price competition most likely to occur?

-Products and services are nearly identical and there are few buyer switching costs -Fixed costs are high and marginal costs are low -Capacity must be expanded in large increments to be efficient -The product is perishable

Ways effective stakeholder management can benefit firm performance

-Satisfied stakeholders are more cooperative and more likely to reveal potentially helpful information -Increased trust lowers the cost of business transactions -Effective management of the complex web of stakeholders can lead to greater adaptability and flexibility in the firm -The likelihood of negative outcomes can be reduced, creating more predictable and stable returns -Firms can build strong reputations that are rewarded in the marketplace by business partners, employees, and customers

Strategic Fit

-Strategy is about combining activities -Fit is important because discrete activities often affect one another -Competitive advantage grows out of the entire system of activities -Replicating the fit between many activities makes imitation hard and makes a competitive advantage more sustainable -Strategy=creating fit among a company's activities

The Power of Suppliers

-Supplier industry can be more concentrated (Microsoft squeezing profits from PC makers) -Supplier group might not depend heavily on buyers (landlord) -Switching costs can be high to change suppliers -Suppliers might try to integrate forward and compete -Are there other suppliers?

Monopoly

-There is only one firm supplying the entire market -The product is totally unique and other firms cannot enter the market -Very profitable because you control pricing

Strategic Groups

-We can apply within-industry analysis to our 5 forces framework to explain performance differences -Strategic group=a set of companies that pursue a similar strategy within a specific industry but differ by important dimensions (R&D expenditures, product differentiation, product and service offerings, distribution, etc.) -Firm performance is determined not only by the industry but also by the strategic group membership -Rivalry among firms of the same strategic group is generally more intense than rivalry between strategic groups

Economies of scale

-When you buy in bulk, you can spread your fixed costs over more units, decreasing cost per unit -Set up a huge factory that can crank out product -Also, you have economy of scale on supply side and incumbents have advantage -New entrants need to enter with big investments to compete on cost

How to gain a competitive advantage

1. A firm provides goods or services consumers value more highly than those of its competitors (Differentiation) 2. Create goods or services similar to the competitors at a lower price (Cost-leadership)

What is strategy?

1. Defining and communicating the company's unique position 2. Making tradeoffs 3. Forging fit among activities

Three elements of a good strategy

1. Diagnosis of the competitive challenge (Analysis of internal and external environment) 2. A guiding policy (Formulation of strategy) 3. A set of coherent actions (Implement the strategy)

What strategy is NOT

1. Grandiose statements about what the company will be (We will be number one) (Need actions) 2. A failure to face a competitive challenge is not strategy (Blockbuster failing to address Hulu, Redbox) 3. Operational effectiveness, competitive benchmarking, or other tactical tools are not strategy (marketing, IT, etc. are just ways you support strategy)

Economic influences

1. Growth rates (Is demand going up or down? Do people have money? 2. Interest rates (Are interest rates low? If so, firms are more competitive) 3. Levels of employment (During a boom, unemployment is low and skilled human capital is abundant) 4. Price stability (Companies must set prices-decreasing price is sometimes bad) 5. Currency exchange rates

Steps of stakeholder impact analysis

1. Identify our stakeholders 2. Identify stakeholders' interests 3. Identify opportunities and threats 4. Identify social responsibilities 5. Address stakeholder concerns

Why do tradeoffs arise?

1. Inconsistencies with image or reputation 2. Tradeoffs arise from activities themselves 3. Limits to internal coordination and control

How can industry analysis be used?

1. Positioning the company to cope with the current forces 2. Anticipating and exploiting shifts in the forces 3. Shaping the balance of the forces to create new industry structure that is more favorable to the company

Three important stakeholder attributes during impact analysis

1. Stakeholder power 2. Stakeholder legitimacy 3. Stakeholder urgency

Porter's Five Forces

1. Threat of entry 2. Power of suppliers 3. Power of buyers 4. Threat of substitutes 5. Rivalry among existing competitors

Porter's Strategic Positions

1. Variety based (Produce subset of an industry's products or services) 2. Needs based (Serve all needs of particular group) 3. Access based (Segment customers who are accessible in different ways)

Stakeholder impact analysis

A decision tool with which managers can recognize, prioritize, and address the needs of different stakeholders, enabling the firm to achieve competitive advantage while acting as a good corporate citizen.

Competition in the Five Forces Model

A firm must be able to capture a significant share of (V-C) to gain and sustain competitive advantage --Competition is NOT defined narrowly as the firm's closest competitors --The stronger the five forces, the lower the industry's profit potential (vice-versa)

Strategic position

A firm's strategic profile based on value creation and cost. The goal is to generate as large a gap as possible between the value the firm's product or service creates and the cost required to produce it (V-C)

PESTEL Model

A framework that categorizes and analyzes an important set of EXTERNAL forces (political, economic, sociocultural, 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 the firm.

Corporate social responsibility

A framework that helps firms recognize and address the economic, legal, social, and philanthropic expectations that society has of the business enterprise at a given point in time

Industry analysis

A method to: 1. Identify an industry's profit potential 2. Derive implications for a firm's strategic position within an industry **Assumes environmental drivers of profitability are the same across industries

Strategy

A set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors

Stakeholder strategy

An integrative approach to managing a diverse set of stakeholders effectively in order to gain and sustain competitive advantage -A single-minded focus on shareholders alone exposes a firm to undue risks that can undermine economic performance and can even threaten the very survival of the enterprise

Strategic management

An integrative field that combines analysis, formulation, and implementation in the quest for competitive advantage

Firm effects

Attribute firm performance to the actions managers take. 55% of a firm's profitability.

Political Influences

Government subsidies, political pressure, regulatory laws

Industry

Group of incumbent companies that face more or less the same set of suppliers and buyers -Firms competing in the same industry offer similar products or services to meet customer needs

Sociocultural factors

Health conscious consumers, demographic trends, the growing Mexican population

Black swan events

Incidents that describe highly improbably but high-impact events. Usually negative in context. They erode the public's confidence in the corporations. This means manager's decisions can affect people globally and you must always consider the stakeholder.

Mobility barrier

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

Entry Barriers

Obstacles that determine how easily a firm can enter an industry, Entry barriers are often one of the most significant predictors of industry profit potential. 1. Economies of scale 2. Network effects 3. Customer switching costs 4. Capital requirements 5. Incumbency advantages independent of size 6. Unequal access to distribution channels 7. Restrictive government policy

Stakeholders

Organizations, groups, and individuals that can affect or are affected by a firm's actions. Have a vested claim or interest in the performance and continued survival of the firm. **The firm is embedded in an exchange relationship with a number of diverse internal and external stakeholders **If any of the stakeholders withhold participation, it can have severe negative implications

Sustainable competitive advantage

Outperforming competitors or the industry average over a prolonger period of time (However, past performance is no guarantee of future performance)

Competitive parity

Performance of two or more firms at the same level

Strategic Positioning

Performing different activities from rivals or performing similar activities in different ways (Unique mix of values) **OE is NOT strategy because strategy implies choosing to perform differently than rivals

Operational Effectiveness

Performing similar activities better than rivals perform them

Competitive industry structure

Refers to elements and features common to all industries. Including the number and size of competitors in an industry, whether the firms possess some degree of pricing power, and the type of product or service the industry offers.

Strategic positioning

Staking out a unique position within an industry that allows the firm to provide value to customers, while controlling costs **Requires trade-offs (You cannot be Wal mart and Nordstrom)

Internal stakeholders

Stockholders, ALL employees, board members

Business strategy

Strategy applied to a discrete market -How attractive is an industry? What are opportunities and threats? How should we position our company? Is this sustainable?

Corporate strategy

Strategy applied to the multidivisional firm -Why do we have firms? What determines firm boundaries? Why do we have multi-business firms?

Competitive advantage

Superior performance relative to competitors in the same industry or the industry average

Economic contribution

The greater the difference between value creation and cost, the greater the firm's economic contribution and it will likely gain a competitive advantage

Structure-Conduct-Performance Model (Industry Competitive Structure)

Theoretical framework that helps us explain differences in industry performance by analyzing how firms are comprised and how they behave 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Monopoly

What is the fundamental goal of management?

To maximize profits (Revenues-Costs)

Competitive disadvantge

Underperformance relative to other competitors in the same industry or the industry average **It is important to compare to the industry because 2% return in an industry like print media is actually really good

Technological factors

Biotechnology, electric vehicles, product innovation

Ecological Factors

Broad environmental factors, think aerosol, BP, etc.

Co-opetition

Cooperation by competitors to achieve a strategic objective

External stakeholders

Customers, suppliers, alliance partners, creditors, unions, communities, media, and governments

Industry effects

Describe the underlying economic structure of the industry and attribute firm performance to the industry in which it competes. 20% of a firm's profitability.