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

Managers need to consider how the following five macroeconomic factors can affect firm strategy

1. Growth rate 2. Levels of employment 3. Interest rates 4. Price stability 5. Currency exchange rates

How to map industry competitors into strategic groups

1. Identify the most important strategic dimensions 2. Choosing two key dimensions for the horizontal and vertical axes, Which expose important differences among the competitors 3. Graphing the firms in the strategic group, indicating each firm's market share by the size of the bubble With which it is represented

When analyzing a firm's external environment, it is critical to apply

1. PESTEL 2.Porters five forces 3.Strategic group mapping

The power of suppliers reduces a firm's ability to obtain superior performance for two reasons

1. Powerful suppliers can raise the cost of production by demanding higher prices for their inputOr by reducing the quality of the input factor service level delivered 2. Powerful suppliers are a threat to firms because they reduced the industry's profit potential by capturing part of the economic value created

Shortcomings of the three models

1. They provided a snapshot Of what is actually a moving target and do not allow for consideration of industry dynamics 2. Do not allow should teaches leaders to fully understand why there are performance differences among firms in safe and she works strategic group

Porters five forces model

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

To increase the profitability of successful entry, strategic leaders need to consider the following five questions

1. Who are the players? -Identify the players:Incumbents, entrance, suppliers, customers, other stakeholders 2. when to enter? -entry timing -stage of industry life cycle - order of entry 3. How to enter? -leverage existing assets -reconfigure value chains -establish niches 4. What type of entry? -scale, commitment, product and/or service, business model 5. Where to enter? -leverage existing assets -reconfigure value chains -establish niches

The weaker the five forces the higher the industry's

Profit potential ---making the industry more attractive for competitors

Consolidated industry tends to be more

Profitable than a fragmented one

Industry analysis

Provides a more rigorous basis not only to identify an industries profit potential but also to derive implications for one firm's strategic position within an industry

Powerful buyers are threat to the producing firms because they

Reduce the industry's profit potential by capturing part of economic value created

Strategic position

Relates to its ability to create value for customers all containing the cost to do so

Mobility barriers

Restrict movement between groups Industry specific factors that separate one strategic group from another

Political factors

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

The PESTEL model provides a relatively straightforward way to

Scan, monitor, and evaluate the important external factors and trends that might impinge upon affirm

Demographic trends are also important to

Sociocultural factors

Industry convergence is often brought on by

Technological advances

It is it important for managers to consider industry dynamics because

The five forces plus complement model only provides a point in time snapshotOf a moving target

At the start of the strategic management process, it is critical for managers to conduct a thorough analysis of the firms external environment to identify threats and opportunities

The initial step is to apply a PESTEL analysis to scan monitor and evaluate changes and trends in the firms macro-environment

Complements increased demand for

The primary product

The 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

By analyzing the factors in the external environment strategic leaders can mitigate

Threats and leverage opportunities

Economic value equals

V - C

Competitive advantage flows to the firm that is able to create as large a gap as possible between the

Value the firm's product or service generates and the cost required to produce it

Strategic group

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

Five forces model

to help managers understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage --Michael Porter

The intensity of rivalry among existing competitors is determined largely by the following factors

1. Competitive industry structure 2. Industry growth 3. Strategic commitments 4. exit barriers

Strategic group mapping provides additional insights

1. Competitive rivalry is strongest between firms that are within the same strategic group 2. The external environment affects strategic groups differently 3. The five competitive forces affect strategic groups differently 4. Some strategic groups are more profitable than others

Follow these steps to apply the five forces model

1. Define the relevant industry 2. Identify the key players in each of the five forces and attempt to group them into different categories 3. Identify the underlying drivers of each force 4. Assess the overall industry structure

Bargaining power of suppliers is high when

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

The power of buyers is high when

-There are a few buyers and each buyer purchases large quantities relative to the size of a single seller -The industry's products are standardized or undifferentiated commodities -Buyers face low or no switching costs -Buyers can credibly threaten to backwardly integrate into the industry

Potential new entry depresses industry profit potential into major ways

1. With the threat of additional capacity coming into an industry,Incumbent firms may lower prices to make entry of pure less attractive to the potential new competitors,Which would in turn reduce the overall industries profit potential,Especially in industries with slower no overall growth in demand 2. The threat of entry by additional competitors may force incumbent firmsTo spend more to satisfy their existing customers.This spending reduces and industry's profit potential, Especially if firms can't raise prices

Incumbent firms can benefit from several important sources of entry barriers

1. economies of scale 2. Network effects 3. Customer switching costs 4.Capital requirements 5. Advantages independent of size 6. Government policy 7. Credible threat of retaliation

The four main competitive industry structures are

1. perfect competition -Many small firms -Firms are price takers -Commodity product -Low entry barriers 2. monopolistic competition -Many firms -Some pricing power -Differentiated product -Medium entry barriers 3. oligopoly -A few large firms -Some pricing power -Differentiated product -High entry barriers 4. monopoly -One firm -Considerable pricing power -Unique product -Very high entry barriers

The five forces model allows strategic leaders to analyze

All players using a wider industry lens, which in turn enables a deeper understanding of industry's profit potential

Economic factors

Are largely macroeconomic affecting a economy wide phenomena

Sociocultural factors

Capture a societies cultures norms and valuesYou left yet

Technological factors

Capture the application of knowledge to create new processes and products

Buyers are the

Customers of an industry

Companies in the same strategic group are

Direct competitors

External factors in the firms task environment or ones that managers

Do have some influence over

Strategic groups differ from one another along important dimensions such as

Expenditures on research and development, technology, product of differentiation nation, product and service offerings, market segments, distribution channels, and customer service

External environment consists of all the factors that can affect its potential to

Gain and sustain a competitive advantage

Industry

Group of incumbent companies facing more or less the same set of suppliers and buyers

PESTEL model

Groups the factors In the firms general environment into six segments -political -economic -sociocultural -technological -ecological -legal

A company is a complementor to your company if:

If customers value your product or service offering more when they are able to combine it with the other companies product or service

Legal factors

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

Switching costs

Incurred by moving from one supplier to another

Firm performance is determined primarily by two factors

Industry and firm effects

To better understand differences and firm performance we must look

Inside the firm to study its resources capabilities and core competencies

Intra group rivalry exceeds

Inter group rivalry

Ecological factors

Involve broad environmental issue such as the natural environment, global warming, and sustainable economic growth

Major innovations in process technology include

Lean manufacturing,Six sigma quality, and biotechnology

Political pressure often result in changes in

Legislation and regulation

External factors in the firm's general environment or ones that managers have

Little direct influence over

The threat of potential entry is reduced when

Network effects are present

In many instances, to strategic groups are in an industry based on two different business strategies

One that pursues a low cost strategy and a second that pursues a differentiation strategy

The power of buyers concerns the

Pressure an industry's customers can put on the producers margins in the industry by demanding a lower price or higher product quality

The threat of substitutes is the ideas that

Products or services available from outside the given industry will come close to meeting the needs of current customers

The stronger the five forces the lower the industry's

Profit potential ---making the industry less attractive for competitors

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

Firm effects

attribute firm performance to the actions managers take

Strategic group model

clusters different firms into groups based on a few key strategic dimensions

co-opetition

cooperation by competitors to achieve a strategic objective

Capital requirements

describe the "price of the entry ticket" into a new industry

Industry Effects

describe the underlying economic structure of the industry

Threat of entry

describes the risk that potential competitors will enter the industry

The final step in industry analysis is to

draw a strategic-group map. --Allows you to explain performance differences within the same industry

Entry barriers

obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential

Competitive industry structure

refers to elements and features common to all industries - number And size of its competitors -Firm's degree of pricing power -Type of product or service -Hate of entry barriers