MGMT 345 - Chapter 2

Product Differentiation

barrier to entry; incumbent companies have brand identification & customer loyalty that potential entrants do not (e.g. unique products, customer loyalty, products at competitive prices)

Government Policy

barrier to entry; licensing & permit requirements; the deregulation of industries (e.g. Time Warner can use its cables to carry telephones)

Access to Distribution Channels

barrier to entry; new entrant must secure distribution of its product/service; shelf space; promotions; intense selling efforts; these advantages may not be available to new entrants

Switching Costs

barrier to entry; one time cost customers face when they buy from a different firm; new equipment, retraining employees, psychic costs of ending a relationship

Capital Requirements

barrier to entry; physical facilities, inventories, marketing activities, availability of financial resources

Cost Disadvantages Independent of Scale

barrier to entry; proprietary product technology (patents); favorable access to raw materials; desirable locations

Strategic Group Mapping

firms in the same strategic group have two or more competitive characteristics in common (i.e. have comparable product line breadth; sell in same price/quality range; emphasize same distribution channels; use same product attributes to appeal to similar types of buyers; use identical technological approaches; offer same services; cover same geographic areas)

Economies of Scale

barrier to entry; spreading costs of production over the number of units produced; spreading fixed costs (i.e. plant & equipment, overhead, advertising, inventory, R&D); increasing efficiency through specialization; variable costs fall as increasing experience generates increasing productivity

Limitations of Porter's 5 Forces & Strategic Group Models

both are static & ignore innovation; focus is on industry & group structures rather than individual companies; innovation creates changes in industry structures, altering competitive environment; industry structure cannot fully explain the performance differences between industry competitors

The threat of substitute products increases when...

buyers face few switching costs; the substitute products' price is lower; substitute products' quality & performance are equal to or greater than the existing product

Economic Segment of General Environment

changes in living standards & general well-being of society; companies are interested in the rate of economic growth (consumer income); economic decline results in reduced consumer income & spending, declining demand, price wars, reduced sales & profit; interest rates; unemployment rate (consumer incentives to spend); inflation (firm's investment plans); changes in stock market valuations (demand for luxury goods); these changes affect consumers' incentives to buy

Global Segment of General Environment

changes in markets, economies, & political systems; markets & economies are interconnected; increasing global trade; currency exchange rates (i.e. Japanese Yen against the US dollar in the 80's); trade agreements among regional blocs (NAFTA, EU, ESEAN); creation of World Trade Organizations (decreasing tariffs/free trade in service)

Sociocultural Segment of General Environment

changes in values, beliefs, & lifestyles of a society; these changes point firms to products that society values which emerges patterns in consumption & lifestyle (e.g. more women in workforce, greater concern for fitness, postponement of family formation); failure to understand these changes can have a very large impact on the ability of a company to gain a competitive advantage

Strategic Groups

cluster of firms who share similar strategies; breadth of product & geographic scope, price/quality, degree of vertical integration, type of distribution system; internal competition between strategic group firms is greater than between firms outside that strategic group; there's more heterogeneity in the performance of firms within strategic groups

Segments of General Environment

demographic, sociocultural, political/legal, technological, economic, & global

Technological Segment of General Environment

developments lead to new products/services; firms can achieve higher quality & lower costs; firms can speed up new product development; innovate more frequently; offer greater variety; technological changes have sudden/dramatic effect on companies' environment (e.g. the internet altered the rules of competition in most industries; telecommunication industry)

General Environment

dimensions in the broader society that influence an industry & the firms within it; trends & events can vary across industries; very little ability to predict or control general environment trends & events

Political/Legal Segment of General Environment

government alters its perspective toward business (pro or anti-business); government determines environmental regulations with which industries must comply; increased/decreased government oversight of businesses (i.e. regulation); government can create favorable or unfavorable climate for companies; antitrust laws; taxation laws; deregulation philosophies (e.g. telecommunication industry); deregulation eliminates legal barriers to entry & allows new companies to enter

A buyer group is successful when...

it's concentrated or it purchases larger volumes relative to seller sales; the product it purchases from the industry are standard or undifferentiated; buyers face few switching costs; the buyers pose a credible threat of backward integration; the industry's product is unimportant to the quality of the buyer's products or services

Bargaining Power of Buyers

part of Porter 5 Force's Model; buyers: individuals/companies that purchase a company's products/services; buyers threaten an industry because it forces down prices; they bargain for higher quality or more services; play competitors against each other

Bargaining Power of Suppliers

part of Porter's 5 Force's Model; suppliers: companies that provide raw materials, services & labor to companies in an industry; suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods & services

Threat of New Entrants

part of Porter's 5 Forces Model; new entrants: companies that have either recently started operating in an industry or that threaten to start operations soon; new entrants are motivated by superior profits of established companies in the industry; new entrants can increase the level of competition & reduce the performance of established companies; with the absence of entry barriers, entry will continue; barriers to entry include: economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale, & government policy

Intensity of Rivalry Among Competitors in an Industry

part of Porter's 5 Forces Model; occurs when competitors sense the pressure on an opportunity on an opportunity to improve their position (e.g. price competition, advertising battles, product introductions, increased customer service or warranties)

Threat of Substitute Products & Services

part of Porter's 5 Forces Model; substitute: other products/services that can perform the same function/meet the same customers' needs in different ways

Firms react when environment factors unfavorably alter business conditions by...

rapidly expanding their production & sales to exploit emerging opportunities

Firms react when environmental factors favorably alter business conditions by...

slowing down production

A supplier group is successful when...

the group is dominated by few companies & is more concentrated than the industry it sells to; the group isn't obligated to contend with substitute products for sale to the industry; the industry is not an important customer of the supplier group; the supplier's product is an important input to buyer's business; the group's products are differentiated or it has built up switching costs for the buyers; the group poses a credible threat of forward integration (they can control their own distribution channels) (e.g. Nike)

Porter's 5 Forces Model of Industry Competition

the state of competition in an industry depends on rivals, customers, suppliers, potential entrants, & substitute entrants; the collective strengths of these forces determine the ultimate profit potential of the industry; a company's strategy is to find a position in the industry where it can best defend itself against these forces or can influence them in it's favor; five forces include: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products & services, & intensity of rivalry among competitors in an industry

Industry rivalry increases when...

there's numerous or equally balanced competitors; industry growth slows/declines (fight for market share); high fixed costs or high storage costs; lack of differentiation opportunities or low switching costs; when strategic stakes are high; when high exit barriers prevent competitors from leaving the industry

Demographic Segment of General Environment

these trends show firms' opportunities & threats; aging population, rising affluence, changes in ethnic composition, geographic distribution of population, etc.; can help a firm determine if their products/services will appeal to customers & how many potential customers for these products/services they will have

In general, how do firms deal with general environment changes?

they strive to control external factors to prevent change, anticipate change, & remain flexible to adapt quickly