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Strategic Management Chapter #3

Terms in this set (61)

Globalization led to extensive entry by foreign car manufacturers in the US market, which increased the:
Number of competitors and the competitive rivalry
A firm's ______ ______ consists of all of the factors that can affect its potential to gain and sustain a competitive advantage
External Environment
External factors in the firm's ______ ______ are ones that managers do have some influence over, such as the composition of their strategic groups or the structure of the industry
Task Environment
PESTEL Model
A framework that categorizes and analyzes an important set of external factors and trends that might impinge upon a firm
The PESTEL Model groups the factors in a firm's general environment into 6 segments:
-Political
-Economic
-Sociocultural
-Technological
-Ecological
-Legal
Political Factors
Result from the processes and actions of government bodies that can influence the decisions and behaviors of firms
-Non-market strategies are used to shape these
-Ex: lobbying, PR, contributions, litigations
Economic Factors
Largely macroeconomic, affecting economy-wide phenomena
Examples of Economic Factors
-Growth Rates
-Levels of Employments
-Interest Rates
-Price Stability
Growth Rates
A measure of the change in the amount of goods and services produced by a nation's economy
-Strategists look to the real growth rates- they adjust for inflation
-Real growth rates indicate the current business cycle of the economy, that is, whether business activity is expanding or contracting
Levels of Employment
In booming times, unemployment tends to be low, and skilled human capital becomes a scarce and more expensive resource
Interest Rates
The amount that creditors are paid for use of their money and the amount that debtors pay for that use, adjusted for inflation
Price Stability
The lack of change in price levels of goods and services
-Inflation- too much money
Sociocultural Factors
Captures a society's cultures, norms, and values
-Because these 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
Technological Factors
Captures the application of knowledge to create new processes and products
-Major innovations in process technology include lean manufacturing, Six Sigma quality, and biotechnology
-The nanotechnology revolution, which is just beginning, promises significant upheaval for a vast array of industries ranging from tiny medical devices to new-age materials for earthquake-resistant buildings
Ecological Factors
Involve broad environmental issues such as the natural environment, global warming, and sustainable economic growth
-Organizations and the natural environment coexist in an interdependent relationship
-Managing these relationships in a responsible and sustainable way directly influences the continued existence of human societies and the organizations we create
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
Industry
A group of incumbent companies facing more or less the same set of suppliers and buyers
-Firms competing in the same industry tend to offer similar products or services to meet specific consumer needs
Industry Analysis
Provides a more rigorous basis not only to identify an industry's profit potential, but also to derive implications for one firm's strategic position within an industry
Profit Potential
The level of profitability that can be expected for the average firm
-Neither random nor entirely determined by industry-specific factors
-Function of the 5 forces that shape competition: threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing firms
Strategic Position
Relates to a firm's ability to create value for customers while containing the cost to do so
-Competitive Advantage flows to the firm that is able to create as large of a gap as possible between the value of the firm's product or service generated and the cost required to produce it (V-C)
5 Forces Model
Helps managers understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage
-Developed by Michael Porter
-Rather than defining competition narrowly as the firm's closest competitors to explain and predict a firm's performance, competition must be viewed more broadly, to also encompass the other forces in an industry: buyers suppliers, potential new entry of other firms, and the threat of substitutes
Rule of Thumb with the 5 Forces Model
The stronger the 5 Forces, the lower the industry's profit potential. Vice Versa, the weaker the 5 Forces, the greater the industry's profit potential
5 Forces in the Airline Industry
-Nature of rivalry is incredibly intense, as consumers primarily make decisions based on prices
-Large corporate customers can contract with airlines to serve all of their employees' travel needs; such powerful buyers further reduce profit margins for air carriers
-Entry barriers are relatively low, resulting in a number of new airlines popping up
-Strong supplier power, the providers of airframes, makers of aircraft engines, aircraft maintenance companies, caterers, labor unions, and airports controlling gate access all bargain away the profitability of airlines
-Substitutes are readily available: if prices are seen as too high, customers can drive their cars or use the train or bus
Threat of Entry
The risk that potential competitors will enter an industry
Potential new entry depresses industry profit potential in two major ways:
-Incumbent firms may lower prices to make entry appear less attractive to the potential new competitors, which would in turn reduce the overall industry's profit potential, especially in industries with slow or no overall growth in demand
-May force incumbent firms to spend more to satisfy their existing customers. This spending reduces an industry's profit potential, especially if firms can't raise prices
Entry Barriers
Obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential
Incumbent firms can benefit from several important sources of Entry Barriers:
-Economies of Scale
-Network Effects
-Customer Switching Costs
-Capital Requirements
-Advantages Independent of Size
-Government Policy
-Credible Threat of Retaliation
Economies of Scale
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
Network Effects
The value of a product or service for an individual user increases with the number of total users
Customer Switching Costs
Incurred by moving from one supplier to another
-Onetime sunk costs, which can be quite significant and a formidable barrier to entry
Capital Requirements
Describe the "price of the entry ticket" into a new industry
-Frequently related to Economies of Scale, capital requirements may encompass investments to set up plants with dedicated machinery, run a production process, and cover start-up losses
Advantages Independent of Size
Incumbent firms often possess cost and quality advantages that are independent of size. These advantages can be based on brand loyalty, proprietary technology, preferential access to raw materials and distribution channels, favorable geographic locations, and cumulative learning and experience effects
Government Policy
Frequent government policies restrict or prevent new entrants.
-In contrast, deregulation in industries such as airlines, telecommunications, and trucking have generated significant new entries. Therefore, the threat of entry is high when restrictive government policies do not exist or when industries become deregulated
Credible Threat of Retaliation
Potential new entrants must also anticipate how incumbent firms will react. A credible threat of retaliation by incumbent firms often deters entry
Powerful Suppliers can reduce a firm's ability to obtain superior performance for two reasons:
-They can raise the cost of production by demanding higher prices for their inputs or by reducing the quality of the input factor or service level delivered
-They are a threat to firms because they reduce the industry's profit potential by capturing part of the economic value created
The relative bargaining Power of Suppliers is high when:
-The suppliers' industry is more concentrated than the industry it sells to
-Suppliers do not depend heavily on the industry for a large portion of their revenues
-Incumbent firms face significant switching costs when changing suppliers
-Suppliers offer products that are differentiated
-There are no readily available substitutes for the products or services that the suppliers offer
-Suppliers can credibly threaten to forward-integrate into the industry
The Power of Buyers
-Strong buyers can reduce industry profit potential and a firm's profitability
-Strong buyers are a threat to the producing firms because they reduce the industry's profit potential by capturing part of the economic value created
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 commoditities
-Buyers face low or no switching costs
-Buyers can credibly threaten to backwardly integrate into the industry
Companies need to be aware of situations when buyers are especially price sensitive, this is the case when:
-The buyer's purchase represents a significant fraction of its cost structure or procurement budget
-Buyers earn low profits or are strapped for cash
-The quality (cost) of the buyers' products and services isn't affected much by the quality (cost) of their inputs
The 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
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
Rivalry among existing competitors
-Threat of entry, power of buyers and suppliers, and the threat of substitutes all exert power upon this rivalry. The stronger the forces, the stronger the expected competitive intensity, which in turn limits the industry's profit potential
Fragmented Industry
Consists of many small firms and tends to generate low profitability
Consolidated Industry
Dominated by a few firms, or maybe just one, and it has the potential to be highly profitable
Competitive Industry Structure
Elements and features common to all industries, including the number and size of competitors, the firms' degree of pricing power, the type of product or service offered, and the height of entry barriers
4 main Competitive Industry Structures
-Perfect Competition
-Monopolistic Competition
-Oligopoly
-Monopoly
Perfectly Competitive Industry
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
-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
-Firms in perfect competition have difficulty achieving even a temporary competitive advantage and can achieve only competitive parity
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
Oligopolistic Industry
Consolidated with a few large firms, differentiated products, high barriers to entry, and some degree of pricing power
-Competing firms are interdependent. With only a few competitors in the mix, the actions of one firm influence the behaviors of the others
-This industry structure is often analyzed using Game Theory, which attempts to predict strategic behaviors by assuming that the moves and reactions of competitors can be anticipated
Monoploy
One, large firm supplying the market. Firm may offer a unique product, and the challenges to moving into the industry tend to be high.
-Monopolist has considerable pricing power
-Firm and industry profit tends to be high
Exit Barriers
Obstacles that determine how easily a firm can leave an industry
-Both economic and social factors
-Can include fixed costs that must be paid regardless of whether thee company is operating in the industry or not
-Industry with low exit barriers is more attractive because it allows underperforming firms to exit more easily
Complement
A product, service, or competency that adds value to the original product offering when the two are used in tandem
-Increase the demand for the primary product, thereby enhancing the profit potential for the industry and the firm
Complementor
A company that provides a good or service that leads customers to value your firm's offering more when the two are combined
Co-opetition
Cooperation by competitors to achieve a strategic objective
What can the 5 Forces Model not do
Cannot determine the changing speed of an industry or the rate of innovation
-This drawback implies that managers must repeat their analysis over time in order to create a more accurate picture of their industry
Industry Convergence
A process whereby formerly unrelated industries begin to satisfy the same customer need
Strategic Group
The set of companies that pursue a similar strategy within a specific industry
-Differ from one another along important dimensions such as expenditures on R&D, technology, product differentiation, product and service offerings, pricing, market segments, distribution channels, and customer service
Strategic Group Model
A framework that explains differences in firm performance within the same industry
-This difference implies that firm performance is determined not only by the industry to which the firm belongs, but also by its strategic group membership
The rivalry among firms within the same Strategic Group is generally:
More intense than the rivalry among strategic groups: intra-group rivalry exceeds inter-group rivalry
Mobility Barriers
Industry-specific factors that separate one strategic group from another
Follow these steps to apply the 5 Forces Model
-Define the relevant industry
-Identify the key players in each of the 5 forces and attempt to group them into different categories
-Identify the underlying drivers of each force
-Assess the overall industry structures
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