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Mgmt 494BI: Chapter Three

Terms in this set (23)

How external factors impact a firm? (achieve competitive advantages/ profits)
General environment:
- Managers have little control. (no direct control)
- Macroeconomic factors are included.
Examples: interest, exchange rates, etc.

Task environment: (control)
- Managers can influence.
- Includes the composition of strategic groups.
- Includes the structure of the industry.
The PESTEL Model
A straightforward way to scan, monitor, and evaluate external factors. (build understanding of environment)

Includes:
- Politcal
- Economical
- Sociocultural
- Technological
-Ecological
- Legal
Industry vs. Firm Effects
Industry Effects
- Describe the economic structure of the industry
- Elements in common to all
- Entry and exit barriers, number and size of companies,
and types of products and services offered

Firm Effects (specific to each firm)
-The actions managers take
- More important than firm effects
Industry and industry analysis
Industry:
•Group of incumbent companies
•Relatively similar suppliers and buyers
•Similar products and services

Industry analysis, a method to: (all firms need to involve, critical sep)
•Identify an industry's profit potential
•Derive implications for a firm's strategic position
Strategic Positioning
A firm's ability to:
- Create value for customers (V).
- While containing costs (C).

Goal: To generate a large gap between: (maximize value, minimize cost)
- The value the firm's product or service creates.
- The cost required to produce it.
(V minus C)
Five Forces Model
The Five Forces Model helps strategic leaders understand:
- The profit potential of different industries.
- How they can position their firms to gain and sustain competitive advantage.

Two key insights about this model:
- Competition is viewed more broadly in the five forces model.(not only direct competitor)
- Profit potential is a function of the five competitive forces.(random)
Porter's Five Forces Model: Name all Five
- Threat of New Entrants
- Threat of Substitute; Products or Service
- Bargaining Power of Suppliers
- Bargaining Power of Buyers
- Rivalry amongst Existing Competitors
Porter's Five Forces Model: Threat of Entry
When is Threat of Entry high?
Threat of Entry
- The risk that potential competitors will enter an industry (lowers industry profit potential)
- Increases spending among incumbent firms

Entry barriers: (how easily a firm can entry the industry)
- Economies of scale.
- Network effects.
- Customer switching costs.
- Capital requirements.
- Advantages independent of size.
- Government policy.
- Credible threat of retaliation.


The Threat of Entry is high when:

✓The minimum efficient scale to compete in an industry is low.

✓Network effects are not present.

✓Customer switching costs are low.

✓Capital requirements are low.

✓Incumbents do not possess:
Brand loyalty.
Proprietary technology.
Preferential access to raw materials.
Preferential access to distribution channels.
Favorable geographic locations.
Cumulative learning and experience effects.

✓Restrictive government regulations do not exist.

✓New entrants expect that incumbents will not or cannot retaliate.
Porter's Five Forces Model: Power of Suppliers
When is Power of Suppliers high?
Power of Suppliers
- Pressures that industry suppliers can exert on an industry's profit potential.
- Lowers industry profit potential if:
•Suppliers demand higher prices for their inputs.
•Suppliers capture part of the economic value created.

The power of suppliers is high when:

✓Supplier's industry is more concentrated than the industry it sells to.

✓Suppliers do not depend heavily on the industry for 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.
Porter's Five Forces Model: Power of Buyers
When is Power of Buyers high?
Power of Buyers (Customers) bargaining power

- Lowers industry profit potential if:
•Buyers obtain price discounts, which reduces revenue.
•Buyers demand higher quality / service, which raises production costs.

- Situations when buyers are price sensitive:
•The buyer's purchase represents a significant portion of its procurement budget.
•Buyers earn low profits or are strapped for cash.
•The quality (cost) of the buyers' products and services is not affected much by the quality (cost) of their inputs.

- Buyers are the customers of an 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.

Ex: The retail giant Walmart provides perhaps the most potent example of tremendous buyer power. Walmart is not only the largest retailer worldwide (with over 12,000 stores and 2 million employees), but it is also one of the largest companies in the world (with $530 billion in revenues in 2019).
- Walmart is one of the few large big-box global retail chains and frequently purchases large quantities from its suppliers.
- Walmart leverages its buyer power by exerting tremendous pressure on its suppliers to lower prices and to increase quality or risk losing access to shelf space at the largest retailer in the world. Walmart's buyer power is so strong that many suppliers co-locate offices directly next to Walmart's headquarters in Bentonville, Arkansas, because such proximity enables Walmart's managers to test the supplier's latest products and negotiate prices.
Porter's Five Forces Model: Threat of Substitutes
When is Threat of Subsititues high?
Threat of Substitutes
- Meet the same basic customer need:
•In a different way.
•Available from outside the given industry.

Examples:
- Software vs. professional services.
- Energy drinks vs. coffee.
- Videoconferencing vs. business travel.
- Wireless phone services vs. internet-based services (Skype).

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.
•High threat: reduce the industry profits by limit the price the industry can charge
Porter's Five Forces Model: Rivalry Among Competitors
When is rivalry among existing competitors high?
Rivalry Among Competitors
- The intensity with which companies in the same industry jockey for market share and profitability.
•Can range from genteel to cut-throat.
•The other forces in the model pressure this rivalry.
•The stronger the forces, the stronger the competitive intensity.

The rivalry among existing competitors is high when:

✓There are many competitors in the industry.

✓The competitors are roughly of equal size.

✓Industry growth is slow, zero, or even negative.

✓Exit barriers are high.

✓Incumbent firms are highly committed to the business.

✓Incumbent firms cannot read or understand each other's strategies well.

✓Products and services are direct substitutes.

✓Fixed costs are high and marginal costs are low.

✓Excess capacity exists in the industry.

✓The product or service is perishable.
What are two key insights Porter derived from the basis of his seminal five forces model?
Porter derived two key insights that form the basis of his seminal five forces model:
1. 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.

2. The profit potential of an industry is neither random nor entirely determined by industry-specific factors. Rather, it is a function of the five forces that shape competition: threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing firms.

- As a rule of thumb, the stronger the five forces, the lower the industry's profit potential—making the industry less attractive for competitors. The reverse is also true: the weaker the five forces, the greater the industry's profit potential—making the industry more attractive
Competitive industry structure is defined by?
- Number and size of competitors.
- Firm's degree of pricing power.
- Type of product or service (commodity or differentiated product).
- Height of entry barriers.
​​- Industry Competitive Structures along the Continuum from Fragmented to Consolidated:
Industry growth?
- Affects intensity of rivalry among competitors.
- During periods of high growth:
•Consumer demand rises.
•Price competition among firms decreases.

- During periods of negative growth:
•Rivalry is fierce.
•Rivals can only gain at the expense of one another.
•Price discounts, promotional campaigns, and retaliation abound.

Example: The demand for knee replacements is a fast-growing segment in the medical products industry. In the U.S, robust demand is driven by the need for knee replacements for an aging population as well as for an increasingly obese population. The leading competitors are Zimmer Biomet, DePuy, and Stryker, with a significant share held by Smith & Nephew.
- Competition is primarily based on innovative design, improved implant materials, and differentiated products such as gender solutions and a range of high-flex knees.
- With improvements to materials and procedures, younger patients are also increasingly choosing early surgical intervention. Competitors are able to avoid price competition and, instead, focus on differentiation that allows premium pricing.
Strategic Commitments
Actions that are
- costly,
- long-term oriented,
- and difficult to reverse

Can stem from:
- Large, fixed cost requirements.
- Non-economic considerations.
- Affects intensity of rivalry among competitors.
Exit Barriers
Obstacles that determine how easily a firm can leave that industry.
- Mainly economic and social factors.
- Include fixed costs that must be paid.
- Ex: employee health care and retirement benefits.
- Contract of suppliers
In Michigan, entire communities still depend on GM, Ford, and Chrysler. If any of those carmakers were to exit the industry, communities would suffer. Other social and economic factors include ripple effects through the supply chain. When one major player in an industry shuts down, its suppliers are adversely impacted as well.
Complements
A product, service, or competency that adds value when used with the original product.
- Complements increase demand for the primary product.
- Enhances the profit potential for the industry and the firm.
- Co-opetition: cooperation among competitors to achieve a strategic objective.
Industry Dynamics
A weakness of other models is that they are static (point-in-time snapshot).

Industry dynamics provides insight about:
•Changing speed of an industry.
•Rate of innovation.
•Help capture structural changes in the industry.

- The U.S. domestic airline industry has witnessed several large, horizontal mergers between competitors, including Delta and Northwest, United and Continental, Southwest and AirTran, as well as American and U.S. Airways. These moves allow the remaining carriers to enjoy a more benign industry structure.
- It also allows them to retire some of the excess capacity in the industry as the merged airlines consolidate their networks of routes. The merger activity in the airline industry provides one example of how firms can proactively reshape industry structure in their favor. A more consolidated airline industry is likely to lead to higher ticket prices and fewer choices for customers, but also more profitable airlines.
Industry Convergence
When unrelated industries begin to satisfy the same customer need.

Caused by technological advances.
Example:Media Industries: Content going online.
Newspapers, magazines, TV, movies, radio, music.
Will print media become obsolete?
- Internet companies such as Google, Facebook, Instagram (acquired by Facebook), LinkedIn (acquired by Microsoft), Snap, Pinterest, and Twitter are changing the industry structure by constantly morphing their capabilities and forcing old-line media companies such as News Corp., Time Warner, and Disney to adapt.
- A wide variety of mobile devices, including smartphones, tablets, and e-readers, provide a new form of content delivery that has the potential to make print media obsolete.
Strategic Groups
Strategic groups:
- A set of companies.
- Pursue a similar strategy.
- In the same industry.

The strategic group model (framework):
- Clusters different firms into groups.
- Is based on key strategic dimensions. (even in the same industry, group perform differently due to different strategy group which infer that group performance not only determine by industry but also by strategies

- Strategic groups differ from one another along important dimensions such as expenditures on research and development, technology, product differentiation, product and service offerings, market segments, distribution channels, and customer service.
How to create a strategic group model?
What are some insights from strategic group mapping?
- Identify the important strategic dimensions.
- Choose two key dimensions:
•For horizontal (Combine) and vertical axes (Take over).
•Ensure they're not highly correlated.

- Graph the firms in the strategic group.
•Each firm's market share is indicated by the size of the bubble.

Insights:
Competitive rivalry is strongest between firms in the same strategic group.
- External environment affects strategic groups differently.
- Five competitive forces affect strategic groups differently.
- Some strategic groups are more profitable than others.
Mobility barriers
- Restrict movement between strategic groups.
- Industry-specific factors that separate one group from another.
- Based on hard-to-reverse investments (strategic commitments).
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