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Chapter 3 external analysis
Terms in this set (55)
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.
describes the processes and actions of government bodies that can influence the decisions and behavior of firms.
official outcomes of political processes as mani-fested in laws, mandates, regulations, and court decisions— all of which can have a direct bearing on a firm's profit potential. In fact, regulatory changes tend to affect entire indus-tries at once.
growth rates, interest rates, level of employment, price stability(inflation/deflation), currency exchange rates
measure of the change in the amount of goods and services produced by a nation's economy. It indicates what stage of the business cycle the economy is in— that is, whether business activity is expanding ( boom) or contracting ( recession).
amount that savers are paid for use of their money and the amount that borrowers pay for that use.
levels of employment
In boom times, unemployment is low, and skilled human capital becomes a scarce and more expensive resource. In economic downturns, unemployment rises. As more people search for employment, skilled human capital is abundant and wages usually fall.
the lack of change in price levels of goods and services— is rare.
currency exchange rates
determines how many dollars one must pay for a unit of foreign currency.If the U. S. dollar depreciates ( declines in value), for example, it takes more dollars to buy one euro, which in turn makes European imports such as LVMH luxury accessories or BMW automobiles
capture a society's cultures, norms, and values. Because sociocul-tural forces 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.
These trends capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class.
capture the application of knowledge to create new processes and products. Recent innovations in process technology include lean manufacturing, six sigma and biotech
concern broad environmental issues such as the natural environment, global warming, and sustainable economic growth.
group of ( incumbent) companies that face 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 customer needs.
provides a more rigorous basis not only to identify an industry's profit potential ( the level of profitability that can be expected for the average firm), but also to derive implications for one firm's strategic posi-tion within an industry.
relates to its ability to create value for customers ( V ) while containing the cost to do so ( 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 ( V- C ).
Five forces model
help managers understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage.competition must be viewed more broadly to encom-pass not only direct rivals but also a set of other forces in an industry: buyers, suppliers, potential new entry of other firms, and the threat of substitutesThe 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.
the stronger the five forces, the lower the industry's profit potential — making the industry less attractive for competi-tors. The reverse is also true: the weaker the five forces, the greater the industry's profitpotential — making the industry more attractive.
Five competitive forces
1. Threat of entry 2. Power of suppliers 3. Power of buyers 4. Threat of substitutes 5. Rivalry among existing competitors
threat of entry
The risk that potential competitors will enter an industry.
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.Economies of scale ¦ Network effects ¦ Customer switching costs ¦ Capital requirements ¦ Advantages independent of size ¦ Government policy ¦ Credible threat of retaliation
economics of scale
cost advantages that accrue for firms with larger output because they can spread fixed costs over more units, can employ tech-nology more efficiently, can benefit from a more specialized division of labor, and can demand better terms from their suppliers. These factors in turn drive down the cost per unit, allowing large incumbent firms to enjoy a cost advantage over new entrants who can-not muster such scale.
positive effect that one user of a product or service has on the value of that product or service for other users. When network effects are pres-ent, the value of the product or service increases with the number of users.
incurred by moving from one supplier to another. Changing vendors may require the buyer to alter product specifica-tions, retrain employees, and/ or modify existing processes. Switching costs are therefore one- time sunk costs, which can be quite significant and a formidable barrier to entry.
the " price of the entry ticket" into a new industry. How much capital is required to compete in this industry, and which companies are willing and able to make such investments?
advantages independent of size
These advantages can be based on brand loyalty, proprietary technology, preferential access to raw materials and/ or distribution channels, favorable geographic locations, and cumulative learning and experience effects.
Frequently government policies restrict or prevent new entrants.
credible threat of retaliation
credible threat of retaliation by incumbent firms often deters entry. Should entry still occur, however, incumbents are able to retaliate quickly, through initiating a price war, for example.
Power of suppliers
captures pressures that industry suppliers can exert on an industry's profit potential. This force reduces a firm's ability to obtain superior perfor-mance for two reasons: powerful suppliers 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. Powerful suppliers are a threat to firms because they reduce the industry's profit potential by capturing part of the economic value created.
power of buyers
Buyers are the customers of an industry. The power of buyers concerns the pressure an industry's customers can put on the producer's margins in the industry by demanding a lower price or higher product quality. When buyers successfully obtain price discounts, it reduces a firm's top line ( revenue). When buyers demand higher quality and more service, it generally raises production costs.
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.
threat of substitutes
dea 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 competitors
the intensity with which companies within the same industry jockey for market share and profitabilityThe intensity of rivalry among existing competitors is determined largely by the follow-ing factors: ¦ Competitive industry structure ¦ Industry growth ¦ Strategic commitments ¦ Exit barriers
competitive industry structure
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. height of entry barriers
many small firmsand tends to generate low profitability
is dominated by a few firms, or even just one firm, and has the potential to be highly profitable.
perfectively competitive industry
characterized as 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. The 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. The result-ing performance of the industry shows low profitability.
many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers.i.e. computer hardware
consolidated with few ( large) firms, differentiated products, high barriers to entry, and some degree of pricing power. The degree of pricing power depends, just as in monopolistic competition, on the degree of product differentiation. competing firms independent
is only one ( large) firm supplying the market. " Mono" means one, and thus a monopolist is the only seller in a market. The firm may offer a unique product, and the challenges to moving into the industry tend to be high. The monopolist has considerable pricing power. As a consequence, firm ( and thus industry) profitability tends to be high.
Obstacles that determine how easily a firm can leave an industry.
A product, service, or competency that adds value to the original product offering when the two are used in tandem.
A company that provides a good or service that leads customers to value your firm's offering more when the two are combined.
The threat of entry is high when: v The minimum efficient scale to compete in an industry is low. v Network effects are not present. v Customer switching costs are low. v Capital requirements are low. v 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. v Restrictive government regulations do not exist. v New entrants expect that incumbents will not or cannot retaliate.
he power of suppliers is high when: v Suppliers' industry is more concentrated than the industry it sells to. v Suppliers do not depend heavily on the industry for their revenues. v Incumbent firms face significant switching costs when changing suppliers. v Suppliers offer products that are differentiated. v There are no readily available substitutes for the products or services that the suppliers offer. v Suppliers can credibly threaten to forward integrate into the industry.
The power of buyers is high when: v There are a few buyers and each buyer purchases large quantities relative to the size of a single seller. v The industry's products are standardized or undifferentiated commodities. v Buyers face low or no switching costs. v Buyers can credibly threaten to backwardly integrate into the industry.
The threat of substitutes is high when: v The substitute offers an attractive price- performance trade- off. v The buyers' cost of switching to the substitute is low.
The rivalry among existing competitors is high when: v There are many competitors in the industry. v The competitors are roughly of equal size. v Industry growth is slow, zero, or even negative. v Exit barriers are high. v Incumbent firms are highly committed to the business. v Incumbent firms cannot read or understand each other's strategies well. v Products and services are direct substitutes. v Fixed costs are high and marginal costs are low. v Excess capacity exists in the industry. v The product or service is perishable.
process whereby for-merly unrelated industries begin to satisfy the same customer need. Industry convergence is often brought on by technological advances.
Cooperation by competitors to achieve a strategic objective.
The set of companies that pursue a similar strategy within a specific industry.
strategic group model
A framework that explains differences in firm performance within the same industry by clustering different firms into groups based on a few key strategic dimensions.
mapping strategic groups
Competitive rivalry is strongest between firms that are within the same strategic group.The external environment affects strategic groups differentlyThe five competitive forces affect strategic groups differentlySome strategic groups are more profitable than others.
Industry- specific factors that separate one strategic group from another.
Follow these steps to apply the five forces model:
1. Define the relevant industry
2. identify key players in each of the 5 forces and attempt to group them into different categories
3. identify underlying drivers of each force
4. assess the overall industry structure
5. draw a strategic group map
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