2: Competition and Industry Structure Flashcards
firm’s external environment
in 4 circles n 6 dimensions for analysis
world > industry > strategic group > firm
PESTEL: Political § Government pressures § Subsidies n incentives § Differences in countries, states
Economic § Growth rates § Interest rates § Employment levels § Currency exchange
Sociocultural
§ Norms, culture, values
§ Demographics
§ Lifestyle changes
Technological
§ Innovation
§ Diffusion
§ Research n development
Ecological
§ Global warming
§ Sustainability
§ Pollution
Legal
§ Court system
§ Legislation
§ Hiring laws
Backup - Structure-Conduct-Performance model
goal,
3 elements explained
> Describes the conditions under which perfect competition in an industry would not unfold
§ Number of buyers and sellers § Product differentiation § Barriers to entry § Cost structures § Vertical integration
§ Pricing behavior § Product strategy § Advertising § Research and development § Investment in plants and equipment
§ Firm performance
§ Society: Productivity and efficiency in allocation
§ Level of employment and progress
continuum of possible industry structures
2 poles
4 stages, seen in 4 dims.
> from fragmented w low profitability
to consolidated w high profitability <
perfect competition
- many firms
- zero pricing power (=price takers)
- commodity product
- low entry barriers
monopolistic competition
- many firms
- some pricing power
- differentiated product
- medium entry barriers
oligopoly
- few firms
- high pricing power
- differentiated product
- high entry barriers
monopoly
- 1 firm
- very high pricing power
- unique product
- very high entry barriers
industries w high n low ROI(C) = profitability
depends on what?
high: SW, pharma, IT services
low: airlines, hotels, electric utilities
depends on 5 competitive forces!
Barriers to entry:
equivalent to,
7=2+1+3+1 types explained when needed
~= collective capital good, generating joint profits for incumbents
Economies of scale:
incumbents @ optimal volume -> delta cost
Cost disadvantage
incumbents have learnt -> delta cost
or could be geographical! (e.g. energy)
Product differentiation
entrants must spend to overcome customer loyalty
Capital requirements
Switching costs
Distribution channels
Government policies (2 "public", 2 "nationalistic") § Licensing requirements § Standards and regulations § Technology transfer provision § Limiting access to raw materials
3 drawbacks of to economies of scale
- trade-off with product differentiation
- technological change may penalize large-scale firm if more specialized
- economies of scale w existing technology may prevent investment in new ones
4=2+1+1 drawbacks of cost advantage thru experience
- nullified by new technologies
- trade-off with product differentiation
- bad if too many firms in the industry use this strategy
- drawing focus away from market developments
intensity of competition
2 measures,
8=4+4 factors, explained when need be
- HHI index = sum_i ( market_share_i^2 )
- CR4 index = market share(4 big) / total
Numerous and equally balanced competitors
Slow industry growth
High fixed costs
> need to fill excess capacity > rapid price cuts
Lack of differentiation or switching costs
> lock-in effect
Capacity increase
Diversity of competitors
High strategic stakes
High exit barriers
substitutes:
3 effects,
3 faciliators
- limit prices > profitability of an industry
- often based in emerging technologies
- managerial challenge for incumbents, because difficult to detect and act on
- low switching costs
- lower price of substitute
- equal or greater performance/quality of substitute
bargaining power:
def
6 factors for suppliers
8 factors for buyers
= ability to influence the price and delivery conditions
- higher concentration than downstream
- lack of substitutes
- low importance of downstream as client
- important input for downstream
- product differentiation or other switching costs
- threat of forward vertical integration
- buying high volumes
- big share of buyer’s spending
- lack of product differentiation
- low switching costs
- low profits
- threat of backward vertical integration
- UNimportant input for downstream
- full information
4=1+2+1 limits of 5-forces framework
- static perspective, i.e. valid in static conditions
- collaboration n coopetition?
- complements?
- Non-market forces such as government policy and international politics?
strategic groups
Porter’s def + (dis)similarities
+ 5=1+4 strat. dims.
= A group of firms in an industry following the same or similar strategy along the same strategic dimensions
- may be idiosyncratic, but are similar on strat. dims
§ Technology leadership § Product quality § Service level § Pricing § Choice of distribution channel
strategic groups in 2 dims. n groups
+ 5=1+2+2 A>B mobility incentives
- 4=1+1+2 mobility barriers
Group A: low prices, weak image
Group B: high prices, strong image
+ Profit B > Profit A
+ Changing buyer preferences
+ Increasing fixed and variable costs A
+ Opportunities for strategic cooperation
+ Expected increase in competitive intensity A
- Cost of strategic change
- Organizational inertia
- Uncertain replication of strategic initiatives
- Difficulty of imitating intangible assets
the 3 determinants of firm performance, quantitatively
- firm effects 30-45%
- industry effects 20%
- other (corporate parent, year effects, unexplained variance) 35-50%
Recap: 8=2+(1+4)+1 models to analyse firm’s environment
PESTEL
Structure-Conduct-Performance
The five-forces model Barriers to entry Intensity of competition Substitution Bargaining power
Strategic groups
