Chapter 2- External Analysis: The Identification of Opportunities and Threats Flashcards
Opportunities
Elements and conditions in a company’s environment that allow it to formulate and implement strategies that enable it to become more profitable.
Threats
Elements in the external environment that could endanger the integrity and profitability of the company’s business.
Industry
A group of companies offering products or services that are close substitutes for each other. (They satisfy the same customer needs).
Porter’s Competitive Forces Model
Focuses on six forces that shape competition within an industry:
1) The risk of entry by potential competitors.
2) The intensity of rivalry among established companies within an industry.
3) The bargaining power of buyers.
4) The bargaining power of suppliers.
5) The closeness of substitutes to an industry’s products, and
6) The power of complement providers. (Note that Portion did not recognize this sixth force, but it is an extension of his model).
Potential Competitors
Companies that are currently not competing in the industry but have the potential to do so.
What are the barriers of entry?
1) Economies of Scale
2) Brand Loyalty
3) Absolute Cost Advantage
4) Customer Switching Costs
5) Government Regulations
Economies of Scale
Reductions in unit costs attributed to large output.
What are some sources of economies of scale?
Sources include:
1) Cost reductions gained through mass-producing a standardized output.
2) Discounts on bulk purchases of raw material inputs and component parts
3) The advantages gained by spreading fixed production costs over a large production volume; and
4) The cost savings associated with distribution, marketing, and advertising costs over a large volume of output.
Brand Loyalty
Preference of consumers for the products of established companies.
Absolute Cost Advantage
A cost advantage that is enjoyed by incumbents in an industry and that new entrants cannot expect to match.
How can a company create brand loyalty?
They can create this by continuously advertising its brand-name products and company name, patent protection of its products, product innovation achieved through company research and development (R&D) programs, an emphasis on high-quality products, and exceptional after-sales service.
What are the three main sources that can lead to an absolute cost advantage?
1) Superior production operations and processes due to accumulated experience, patents, or trade secretes.
2) Control of particular inputs required for production, such as labor, materials, equipment, or management skills, that are limited in supply.
3) Access to cheaper funds because existing companies represent lower risks than new entrants.
Switching Costs
Costs that consumers must bear to switch from the products offered by one established company to the products offered by a new entrant.
What four factors have a major impact on the intensity of rivalry among established companies within an industry?
1) Industry competitive structure.
2) Demand conditions.
3) Cost conditions,
4) The height of exit barriers in the industry.
Industry Competitive Structure
Revers to the number and size distribution of companies within it, something that strategic managers determine at the beginning of an industry analysis.
Fragmented Industry
This type of industry consists of a large number of small or medium-sized companies, non of which is in a position to determine industry price.
Consolidated Industry
This type of industry is dominated by a small number of large companies (an oligopoly) or, in extreme cases, by just one company (a monopoly).
Exit Barriers
These are economic, strategic, and emotional factors that prevent companies from leaving an industry.
What are instances when the buyer has more power?
Buyers have more power when:
1) When buyers have a choice.
2) When the buyers purchase in large quantities, they can use their purchasing power as leverage to bargain for price reductions.
3) When the supply industry depends upon buyers for a large percentage of its total orders.
4) When switching costs are low and buyers can pit the supplying companies against each other to force down prices.
5) When it is economically feasible for buyers to purchase an input from several companies at once, they can pit one company in that industry against another.
6) When buyers can threaten to enter the industry and independently produce the product, then supplying their own needs, they can force down industry prices.
Bargaining Power of Suppliers
Refers to the ability of suppliers to raise input prices, or to raise the costs of the industry in other ways.
In what situations do suppliers have more bargaining power?
1) The product that suppliers sell has few substitutes and is vital to the companies in an industry.
2) The profitability of suppliers is not significantly affected by the purchases of companies in a particular industry; in other words, when the industry is not an important customer to the supplier.
3) Companies in an industry would experience significant switching costs if they moved to the product of a different supplier because a particular supplier’s products are unique or different.
4) Suppliers can threaten to enter their customers’ industry and use their inputs to produce products that would compete directly with those of companies already in the industry.
5) Companies in the industry cannot threaten to enter their suppliers’ industry and make their own inputs as a tactic for lowering the price of inputs.
Substitute Products
The products of different businesses or industries that can satisfy similar customer needs.
Complementors
Companies that sell products that add value to (complement) the products of companies in an industry because, when used together, the combined products better satisfy customer demands.
Mobility Barriers
These are within-industry factors that inhibit the movement of companies between strategic groups.
What are the five stages in the industry life-cycle model?
1) Embryonic
2) Growth
3) Shakeout
4) Mature
5) Decline
Embryonic Industry
This is an industry that is just beginning to develop. Growth at this stage is slow because of factors such as buyer’s unfamiliarity with the industry’s product, high prices due to the inability of companies to leverage significant scale economies, and poorly developed distribution channels.
Growth Industries
In this type of industry, first-time demand is expanding rapidly as many new customers enter the market. Typically, this occurs when customers become familiarity with the product, prices fall because scale economies have been attained, and distribution channels develop.
Industry Shakeout
In this phase the rate of growth slows and demand approaches saturation levels: more and more of the demand is limited to replacement because fewer potential first-time buyers remain.
Mature Industries
In this stage the market is totally saturated, demand is limited to replacement demand, and growth is low or zero.
Declining Industries
In this phase, growth becomes negative for a variety of reasons, including technological substitution, social changes, demographics, and international competition.
What is the main limitation with the industry life-cycle model?
This model serves as a generalization. In practice, industry life cycles do not always follow the pattern this model depicts. Some stages can be skipped and the length of time in each stage can vary.
Punctuated Equilibrium
A view of the evolution of industry structure where long periods of equilibrium (refreezing), when an industry’s structure is stable, are punctuated by period of rapid change (unfreezing), when industry structure is revolutionized by innovation.
What are the macroenvironment forces?
1) Political and Legal Forces
2) Demographic Forces
3) Global Forces
4) Technological Forces
5) Social Forces
6) Macroeconomic Forces
what are the four primary macroeconomic forces?
1) The growth rate of the economy.
2) Interest rates.
3) Currency exchange rates.
4) Inflation (or deflation) rates.
