Chapter 3: External Analysis: Industry Structure Competitive Forces, and Strategic Groups Flashcards
A framework that categorizes and analyzes an important set of external factors (political, economic, sociocultural, technological, ecological, and legal)
that might impinge upon a firm. These
factors can create both opportunities and
threats for the firm.
Pestel Model
result from the pressure that various groups such as government bodies,
nongovernmental organizations (NGOs), and social movements can exert to influence the
decisions and behavior of firms.
Political Factors
Strategic leaders’ activities outside
market exchanges (in which firms sell products or provide services) to influence a firm’s general environment through such activities as lobbying, public relations,
contributions, and litigation that will lead
to favorable outcomes for the firm.
Nonmarket Strategy
in a firm’s external environment are largely macroeconomic, affecting
economy-wide phenomena.
Economic Factors
measures the change in the value of
goods and services produced by a nation’s economy.
Growth Rates
In boom times, unemployment tends to be low, and skilled human capital becomes scarce and more expensive.
Employment Level
rates—the amount that creditors earn for lending their money and the amount that
debtors pay to use that money, adjusted for inflation.
Interest Rates
little or no change in the prices of goods and services—is rare because economic growth is dynamic and needs to be matched with adequate monetary supply.
Price Stability
A general and sustained increase
in the overall price level for goods and
services in an economy.
Inflation
determines how many dollars
one must pay for a unit of foreign currency. It is a critical variable for any company buying
or selling products and services across national borders, and strategic leaders need to fully
appreciate the power of varying currency exchange rates to assess their effects on firm
performance.
Currency Exchange Rates
capture the application of knowledge to create new processes and products. Significant innovations in process technology include lean manufacturing, Six Sigma quality, genetic engineering, artificial intelligence (AI), and quantum computing.
Technological Factors
concern broad environmental issues such as the natural environment, climate change, and sustainable economic growth. Organizations and the natural environment coexist in an interdependent relationship.
Ecological Factors
capture the official outcomes of political processes as manifested in laws, man-
dates, regulations, and court decisions, all of which can directly impact a firm’s profit potential. Regulatory changes tend to affect entire industries.
Legal Factors
Occurs
when the production or
consumption of goods
and services imposes
costs on or provides
benefits to others, but
the prices of the goods
and services do not
capture these costs
and benefits.
Externalities
Firm performance attributed to the
structure of the industry in which the firm competes.
Industry Effects
Firm performance attributed to the
actions strategic leaders take.
Firm Effects
A group of
incumbent firms with
more or less the same
set of suppliers and
buyers.
Industry
A method to (1) identify
an industry’s profit
potential and (2) derive
implications for a firm’s
strategic position
within an industry.
Industry Analysis
A firm’s strategic profile
based on the difference
between value creation
and cost (V – C).
Strategic Position
A framework that identifies five forces that determine the profit potential of an industry
and shape a firm’s competitive strategy.
Five Forces Model
The risk that potential competitors will enter an industry.
Threat of Entry
Obstacles that discourage or prevent entry into an industry.
Entry Barriers
are 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.
Economies of Scale
The positive impacts that
one user of a product
or service has on other
users of that product or
service.
Network Effects
are the costs that a customer incurs when
changing to the products, services, and/or brands offered by a different vendor.
Customer Switching Cost
are the “entry ticket price” into a new industry.
Capital Requirements
Incumbent firms often possess cost and quality advantages that are independent of company size.
Advantages Independent Size
an essential concept in marketing, captures a consumer’s
emotional attachment and feelings toward a specific brand.
Brand Loyalty
technology is any process, method, device, or system
that firms use to solve problems when providing products and services.
Proprietary Technology
access to raw materials, critical components, and distribution channels can bestow absolute cost advantages.
Preferential Access
such as the locations of Tesla’s Gigafactories
near Austin, Texas, and Shanghai, China, provide advantages that other locales cannot match easily.
Favorable Locations
Finally, incumbent firms often benefit from cumulative learning and experience effects over long periods.
Cumulative Learning and Experience
Suppliers with strong bargaining power can exert pressure on an industry’s profit potential.
The Power of Suppliers
In many ways, buyers’ bargaining power is the flip side of suppliers’ bargaining power.
Power of Buyers
Substitutes are the threat that products or services available from outside the given industry will come close to meeting the needs of current customers
THE THREAT OF SUBSTITUTES
The threat of substitutes is high when they offer a low-cost alternative that provides a similar or equivalent product or service performance.
Price/Performance Trade-Off
In addition to offering a lower price, substitutes may become
more attractive by offering a higher value proposition.
Low Switching Cost
Elements
and features common
to all industries, includ-
ing the number and
size of competitors, the
firms’ degree of pricing
power, the type of
product or service of-
fered, and the height
of entry barriers.
Competitive Industry Structure
It is characterized by
many small firms, a commodity product, ease of entry, and little or no ability for each firm to raise its prices.
Perfect Competition
a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers.
Monopolistic Competition
industry is consolidated. It has a few large firms, differentiated products, high barriers to entry, and some degree of pricing power.
Oligopoly
when there is only one, often large firm supplying the market.
Monopoly
directly affects the intensity of rivalry among competitors. During periods of high growth, consumer demand rises, and price competition among firms frequently decreases.
Industry Growth
costly, have a long-
term impact, and are
difficult to reverse.
Contrast with tactical
decisions, which are
short-term and can be
easily reversed.
Strategic Commitments
The obstacles that interfere
with a firm’s ability to
leave an industry.
exit barriers
A product, service, or competency that adds value to the original product offering when the two are used in tandem.
Complement
A company that provides a good or service that leads customers to value your firm’s offering more when the two
are combined.
Complementor
Cooperation by competitors to achieve a strategic objective.
Co-opetition
A process whereby
formerly unrelated
industries begin to
satisfy the same
customer need.
Industry Convergence
The
set of companies that
pursue a similar
strategy within a
specific industry.
Strategic Group
A framework
that explains differ-
ences in firm perfor-
mance within the same
industry.
Strategic Group Model
Industry-specific factors that separate one
strategic group from
another.
Mobility Barriers
