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Results Driven Strategic Management > Chapter 3: External Analysis: Industry Structure, Competitive Forces, and Strategic Groups > Flashcards

Chapter 3: External Analysis: Industry Structure, Competitive Forces, and Strategic Groups Flashcards

-PESTEL framework -The Five Forces Model -Changes over Time- Industry Dynamics -Performance Differences within the Same Industry: Strategic Groups

1
Q

Why is it important for a firm to analyze its external environment? (4)

A
  • managers can mitigate threats
  • managers can leverage opportunities
  • gain understanding of potential impacts
  • understand the source/proximity of factors
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2
Q

What is the PESTEL model?

A

a framework that categorizes and analyzes an important set of external factors that might impinge upon a firm. These factors create both opportunities and threats for the firm.

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3
Q

What are the 6 factors in the PESTEL model?

A
  • political factors
  • economic factors
  • sociocultural factors
  • technological factors
  • ecological factors
  • legal factors
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4
Q

What do political factors result from?

A

the processes and actions of government bodies that can influence the decisions and behavior of firms.

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5
Q

How can firms influence politics? (4)

A

Lobbying, public relations, contributions, litigation. (called “nonmarket strategies”)

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6
Q

Economic factors that impact a firm are largely …?

A

macroeconomic

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7
Q

What 5 macroeconomic factors can affect a firm’s strategy?

A
  • growth rates
  • levels of employment
  • interest rates
  • price stability (inflation and deflation)
  • currency exchange rates
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8
Q

What is the economic growth rate?

A

the measure of change in the amount of goods and services produced by a nation’s economy.

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9
Q

In periods of economic expansion, how are growth rates impacted?

A

businesses expand and become more profitable.

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10
Q

In periods of economic expansion, how are levels of employment impacted?

A

unemployment is low.

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11
Q

In periods of economic expansion, how are interest rates impacted?

A

credit is cheap because interest rates are low.

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12
Q

In periods of economic expansion, how is price stability impacted?

A

Rising prices result in inflation.

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13
Q

In periods of economic expansion, how are currency exchange rates impacted?

A

the dollar can appreciate.

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14
Q

What are sociocultural factors?

A

capture a society’s cultures, norms, and values.

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15
Q

What are the properties of sociocultural factors and how should managers approach them?

A

Sociocultural factors are constantly in flux and differ across groups. Managers need to closely monitor these trends a consider implications for the firm’s strategy.

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16
Q

What are demographic trends?

A

population characteristics related to age, gender, family size,ethnicity, sexual orientation, religion or socioeconomic class.They present opportunities and threats.

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17
Q

What are technological factors?

A

they capture the application of knowledge to create new processes and products.

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18
Q

Name 3 major innovations in process technology?

A

Six sigma quality, lean manufacturing, and biotechnology.

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19
Q

Name 3 major innovations in product technology?

A

smart phones, computer tablets, and high-performing electric cars e.g., tesla

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20
Q

What do ecological factors involve?

A

broad environmental issues such as the natural environment, global warming, and sustainable economic growth.

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21
Q

Negative examples of organizations’ impact on ecological factors

A

pollution of air and water as well as depletion of natural resoruces. e.g., BP oil spill.

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22
Q

Example of ecological factors creating business opportunity:

A

Tesla. The company addresses environmental concerns over carbon emissions.

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23
Q

What do legal factors include?

A

the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions.

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24
Q

Give an example of legal factors.

A

To get more people to buy zero-emissions vehicles, the government gives a tax credit of $7,500 to people who buy new electric cars.

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25
Q

What is an industry?

A

a group of incumbent companies that face more or less the same set of buyers and suppliers. They tend to offer similar products and services.

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26
Q

What is industry analysis?

A

a method to (1) identify an industry’s profit potential and (2) derive implications for a firm’s strategic position within an industry.

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27
Q

What is strategic positioning?

A

a firm’s strategic profile based on the difference between value creation and cost (V - C). The goal is to create as large a gap as possible between value and cost.

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28
Q

What is the five forces model?

A

a framework that identifies five forces that determine the profit potential of an industry and shape a firm’s competitive strategy.

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29
Q

What are the 5 forces n the five forces model?

A
  • threat of entry
  • power of suppliers
  • power of buyers
  • threat of substitutes
  • rivalry among existing firms.
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30
Q

Formula for economic value:

A

value of the product or service produced by a firm minus the cost to produce it.
V - C

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31
Q

What is the threat of entry?

A

the risk that potential competitors will enter an industry.

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32
Q

How does potential new entry depress profit potential? (2)

A
  • the threat of more companies coming may cause incumbent firms to lower their prices so entry looks less attractive.
  • Incumbent companies spend more to satisfy their existing customers.
33
Q

What are entry barriers?

A

obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential.

34
Q

What are the 7 types of entry barriers?

A
  1. ) economies of scale
  2. ) network effects
  3. ) customer switching costs
  4. ) capital requirements
  5. ) advantages independent of size
  6. ) government policy
  7. ) credible threat of retaliation
35
Q

What are economies of scale?

A

the cost advantages that accrue to firms with larger outputs 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.

36
Q

What are network effects?

A

the value of a product or service for an individual user increases with the total number of users. e.g., facebook has so many users that other entrants like Google Plus can’t compete.

37
Q

What are customer switching costs?

A

costs incurred by moving from one supplier to another.

38
Q

What are capital requirements?

A

describe the “price of entry ticket” in a new industry. Basically, it’s the amount of capital a firm will need to compete in the industry.

39
Q

What are “advantages independent of size”?

A

incumbent firms often possess advantages that are independent of size such as brand loyalty or preferential access to raw materials.

40
Q

How can government policy be an entrance barrier?

A

they can restrict or prevent new entrants. e.g., China often requires foreign companies to enter joint ventures with domestic ones and share technology.

41
Q

Explain the “credible threat of retaliation” barrier to entry.

A

Potential new entrants must anticipate how incumbent firms will react. They can retaliate quickly, through initiating a price war, for example, which would deter new entrants.

42
Q

Explain the power of suppliers.

A

industry suppliers can exert a lot of pressure on the industry’s profit potential.

43
Q

How can suppliers lower industry profit potential?

A

they can increase the prices of their inputs or reduce their quality.

44
Q

Suppliers have a lot of bargaining power when…? (6)

A
  1. ) supplier’s industry is more concentrated than the industry it sells to.
  2. ) Suppliers do not depend heavily on the industry for revenue.
  3. ) Switching costs would be high for incumbent firms.
  4. ) Suppliers offer products that are differentiated
  5. ) Substitute products are not available
  6. ) Suppliers can forward-integrate into the industry.
45
Q

Buyers have a lot of bargaining power when: (4)

A
  1. ) there are few buyers and each buyer purchases large quantities.
  2. ) The industry’s products are standardized.
  3. ) Buyers face low switching costs.
  4. ) Buyers can backwardly-integrate into the industry.
    e. g., Walmart has tremendous buyer power. Suppliers compete for shelf space which keeps costs low.
46
Q

How do customer-buyers put pressure on an industry?

A

they can demand lower prices or higher-quality products.

47
Q

What is the threat of substitutes?

A

products or services outside an industry meeting the needs of current customers. e.g., turbotax has become a substitute for professional tax services like H&R Block.

48
Q

When is the threat of substitutes high? (2)

A
  • the substitute offers an attractive price-for-performance trade off.
  • buyer’s cost of switching to a substitute is low.
49
Q

What is rivalry among competitors?

A

the intensity with which companies in the same industry jockey for market share and profitability.

50
Q

What is the relationship between rivalry among competitors and the other 4 forces?

A

The stronger the forces, the higher the intensity of rivalry among competitors.

51
Q

What is the intensity of rivalry among competitors determined by? (4)

A
  • competitive industry structure
  • industry growth
  • strategic commitments
  • exit barriers
52
Q

What is the competitive industry structure?

A

Elements and features common to all industries, including the number and size of competitors, the firm’s degree of pricing power, the type of product or service offered, and the height of entry barriers.

53
Q

What is a fragmented industry?

A

consists of many small firms and tends to generate low profitability.

54
Q

What is a consolidated industry?

A

dominated by a few firms and has the potential to be highly profitable.

55
Q

What are the characteristics of a perfectly competitive industry?

A

it is fragmented and has many small firms, a commodity product, ease of entry, and little ability for each firm to raise its prices. e.g., online pet store surge in 1999.

56
Q

What are the characteristics of monopolistic competition?

A

there is only one, often large firm supplying the market. Monopolies have considerably high pricing power, medium entry barriers, and profits tend to be high.

57
Q

What are the characteristics of an oligopoly?

A
  • few (often large) firms.
  • some pricing power
  • differentiated product
  • high entry barriers
  • firms are interdependent
  • Resulting industry: firm actions are often coordinated.
    e. g., Fedex and UPS, Coke and Pepsi.
58
Q

What are the characteristics of a monopoly?

A
  • one firm
  • considerable pricing power
  • unique product
  • very high entry barriers
  • resulting industry: profit extracted
  • power companies like Georgia Power and Philadelphia Gas Works.
59
Q

How does growth effect an industry?

A

industry growth directly affects the intensity of rivalry among competitors.

60
Q

During periods of high growth…(2)

A

-consumer demand rises
-price competition among firms decreases
(they are focused on attracting new customers; not taking profitability away from each other).

61
Q

During periods of negative growth…(2)

A
  • rivalry is fierce.
  • Rivals can only gain at the expense of one another.
    e. g., dollar menus at McDonalds, BK, Wendys etc
62
Q

What are strategic commitments?

A

firm actions that are costly, long-term oriented and difficult to reverse.

63
Q

What are exit barriers?

A

Obstacles that determine how easily a firm can leave an industry.

64
Q

Give 2 examples of exit barriers.

A
  1. ) Contractual obligations: may still be obligated to pay suppliers even if the company isn’t running.
  2. ) Social obligations: example- entire communities in Michigan would suffer if GM, Ford, or Chrysler left the market.
65
Q

What is the “sixth force”?

A

Compliments

66
Q

What are compliments?

A

a product, service, or competency that adds value to the original product offering when the 2 are used in tandem.

67
Q

What is a complementor?

A

a company that provides a good or service that leads customers to value your firm’s offering more when the two are combined.

68
Q

What is the major drawback of the five forces model?

A

it only provides a snapshot of a moving target. The FFM is static and cannot determine the changing speed of an industry or the rate of innovation. Industries are not stable, they are dynamic. For example, horizontal mergers in the airline industry changed the structure of the industry altogether.

69
Q

What is industry convergence?

A

a process by which formerly unrelated industries begin to satisfy the same customer need.

70
Q

What is a common cause of industry convergence?

A

technological advancement. e.g., media convergence. There aren’t a lot of stand-alone newspaper companies because websites like google can provide all kinds of media content.

71
Q

What are strategic groups?

A

the set of companies that pursue a similar strategy within a specific industry. They differ from each other in terms of expenditures on research and development, tech, product differentiation, etc.

72
Q

What is the strategic group model?

A

a framework that explains differences in firm performance within the same industry.

73
Q

Insights from strategic group mapping: competitive rivalry

A

strongest between firms within the same strategic group.

74
Q

Insights from strategic group mapping: External Environment

A
  • affects strategic groups differently.

e. g., during recessions, high-end airlines lose sales whereas low-end airlines become more profitable.

75
Q

Insights from strategic group mapping: The Five Competitive Forces

A
  • affect strategic groups differently
  • e.g., for cheaper airlines, the threat of supplier power tends to be stronger because they are smaller and have weaker negotiating power.
76
Q

Insights from strategic group mapping: Profitability

A
  • some strategic groups are more profitable than others.

e. g., in the US, lower-cost point-to-point airlines tend to be more profitable.

77
Q

What are mobility barriers?

A

industry-specific factors that separate one strategic group from another; restricts mobility between groups.
e.g.,- would be difficult for point-to-point airlines to take on a lot of international routes.

78
Q

What are the 3 steps of external analysis?

A
  1. ) PESTEL Analysis- determine how external factors affect the industry.
  2. ) Porter’s Five Forces- Assess the overall industry environment.
  3. ) Draw a Strategic Group Map-explain performance differences within an industry.

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