Equity #31 - The Five Competitive Forces That Shape Strategy Flashcards
Explain how the threat of new entrants drives industry profitability in the medium and long term.
LOS 31.a
Threat of new entrants. Will new industry entrants compete away the value-added component of price? The greater the threat of entry, the more pricing pressure there is on current competitors and the lower industry profits are.
Explain how the threat of substitutes drives industry profitability for the medium and long term.
LOS 31.a
Threat of substitutes. Do alternative products or approaches put a ceiling on the price buyers are willing to pay? The more cost-effective a substitute product is, the more pricing pressure there is on industry competitors.
Explain how the bargaining power of buyers drives industry profitability for the medium and long term.
LOS 31.a
Bargaining power of buyers. Will buyers capture the value-added component of price? The more power buyers have, the more pressure they can apply to lower industry prices and profits.
Explain how the bargaining power of suppliers drives industry profitability for the medium and long term.
LOS 31.a
Bargaining power of suppliers. Will suppliers capture the value-added component of price? The more power suppliers have, the more pressure they can apply to raise industry costs and lower profits.
Explain how rivalry among existing competitors drives industry profitability for the medium and long term.
LOS 31.a
Rivalry among existing competitors. Will existing firms compete away the value-added component through lower prices or higher costs? The more rivalry there is among current competitors, the more likely they are to engage in destructive price wars or to raise the cost of competing by increasing marketing, enhancing product features and/or services, or other product attributes.
Two central questions that provide the basis for the firm’s choice of a competitive strategy.
LOS 31.a
Industry attractiveness: Is the industry attractive in terms of long-term profitability potential?
Competitive advantage: What determines a firm’s relative competitive position within an industry?
List Porter’s Five Forces.
LOS 31.a
Threat of new entrants.
Threat of substitutes.
Bargaining power of buyers.
Bargaining power of suppliers.
Rivalry among existing competitors.
Describe why industry growth rate, technology and innovation, government, and complementary products and services are fleeting factors rather than forces shaping industry structure.
LOS 31.b
Not all factors that affect an industry are considered one of Porter’s five forces.
For example, industry growth rate, technology and innovation, government, and complementary products and services are transient factors that do not have a clear-cut impact on profitability. These should be evaluated in terms of their influence on Porter’s five forces.
List some factorts that are fleeting factors rather than forces shaping industry structure.
LOS 31.b
industry growth rate
technology and innovation
government
complementary products and services
Explain how positioning a company may be used to achieve a competitive advantage.
LOS 31.d
Managers should intentionally create changes in the five forces by reducing customer power (increase service, bypass middlemen); supplier power (using standardized parts, outsourcing labor); availability of substitutes (enhance features, add distribution channels); threat of entry (raising fixed costs, lobbying regulators); and reduce rivalry (avoid price wars, differentiate products).
Explain how exploiting industry change may be used to achieve a competitive advantage.
LOS 31.d
Firms can capitalize on changes in the industry with forward/backward integration and changes in external forces (e.g., the use of cell phones vs. land lines). These opportunities can be taken by leaders, smaller competitors, or new entrants depending upon the nature of the opportunity and the industry structure.
Explain how shaping industry structure may be used to achieve a competitive advantage.
LOS 31.d
A firm can create changes in the industry structure and improve industry attractiveness by enhancing industry value added overall (e.g., eliminating inefficiencies in the supply chain or distribution network), or by redistributing the value added in favor of industry participants (e.g., improving pricing by reducing customer power). Industry leaders are best positioned to reshape the industry.
List the 6 steps to using Poter’s 5 forces industry analysis
LOS 31.d
- define the industry:
- in terms of products/services and geographic market
- examine in context of the 5 forces
- similar products with different industry structures treat as separate industries
e. g. lumber to homebuilders and to furniture makers
- identify the participants: competitors, buyers, suppliers, new entrants, substitues
- determine strength/weakness of each force, what drives it and why.
- determine industry structure using an analytical framework
- how they affect pricing, input cost structure
- distinguish between cause (ease of entry) and effect (price competition)
- determine which are most important determinants of profitability
- assess current and potential shifts in each force:
- transient vs. long-term structural changes
- incorporate trends and not static analysis
- decide which forces can be altered to affect the value of the industry or firm
