External Analysis Flashcards
- PESTEL FRAMEWORK
- categorizes & analyzes factors that might impinge upon the firm.
- these factors can create both opportunities or threats for the firm
POLITICAL ECONOMIC SOCIOCULTURAL TECHNOLOGICAL ECOLOGICAL LEGAL
- 5 FORCES MODEL
- explains why different industries have different levels of profitability
- identifies industry profit potential
THREAT OF ENTRY POWER OF SUPPLIERS POWER OF BUYERS THREAT OF SUBSTITUTES RIVALRY AMONG EXISTING COMPETITORS
- effects on firm performance
- industry effect - media of operating margin; attribute firm performance to economic structure of the industry in which firm operates
- firm effect - std deviation of operating margin - attribute firm performance directly to the actions strategic leaders take
- key insights underlying 5 forces
- competition should be broadly defined
- profit potential: the stronger the 5 forces the lower the industry’s profit potential & vice versa; firm’s ideal position in an industry should relax constraints of strong forces & leverage weak forces
- Threat of entry
risk of potential competitors entering the industry
potential new entry reduces industry profitability
barriers of entry:
- economies of scale
- customer switching costs
- credible threat of retaliation
- capital requirements
- advantages independent of size
- government policy
- Power of suppliers
industry suppliers reduce industry profit potential by capturing part of economic value by demanding higher prices for their inputs and/or reducing the quality of the input/service demanded
BARGAINING POWER OF SUPPLIERS is higher when:
- supplier offer products that are undifferentiated
- suppliers do not depend on the industry for a large portion of revenues
- supplier industry is more concentrated than the industry it sells to
- incumbents face large switching costs when changing suppliers
- there are no reliably available substitutes
- suppliers can credibly threaten to forward integrate into industry
- Power of buyers
they demand lower prices and higher quality which increases production costs
powerful buyers reduce industry profitability
POWER OF BUYERS IS HIGH when:
- few buyers
- industry products are standardized/undifferentiated
- buyers face low/no switching costs
- buyers can threaten to backwards integrate
- Threat of Substitutes
substitutes: products/ services available from outside the given industry that come close to meeting the needs of current customers
reduces industry profitability by limiting price that industry competitors can charge
its HIGH when:
- buyers cost of switching to substitute is low
- substitute offer an attractive price-performance trade-off
- Rivalry among existing
Intensity with which incumbents fight eachother for mkt share
its HIGH when:
- industry fragmented (instead of concentrated)
- industry not growing
- there are exit barriers
- incumbents made strategic commitments to industry
- How to measure concentration
- Concentration ratio
- Herfindhal Index
note: concentration results in low rivalry among incumbents; makes them stronger vs suppliers and buyers
- Concentration ratio:
CRn=MS1+MS2+…+MSn
total mkt share of n competitors (usually n=4)
- Herfindhal Index
HI = MS1^2 + MS2^2+…+MSn^2
n=total companies
mkt shares squared before being summed to give additional weight to firms w/larger sizes
- Classes of concentration
CR4 HI
not concentrated 0-0.4 0-0.15
moderatly concentrated 0.4-0.7 0.15-0.25
highly concentrated >0.7 >0.25
note: if HI is in class below CR4, it indicates there is highly fragmentation of industry beyond 4 leaders
- 6th Force
Strategic role of complements
complements rise the demand for primary product, thereby enhancing the profit potential for industry & firm
- Industry dynamic
- change through CONSOLIDATION
- firms can change industry structure in their favour through consolidation
- leads to fewer competitors which implies higher indust. profitability
- change through CONVERGENCE
- takes place when formerly unrelated industries begin to satisfy same customer need
- can lead to emergence of new industries
