IB CH 2 BS Textbook Flashcards
External Analysis
opportunities and threats in the firms environment
(external developments can be threat and opportunity at the same time; a trend like globalization may open up vast new markets abroad, but is also likely to increase competition in the company’s home market.)
Definition of business environment
- those external factors that affect the firm’s decisions and performance, but are not in its direct control
(e. g. competitors, suppliers, consumers, stockholders, governments, regulatory agencies and labour markets.)
industry in comparison to market
industry participates in two types of markets:
- the market in which firms sell their output
- markets in which they purchase their inputs
Layers of business environment
3 Layers:
- macro level
(greater environment surrounding an organization; forces over which the firm generally has no influence)
- industry: combination of at least two markets
- market
Macro-Environment
(e.g. economic up- and downturns; terrorist attacks)
SEPTEmber analysis
to evaluate trends and issues arising in the Macro-Environment Sociocultural Economic Political-legal Technological Ecological
- useful starting point for any business analysis
Sociocultural environment
factors and trends that may affect the consumption behaviour of its customers
Economic
how local, national or global economic conditions may impact the firm
Political-legal dimension
all political conditions and governmental decisions that may affect a business
Technological setting
all technological and scientific developments that may trigger a firm to review its products, processes or strategy
Ecological environment
general conditions of the natural resources a company uses and the attitude of environmental pressure groups, or society as a whole, to a company’s environmental policy and its consequences
How to use the SEPTEmber analysis
- list all relevant trends and changes concerning the five elements of the environment (not issues from the past or current situation)
- list has to be ranked (urgency of the firm to respond)
How can the industry be analyzed?
- analysis of the industry with the industry life cycle analysis
What does the maturity of the industry tell us?
-It’s susceptibility to change
What do we use Porter’s analysis of the five competitive forces for?
to understand the nature of competition in an industry
What does competition do with profit?
It drives it down Profitability
What is the best predictor of a firms’ performance?
Profitability
What does the place in the industry life cycle tell us?
key determinant for:
- industry’s growth potential
- competitive intensity
- profit potential
- susceptibility (Anfälligkeit) to change
–> essential for investment decisions (nearly always based on estimations of growth in sales
Industry Life Cycle stages
- initiation
- growth
- maturity
- decline
What happens in the initiation Phase?
- new products are being launched and R&D expenditures soak up most of the pioneering firms’ revenues
- the earlier a firm enters, the more experience is accumulated (‘early mover’ strategy can build a competitive advantage)
The growth stage
characterized by increased awareness of and demand for the products.
- sales and profitability go on the rise
- important to build market shares faster than rivals
- one strategy is to price below initial cost to gain market share and discourage competitors
What is an experience curve
It is an empirical estimate of the learning that takes place after repeating the same or similar activities several times.
EVERY TIME A FIRM’S CUMULATIVE PRODUCTION DOUBLES, ITS COSTS WILL DECLINE BY A FIXED PERCENTAGE
- e.g. a 70% experience production curve for computer chips indicates that costs will fall to 70 % of their previous level every time total chip production has doubled.
By which factors is the experience effect caused?
- Efficiency, specialisation and learning
- Experience effects are most likely to occur in industries involving complex and/or labour-intensive tasks
Experience curve and strategy
- around an industry entry barriers could be erected
- the cost advantage of the ‘early movers’ may prove insurmountable for less experienced firms ‘late movers’
maturity stage
- when growth slows down the maturity stage is entered
- established products generate steady cash flows
- successful products may achieve enormous returns (cash cows)
- gradually a mature industry suffers from overcapacity, which puts pressure on margins (Gewinnmarge)
decline stage
- products of the mature market are being substituted by better ones
- firms wanting to stay in the the declining market have to invest a lot in marketing and a strong brand name
The Five Competitive Forces
- competition is a major determinant of the attractiveness of an industry (it impacts the industry’s profit potential)
- the model is used to determine the industries profitability
- competitive rivalry
- bargaining power of buyers
- threat of new entrants
- bargaining power of suppliers
- threat of substitutes
Bargaining Power of Buyers
The extent to which customers can compare, play competitors against each other and bargain for better product attributes and lower prices
- a customer’s bargaining power is high when
a) the purchase volume is large in relative to the seller’s total sales
b) many alternative suppliers are available
c) the buyer’s sheer size enables him to integrate backwards (i.e. to buy or start up as one of his own suppliers)
Bargaining Power of Suppliers
- an industry is affected by its suppliers’ ability to increase prices
is high when
a) they are highly concentrated so that companies cannot easily ‘shop around’
b) the supplier is not dependent on a single industry for its income
c) switching between suppliers is expensive for companies
d) there is no substitutes for the supplied product or service
Threat of New Entrants
- future entrants can diminish profitability for the incumbents because they compete for the same customers and resources
- market expansion of other firms in other geographical areas
- product expansion of other firms
- backward integration: current customers make the product themselves
- forward integration: the current supplier makes the product himself
the threat of entry is expressed in terms of entry barriers
- capital requirements
- unequal access to resources
- customer switching costs
- benefits of scale
- repuatation
incumbents
etablierte Firmen in dem Fall
Threat of subsitutes
- substitutes are products or services that satisfy the same or a similar customer need, although they may have a different form and are produced in a different industry.
Competitive Rivalry
- the main determinant of competition intensity is the extent to which competing firms are differentiated and focus on separate groups of customers (niches)
- also the more current players and fewer buyers, the high the competitive rivalry
- competitive rivalry is increased by exit barriers (investments which are specific to the firm or industry, which cannot be used elsewhere, and which may lock companies into unprofitable industries.
sunk costs
those costs of a firm which are irrevocably committed to a particular use, and therefore are not recoverable in case of exit. (capital investment, long-term leasing contracts)
carrying out a five competitive forces analysis
- each of the five forces can be rated as high, medium or low in strength.
- the sum is the profitability of an industry ‘strength score’
Primary stakeholders
called the market or task environment of a firm, have a direct economic relationship with the company
(suppliers, customers, creditors, competitors)
Secondary stakeholders
-non-market environment of the firm
- affect company profitability indirectly
- secondary stakeholders often impose constraints on the company
- secondary stakeholders are important for the firms reputation, image, branding and public opinion
(governments, social activist groups, the media, general public, lobbyist groups or industrial associations)
How to carry out a stakeholder analysis?
The power and interest of your stakeholders can be mapped using a power/stake matrix.
Mapping your firm’s stakeholders enables you to identify and prioritise all parties to include in your decisions, based on their stake and their power to affect your outcomes.
What is a market?
A market consists of a group of current or potential customers with the willingness and ability to buy products to satisfy wants.
Thus, markets consists of buyers, people or organizations and their needs - not products.
Definition Industry
An industry consists of sellers, typically organizations, that offer products or classes of products that are similar to and close substitutes for one another
What is marketing?
To come up with the best solution to customers’ needs, and to sell this solution as profitable as possible.
What types of markets are there?
- final product (service market)
- intermediary market
- market of raw materials or other resources like labour
market profiling
- outlines the important features of your target market
- size of the market (expressed in total annual sales)
- growth opportunities
market segmentation
- is used to find out which parts of the market will be the most favorable to target.
- segmentation refers to the identification of customer groups within the market that respond differently to a particular marketing strategy
- the analysis is performed by selecting typically two variables that differentiate customers in the market –> will result in at least 4 customer segments.
(e. g. Geography (Europe, US); Customer Income (Low Average))
What are customer needs?
Customer needs are defined as a “description in the customer’s own words of the benefits to be fulfilled by the product or service.”
- Customer needs specify what a company needs to be good at to be successful in serving a particular market.
How can companies distinguish themselves from others concerning customer needs?
They have to have a superior value proposition as differentiating characteristics
How to carry out a customer needs analysis?
- ask customers directly
- create a complete list of needs in a specific market in current and future time
- create a matrix with needs in a particular market and assign weights to the factors depending how important they are for success. (you can also add competitors with differentiating characteristics)
What should be done if a competitors weakness is identified?
Strategic attack
- a competitor’s cost structure can provide a firm with clues as to which markets to enter
What is competition?
- all those actual and potential offerings and alternatives available to a firm’s target customers
How can competitors be defined?
Through the customer perspective and the market perspective
Definition of competitors through customer perspective
- competitors offer the same, similar or close substitute products.
Definition of competitors through market perspective
- using the concept of strategic groups
- a strategic group is defined as a “group of firms following the same or a similar strategy along the strategic dimensions”
How to do a competitor analysis?
- identify competitors
- find out how similar and competitive each of them are
- analyse their value propositions, performance…
