Unit 14.1 Flashcards
External Environment layers
((((Firm)Market)Industry)General Environment)
Competitors also referred to as…
strategic group
Industry competitors include…
all competitors, not just direct competitors
General Environment analysis acronym
PESTEL
PESTEL
Political Economic Social Technological Ecological Legal
PESTEL Analysis Objectives
- Identify external factors
- Discern trends and predict outcomes
- Extract Opportunities and threats
Ecological
Businesses need to understand how they impact the environment operationally
Legal/Ethical
Laws, mandates, regulations and court decisions
SCP Model
Structure, Conduct, Performance
Structure
Industry Structure
- # of competitors
- Value chain and extent of vertical integration
- Economics of supply and demand
- Cost of entry/exit
Conduct
- Branding, product differentiation and price setting
- Capacity
- Innovation
- Operating Efficiencies
- Collusion
Performance
- Profits
- Value creation
- Technological progress
- Shareholder returns
- Industry performance
Perfect Competition
- Many small firms
- Low entry barriers
Monopoly
- One firm
- Pricing Power
- Very high entry barriers
Monopolistic Competition
- Many firms
- Some pricing Power
- Differentiated product
- Medium Entry barriers
Oligopoly
- Few large firms
- Some pricing power
- Differentiated Product
- High entry barriers
Attractiveness
Total industry profitability
The stronger the force…
the greater the negative impact is on firm profits
Porter 5 Forces
1) Bargaining Power of Suppliers
2) Bargaining power of buyers
3) Competitive Rivalry
4) Threat of new entrants
5) Threat of substitute products or services
Concentration Ratio
the ratio of the combined market shares of a given number of firms to the whole market size
- Used to assess the extent to which a given market is oligopolistic
Concentration Ratio impacts…
Competitive Rivalry
Buyer Bargaining Power
Supplier Bargaining Power
Switching Costs
the costs that a consumer incurs as a result of changing brands, suppliers or products
Switching Costs impact…
all five forces
Forward Integration
Business strategy that involves a form of vertical integration whereby business activites are expanded to include control of the direct distribution or supply of a company’s products.
- Company moves down the supply chain
Backward Integration
Company moves UP the supply chain by controlling supply.
Forward/Backward Integration impacts…
Buyer bargaining power
Supplier bargaining power
Bargaining Power of Suppliers is HIGH when:
- Concentrated supplier industry
- Suppliers not dependent on industry for majority of revenue
- Industry competitors firms face supplier switching costs
- Suppliers hold scarce resources
- Suppliers offer differentiated products
- There are no or few supplier substitutdes
- Suppliers can forward-integrate into the industry
Bargaining Power of Buyers is HIGH when:
- There are a few buyers and each buy purchases large quantities
- The industry’s products are standardized or undifferentiated commodities
- The buyer has many substitude options
- Buyers face low or no switching costs
- Buyers are price-sensitive
- Buyers can backwardly integrate into the industry
Threat of Substitutes is HIGH when:
- The substitute offers and attractive price-performance trade-off
- The buyer’s cost of switching to the substitute is low
- Buyer are not loyal to any of the industry competitors
Threat of Substitutes is HIGH when:
- The substitute offers and attractive price-performance trade-off
- The buyer’s cost of switching to the substitute is low
- Buyer are not loyal to any of the industry competitors
The primary impact of a substitutes is the..
limits placed on the pricing flexible of the industry competitors
Threat of New Entrants is HIGH when…
there are no or low barriers to entry and the Industry Average Profitability is high
Barriers to entry include:
- Economies of scale
- Network effects
- Customer switching costs
- Capital requirements
- Advantages independent of size
- Government policy
- Credible threat of retaliation
Competitive Rivalry
- Other 4 forces put pressure on this rivalry
- The stronger the forces, the higher the intensity
Less rivalry when:
- High buyer switching costs
- Low exit barriers
- Economies of scale not competitive a factor
- More industry concentration
- More product differentiation
The more dissimilar the products of firms are…
the more attractive the industry (heterogenous goods)
Complement
a product, service, or competency that addes value to the original product offering when the two are used in tandem
Complements tend to result in…
higher margins and profits for industry competitors
Ways companies can mitigate structural impediment to firm profitability:
- Increase product differentiation
- Diversify product lines
- Introduce or strengthen switching costs
- Continually innovate to increase product value
- Alter bargaining relationships between the industry competitors and buyers and suppliers
- Build barriers to entry to keep new competition out
- Develop complements or build strategic partnerships with complement providers
