Week 2 Flashcards
What are the 5 major industry forces? how do they shape average profitability in an industry?
Competitive Rivalry - number of competitors, size and market share etc.
Threat of new entrants - The likelihood of new firms entering the industry which increases competition and reduce profitability
Threat of substitutes - The degree to which customers can switch to alternative products or services
Bargaining power of buyers - The degree to which customers can influence the prices
Bargaining power suppliers - The degree to which suppliers can influence prices
when all low = higher increase in profitability
What six factors determine the intensity of rivalry?
1) Number of competitors and relative size - more competitors in the industry, the higher the intensity of rivalry is likely to be. difficult to keep track of prices. mainly few large firms than small firms.
2) Relatively standardized products - buyers are less loyal to brand that is common and easy to convince them to switch brands
3) Low switching costs - barriers that help keep buyers using the same supplier by imposing extra costs for switching suppliers
4) Slow growth in demand for products and services - desperate companies = more sales, discounts etc
5) High levels of unused production capacity - unused production capacity is expensive, when more is produced than demanded in the market firms often have to drop their price or risk having unsold product
6) High fixed costs - supply of products have to sell quickly or take large loses, discounting leads to increased rivalry
7) High exit barriers - high rivalry when firms must make significant investments in non re deployable assets
What is price sensitivity?
When buyers are more price sensitive, they are more likely to exert pressure on suppliers to keep prices low
What is it to have high supplier bargaining power?
When suppliers have higher bargaining power, they can charge higher prices, which tends to decrease average profitability in a buyers industry.
What is forward integration?
business strategy that involves expanding a company’s activities to include the direct distribution of its products. sales and service
What is threat of new entrants?
New entrants are eager to gain market share at the expense of other firms and they bring in new production capacity which tends to drive prices down unless demand is growing faster than the increase in supply
What are barriers to entry? what are some types of barriers?
The way organizations make it more difficult for potential entrants to get a foothold in the industry
government regulation
economies of scale
product differentiation
access to distribution channels
capital requirements
cost advantages independent of size
What are some examples of barriers to entry?
1) Economies of scale, experience or learning
Employees become more efficient
Company has mass manufacturing methods
Easy to get discounts through purchasing in high volumes
Being able to spread the fixed cost of machinery
2) Patents or proprietary knowledge
3) Better locations
4) Economies of scope
less expensive costs per unit by bundling different types of products
5) preferential access to critical resources
6) capital requirements
7) network effects
8) government policy regulations
How should a firm decide what industry it is in?
Define the product or service
Identify the customer
Analyze the competition
Analyze the market
Determine the closest industry match
Consider multiple industries
What is threat of substitute products? what does it involve?
Are the products from different businesses or industry that can satisfy similar customer needs
Involves scanning other industries to find products that might serve the same basic functions as your product, questioning the boundaries of your industry
Awareness and availability - if a substitute is difficult to find or acquire, the threat is diminished
Price and performance - costs of switching are low = more likely to switch over, the closer a substitute is in performance, the less flexible a seller can be with price
Overall Industry attractiveness
Attractive industries are profitable, those firms have created power over buyers and suppliers, created barriers to entry and minimized the threat of substitutes while keeping rivalry minimum
What are the 8 categories of the general environment?
- Complementary products or services - industry’s products can work well with another
- Technological change - new products, new innovation
- General economic conditions - that state of an economy can affect a region/nation and the ability of the average firm in the industry to be profitable
- Demographic forces - changes in the basic characteristics of a population
- Ecological/Natural environment
- Global Forces
- Political, Legal and regulatory forces
- Social Cultural forces
What is the purpose of an external analysis?
The purpose of conducting an external analysis is to identify the opportunities and threats that exist in the organization’s external environment.
What is resource based view?
A perspective on strategic management that suggests a firm’s unique resources and capabilities are key drivers of competitive advantage.
Why is it important for a firm to accurately determine what industry it is in?
So that execs can identify their real competitors are and the economic forces that influence the strategies they hope to pursue.
