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Chapter 3
External Analysis
| Question | Answer |
|---|---|
| What is the External Environment? | Anything OUTSIDE the organization Macroenvironment > Industry Environment > Strategic Group > Organiztion |
| Macroenvironment Analysis - PESTEL | Politics --> government processes and actions Economy --> macroeconomic factors Sociocultural --> cultures, norms, and values Technical --> use knowledge to create processes/products Ecological --> environmental issues Legal --> laws, regs, etc. |
| PESTEL: Politics | Government stability, tax rates How firms can affect political to favor firms --> Nonmarket strategy ----> Lobbying, public relations, contributions, litigation |
| PESTEL: Economic | Macroeconomic, economy wide phenomena Growth Rates Levels of Employment Interest Rates Price Stability Currency Exchange Rates |
| PESTEL: Sociocultural | captures society’s cultures, norms, and values Constantly in flux, differ across social groups like demographics Lifestyle, demographics |
| PESTEL: Technological | capture application of knowledge to create new processes and products Government research funding, mature is technology |
| PESTEL: Ecological | broad environmental issues, like natural environment, global warming, and sustainable economic growth Environmental protection laws, local environmental issues |
| PESTEL: Legal | official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions Protection of intellectual property, consumer laws |
| PESTEL: Politics <-- PARTS | Players Rules Scope |
| PESTEL: Economic <-- PARTS | Players Added Value |
| PESTEL: Sociocultural <-- PARTS | Rules |
| PESTEL: Technological <-- PARTS | Players Rules |
| PESTEL: Ecological <-- PARTS | Rules |
| PESTEL: Legal <-- PARTS | Rules Scope |
| Industry Environment | Group of incumbent firms facing more or less the same set of suppliers and buyers |
| What affects the industry environment | Underlying economic structures of the industry Attribute firm performance to the industry that the firm competes in Entry and exit barriers, # and size of companies, types of products/services offered |
| What does an industry analysis do | Identify an industry’s profit potential (level of profitability that is expected for the average firm) Derive implications for a firm’s strategic position within an industry |
| Strategic position | Firm’s ability to create value for customers (V) while containing cost (C) High (V-C) creates competitive advantage |
| Industry Analysis: Value Creation and Capture | Value Creation: size of the pie created Value Capturing: portion of pie captured Line Chart: dollars v. quantity produced by industry Pie: triangle created by industry demand (hypotenuse) and cost of resources (bottom line) |
| What does Value Creation Do | Pie Gets Bigger Demand Increases - Fewer substitutes at high prices - More cheaper complements - Population and income growth Cost Decreases - Cost reductions by suppliers and incumbents |
| What does Value Capture Do | Portion of pie gets bigger - Reduces competition - higher entry barriers - stronger vertical position |
| Porter's 5 Forces Model Industry Analysis | Framework that identifies five forces that determine the industry profit potential and shape a firm’s competitive strategy New Entrants Threat Power of Suppliers Power of Buyers Substitute Threat ==> Rivalry Among Existing Competitors |
| Porter's 5 Forces Model: Threat of New Entrants | Risk of potential competitors entering the industry Reduces industry’s overall profit potential ==> excess capacity, lower prices ==> increases incumbent firms spending Prevented by entry barriers (high == good) |
| Types of Entry Barriers | Economies of Scale Network Effects Customer Switching Costs Advantage Independent of Size Capital Requirements Government Policy Credible Threat of Retaliation |
| Entry Barriers: Economies of Scale | Incumbents are larger so they can make more costs and more products, thus allocate lower costs per unit Also means; better supplier relationships more employees dedicated to function activities better tech |
| Entry Barriers: Network Effects | Hearsay advertising; positive externality Positive effect that a product/service has on one 1 user ==> increase value for other users |
| Entry Barriers: Customer Switching Costs | Expensive for a firm to switch suppliers because: changing product specifications, process, training |
| Entry Barriers: Capital Requirements | Entry ticket into the industry Sunk cost to build a production facility, buy machinery, cover start-up losses. |
| Entry Barriers: Advantages Independent of Size | Brand Location Preferential access to raw materials Knowledge/Experience |
| Entry Barriers: Government Policy | Some government law bans new entry into existing industries Like a foreign nation banning American chains from entering |
| Entry Barriers: Credible Threat of Retaliation | Incumbent firms could retaliate with a price war or attack in another industry |
| Porter's 5 Forces Model: Bargaining Power of Suppliers | Can reduce the industry’s profit potential by capturing part of the economic value created Increase production cost: - higher input price - lower quality or service |
| Porter's 5 Forces Model: Bargaining Power of Suppliers - When is it high? | - Supplier industry is more concentrated than buyer industry - doesn't depend on buyer industry for large % of revenue - buying incumbents have high switching costs - supplier has differentiated products - no substitutes available |
| Porter's 5 Forces Model: Bargaining Power of Buyers | Reduce firm revenue - demand lower price - demand higher quality --> higher production cost |
| Porter's 5 Forces Model: Bargaining Power of Buyers - When is it high? | - Few buyers that buy large quantities - Standardized Industry product - Low/no switching costs - Price sensitive situations --> purchase is big % of buyer budget --> low profit buyers == low cash --> Q/C of buyer goods is unaffected by input Q/C |
| Porter's 5 Forces Model: Threat of Substitutes | Products/services available from outside the given industry will satisfy customer needs --> Ex. energy drink vs. coffee Reduces industry profit potential - Limits the price the industry’s competitors can charge for their products/services |
| Porter's 5 Forces Model: Threat of Substitutes - When is it high? | Substitute offers an attractive price-performance trade-off Buyers cost of switching to the substitute is low |
| Porter's 5 Forces Model: Rivalry Among Existing Firms | Intensity with which companies within the same industry compete for market shares and profitability Pressured by other 4 forces Strong 4 forces → Strong expected competitive intensity → limits industry’s profit potential |
| Porter's 5 Forces Model: Rivalry Among Existing Firms - How is it determined? | Competitive Industry Structure --> Number & size of competitors --> type of product/service (differentiation?) --> Entry Barriers Height Industry Growth Strategic Commitments Exit Barriers |
| 4 Types of Industry Structure | - Perfect many small firms easy entry no price raising same products - Monopolistic many firms diff. products some barriers some price raising - Oligopoly few big firms diff. products high barriers - Monopoly 1 big firm w/power |
| Industry Growth | High growth == high customer demand ==> decreased price competition |
| Strategic Commitments | Firm actions that are costly, long-term oriented, and difficult to reverse Stem from large fixed cost requirements and noneconomic considerations |
| Exit Barriers | Obstacles stopping a firm from leaving an industry |
| Entry Choices | When? To enter Industry life cycle stage Entry Order How? Use existing assets Reconfigure Value chain Set up Niche What? Scale, commitment, prod./serv, business model Where? Product position, price strategy, potential partners Who? |
| Industry Dynamics | 5 forces model is a snapshot, but industry is dynamic - Consolidated Industry - Industry Convergence |
| Consolidated Industry | Few competitors → higher industry profitability Incumbents want to reduce # of competitors |
| Industry Convergence | Formerly unrelated industries being able to satisfy the same customer need |
| Strategic Groups | Set of companies that a firm is a part of that pursue a similar strategy within a specific industry in their quest for competitive advantage Differ by: R&D, tech, product differentiation, market segments, customer service, etc. |
| Strategic Group Model | Clusters different firms into groups based on a few key strategic dimensions Intra-group rivalry >>> inter-group rivalry 1. Identify strategic dimension 2. Pick 2 key dimensions that show vital differences 3. Graph it out |
| Mobility Barriers | Industry-specific factors that stop movement between groups |
Created by:
opon12
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