Ch. 3 Flashcards
(43 cards)
PESTEL Model stands for:
Political Economic Sociocultural Technological Ecological Legal
What does the Pestel Model represent?
Environmental factors that pose Opportunities and Threats
Political Environment Factors
Processes/actions of government that can influence the decisions and behavior of firms
Legal Environment Factors
Laws, mandates, regulations, and court decisions – all of which can have a direct bearing on a firm’s profit potential
Economic Environment Factors
Economy-wide phenomena, consisting of the following five macroeconomic factors affecting firm strategy:
Growth rates
Interest rates
Levels of employment
Price stability (inflation and deflation)
Currency exchange rates
Sociocultural Environment Factors
Capture cultures, norms, and values for society; are dynamic and differ across groups
- Implications for firm strategy must be considered
Sociocultural and Demographic trends, why is it important to know?
Capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class.
- How to service
Technological Environment Factors
Capture the application of knowledge to create new processes and products
- Innovations in process technology
- Innovations in product technology
- Nanotechnology revolution
Ecological Environment Factors
Broad environmental issues
- the natural environment, global warming, and sustainable economic growth
Business and natural worlds are interdependent and inextricably linked
Managing these relationships in a sustainable manner directly influences the continued existence of human societies and the organizations we create
Def: Industry
Group of incumbent companies
Relatively the same set of suppliers and buyers
Tend to offer similar products and services
Industry Analysis is used to:
Identify an industry’s profit potential
Derive implications for a firm’s strategic position within an industry
Def: Strategic Postioning
A firm’s strategic profile
Based on value creation and cost
What is the goal of strategic positioning?
Generate a large gap between
- The value the firm’s product or service creates (V)
- The cost required to produce it (C)
Competitive Advantage = a large value gap (V - C)
What is the point of the five forces model?
Managers can predict industry profit potential and position their firms for sustainable competitive advantage
- to determine the success of an industry NOT to determine whether or not to enter it
What is the five forces model?
A framework for identifying the five forces that determine industry profit potential and help shape firm competitive strategy
The model intersects:
Theory: industrial organization economics with
Practice: hundreds of case studies
Whats are the five forces and what do they determine?
- Threat of new entrants
- Bargaining power of buyers
- Threat of substitute products or services
- Bargaining power of suppliers
- Rivalry amongst competitors (center)
- determine the profit potential of an industry and shape a firm’s competitive strategy
The stronger the five forces the ______ likely I will want to be in that industry
The stronger the five forces the LESS likely I will want to be in that industry
Def: Threat of Entry
The risk that potential competitors will enter an industry and change dynamics of that industry
- incumbents (firms already in the industry) spend more to satisfy existing customers
Entry barriers for firms trying to get into an industry
- Obstacles blocking others from entering
2. A significant predictor of industry profit potential
Def: Power of Suppliers
Pressures that industry suppliers can exert on an industry’s profit potential
If all the products are the same, the buyer then gets all the power because they choose what they want from who
How can the power of suppliers lower an industry’s profit potential?
- Suppliers demand higher prices for their inputs
- Suppliers reduce quality
Strong suppliers = cost goes up, value (net profit) goes down
Bargaining Power of Buyers Is High When:
- There are a few buyers & each buyer purchases large quantities.
- The industry’s products are standardized or undifferentiated commodities.
- Buyers face low or no switching costs.
- Buyers can backwardly integrate into the industry.
Example of a powerful buyer
Walmart is a powerful buyer; pays suppliers after, sets prices, dates, can even make the firm make no money because they are so people
Def: Threat of Substitutes
Products or services outside an industry meeting the needs of current customers
- High threats of substitutes = less profit potential
ex. H&RBlock vs. Turbo tax; completely different set up still meeting the same need
