Chapter 2- External Analysis: The Identification of Opportunities and Threats Flashcards
(34 cards)
Opportunities
Elements and conditions in a company’s environment that allow it to formulate and implement strategies that enable it to become more profitable.
Threats
Elements in the external environment that could endanger the integrity and profitability of the company’s business.
Industry
A group of companies offering products or services that are close substitutes for each other. (They satisfy the same customer needs).
Porter’s Competitive Forces Model
Focuses on six forces that shape competition within an industry:
1) The risk of entry by potential competitors.
2) The intensity of rivalry among established companies within an industry.
3) The bargaining power of buyers.
4) The bargaining power of suppliers.
5) The closeness of substitutes to an industry’s products, and
6) The power of complement providers. (Note that Portion did not recognize this sixth force, but it is an extension of his model).
Potential Competitors
Companies that are currently not competing in the industry but have the potential to do so.
What are the barriers of entry?
1) Economies of Scale
2) Brand Loyalty
3) Absolute Cost Advantage
4) Customer Switching Costs
5) Government Regulations
Economies of Scale
Reductions in unit costs attributed to large output.
What are some sources of economies of scale?
Sources include:
1) Cost reductions gained through mass-producing a standardized output.
2) Discounts on bulk purchases of raw material inputs and component parts
3) The advantages gained by spreading fixed production costs over a large production volume; and
4) The cost savings associated with distribution, marketing, and advertising costs over a large volume of output.
Brand Loyalty
Preference of consumers for the products of established companies.
Absolute Cost Advantage
A cost advantage that is enjoyed by incumbents in an industry and that new entrants cannot expect to match.
How can a company create brand loyalty?
They can create this by continuously advertising its brand-name products and company name, patent protection of its products, product innovation achieved through company research and development (R&D) programs, an emphasis on high-quality products, and exceptional after-sales service.
What are the three main sources that can lead to an absolute cost advantage?
1) Superior production operations and processes due to accumulated experience, patents, or trade secretes.
2) Control of particular inputs required for production, such as labor, materials, equipment, or management skills, that are limited in supply.
3) Access to cheaper funds because existing companies represent lower risks than new entrants.
Switching Costs
Costs that consumers must bear to switch from the products offered by one established company to the products offered by a new entrant.
What four factors have a major impact on the intensity of rivalry among established companies within an industry?
1) Industry competitive structure.
2) Demand conditions.
3) Cost conditions,
4) The height of exit barriers in the industry.
Industry Competitive Structure
Revers to the number and size distribution of companies within it, something that strategic managers determine at the beginning of an industry analysis.
Fragmented Industry
This type of industry consists of a large number of small or medium-sized companies, non of which is in a position to determine industry price.
Consolidated Industry
This type of industry is dominated by a small number of large companies (an oligopoly) or, in extreme cases, by just one company (a monopoly).
Exit Barriers
These are economic, strategic, and emotional factors that prevent companies from leaving an industry.
What are instances when the buyer has more power?
Buyers have more power when:
1) When buyers have a choice.
2) When the buyers purchase in large quantities, they can use their purchasing power as leverage to bargain for price reductions.
3) When the supply industry depends upon buyers for a large percentage of its total orders.
4) When switching costs are low and buyers can pit the supplying companies against each other to force down prices.
5) When it is economically feasible for buyers to purchase an input from several companies at once, they can pit one company in that industry against another.
6) When buyers can threaten to enter the industry and independently produce the product, then supplying their own needs, they can force down industry prices.
Bargaining Power of Suppliers
Refers to the ability of suppliers to raise input prices, or to raise the costs of the industry in other ways.
In what situations do suppliers have more bargaining power?
1) The product that suppliers sell has few substitutes and is vital to the companies in an industry.
2) The profitability of suppliers is not significantly affected by the purchases of companies in a particular industry; in other words, when the industry is not an important customer to the supplier.
3) Companies in an industry would experience significant switching costs if they moved to the product of a different supplier because a particular supplier’s products are unique or different.
4) Suppliers can threaten to enter their customers’ industry and use their inputs to produce products that would compete directly with those of companies already in the industry.
5) Companies in the industry cannot threaten to enter their suppliers’ industry and make their own inputs as a tactic for lowering the price of inputs.
Substitute Products
The products of different businesses or industries that can satisfy similar customer needs.
Complementors
Companies that sell products that add value to (complement) the products of companies in an industry because, when used together, the combined products better satisfy customer demands.
Mobility Barriers
These are within-industry factors that inhibit the movement of companies between strategic groups.
