Chapter 3: External Analysis: Industry Structure, Competitive Forces, and Strategic Groups

Question 1

Why is it important for a firm to analyze its external environment? (4)

Answer 1

• managers can mitigate threats
• managers can leverage opportunities
• gain understanding of potential impacts
• understand the source/proximity of factors

Question 2

What is the PESTEL model?

Answer 2

a framework that categorizes and analyzes an important set of external factors that might impinge upon a firm. These factors create both opportunities and threats for the firm.

Question 3

What are the 6 factors in the PESTEL model?

Answer 3

• political factors
• economic factors
• sociocultural factors
• technological factors
• ecological factors
• legal factors

Question 4

What do political factors result from?

Answer 4

the processes and actions of government bodies that can influence the decisions and behavior of firms.

Question 5

How can firms influence politics? (4)

Answer 5

Lobbying, public relations, contributions, litigation. (called “nonmarket strategies”)

Question 6

Economic factors that impact a firm are largely …?

Answer 6

macroeconomic

Question 7

What 5 macroeconomic factors can affect a firm’s strategy?

Answer 7

• growth rates
• levels of employment
• interest rates
• price stability (inflation and deflation)
• currency exchange rates

Question 8

What is the economic growth rate?

Answer 8

the measure of change in the amount of goods and services produced by a nation’s economy.

Question 9

In periods of economic expansion, how are growth rates impacted?

Answer 9

businesses expand and become more profitable.

Question 10

In periods of economic expansion, how are levels of employment impacted?

Answer 10

unemployment is low.

Question 11

In periods of economic expansion, how are interest rates impacted?

Answer 11

credit is cheap because interest rates are low.

Question 12

In periods of economic expansion, how is price stability impacted?

Answer 12

Rising prices result in inflation.

Question 13

In periods of economic expansion, how are currency exchange rates impacted?

Answer 13

the dollar can appreciate.

Question 14

What are sociocultural factors?

Answer 14

capture a society’s cultures, norms, and values.

Question 15

What are the properties of sociocultural factors and how should managers approach them?

Answer 15

Sociocultural factors are constantly in flux and differ across groups. Managers need to closely monitor these trends a consider implications for the firm’s strategy.

Question 16

What are demographic trends?

Answer 16

population characteristics related to age, gender, family size,ethnicity, sexual orientation, religion or socioeconomic class.They present opportunities and threats.

Question 17

What are technological factors?

Answer 17

they capture the application of knowledge to create new processes and products.

Question 18

Name 3 major innovations in process technology?

Answer 18

Six sigma quality, lean manufacturing, and biotechnology.

Question 19

Name 3 major innovations in product technology?

Answer 19

smart phones, computer tablets, and high-performing electric cars e.g., tesla

Question 20

What do ecological factors involve?

Answer 20

broad environmental issues such as the natural environment, global warming, and sustainable economic growth.

Question 21

Negative examples of organizations’ impact on ecological factors

Answer 21

pollution of air and water as well as depletion of natural resoruces. e.g., BP oil spill.

Question 22

Example of ecological factors creating business opportunity:

Answer 22

Tesla. The company addresses environmental concerns over carbon emissions.

Question 23

What do legal factors include?

Answer 23

the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions.

Question 24

Give an example of legal factors.

Answer 24

To get more people to buy zero-emissions vehicles, the government gives a tax credit of $7,500 to people who buy new electric cars.

Question 25

What is an industry?

Answer 25

a group of incumbent companies that face more or less the same set of buyers and suppliers. They tend to offer similar products and services.

Question 26

What is industry analysis?

Answer 26

a method to (1) identify an industry's profit potential and (2) derive implications for a firm's strategic position within an industry.

Question 27

What is strategic positioning?

Answer 27

a firm's strategic profile based on the difference between value creation and cost (V - C). The goal is to create as large a gap as possible between value and cost.

Question 28

What is the five forces model?

Answer 28

a framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy.

Question 29

What are the 5 forces n the five forces model?

Answer 29

- threat of entry - power of suppliers - power of buyers - threat of substitutes - rivalry among existing firms.

Question 30

Formula for economic value:

Answer 30

value of the product or service produced by a firm minus the cost to produce it. V - C

Question 31

What is the threat of entry?

Answer 31

the risk that potential competitors will enter an industry.

Question 32

How does potential new entry depress profit potential? (2)

Answer 32

- the threat of more companies coming may cause incumbent firms to lower their prices so entry looks less attractive. - Incumbent companies spend more to satisfy their existing customers.

Question 33

What are entry barriers?

Answer 33

obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential.

Question 34

What are the 7 types of entry barriers?

Answer 34

1. ) economies of scale 2. ) network effects 3. ) customer switching costs 4. ) capital requirements 5. ) advantages independent of size 6. ) government policy 7. ) credible threat of retaliation

Question 35

What are economies of scale?

Answer 35

the cost advantages that accrue to firms with larger outputs because they can spread fixed costs over more units, employ technology more efficiently, benefit from a more specialized division of labor, and demand better terms from their suppliers.

Question 36

What are network effects?

Answer 36

the value of a product or service for an individual user increases with the total number of users. e.g., facebook has so many users that other entrants like Google Plus can't compete.

Question 37

What are customer switching costs?

Answer 37

costs incurred by moving from one supplier to another.

Question 38

What are capital requirements?

Answer 38

describe the "price of entry ticket" in a new industry. Basically, it's the amount of capital a firm will need to compete in the industry.

Question 39

What are "advantages independent of size"?

Answer 39

incumbent firms often possess advantages that are independent of size such as brand loyalty or preferential access to raw materials.

Question 40

How can government policy be an entrance barrier?

Answer 40

they can restrict or prevent new entrants. e.g., China often requires foreign companies to enter joint ventures with domestic ones and share technology.

Question 41

Explain the "credible threat of retaliation" barrier to entry.

Answer 41

Potential new entrants must anticipate how incumbent firms will react. They can retaliate quickly, through initiating a price war, for example, which would deter new entrants.

Question 42

Explain the power of suppliers.

Answer 42

industry suppliers can exert a lot of pressure on the industry's profit potential.

Question 43

How can suppliers lower industry profit potential?

Answer 43

they can increase the prices of their inputs or reduce their quality.

Question 44

Suppliers have a lot of bargaining power when...? (6)

Answer 44

1. ) supplier's industry is more concentrated than the industry it sells to. 2. ) Suppliers do not depend heavily on the industry for revenue. 3. ) Switching costs would be high for incumbent firms. 4. ) Suppliers offer products that are differentiated 5. ) Substitute products are not available 6. ) Suppliers can forward-integrate into the industry.

Question 45

Buyers have a lot of bargaining power when: (4)

Answer 45

1. ) there are few buyers and each buyer purchases large quantities. 2. ) The industry's products are standardized. 3. ) Buyers face low switching costs. 4. ) Buyers can backwardly-integrate into the industry. e. g., Walmart has tremendous buyer power. Suppliers compete for shelf space which keeps costs low.

Question 46

How do customer-buyers put pressure on an industry?

Answer 46

they can demand lower prices or higher-quality products.

Question 47

What is the threat of substitutes?

Answer 47

products or services outside an industry meeting the needs of current customers. e.g., turbotax has become a substitute for professional tax services like H&R Block.

Question 48

When is the threat of substitutes high? (2)

Answer 48

- the substitute offers an attractive price-for-performance trade off. - buyer's cost of switching to a substitute is low.

Question 49

What is rivalry among competitors?

Answer 49

the intensity with which companies in the same industry jockey for market share and profitability.

Question 50

What is the relationship between rivalry among competitors and the other 4 forces?

Answer 50

The stronger the forces, the higher the intensity of rivalry among competitors.

Question 51

What is the intensity of rivalry among competitors determined by? (4)

Answer 51

- competitive industry structure - industry growth - strategic commitments - exit barriers

Question 52

What is the competitive industry structure?

Answer 52

Elements and features common to all industries, including the number and size of competitors, the firm's degree of pricing power, the type of product or service offered, and the height of entry barriers.

Question 53

What is a fragmented industry?

Answer 53

consists of many small firms and tends to generate low profitability.

Question 54

What is a consolidated industry?

Answer 54

dominated by a few firms and has the potential to be highly profitable.

Question 55

What are the characteristics of a perfectly competitive industry?

Answer 55

it is fragmented and has many small firms, a commodity product, ease of entry, and little ability for each firm to raise its prices. e.g., online pet store surge in 1999.

Question 56

What are the characteristics of monopolistic competition?

Answer 56

there is only one, often large firm supplying the market. Monopolies have considerably high pricing power, medium entry barriers, and profits tend to be high.

Question 57

What are the characteristics of an oligopoly?

Answer 57

- few (often large) firms. - some pricing power - differentiated product - high entry barriers - firms are interdependent - Resulting industry: firm actions are often coordinated. e. g., Fedex and UPS, Coke and Pepsi.

Question 58

What are the characteristics of a monopoly?

Answer 58

- one firm - considerable pricing power - unique product - very high entry barriers - resulting industry: profit extracted - power companies like Georgia Power and Philadelphia Gas Works.

Question 59

How does growth effect an industry?

Answer 59

industry growth directly affects the intensity of rivalry among competitors.

Question 60

During periods of high growth...(2)

Answer 60

-consumer demand rises -price competition among firms decreases (they are focused on attracting new customers; not taking profitability away from each other).

Question 61

During periods of negative growth...(2)

Answer 61

- rivalry is fierce. - Rivals can only gain at the expense of one another. e. g., dollar menus at McDonalds, BK, Wendys etc

Question 62

What are strategic commitments?

Answer 62

firm actions that are costly, long-term oriented and difficult to reverse.

Question 63

What are exit barriers?

Answer 63

Obstacles that determine how easily a firm can leave an industry.

Question 64

Give 2 examples of exit barriers.

Answer 64

1. ) Contractual obligations: may still be obligated to pay suppliers even if the company isn't running. 2. ) Social obligations: example- entire communities in Michigan would suffer if GM, Ford, or Chrysler left the market.

Question 65

What is the "sixth force"?

Answer 65

Compliments

Question 66

What are compliments?

Answer 66

a product, service, or competency that adds value to the original product offering when the 2 are used in tandem.

Question 67

What is a complementor?

Answer 67

a company that provides a good or service that leads customers to value your firm's offering more when the two are combined.

Question 68

What is the major drawback of the five forces model?

Answer 68

it only provides a snapshot of a moving target. The FFM is static and cannot determine the changing speed of an industry or the rate of innovation. Industries are not stable, they are dynamic. For example, horizontal mergers in the airline industry changed the structure of the industry altogether.

Question 69

What is industry convergence?

Answer 69

a process by which formerly unrelated industries begin to satisfy the same customer need.

Question 70

What is a common cause of industry convergence?

Answer 70

technological advancement. e.g., media convergence. There aren't a lot of stand-alone newspaper companies because websites like google can provide all kinds of media content.

Question 71

What are strategic groups?

Answer 71

the set of companies that pursue a similar strategy within a specific industry. They differ from each other in terms of expenditures on research and development, tech, product differentiation, etc.

Question 72

What is the strategic group model?

Answer 72

a framework that explains differences in firm performance within the same industry.

Question 73

Insights from strategic group mapping: competitive rivalry

Answer 73

strongest between firms within the same strategic group.

Question 74

Insights from strategic group mapping: External Environment

Answer 74

- affects strategic groups differently. | e. g., during recessions, high-end airlines lose sales whereas low-end airlines become more profitable.

Question 75

Insights from strategic group mapping: The Five Competitive Forces

Answer 75

- affect strategic groups differently - e.g., for cheaper airlines, the threat of supplier power tends to be stronger because they are smaller and have weaker negotiating power.

Question 76

Insights from strategic group mapping: Profitability

Answer 76

- some strategic groups are more profitable than others. | e. g., in the US, lower-cost point-to-point airlines tend to be more profitable.

Question 77

What are mobility barriers?

Answer 77

industry-specific factors that separate one strategic group from another; restricts mobility between groups. e.g.,- would be difficult for point-to-point airlines to take on a lot of international routes.

Question 78

What are the 3 steps of external analysis?

Answer 78

1. ) PESTEL Analysis- determine how external factors affect the industry. 2. ) Porter's Five Forces- Assess the overall industry environment. 3. ) Draw a Strategic Group Map-explain performance differences within an industry.