Microenvironment Flashcards
(35 cards)
What does Porters Five Forces assist with?
assists with industry analysis and helps to identify industry attractiveness in terms of 5 forces.
The forces determine an industry’s structure and its attractiveness. If industry is not defined correctly there is a risk that the whole analysis becomes flawed and significant strategy aspects are overlooked.
What does competitive rivals involve?
organisations aiming at the same customer groups with similar products or services. 5 factors determine rivalry in a industry or market.
1. Competitor concentration and balance - less numbers lower rivalry = balance means conflict prone to one another
2. Degree of discrimination - higher means lower rivalry
3. Industry growth rates - higher growth means lower rivalry
4. High fixed costs - increased means lower rivalry
5. High exit barriers - lower barriers mean lower rivalry
What does Threat of Entry involve?
The greater the threat, the worst it is for incumbents of an industry. An attractive industry has high barriers to entry that reduce the threat of new competitors. There are 5 important entry barriers:
1. Economies of scale
2. Customer switching costs
3. Capital requirements
4. Access to supply or distribution channels and other incumbency advantages
5. Expected retaliation
What are the underlying drivers of economies of scale?
Decline in unit costs of a product as the absolute volume per period increases.
Forces entrants to come in at a large scale or come in at a small scale and accept a cost disadvantage, both undesirable options.
What are the underlying drivers of product differentiation?
Established firms have brand identification and customer loyalties. Forces entrants to spend heavily (time and resources) to overcome existing customer loyalties.
What are the underlying drivers of capital requirement?
financial resources and investments. High capital requirements reduce the pool of likely entrants.
What are the underlying drivers of switching costs?
One time costs facing the buyer of switching from one suppliers products to another. Forces entrants to offer a major improvements in cost for the buyer to switch from incumbents.
What are the underlying sources of access to distribution channels?
Ability to access distribution channels . Forces entrants to persuade channels to accept their products through price breaks cooperate advertising allowances and the line, which reduces profits.
What are the underlying sources of cost disadvantages independent of scale?
Established firms may have cost advantages not replicable by entrants no matter what their size and attained FOS.
Entrants have to find ways to compete with these advantages.
What are the underlying sources of government policy?
Government control and regulation, government can limit or even foreclose entry in some regulated industries
What are the underlying sources of expected retaliation?
Reactions of existing competitors. Entrants are likely to face this if established firms have substantial resources or high commitment to the industry.
What does Threat of Substitutes?
Products or services that offer the same or similar function and benefit to an industries own products or services but have a different nature.
Managers may focus too much on thier competitors in their own industries and neglect the threat posed by substitutes - theses can reduce demand for a particular type of products as customers switch to alternatives.
Risk of substitution puts a cap on the prices that can be charged in an industry. 2 important points are to be bared in mind about substitutes:
1. Extra industry effects
2. Price/performance ratio
What are the different drivers that can affect the threat of substitutes?
- number of substitutes products available - lower number, lower threat
- switching costs - higher costs, lower threat
- product differentiation - more differentiated, lower threat
- buyers propserity to substitute - less prosperity, lower threat
- relative price performance of substitutes - worse performance lower threat
What does the bargaining power of buyers involve?
These are the organisations immediate customers, not necessarily the ultimate consumers. If buyers are powerful then they can demand low prices or costly product or service improvements.
Buyer power is likely to be higher when they are 1. Concentrated buyers, 2. Low switching costs, 3. Buyer competition threat.
It is very important that buyers distinguish from ultimate consumers to more strategic customers such as retailers.
What are the different drivers that affect bargaining power of a buyer?
- number of buyers - higher numbers, lower power
- size of each buyers order - smaller order, lower power
- buyers ability to substitute - lower ability, lower power
- buyer switching costs - higher costs, lower power
- buyers information availability - less information, lower power
- buyers threat of backward integration - smaller threat, lower power
- importance of products to buyer - more important, lower power
What does bargaining power of suppliers involves?
Suppliers supply the organisation with what it needs to produce the product or service. Factors increases supplier power are the converse to those for buyer power.
What are the different drivers that affect bargaining power of suppliers?
- concentrated suppliers- lower concentration, lower power
- high switching costs - high costs, lower power
- supplier competition threat.
- differentiated products - lower differentiation, lower power.
- number of suppliers - higher numbers, lower power.
- industry threat of backward integration - higher threat, lower power.
- suppliers contribution to quality or service of the industry products - smaller contribution, lower power.
- importance of industry to suppliers profit - less important, lower power.
What are the aims of the 5 Forces analysis?
An assessment of the attractiveness of the industry and any possibilities to manage strategies in relation to the force to promote long term survival and competitive advantage - manager should identify strategic positions to defend itself and exploit forces e.g. building barriers to entry by becoming more vertically integrated.
What does SWOT analysis involve?
It pulls information from internal sources and external sources. General idea of SWOT is that a firm strategy must:
- build on its strength
- remedy the weaknesses or work around them
- protect the firm from the threats
- take advantage of the opportunities presented by the environment
What does SWOT focus on?
On the opportunities and threats that are directly relevant for a specific company and industry and it leaves out general and broad factors.
What is SWOTs aim?
It aims to identify strengths and weaknesses that are relevant to the company and ones that they are capable of dealing with and any changes that may take place in the business environment. SWOT can be used to generate strategic options - using a TOWs matrix.
How do strengths and opportunities combine?
SO - strategic options generate options here that uses strengths to take advantages of opportunities
How to strengths and threats combine?
ST - strategic options, generate options here that uses strengths to avoid threats.
How do weaknesses and opportunities combine?
WO - strategic options, generate options here that take advantage of opportunities by overcoming weaknesses.
