Week 3 - Chapter 3 Flashcards
In order to chart a company’s strategic course wisely, managers must first develop a deep understanding of the company’s present situation.
2 facets of a company’s situation are especially pertinent. What are they?
1 – Its external environment – most notably, the competitive conditions of the industry in which the company operates
2 – Its internal environment – particularly the company’s resources and organizational capabilities.
What is the macro-environment?
The macro-environment encompasses the broad environmental context in which a company’s industry is situated.
It’s important for managers to determine which macro-economic factors represent the most strategically relevant factors outside the firm’s industry boundaries.
What is meant by strategically relevant?
Strategically relevant means the macro-economic factors which are important enough to have a bearing on the decisions the company ultimately makes about its long-term direction, objectives, strategy and business model.
What are the 6 components of the Macro-Environment?
(PESTEL analysis)
1 - Political factors 2 - Economics conditions 3 - Sociocultural forces 4 - Technological factors 5 - Environmental forces 6 - Legal and regulatory factors
The most powerful and widely used tool for diagnosing the principal competitive pressures in a market is the 5 forces framework.
This framework, holds that competitive pressures on companies within an industry comes from 5 sources.
What are they?
1 - Competition from rival sellers
2 - Competition from potential new entrants to the industry
3 - Competition from producers of substitute products
4 - Supplier bargaining power
5 - Customer bargaining power
Using the 5 forces model to determine the nature and strength of competitive pressures in a given industry involves 3 steps.
What are they?
1 - For each of the 5 forces, identify the different parties involved, along with the specific factors that bring about competitive pressures.
2 - Evaluate how strong the pressures stemming from each of the 5 forces are (strong, moderate, or weak)
3 - Determine whether the 5 forces, overall, are supportive of high industry profitability.
The intensity of competition from rival sellers within an industry depends on a number of identifiable factors. What are they?
- Buyer demand is growing slowly or declining
- Buyer costs to switch brands are alow
- The products of rival sellers become less strongly differentiated
- Industry members have too much inventory or significant amounts of idle production capacity.
- The number of competitors increase and they become more equal in size and capability
The seriousness of the threat of new entrants in a particular market depends on what 2 factors?
1 - Whether entry barriers are high or low
2 - The expected reaction of existing members to the entry of newcomers.
Entry barriers are high (and threat of entry is low) when?
- Incumbents have large cost advantages over potential entrants due to economies of scale, experience, other cost advantages.
- Customers have strong brand preferences
- There are strong network effects
- High capital requirements
3 factors determine whether the competitive pressures from substitute products are strong or weak. What are they?
Competitive pressures are stronger when:
1 - Good substitutes are readily available and attractively priced
2 - Buyers view the substitutes as comparable or better in terms of quality, performance, and other relevant attributes.
3 - Low switching costs
There are 3 signs that the competitive strength of substitute products are increasing.
What are they?
1 - Whether the sales of substitutes are growing faster than the sale of the industry being analyzed.
2 - Whether the producers of substitutes are investing in adding capacity.
3 - Whether the producers of substitutes are earning progressively higher profits.
Before assessing the competitive pressures coming from substitutes, company managers must identify the substitutes which involves what 2 steps?
1 - Determining where the industry boundaries lie
2 - Figuring out which other products or services can address the same basic customer needs as those produced by industry members.
A variety of factors determine the strength of suppliers’ bargaining power.
Supplier power is stronger when?
- Demand for suppliers’ products is high and the products are in short supply
- It is difficult or costly for the industry members to switch their purchases from one supplier to another
- Suppliers provide an item that accounts for no more than a small fraction of the costs of the industry’s product.
Whether buyers are able to exert strong competitive pressures on industry members depends on 2 factors.
What are they?
1 - The degree to which buyers have bargaining power
2 - The extent to which buyers are price-sensitive
Buyer bargaining power is stronger when?
- Buyer demand is weak in relation to the available supply.
- Industry goods are standardized, or differentiation is weak.
- Buyers’ cost of switching to competing brands or substitutes are relatively low.
What 3 factors increase buyer price sensitivity, resulting in greater competitive pressures on the industry as a result?
The following factors increase buyer price sensitivity and result in greater competitive pressures on the industry as a result:
1 - when buyers are earning low profits or have low income
2 - the product represents a large fraction of their total purchase
3 - the quality of the product is not uppermost in their considerations
Effectively matching a company’s business strategy to prevailing competitive conditions has 2 aspects.
What are they?
1 - Pursuing avenues that shield the firm from as many of the different competitive pressures as possible.
2 - Initiating actions calculated to shift the competitive forces in the company’s favor by altering the underlying factors driving the 5 forces.
The value net differs from the 5 forces framework in 3 important ways.
What are they?
1 - The value net focuses on the interactions of industry participants with a particular company. Thus it places the firm in the centre of the framework as shown in the diagram.
2 - The category of “competitors” is defined to included not only the focal firm’s direct competitors or industry rivals, but also the sellers of substitute products and potential entrants.
3 - The value net framework introduces a new category of industry participant that is not found in the 5 forces framework - that of “complementors”
In the value net, there are 4 key connections to the center which is “The firm”.
What are they?
1 - Customers
2 - Complementors
3 - Suppliers
4 - Competitors
What are complementors?
Complementors are the producers of complementary products, which are products that enhance the value of the focal firm’s products when they are used together (shoes and shoelaces).
What are driving forces?
Driving forces are the major underlying causes of change in industry and competitive conditions
Driving force analysis has 3 steps.
What are they?
1 - identifying what the driving forces are
2 - assessing whether the drivers of change are, on the whole, acting to make the industry more or less attractive
3 - determining what strategy changes are needed to prepare for the impact of the driving forces
Most drivers of industry and competitive change fall into what categories?
- Changes in an industry’s long-term growth rate.
- Increasing globalization
- Emerging new internet capabilities and applications
In terms of assessing the impact of the forces driving industry change, what 3 questions need to be answered?
1 –causing demand for the industry’s product to increase or decrease?
2 –making competition more or less intense?
3 – Will the combined impacts of the driving forces lead to higher or lower industry profitability?
