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MG206 Porter and External

Simona De MG206 English 40 cards

Cards in this deck (40)

  1. 1LIST of PORTER 5 FORCES1)Threat of New Entrants
    2)Bargaining power of Suppliers
    3) Bargaining power of Buyers
    4) Rivalry among existing comp
    5) Threat of Substitute
    To predict the future profits of an industry; examine how the industry's current and recent levels of competition and profitability are a consequence of its present structure; identify trends that are changing the industry structure; identify how these structural changes will affect the 5 forces of competition and resulting profitability of industry
  2. 2Intense Forcesairlines, textiles and hotels =>
    fierce competition => almost no company in such industries earns attractive returns on investment.
  3. 3Benign Forcessoftware, soft drinks, toiletries and many others industries, allowing incumbent firms to earn lucrative profits.
  4. 4What does the strongest competitive force/ forces determine?The strongest competitive force/forces determines the profitability of an industry and becomes one of the most important sources for strategy formulation.
  5. 5The threat of entry- a force that puts pressure on prices, costs and the rate of investment necessary to compete.
    -Particularly when new entrants are diversifying from other markets.
    -Lets remember, not so long ago example of Apple entering the music industry and “shacked up” competition by leveraging its existing capabilities and cash flows.
    -Incumbent firms will try to minimise the risk of new entrants coming into the market by building barriers to entry
  6. 6Barriers to Enter1) supply and/or demand side economies of scale,
    2) capital requirements,
    3) incumbency advantages independent of size,
    4) incumbent may have cost or quality advantages not available to rivals, for example, geographic locations or established brand identities,
    5) unequal access to distribution channels, 6) customer switching costs
    7) restrictive government policy such as government direct limitation of entry into industries through licensing requirements. Regulated industries like liquor, retailing, taxi services and airlines are visible examples.
  7. 7The power of suppliers-Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services and shifting costs to industry participants.
    - A supplier group is powerful if it is more concentrated than the industry it sells to and does not depend heavily on the industry for its revenues.
    - It is also of significant meaning for consumer to face switching costs in order to be locked-in within the industry.
    -products offered by a powerful supplier group must be heterogeneous and do not have substitutes. This will eliminate the potential for negotiating leverage of buyers. Good examples of this are pilots’ unions.
    -a powerful supplier must be able to credibly threaten to integrate forward into industry.
  8. 8The power of buyers-the power of buyers is a force opposing the power of suppliers.
    -Powerful buyers capture more of the value for themselves by charging lower prices, demanding better quality or services and generally playing industry participants of against one another at the expense of the industry profits.
    -Strong power of buyers is present in the mobile phone service industry.
    -Powerful buyers are those that have negotiating leverage relative to industry participants, especially if they are price sensitive, using their influence primary to pressure price reductions.
    -Buyers can credibly threaten to integrate backward and produce the industry’s product themselves.
  9. 9The rivalry among existing competitors-A vital force that depends on intensity and on the basis on which they compete.
    -This force will be high if competitors are numerous or are roughly equal in size and power, industry experiences a slow growth, exit barriers are high, and rivals are highly committed to the business and have aspirations for leadership.
    -Rivalry is especially destructive to profits if it gravitates solely to price because price competition translates profits directly from an industry to its customers.
  10. 10The threat of substitutes- An equally important force but yet very tricky to define.
    - Substitutes are always present but they are easy to overlook because they may appear to be very different from the industry product.
    -For example, improvements in the plastic materials allowed substituting for steel in many automobile components.
    -The threat of substitute is high if it offers an attractive price performance trade-off to the industry product, buyers cost of switching to substitute is low, firms cannot read each other’s signals well enough because of lack of familiarity wit one another, diverse approaches to competing or different goals.
  11. 11BENEFITS of PORTER 5 FORCESAll of the five forces give a great of overview of the external market.
    It helps predict the future profits of industry,
    examine how the industries current and recent levels of competition and profitability are a consequence of its present structure,
    identify trends that are changing the industry’s structure and identify how these structural changes will affect the five forces of competition and resulting profitability of the industry.
  12. 12LIMITATIONS of PORTER 5 FORCES (1)- Since economic theory identifies two types of relationship between different products: substitutes and compliments, the analysis of the competitive environment needs to take into account another force- the presence of compliments. Compliments unlike substitutes increase value of product, for example without ink cartridges my printer has very little value to me. (R.M Grant, 2013)
    it does not explain why within one industry, different firms have different profitability levels. Industry accounts for only roughly 20% of the variance in from performance. Competitive advantage rather than industry attractiveness is the primary source of superior profitability (Garth Saloner, 2001) Internal resources and capabilities rather than external market focus have been viewed as comprising a more secure base for formulating strategy.
    The greater the rate of change in a firm’s external environment, the more likely it is to that internal R+C rather than the external market focus will provide a secure foundation for long term strategy.
  13. 13LIMITATIONS of PORTER 5 FORCES (2)- it is static and therefore fails to acknowledge the fact that boundaries move across time. Also the role and nature of the five forces itself can change. Consequently, for the framework to stay relevant one must update it continuously, what in turn is inefficient, and time and resource consuming.
    -it fails to assess the effect of government, public sector on firm performance. Environmental regulation, licensing requirements, safety standards, taxes, subsidies and many other factors have a profound effect on industry profitability. Even though one can argue that Porter has accounted for these factors under barriers to entry category within the threat of entry force, it is not sufficient for those industries where government influence plays a major role. Addressing the many rolls of public sector can play in shaping up from strategic options and decisions.
  14. 14LIMITATIONS of PORTER 5 FORCES (3)Another key deficiency of the five forces framework is in viewing inter-firm relations as exclusively competitive in nature. What about cooperation, for example Intel and Microsoft? With this focus, it dos not really take into consideration strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks or others.
  15. 15CONCLUSION ON PORTER 5 FORCESPorter Five force of competition framework allows determining the attractiveness of an industry but is not sufficient on its own. It is good to be used as a starting point for further analysis, aiding managers to think about the current situation of their industry in a structured, easy-to-understand way.
    In combination with other frameworks a more comprehensive analysis can be achieved. Vivid examples of such frameworks are: resource-based view, Brandenburger and Nalebuff “Value Net” model, that consists of suppliers, customers, competitors and complementors, PESTEL analysis, which reveals drivers for change in an industry and insights about the expected political, legal, economical, socio-demographical and technological changes that can influence the five competitive forces and thus have impact on industry structures, and SWOT analysis that provides knowledge of strength, weaknesses, opportunities and threats.
  16. 163 factors related to industry analysis (R.Grant)1) External factors are very VOLATILE that is because tech. and govt. regulations change significantly and quickly.
    2) All firms are successful in their own, unique way and therefore industry analysis is not sustainable way for success.
    3) Unless a firm is impressive with its resources and capabilities (internal factors) it will not be successful on sustainable basis.
    => Today firm market power tends to be transitory. That is why R&D of big corporation is enormous. Big players try to ensure that barriers to enter are high enough to prevent the new entrants to create the competition.
  17. 17Why is there a shift in FOCUS OF STRATEGY THINKING from external environments of the firm to the internal ?-Internal environment is much more STABLE
    -Internal resources and capabilities rather than external market focus have been used as comprising a more secure base for formulating strategy
    -competitive advantage rather than industry attractiveness is the primary source of superior profitability
    -the greater the role of change in a firm's external environment, the more likely it is that internal resources and capabilities rather than external market focus will provide a secure foundation for long term strategy. In fast-moving, technology-based industries basing strategy upon capabilities can help firm outlive the life cycles of the initial products
    +VE EXAMPLE: Apple's remarkable ability to combine technology, aesthetics and ease of use has allowed it to to expand beyond its initial focus on desktop and notebook computers into and MP3 players smartphones and tablet computers
    -VE EXAMPLE: KODAK tried to maintain its market focus
  18. 18WHY IS EXTERNAL MARKET ANALYSIS PERFORMED?It shows Future Trends Forecast (once you can predict future well (meet future expectations), you can engage in advantageous behavior)
  19. 19What are the effects of industry characteristics on firm performance?Differences in industry performance can be large and long lasting, managers need to understand what determines them.
    For example, OPEC prices rose in 1970 => Decreased profits of plastic industry in which petroleum derivates are an important input
  20. 20Industry analysisFramework for anticipating systematic differences in average firm performance
    The variation in profits occurs in part because firms in the same industry make different strategic decisions in which both industry characteristics and firms response matter
    Industry accounts for only 20% of variance in firm performance
  21. 21What are the industry characteristics that are important for firm performance?-number of firms
    -tech comp
    -sizes of firms
    -eco of scales
    -consumer pref
    -etc
  22. 22SCPSTRUCTURE-CONDUCT-PERFORMANCE
    Framework was designed to understand how government might intervene to increase social welfare
    Basic conditions (for any framework the starting point is a well-defined industry)=> market structure=> conduct=> performance
    &
    Public policy
    Modified to place performance as centrepiece has been basis of many industry analysis strategic management trends=> porter 5 forces
    Firm behaviour is driven primarily by the market structure => as the number of firms in the industry decrease and competitive pressures abate, the firm can behave in ways that increase profits, e.g. Increase prices
  23. 23What is the greatest strategic challenge general managers face?CHANGE maybe the greatest strategic challenge general managers face
    Managers must maintain a mental map of the relationship among firms internal and external environments, actions and performance
    e.g. Ford believed in elastic demand, decreased costs and standardisation => decreased prices=> by 1927 captured 1/2 market
    G.M. produced range of models that it updated each year=> acquired many independent firms=> dominated the market
    Attractive entry by foreign firms: small car segment+ changing fuel prices+ change in technology= Japanese and European cars are better quality than US
    Response of US is production of SUV that made fortunes
    THROUGHOUT THE HISTORY, THE LEADING FIRMS TRANSFORMED THEIR RELATIONSHIP WITH THE VALUE CHAIN, WHAT SHOWS THE IMPORTANCE OF FORMULATING STRATEGIC RESPONSE TO CHANGE
  24. 24How can they change in a firm's environment affect it's competitive advantageA sustained competitive advantage is CENTRAL to a successful strategy, and change in the firm's environment can affect its competitive advantage
    e.g. Small independent drugstores tailored their services to a local community of customers. When large chain stores entered, the incumbent firms were unable to compete in the new environment.
    The share of pie (potential industry earnings) that the incumbent firms can capture depends on how intense competition among them is, how high barriers to entry are, how much value buyers/ suppliers can capture
    Managers often cannot distinguish between LT AFFECTS and ST FLUCTUATIONS=> ILC
  25. 25INDUSTRY LIFE CYCLE = EMERGENCEEMERGENCE=>
    Competition among different approaches is what distinguishes competition in the emergence stage of an industry
    One approach triumphs in the market and firms that pursue wrong approach fail
    INVENTION-common ingredient of the new successful venture BUT uncertain, hard to see opportunity and bring the resources to seize it
    FIRST MOVER ADV
    Entrepreneurs and investors face 4 main sources of uncertainty:
    TECH; MARKET; ORG; STRATEGIC
    The competition for resources help explain why the market tends to grow relatively slowly in this phase, none of their resource holders is confident enough to place any large bets on any alternative.
  26. 26INDUSTRY LIFE CYCLE = EMERGENCE=>RETENTIONRetention occurs when the winning approaches emerge and the surviving firms imitate the more successful features of their rivals' approaches & new entrants imitate the successful incumbents= there is much less variety among the survivors than among the original contenders
    Many industries experience a period of consolidation after the emergent phase of their life cycle BUT this pattern is much more pronounced in HIGH-TECH markets where an underlying product characteristics accentuates it (the products benefits to each user increase along with the number of other users)=> Saloner et al
  27. 27INDUSTRY LIFE CYCLE = GROWTHThe WINNERS is in the GROWTH stage are the firms that produce the most attractive products within the class of products that won out during their emergent phase
    -increase in industry demand=> does not need to steal customers from competitors=> high-performance by solidifying its position in the market BUT a new firm that does not have commitments to existing channels or A well established product line might adopt new business models more readily
    THE STRATEGY must deal with potential threat from new entrants as well as current competition from incumbents
  28. 28INDUSTRY LIFE CYCLE = MATURITY&DECLINEMATURITY&DECLINE PHASE of the industry life cycle exhibits greater stability than any other stage
    Leaders have well-established position, stable market shares, innovation tends to be incremental- refining and improving what is already there. Focus on maintaining competitive advantage
    Once growth rate slow all the industry enters the mature/ declining phase. a firm's ability to maintain competitive advantage determines its ability to survive and prosper.
    Uncertainty is LOW
  29. 29INDUSTRY LIFE CYCLE CRITICISMNo industry has to follow these stages. Managers should use this profile to think about what problems industry EVOLUTION presents the firm
  30. 30WHAT FACTORS INFLUENCE INDUSTRY ENVIRONMENT?- The national/ international economy
    -Tech
    -Govt and political forces
    -The natural environment
    -Demographics
    -Social forces
    THE CORE OF THE FIRM'S BUSINESS ENVIRONMENT IS FORMED BY ITS RELATIONSHIPS WITH 3 SETS OF PLAYERS: CUSTOMERS, SUPPLIERS, COMPETITORS
  31. 31PESTPEST analysisi and similar approaches to macro-level environment scanning can be USEFUL IN KEEPING A FIRM ALERT TO WHAT HAPPENING IN THE WORLD
    BUT
    -costly
    -info overload
  32. 32STRATEGIES to alter industries structure-Identify key structural futures of an industry that are responsible for depressing profits
    -which of those structural features are amenable to change through appropriate strategic initiatives
    e.g. Profits revival in steel industry was mainly result of demand from China, however it was also supported by rapid consolidation of the industry led by NITTAL's merger with ARCELOR
    e.g. In the absence of significant product differentiation the airlines have used frequent-flyer schemes to build customer loyalty. The companies have also achieved dominance of particular airports
  33. 33ARCHITECTURAL ADVANTAGE (who? & what?)M.JACOBIDES
    All firms have the potential to influence the development of industry structure to suit their own interests
    Thereby achieving architectural advantage that results from:
    1)Creating one's own bottleneck:
    e.g. Apple dominance of the music download market through iTUNES is achieved through a digital right management strategy that effectively locks in consumers through the incompatibility of its music files with other MP3 formats
    2)Relieving bottlenecks in other parts of the value chain
    e.g. Google developed Android to prevent other firms from gaining a bottleneck in operating systems for mobile devices which might have threatened Google's ability to transfer its dominance of search service from fixed to mobile devices
    3) redefining roles and responsibilities in the industries
    e.g. IKEA's ability to become the worlds biggest and most successful supplier of furniture was based upon a strategy which required a transfer of furniture assembly from furniture manufacturers to consumers
  34. 34Positioning The CompanyRecognising and understanding the competitive forces that a firm faces within its industry allows managers to position the firm where competitive forces are weakest
    e.g. PACCAR illustrates the principle of positioning a company within a given industry structure. The firm has found a position of its industry where the competitive forces are weaker- where it can avoid buyer power and price-based rivalry. And it has tailored every single part of the value chain to cope well with their forces in their segment. As a result PACCAR has been IT for 68 years straight and has earned a LR return on equity above 20%
    EFFECTIVE POSITIONING requires THE FIRM to anticipate CHANGE in the competitive forces likely to affect the industry
    e.g. Traditional book retailing has been devastated by online retailers such as Amazon and e-books
  35. 35KEY CHALLENGE IN INDUSTRY ANALYSISThe key challenge in the industry analysis is defining the relevant industry and establishing who competing with whom
    IDENTIFYING KEY SUCCESS FACTORS CAN BE HELPFUL TO OVERCOME THESE CHALLENGES
    -What do customers want? (analysis of demand=> can be done through analysing profit drivers)
    -how does the firm survive competition?
    => industry analysis allows to make first approach at identifying the sources of competitive advantage through recognising key success factors in which competition must move quickly and build advantages and erode the advantage of its rivals
  36. 36HypercompetitionHypercompetition-Intense and rapid competition moves
    Competition is a dynamic process in which industry structure is constantly changing raises issues of whether competitive behaviour should be seen as an outcome of industry structure or a determinant (AUSTRIAN SCHOOL OF ECONOMICS)
    If structural transformation is rapid, and then the 5 forces DO NOT offer a stable basis on which to predict competition and profitability.
    The ONLY route to sustained superior performance and the Hebrew competition is through continual you'll be creating and renewing competitive advantage
  37. 37The contribution of game theoryPermits the framing of strategic decisions
    Predicts the outcome of competitive situations and identifies optimal strategic choices
    Points to 5 aspects of strategic behaviour through which a firm can increase its competitive outcomes:
    1) Cooperation (Intel+Microsoft)
    2) Deterrence (impose costs on the another players for actions deemed undesirable)
    3) commitment
    4) change the structure of the game being played
    5) signalling
    Game theory has not developed to the point where it permits us to model real business situation in a level of detail that can generate precise predictions
    Game theory provides a set of tools that allows us to structure our review of competitive interaction-as systematic framework for exploring the dynamics of competition
  38. 38Competitive intelligenceInvolves the systematic collection and analysis of information about rivals for informing decision-making
    Useful for everyday business situations
    Less formal and more empirically based approach for predicting competitive behaviour
    Main purpose:
    Forecast competitive future strategies and decisions
    Predict competitors likely reactions to firms strategic initiatives
    Determine how competitors behaviour can be influenced to make it more favourable
    PROBLEM!
    Sam information is private=> legal issues
    Information OVERLOAD
  39. 39A framework for competitors analysis (WHO? WHAT?)PORTER
    Involves: strategy + objectives +assumptions+ resources and capability = predictions
    The key is to link the content of top management communication with evidence of strategic actions
  40. 40Segmentation and strategic groupsThe main usefulness of strategic group analysis is understanding strategic positioning, recognising patterns of competition, identifying strategic niches, it is less useful tool for analysing Interfirm profit differences
    Basic argument is that mobility barriers between strategic groups permit some groups of firms to be persistently more profitable than other groups. BUT this may reflect the fact that the members of a strategic Group, although PURSUING similar strategies, are not necessary in competition with one another
    E.g. Within the European airline industry budget airlines such as: easyJet, airbaltic, skyeurope, ryanair pursue similar strategies that do not for the most part compete on the same route

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MG206 Flashcards on MG206 Porter and External , created by Simona De on 09/04/2015.
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  • Created by Simona De · Apr 9, 2015
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