Ch 02

• Opportunities

  Elements in the external environment that could allow a company to formulate and implement strategies to become more profitable
• Threats


  Elements in the external environment that could endanger a firm's integrity and profitability
• Industry


  Group of companies offering products or services that are close substitutes for each other
• Sector


  Group of closely related industries
• Market segments


  Distinct groups of customers within a market that can be differentiated on the basis of their individual attributes and specific demands
• Market segments


  • Established: Coca-Cola, Pepsi
  • Health conscious: Fruit Juices, Sports Drinks
  • Premium: Tonic-Water, Canned Smoothies and Specialty Coffees
• Changing industry boundaries


  • Industry boundaries may change over time as customer needs evolve, or as emerging new technologies enable companies in unrelated industries to satisfy established customer needs in new ways
• Changing industry boundaries


  • Telecom, Healthcare
• Risk of entry by potential competitors

  • Economies of scale
  • Brand loyalty
  • Absolute cost advantage
  • Switching costs
  • Government regulations
• Potential competition


  Companies that are currently not competing in the industry but have the potential to do so
• Coca-Cola entering bottled water industry
• Economies of scale


  Cost reductions gained through mass-producing a standardized output, discounts on bulk purchases, spreading fixed production costs over a large production volume, and cost savings associated with distributing, marketing, and advertising costs over a large volume of output
• Brand loyalty


  A company can create brand loyalty 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
• Absolute cost advantage


  Costs that established companies have relative to potential entrants, arising from superior production operations and processes, control of particular inputs required for production, and access to cheaper funds
• 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
• Government regulations


  Falling entry barriers due to government regulation results in significant new entry, increase in the intensity of industry competition, and lower industry profit rates
• Risk of entry: Rivalry among established companies


  • Competitive struggle between companies within an industry to gain market share from each other
• Intense rivalry among established companies

  Constitutes a strong threat to profitability
• Factors impacting intensity of rivalry

  • Industry competitive structure - number and size distribution of companies in it
  • Demand conditions - increasing demand moderates competition
  • Cost conditions - when fixed costs are high, profitability is highly leveraged to sales volume
  • Exit barriers - economic, strategic, and emotional factors that prevent companies from leaving an industry
• High exit barriers - Companies become locked into an unprofitable industry where overall demand is static or declining
• Bargaining power of buyers


  • Ability to bargain down prices or raise costs by demanding better product quality and service, choosing sellers and purchasing in large quantities, supplier industry being dependent on them for a major portion of sales, low switching costs and ability to purchase an input from several companies at once, threat of entering the industry and producing the product
• Bargaining power of suppliers


  • Ability to raise input prices or industry costs, product having no substitutes and being vital to the buyer, not being dependent on one particular industry for their sales, companies incurring high switching costs if they moved to a different supplier, threat of entering customers' industry, knowledge that companies cannot enter the suppliers' industry
• Substitute products


  Those of different businesses that satisfy similar customer needs and limit the price that companies in an industry can charge for their product
• Complementors


  Companies that sell products that add value to the other products
• Strong vs weak complementors

  • Strong complementors provide increased opportunity for creating value, while weak complementors slow industry growth and limit profitability
• Complementors


  • Film/Camera, Games/Console, Android/iOS, PS/Xbox, PC/Mac
• Strategic groups within industries

  • Companies in an industry differ in the way they strategically position products in the market, determined by product quality, distribution channels and market segments served, technological leadership and customer service, pricing and advertising policy, and promotions offered
• Some strategic groups are more desirable than others because competitive forces open up greater opportunities and present fewer threats for those groups
• Mobility barriers


  Factors that make it difficult for companies to change their strategic group
• Implications of strategic groups

  • Customers view companies within the same strategic group as direct substitutes for each other, the immediate threat to a company are rivals within its own strategic group, different strategic groups have different relationships to each of the competitive forces
• Strategic groups


  • NSU, IUB and UODA vs SCB, Sonali Bank
• Stages in the industry life cycle

  • Embryonic industry - development stage with slow growth, growth industry - first-time demand expands rapidly, industry shakeout - demand approaches saturation, mature industries - market is totally saturated, declining industries - growth becomes negative
• Macroeconomic forces


  • Growth rate of the economy, interest rates, currency exchange rates, inflation or deflation rates
• Global and technological forces

  • Global forces - falling barriers to international trade, technological forces - making products obsolete, creating new product possibilities, impacting barriers to entry and reshaping industry structure
• Demographic, social, and political forces

  • Demographic forces - outcomes of changes in population characteristics, social forces - changing social morals and values, political and legal forces - outcomes of changes in laws and regulations
• Competitive advantage cannot be sustained unless a company is willing and prepared to understand that change, uncertainty, and variability are inevitable, recognize changes, recognize the opportunities and threats of these changes, take advantage of the opportunities and address the threats, and continuously monitor, provide feedback, and take corrective actions