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Flashcards in 2: Competition and Industry Structure Deck (16)
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1
Q

firm’s external environment

in 4 circles n 6 dimensions for analysis

A

world > industry > strategic group > firm

PESTEL:
Political
§  Government pressures
§  Subsidies n incentives
§  Differences in countries, states
Economic
§  Growth rates
§  Interest rates
§  Employment levels
§  Currency exchange

Sociocultural
§ Norms, culture, values
§ Demographics
§ Lifestyle changes

Technological
§ Innovation
§ Diffusion
§ Research n development

Ecological
§ Global warming
§ Sustainability
§ Pollution

Legal
§ Court system
§ Legislation
§ Hiring laws

2
Q

Backup - Structure-Conduct-Performance model
goal,
3 elements explained

A

> Describes the conditions under which perfect competition in an industry would not unfold

§  Number of buyers and sellers
§  Product differentiation
§  Barriers to entry
§  Cost structures
§  Vertical integration
§  Pricing behavior
§  Product strategy
§  Advertising
§  Research and development
§  Investment in plants and equipment

§ Firm performance
§ Society: Productivity and efficiency in allocation
§ Level of employment and progress

3
Q

continuum of possible industry structures
2 poles
4 stages, seen in 4 dims.

A

> from fragmented w low profitability
to consolidated w high profitability <

perfect competition

  • many firms
  • zero pricing power (=price takers)
  • commodity product
  • low entry barriers

monopolistic competition

  • many firms
  • some pricing power
  • differentiated product
  • medium entry barriers

oligopoly

  • few firms
  • high pricing power
  • differentiated product
  • high entry barriers

monopoly

  • 1 firm
  • very high pricing power
  • unique product
  • very high entry barriers
4
Q

industries w high n low ROI(C) = profitability

depends on what?

A

high: SW, pharma, IT services
low: airlines, hotels, electric utilities

depends on 5 competitive forces!

5
Q

Barriers to entry:
equivalent to,
7=2+1+3+1 types explained when needed

A

~= collective capital good, generating joint profits for incumbents

Economies of scale:
incumbents @ optimal volume -> delta cost

Cost disadvantage
incumbents have learnt -> delta cost
or could be geographical! (e.g. energy)

Product differentiation
entrants must spend to overcome customer loyalty

Capital requirements

Switching costs

Distribution channels

Government policies (2 "public", 2 "nationalistic")
§  Licensing requirements
§  Standards and regulations
§  Technology transfer provision
§  Limiting access to raw materials
6
Q

3 drawbacks of to economies of scale

A
  • trade-off with product differentiation
  • technological change may penalize large-scale firm if more specialized
  • economies of scale w existing technology may prevent investment in new ones
7
Q

4=2+1+1 drawbacks of cost advantage thru experience

A
  • nullified by new technologies
  • trade-off with product differentiation
  • bad if too many firms in the industry use this strategy
  • drawing focus away from market developments
8
Q

intensity of competition
2 measures,
8=4+4 factors, explained when need be

A
  • HHI index = sum_i ( market_share_i^2 )
  • CR4 index = market share(4 big) / total

Numerous and equally balanced competitors

Slow industry growth

High fixed costs
> need to fill excess capacity > rapid price cuts

Lack of differentiation or switching costs
> lock-in effect

Capacity increase

Diversity of competitors

High strategic stakes

High exit barriers

9
Q

substitutes:
3 effects,
3 faciliators

A
  • limit prices > profitability of an industry
  • often based in emerging technologies
  • managerial challenge for incumbents, because difficult to detect and act on
  • low switching costs
  • lower price of substitute
  • equal or greater performance/quality of substitute
10
Q

bargaining power:
def
6 factors for suppliers
8 factors for buyers

A

= ability to influence the price and delivery conditions

  • higher concentration than downstream
  • lack of substitutes
  • low importance of downstream as client
  • important input for downstream
  • product differentiation or other switching costs
  • threat of forward vertical integration
  • buying high volumes
  • big share of buyer’s spending
  • lack of product differentiation
  • low switching costs
  • low profits
  • threat of backward vertical integration
  • UNimportant input for downstream
  • full information
11
Q

4=1+2+1 limits of 5-forces framework

A
  • static perspective, i.e. valid in static conditions
  • collaboration n coopetition?
  • complements?
  • Non-market forces such as government policy and international politics?
12
Q

strategic groups
Porter’s def + (dis)similarities
+ 5=1+4 strat. dims.

A

= A group of firms in an industry following the same or similar strategy along the same strategic dimensions
- may be idiosyncratic, but are similar on strat. dims

§ Technology leadership 
§ Product quality 
§ Service level
§ Pricing
§ Choice of distribution channel
13
Q

strategic groups in 2 dims. n groups
+ 5=1+2+2 A>B mobility incentives
- 4=1+1+2 mobility barriers

A

Group A: low prices, weak image
Group B: high prices, strong image

+ Profit B > Profit A
+ Changing buyer preferences
+ Increasing fixed and variable costs A
+ Opportunities for strategic cooperation
+ Expected increase in competitive intensity A

  • Cost of strategic change
  • Organizational inertia
  • Uncertain replication of strategic initiatives
  • Difficulty of imitating intangible assets
14
Q

the 3 determinants of firm performance, quantitatively

A
  • firm effects 30-45%
  • industry effects 20%
  • other (corporate parent, year effects, unexplained variance) 35-50%
15
Q

Recap: 8=2+(1+4)+1 models to analyse firm’s environment

A

PESTEL
Structure-Conduct-Performance

The five-forces model
Barriers to entry
Intensity of competition 
Substitution 
Bargaining power

Strategic groups

16
Q

6=3+1+2 steps in industry analysis

A
  1. define the industry (neither too broad- or narrowly)
  2. identify & segment participants à la Porter
  3. analyze Porter’s 5 forces based on MAIN drivers
  4. determine overall structure & check it vs profitability
  5. analyze recent & likely future changes in 5 forces
  6. identify industry aspects that you, competitors, entrants or substitutes can influence!