...Chapter 2 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis KNOWLEDGE OBJECTIVES 1. Explain the importance of analyzing and understanding the firm’s external environment. 2. Define and describe the general environment and the industry environment. 3. Discuss the four activities of the external environmental analysis process. 4. Name and describe the general environment’s six segments. 5. Identify the five competitive forces and explain how they determine an industry’s profit potential. 6. Define strategic groups and describe their influence on the firm. 7. Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them. CHAPTER OUTLINE Opening Case Environmental Pressures on Wal-Mart THE GENERAL, INDUSTRY, AND COMPETITOR ENVIRONMENTS EXTERNAL ENVIRONMENTAL ANALYSIS Scanning Monitoring Forecasting Assessing SEGMENTS OF THE GENERAL ENVIRONMENT The Demographic Segment The Economic Segment The Political/Legal Segment The Sociocultural Segment The Technological Segment The Global Segment Strategic Focus Does Google Have the Market Power to Ignore External Pressures? INDUSTRY ENVIRONMENT ANALYSIS Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Intensity of Rivalry among Competitors INTERPRETING INDUSTRY ANALYSES ...
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...Chapter 12 & 13 2- Well in my own words I am going to try to explain price and non-price competition with a scenario/ example. Wal-Mart is definitely the best (in my opinion) using the price competition approach against its competitors which is pretty much all kind of business out there from groceries, electronics, auto and others. They have what they call a “low price guaranty” and the “matching price” on others. This is one of the most aggressive pricing strategies out there. On another hand, you have a company like Brookshire’s, in Tyler which definitely cannot compete which so a big market like Wal-Mart so they approach is a non-price competition because their focus is more is the quality of their product and customer service. Like for example, the store brand quality between these two is big. The quality of the Brookshire’s brand is better (in my opinion). So by focusing in these areas Brookshire’s stays relevant in the grocery business against big corporations. I believe these two approaches obviously work better when they are competing in the same market. Like staples against office depot both have to compare prices and have a price competition approach. 4- * characteristics * Product or a service that people cannot live without. For example: Utilities service like water, electricity, a drug or medicine that some people depend on to live or survive. This kind of product if the price changes people have no other option that just getting it. * In...
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...management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. —Warren Buffett, Chairman, Berkshire Hathaway The reinsurance business has the defect of being too attractive-looking to new entrants for its own good and will therefore always tend to be the opposite of, say, the old business of gathering and rendering dead horses that always tended to contain few and prosperous participants. —Charles T. Munger, Chairman, Wesco Financial Corp. OUTLINE n n n n n INTRODUCTION AND OBJECTIVES FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND AND COMPETITION ANALYZING INDUSTRY ATTRACTIVENESS Porter’s Five Forces of Competition Framework Competition from Substitutes Threat of Entry Rivalry Between Established Competitors Bargaining Power of Buyers Bargaining Power of Suppliers APPLYING INDUSTRY ANALYSIS Describing Industry Structure Forecasting Industry Profitability Strategies to Alter Industry Structure 66 INTRODUCTION AND OBJECTIVES 67 n n n n DEFINING INDUSTRIES: WHERE TO DRAW THE BOUNDARIES Industries and Markets Defining Markets: Substitution in Demand and Supply FROM INDUSTRY ATTRACTIVENESS TO COMPETITIVE ADVANTAGE: IDENTIFYING KEY SUCCESS FACTORS SUMMARY NOTES INTRODUCTION AND OBJECTIVES In this chapter and the next we explore the external environment of the firm. In Chapter 1 we observed that profound understanding...
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...ay Price Wars Summary: Price wars have plagued industry after industry in recent years. Indeed, price wars must be avoided like the plague! More often than not, there are no winners, only losers. The effects of price wars are not only severe but also enduring. Price wars can lead to a severe erosion of profits. Unless there is a significant cost advantage, for the company introducing the price cut, a price reduction will lead to retaliation by competitors. So dropping prices normally does not lead to an increase in market share. Instead it leads to a sharp drop in profits. Price wars also shape customer expectations. Research indicates that the lowest price people pay for a product or service is remembered longest, and becomes their reference point. Driving down prices to unreasonable levels, has a dramatic influence on a customer's perception of what is a "reasonable" price long after the war ends. Price wars also divert the attention of customers away from product benefits towards price. That is usually bad for the industry. Many of the justifications given by managers for entering a price war are untenable. The claim that weak competitors can be knocked out through a price war is weak. Indeed, there is sufficient empirical evidence to indicate that price wars are not guided by any logic. They tend to get emotional and continue long after it has become economically unviable to offer these products at such low prices. As Robert A. Garda and Michael V. Marn, point out,...
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...To what extent would a differentiation strategy be a better option than a low cost option for Aspire when entering China? (16marks) A differentiation strategy is something businesses use to gain an edge over their competitors. In industries where multiple competitors produce similar products, managers will try to make their product unique in some way so that it stands out from the pack. A low cost option focuses on providing similar benefits to competitors, but at a lower price. For Aspire to differentiate, they need to provide more benefits than their competitors for example strong levels of customer service, which therefore should enable them to charge higher prices. If Aspire pursued a differentiation strategy the distribution of the coffee should be exclusive, keeping a tight control over distribution to maintain an exclusive image. This being used to emphasise the difference between their products (the coffee) to their rivals. In order to compete in the Chinese market Aspire needs to make sure its product is different from competitors. If consumers value this difference it will benefit the firm in two ways, firstly by an increased sales volume and a greater scope for charging a higher price. Differentiation can be based on a number of different characteristics for example different distribution methods, clever promotional and advertising campaigns to boost brand image and sales and the design of the products itself for example the coffee cups etc. Differentiation...
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...Describe characteristics and give examples of perfect competition (pure competition). * Many buyers and sellers participate in the market (famers market); * Sellers offer identical products (oranges and shoes); * Informed buyers and sellers (car dealerships, computers); * Ability for sellers to enter or exit the market freely (restaurants, consultants service) How do start-up costs discourage entrepreneurs from entering the market? * High start up costs discourage new ventures by creating the potential for large losses; many people are unwilling to take the risk of starting a new business . What is an example of barriers to entry in the magazine market? * Start up costs – example: office space * Technology - example: word processing equipment * Why does government usually approve of natural monopolies? * They operate at a lower cost to both consumers and producers, so they are generally allowed because they are the most efficient source of that good or service * What are three different forms of price competition? 1) Discounted airline fares 2) Manufacturer’s rebate offers 3) Senior citizen or student discounts 4) Kids fly or stay free promotions * What are economies of scale? * When an economies of scales exist, a firm’s start-up costs are high, but its average costs fall for each unit it produces, even at a level of output high enough to supply the entire the market * What...
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...If you find yourself facing a price war, you'll need to understand how it started in order to respond effectively. Often the best counterattack does not. involve a retaliatory price How by Akshay R. Rao, Mark E. Bergen, and War ^ 1 I 1^ f Scott Davis N THE BATTLE TO CAPTURE THE CUSTOMER, companies use a wide range of tactics to ward off competitors. Increasingly, price is the weapon of choice - and frequently the skirmishing degenerates into a price war. Creating low-price appeal is often the goal, hut the result of one retaliatory price slashing after another is often a precipitous decline in industry profits. Look at the airline price wars of r992. When American Airlines, Northwest Airlines, and other U.S. carriers went toe-to-toe in matching and exceeding one another's reduced fares, the result was record volumes of air travel-and record losses. Some estimates suggest that the overall losses suffered hy the industry that year exceed the combined profits for the entire industry from its inception. Price wars can create economically devastating and psychologically dehilitating situations that take an extraordinary toll on an individual, a com- HARVARD BUSINESS REVIEW March-April 2000 107 How to Fight a Price War pany, and industry profitability. No matter who wins, the comhatants all seem to end up worse off than before they joined the battle. And yet, price wars are becoming increasingly common and uncommonly ...
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...trust and confidence of consumers. Proprietary technologies protect companies legally through patents and copyrights so others cannot replicate their product. Existing firms have established distribution channels, which ensure the product gets to where it needs to be delivered. Burton Snowboards is a company that has held its position in the snowboard industry because the brand is well established so the consumer knows they are buying a quality snowboard every time. Rivalry among existing competitors and threat of substitute products or services would both keep the profit down for airlines because the cost remains fixed while the price is reduced due to competition. On the other hand, the soft drink industry is more profitable because the industry has room for demand so competition is not as of factor. The elimination of a possible rival firm is not always good in the long run because of competition. This creates good price ranges and leverage with suppliers. Apple produces and sells a large amount of product, which allows them to have the upper hand when...
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...company communicate with its customers or suppliers. It can give a company insight into the likes and dislikes of its current customers as well as potential customers. In terms of marketing this can be a massive advantage knowing how to communicate to your target customers and making sure you tailor your strategy to their taste. Further benefits are that a company can identify opportunities and threats while also reducing risks and uncertainties. For instance, it can show the company that a certain product they had planned to launch does not fully match the wants and needs of its target market and in return can make modifications or changes as needed. In regards to threats, such as an airline finding out that a low cost competitor is looking to make an entry on certain routes that they operate. The airline can take appropriate measures to combat this and persuade passengers to stay with them or simply cut the route. Business research also provides a company with the significant benefit of evaluating the company’s progress according to its strategy. It also enables the company to see how they stand in comparison to their competitors. Also potential problems and losses can be avoided which otherwise would...
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...management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. —Warren Buffett, Chairman, Berkshire Hathaway The reinsurance business has the defect of being too attractive-looking to new entrants for its own good and will therefore always tend to be the opposite of, say, the old business of gathering and rendering dead horses that always tended to contain few and prosperous participants. —Charles T. Munger, Chairman, Wesco Financial Corp. OUTLINE n n n n n INTRODUCTION AND OBJECTIVES FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND AND COMPETITION ANALYZING INDUSTRY ATTRACTIVENESS Porter’s Five Forces of Competition Framework Competition from Substitutes Threat of Entry Rivalry Between Established Competitors Bargaining Power of Buyers Bargaining Power of Suppliers APPLYING INDUSTRY ANALYSIS Describing Industry Structure Forecasting Industry Profitability Strategies to Alter Industry Structure 66 INTRODUCTION AND OBJECTIVES 67 n n n n DEFINING INDUSTRIES: WHERE TO DRAW THE BOUNDARIES Industries and Markets Defining Markets: Substitution in Demand and Supply FROM INDUSTRY ATTRACTIVENESS TO COMPETITIVE ADVANTAGE: IDENTIFYING KEY SUCCESS FACTORS SUMMARY NOTES INTRODUCTION AND OBJECTIVES In this chapter and the next we explore the external environment of the firm. In Chapter 1 we observed that profound understanding...
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...Alper Küçükaslan S000773 COCA-COLA WARS CASE ASSIGNMENT 1. Compare the economics of the concentrate business to that of the bottling business: why is the profitability so different? (Use 5-forces analysis for both industries) Concentrate business requires relatively less capital investments. This factor makes easier entering to the market. Less material usage and few input requirements also makes threat of substitutes and services more applicable however, Coke & Pepsi grants %72 of the market so that there is a high risk of market entrance in concentrate business. Also, high costs of marketing (advertisement & promotions) require a solid brand image and sustainable budget so that it’s hard to compete in such a market. Furthermore, customer loyalty and economies of scale makes this market profitable for huge players such as Cola and Pepsi. Bottler business on the other hand requires high investment capital and too much operational cost which makes harder for new entrances to the market. Bottlers’ gross margin exceed %40 whereas their operational margin is %8 which is 1/3 of concentrate businesses. Bottlers are responsible for their own logistics and sales forces territorially and they are bounded on their pricing strategy through their contract with suppliers (Coke & Pepsi) so that their operational profitability remains low. More inputs and operational costs weaken bargaining power of suppliers however; because of high sales volumes and solid brand image with...
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...billion. As Tyco expanded, some questioned the company’s ability to service its debt commitments. Other claimed that management was engaging in accounting tricks to pad its books and make the company appear significantly audited every year, and the outside accountants had detected no problems. These criticisms, which were ignored for some time, were finally shown to have some validity in 2002 when Kozlowski was forced out by the board and subsequently charged with tax evasion by federal authorities. In addition, Kozlowski used corporate asset as personal treasury, such as pay for an expensive birthday party for his wife, and to purchase an expensive Manhattan apartment and world-class art collection. 3. Between 2002 to 2005, Southwest Airlines was the only...
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...60601.(1) The proposed consent order has been placed on the public record for sixty (60) days for reception of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the agreement and the comments received, and will decide whether it should withdraw from the agreement or make final the agreement’s proposed order. The complaint alleges that during 1993 Stone Container engaged in acts and practices that, collectively and in the prevailing business environment, constituted an invitation from Stone Container to competing linerboard manufacturers to join a coordinated price increase. This invitation to collude is an unfair method of competition, and violates Section 5 of the Federal Trade Commission Act. In January 1993, Stone Container announced a $30 per ton price increase for all grades of linerboard, to take effect the following March. As of March 1993, several major linerboard manufacturers had failed to announce an equivalent price move, and Stone Container was forced to withdraw its price increase. Stone Container concluded that its proposed price increase had failed to garner the requisite competitor support, in significant part because Stone Container and other firms in the industry held excess inventory. A firm that holds unwanted inventory will be tempted to shade prices in order to increase sales volume (or in any event, rivals may be concerned about...
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...Porter's 5 forces model is a powerful way of analysing the competitive forces that shapes every industry in general. This was developed by Michael E. Porter of Havard Business School in 1979. This tool helps you to identify whether a new product, investment, services or business have the potential to be profitable. The 5 competative forces that are taken into consideration are: Competition in the Industry Potential of new entrant into Industry Power of Suppliers Power of Customers Threat to substitute products Lets discuss each of these points in detail: Competition in the Industry: This describes the competition between the existing firms in an industry. Greater the competitive riverly (companies providing equally good products or services) lesser are the profit margin. The price of the product/services is the single most defining factor that influences the customer's buy decision. Hence to maintain low cost, companies consistently has to make manufacturing improvements to keep the business competitive. This requires additional capital expenditure which tends to eat up company's earning. On the other hand if no one else can provide products/ services the way you do you have a monopoly. Lets try to explore these points in more detail. Look at the current senario, the small car market in India is very competitive with players like Maruti Suzuki, Tata Motors, Huyndai etc. which was preety much dominated by Maruti. But with launch of Nano the 1 lakh car the...
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...reserved No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163. ISBN: 978-1-4221-6059-6 By his example, Arthur Rosin, my uncle, taught me the pleasures of understanding and explaining. This book is dedicated to him, to Betty Rosin, and to my parents, Cyrille and Eugene Gorin. Contents Copyright Acknowledgments Introduction Part One: What Is Competition? 1. Competition: The Right Mind-Set 2. The Five Forces: Competing for Profits 3. Competitive Advantage: The Value Chain and Your P&L Part Two: What Is Strategy? 4. Creating Value: The Core 5. Trade-offs: The Linchpin 6. Fit: The Amplifier 7. Continuity: The Enabler Epilogue: A Short List of Implications FAQs: An Interview with Michael Porter A Porter Glossary: Key Concepts Chapter Notes and Sources About the Author Acknowledgments The Michael Porter I know is first and foremost a gifted teacher. If this book succeeds in helping readers understand Porter’s ideas in their full richness, it is thanks in large measure to his encouragement, his guidance, and his patience in explaining those ideas to me. As this book progressed, he carefully...
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