What Are The Major Features Of An Industry And The Forces That Affect Industry Profitability?

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Strategy and Competition
COMM 401

External Environment
Jan.15, 2015

Today’s Agenda
• Why is it important to understand the external environment for strategy and firm performance?
• What are the critical elements of external
Environment: the general, industry, competitor environment • What are the major features of an industry and the forces that affect industry profitability?

The external Environment of the Organization
General/Macro
Environment
Industry
Environment
Strategic Group
(Competitor
Environment)
The
Organization

General/Macro Environment
Segment

Related factors

Demographic Segment

Population size, Age structure,
Ethnic mix, Geographical distribution
Income distribution, Immigration

Socio-cultural Segment

A society’s attitudes and values, Women in the workforce, Workforce diversity,
Environmental Concerns, Work life quality attitudes

Political/Legal Segment

Competition Laws, Labor Laws, Taxation laws , Education philosophies & policy,
De-/ Regulation philosophy

Economic Segment

The general economic health of the country, The impact of purchasing power, the unemployment rate, and the interest rates, currency exchange rate

Technological Segment

Product innovations, Process innovations, Focus of private & governmentsupported R&D expenditures, New communication technologies

Global Segment

Global integration versus local differentiation
New markets as well as existing markets

Physical Environment
Segment

Ecological, social, and economic factors that can affect the physical environment and business practices

Rise and Fall of Krispy Kreme Donut

Industry Analysis
• Firms will have normal profits (enough profit to cover the cost of capital) if an industry has perfect competition.
– Numerous sellers and buyers (No monopolies)
– Perfect information
– Relatively homogeneous products
– No barriers to entry or exit

• What if not?

What is an industry
• An industry is a group of firms that produce or sell the same product in a market.
• Complication of defining industry boundaries

A model of industry structure:
Porter’s 5 Forces Model
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers

Rivalry Among Competing
Firms in Industry

Threat of
Substitute
Products

Industry Value Chain

Bargaining
Power of
Buyers

Threat of New Entrants
• The higher the entry barriers, the higher the returns for existing firms in the industry
• Sources of the entry barriers:

Bargaining Power of Suppliers
• Suppliers exert power in the industry by threatening
to