Extrenal Analysis: Industry Structure, Competitive Forces, And Strategic Groups

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Ch 3 Extrenal analysis: Industry structure, competitive forces, and strategic groups
PESTEL model – provides a relatively straightforward way to categorize and analyze the important external forces that might impinge upon a firm (political, economic, sociocultural, technological, ecological, and legal)
Growth rate – measure of the change in the amount of good and service produced by a nation’s economy
Price stability –the lack of change in price levels of goods and services – is rare
Inflation – when there’s too much money in an economy, the prices tends to rise. Inflation goes along with higher interest rates and lower economic growth
Deflation – decrease in overall price level
Balance of trade – difference between nation’s exports and imports
Sociocultural factors – society’s culture, norms, and values
Industry – group of companies offering similar products/services. It makes up the supply side of the market, while customers make up the demand side
Structure-conduct-performance (SCP) model – framework that explains difference in industry performance; It identifies 4 different industry types: 1.perfect competition, 2. Monopolistic competition, 3. Oligopoly, 4. Monopoly. Fragmented industries tend to be less profitable than consolidated ones.
Underlying industry structure determines firm conduct, which concern’s the firm’s ability to differentiate its goods and services and thus to influence the price it can charge.
Fragmented industry structures consist of many small firms and tend to generate low income. Consolidated industry structures are dominated by a few firms, or even just one firm, and tend to be highly profitable.
Five forces model – framework proposed by Michael Porter that identifies 5 forces that determine the profit potential of an industry and shape a firm’s competitive strategy
5 forces: 1. Threat of entry 2. Power of suppliers 3. Power of buyers 4. Threat of substitutes 5. Rivalry among existing competitors
The key take-away: the stronger (weaker) the forces, the lower (greater) the industry’s ability to earn above-average profits, and correspondingly the lower (greater) the