Strategic Management and Competitive Advantage ch 2

General environment
Consists of broad trends in the context within which a firm operates that can have an impact on a firm’s strategic choices.
Technological change
Creates both opportunity, as firms begin to explore how to use technology to create new products and services, and threats, as technological change forces firms to rethink their technological strategies.
The distribution of individuals in a society in terms of age, sex, marital status, income, ethnicity, and other personal attributes that may determine buying patterns.
The values, beliefs, and norms that guide behavior in a society.
Economic climate
The overall health of the economic systems within which a firm operates.
When activity in an economy is relatively low
A severe recession that lasts for several years
Business cycle
The alternating pattern of prosperity followed by recession, followed by prosperity.
Legal and political conditions
The legal and political dimensions of an organization’s general environment are the laws and the legal system’s impact on business, together with the general nature of the relationship between government and business.
Specific International events
Events such as civil wars, political coups, terrorism, wars between countries, famines, and country or regional economic recessions.
Structure-conduct-performance (S-C-P) model
An approach to understand the relationship among a firms environment, behavior, and performance. The original objective of this work was to describe conditions under which competition in an industry would not develop.
The five forces framework
Identifies the five most common threats faced by the firms in their local competitive environments and the conditions under which these threats are more or less likely to be present.
Environmental threat
Any individual, group, or organization outside a firm that seeks to reduce the level of that firms performance.
New entrants
Firms that have either recently started operating in an industry or that threaten to begin operations in an industry soon.
Barriers to entry
Attributes of an industries structure that increase the cost of entry.
Economies of scale
When a firms costs fall as a function of its volume of production.
Diseconomies of scale
Exist when a firm’s costs rise as a function of its volume of production
Product differentiation
Incumbent firms possess brand identification and customer loyalty that potential entrants do not.
Proprietary technology
Gives incumbent firms important cost advantages over potential entrants.
Managerial know-how
The knowledge and information that are needed to compete in an industry on a day to day basis.
Favorable access to raw materials
Incumbent firms may also have cost advantages, compared to new entrants, based on favorable access to raw materials.
Learning curve cost advantages
Potential entrants to an industry must endure substantially higher costs while they gain experience and thus they may not enter the industry despite the superior profits being earned by incumbent firms.
Government policy as a barrier to entry
Governments, for their own reasons, may decide to increase the cost of entry into an industry.
The intensity of competition among a firms direct competitors.
Meet approximately the same customer needs, but do so in different ways. (Water is a substitute for Pepsi)
Make a wide variety of raw materials, labor, and other critical assets available to firms.
Indicators of the threat of suppliers in an industry
1. Suppliers industry is dominated by small number of firms
2. Suppliers sell unique or highly differentiated products.
3. Suppliers are not threatened by substitutes.
4. Suppliers threaten forward vertical integration.
5. Firms are not important customers for suppliers.
Forward vertical integration
When suppliers can credibly threaten to enter into and begin competing in a firm’s industry.
Purchase firms products or services. Whereas powerful suppliers act to increase a firms costs, powerful buyers act to decrease a firm’s revenues.
Indicators of the threat of buyers in an industry
1. Numbers of buyers is small
2. Products sold to buyers are undifferentiated and standard
3. Products sold to buyers are a significant percentage of a buyers final cost
4. Buyers are not earning significant economic profits
5. Buyers threaten backward vertical integration
Backward vertical integration
When a buyer has a strong inventive to enter into its suppliers business to capture some of the economic profits being earned by the supplier.
A firm is a competitor if your customers value your product less when they have the other firm’s product than when they have your product alone. Rivals, new entrants, and substitutes are all examples of competitors.
Another firm is a complementor if your customers value your product more when they have this other firms product than when they have your product alone.
The four industry structures
1. Fragmented industries
2. Emerging industries
3. Mature industries
4. Declining industries
Fragmented industries
Industries in which a large number of small or medium sized firms operate and no small set of firms has dominant market share or creates dominant technologies.
Consolidation strategy
Consolidating the number of firms in the industry
First-mover advantages
Are advantages that come to firms that make important strategic and technological decisions early in the development of an industry.
Technological leadership strategy
Firms make early investments in particular technologies in an industry.
Strategically valuable assets
Resources required to successfully compete in an industry. Firms that are able to acquire these resources have, in effect, erected formidable barriers to imitation in an industry.
Customer switching costs
Exist when customers make investments in order to use a firms particular products or services. These investments tie customers to a particular firm and make it more difficult for customer to begin purchasing from other firms.
The activities a firm engages in to design, produce, and sell its products or services.
Process innovation
A firm’s effort to refine and improve its current processes.
Declining industry
An industry that has experienced an absolute decline in unit sales over a sustained period of time.
Market Leader
The firm with the largest market share in that industry
Niche strategy
In a declining industry reduces its scope of operations and focuses on narrow segments of the declining industry.
Harvest strategy
in a declining industry do not expect to remain in the industry over the long term. Instead, they engage in a long, systematic, phased withdrawal, extracting as much value as possible during the withdrawal period.
To extract a firm form a declining industry. However, unlike harvest, divestment occurs quickly, often soon after a pattern of decline has been established.

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