Summary of Chapter

Summary of Chapter

Summary of Chapter

1.An industry can be defined as a group of companies offering products or services that are close substitutes for each other. Close substitutes are products or services that satisfy the same basic customer needs.

2.The main technique used to analyze competition in the industry environment is the five forces model. The five forces are (1) the risk of new entry by potential competitors, (2) the extent of rivalry among established firms, (3) the bargaining power of buyers, (4) the bargaining power of suppliers, and (5) the threat of substitute products. The stronger each force is, the more competitive the industry and the lower the rate of return that can be earned.

3.The risk of entry by potential competitors is a function of the height of barriers to entry. The higher the barriers to entry are, the lower is the risk of entry and the greater are the profits that can be earned in the industry.

4.The extent of rivalry among established companies is a function of an industry’s competitive structure, demand conditions, cost conditions, and barriers to exit. Strong demand conditions moderate the competition among established companies and create opportunities for expansion. When demand is weak, intensive competition can develop, particularly in consolidated industries with high exit barriers.

5.Buyers are most powerful when a company depends on them for business but they themselves are not dependent on the company. In such circumstances, buyers are a threat.

6.Suppliers are most powerful when a company depends on them for business but they themselves are not dependent on the company. In such circumstances, suppliers are a threat.

7.Substitute products are the products of companies serving customer needs similar to the needs served by the industry being analyzed. The more similar the substitute products are to each other, the lower is the price that companies can charge without losing customers to the substitutes.

8.Some argue for a sixth competitive force of some significance: the power, vigor, and competence of complementors. Powerful and vigorous complementors may have a strong positive impact on demand in an industry.

9.Most industries are composed of strategic groups: groups of companies pursuing the same or a similar strategy. Companies in different strategic groups pursue different strategies.

10.The members of a company’s strategic group constitute its immediate competitors. Because different strategic groups are characterized by different opportunities and threats, it may pay a company to switch strategic groups. The feasibility of doing so is a function of the height of mobility barriers.

11.Industries go through a well-defined life cycle: from an embryonic stage, through growth, shakeout, and maturity, and eventually decline. Each stage has different implications for the competitive structure of the industry, and each gives rise to its own set of opportunities and threats.

12.The five forces, strategic group, and industry life cycles models all have limitations. The five forces and strategic group models present a static picture of competition that deemphasizes the role of innovation. Yet innovation can revolutionize industry structure and completely change the strength of different competitive forces. The five forces and strategic group models have been criticized for deemphasizing the importance of individual company differences. A company will not be profitable just because it is based in an attractive industry or strategic group; much more is required. The industry life cycle model is a generalization that is not always followed, particularly when innovations revolutionize an industry.

13.The macroenvironment affects the intensity of rivalry within an industry. Included in the macroenvironment are the macroeconomic environment, the global environment, the technological environment, the demographic and social environment, and the political and legal environment.