Essential Unit Vocabulary
Assessing – In the competitive assessment process, firms are advised to follow four specific activities to understand their external environment: scanning, monitoring, forecasting and assessing. This final step of assessment defines the likelihood a trend will become an opportunity or a threat.
Attractiveness of an Industry – The attractiveness of an industry influences the decision to enter that industry. An “attractive industry” is one that offers high potential profit yields. Determining the attractiveness of an industry is the primary goal of conducting the analysis of an industry using Michael Porter’s 5-Forces of Competition. For example, an industry is more likely to be labeled as attractive when more of the following conditions exist: Low threat of substitute products; high barriers to enter the industry; rivalry among existing competitors is low or when existing industry rivals have high bargaining power with its suppliers.
Bargaining Power of Buyer – The bargaining power of customers (buyers) directly affects the market as a whole when they expect lower prices or special services. When the buyer’s bargaining power is high it forces rivals to cut prices or improve the product’s offering in terms of quality, features or service. High buyer bargaining power reduces operating profits and make the industry less attractive for new entrants.
Bargaining Power of Suppliers – A party that supplies goods or services is a Supplier. A supplier may be distinguished from a contractor or subcontractor, who commonly adds specialized input to deliverables. Also called vendor. The bargaining power of suppliers is strong when there is a steep price for switching to alternate suppliers, when needed inputs are in short supply, when the particular supplier has a differentiated input in terms of quality, performance or image, when the supply is critical to seller’s production or when there are few suppliers from which to choose. When a supplier has high bargaining power it forces members of the industry to accept its price and terms.
Competitive Intelligence – Scanning, monitoring, forecasting, and assessing information about competitors in order to better understand them and enhance business decision making. There are two different types, Tactical and Strategic. Tactical competitive intelligence is short term and seeks to provide input into issues such as capturing market share or increasing revenue. Strategic competitive intelligence focuses on longer term issues such as key risk and opportunities.
Competitor Environment – The competitive environment describes the dynamic external structure in which a company/business operates. The level of competition depends on how many sellers are in the market currently. The higher the number of competing businesses , the more competitive the industry/market will be.
Degree of Rivalry – Occurs when two or more companies compete with each other in similar markets and/or with similar resources. In Porter’s Five Forces of Competition, the degree of rivalry among competing sellers in an industry will be great when members are active in making fresh moves to improve their standing or performance, when buyer demand is growing slowly or falling, when sellers have excess capacity or inventory, the number of rivals increases and they are of comparable size, the industry is selling a commodity and switching costs for buyers are low.
Forecasting – A planning tool that helps management create projections in its attempt to cope with the uncertainty of the future, relying mainly on data from the past and present, and analysis of trends.
General Macro Environment – The major external and uncontrollable factors that influence an organization’s decision making and affect its performance and strategies. These factors include: economic factors, demographics, legal, political and social conditions, technological changes, as well as natural forces.
Industry Analysis – A market assessment tool designed to provide a business with an idea of the complexity and profit potential of a particular industry. Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers, the condition of rivals, and the likelihood of new market entrants or substitute products.
Industry’s Driving Forces – An industry’s driving forces that are outside a firm, forces that are external to an organization, but still trigger changes in the strategy of that firm.
Industry Environment – The factors directly influencing a firm’s competitive actions/responses and is typically defined by Porter’s Five Factors of Competition — the bargaining power of Buyers and Suppliers, the threat of New Entrants and Substitute products and the degree of Rivalry within the industry. In comparison to the general environment, the industry environment has more likely effect on a firm’s strategic competitiveness and above-average returns.
Industry Life Cycle – Describes the evolutionary timeline of an industry including: Introduction featuring slow sales growth and nonexistent profits; Growth phase in which market acceptance accelerates and profits increase; Maturity when sales slow down and profits level off or decline; and Decline when sales fall off dramatically and profits drop, typically irrecoverably.
Key Success Factors – Those competitive factors that most affect industry members’ ability to prosper in the marketplace. It may include particular strategy elements, product attributes, resources, competitive capabilities, or intangible assets with the greatest impact on the future success in the marketplace.
Market Segmentation – The process of defining and subdividing a large homogenous market into clearly identifiable segments having similar needs, wants or demand characteristics.
Porter’s Five Forces Model of Competition – This model is used as an analytical tool for identifying the profit potential of an industry. The five forces consist of the threat of new entrants, threat of substitute products, the bargaining power of suppliers and buyers and the intensity of rivalry by existing industry participants. The model is universal in its applicability but does not yield precise, quantified data about the industry. Instead, it produces a framework for understanding the relative strength or weakness of each of the five forces and helps the analyst ultimately determine the attractiveness of the industry relative to profit potential.
SWOT Analysis – Stands for strength, weakness, opportunities and threats. Each of the four factors is typically examined anecdotally and using quantified information to assess both the internal capabilities of a firm (strengths and weaknesses) and the external conditions within which the firm operates (opportunities and threats). It is typically used as a preliminary tool to provide qualitative information that can be used to focus quantitative investigation.
Threat of New Entrants – In the context of Porter’s Five Forces of Competition, the threat of New Entrants is increased when there is a large pool of entry candidates, when barriers to entry are low or are easy to hurdle, there is profit to be made in the industry, buyer demand is increasing and existing industry members are unable or unwilling to contest new entrants.
Threat of Substitution – In Porter’s Five Forces model, a substitute is defined as a product that meets the essential needs of an industry’s buyers at a lower price. The threat of substitution is increased when buyers have multiple options, when those options are attractively priced, when the alternative has comparable or better performance features, when buyers have low switching costs and when end users grow more comfortable using the alternative.