Class2 Five Forces

Class2 Five Forces - BUSI698 StrategicManagement...

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BUSI 698   Strategic Management Industry (5-Forces) Analysis Isin Guler 1 of 23
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Course Overview Firm Economic Profits (Π29 Industry-Level Sources Firm-Level Sources Industry Structure Business Strategy: - Competitive Positioning - Resources & Capabilities Corporate Strategy Strategy Implementation 2 of 30
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What is Strategy About? Price Quantity Demand marginal cost price quantity Supply 3 of 30
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Industry-level Sources of Profitability Differences Source: Fortune Global 500, 2005-2007 Industry 2005- 2007% Network and Other Communications Equipment 12.67 Medical Products and Equipment 12.10 Mining, Crude-Oil Production 11.87 Oil and Gas Equipment, Services 11.00 Pharmaceuticals 10.20 Utilities: Gas and Electric 3.00 Motor Vehicles and Parts 2.87 Airlines 1.33 Banks: Commercial and Savings 0.75 Homebuilders 0.55 4 of 30
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What is a 5-Forces Analysis? Premise: Competition is rooted in the underlying economics of the industrial organization; resulting forces collectively determine the profit potential of the industry Purpose: It helps us to assess the attractiveness of an industry . 5 of 30
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A Step-by-Step Guide to Applying the Five Forces Framework Step I : Define the Industry create a clear, concise description of the industry. Be as specific as possible. if you are stuck, define the industry based on similar products that have common suppliers and buyers Step II : Identify the organizations/products involved in each relevant force Step III: Assess the Strength of the Five Forces within the Industry remember you are assessing the industry not the firm start with factors and work up for each force ask whether the factors that affect each force are sufficient to raise costs, lower prices, or enable profits to be competed away Step IV : Ascertain the Overall Effect of the Forces assess whether any of the forces are so strong (or so weak) that they will have an exceptional impact on overall industry profits compare across all forces to see whether the forces, overall, make the industry favorable or unfavorable for incumbent firms favorable industries profits above economy-wide average unfavorable industries profits below economy-wide average 6 of 30
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Perfect Competition Price Quantity price = marginal cost quantity in perfect competition, if firms raise their price, they lose all sales thus P=MC and P = 0!!! lesson
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Class2 Five Forces - BUSI698 StrategicManagement...

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