External Analysis and Industry Structure

"Asset-light approach" based on its platform strategy. Airbnb offers more accomodations than the three biggest hotel chains combined (Marriott, Hilton and Intercontinental). Like global hotel chains, Airbnb uses sophisticated pricing and reservation systems. Airbnb is a new entrant in the gobal hotel-industry. Chesky and Gebbia created the bsuiness idea to help people rent out their spare rooms. Airbnb developed a seamless transaction experience between hosts and guests and was able to earn a little over 10% on each transaction conducted on the site. Timing was fortuitious as during the gloabal financial crisis, people were looking for low-cost accomodations while hosts were trying to pay rent/mortgages

Group of incumbent firms facing more or less the same set of suppliers and buyers. Firms competing in the same industry tend to offer similar products or servcies to meet specific customer needs

The mdoel helps strategic leaders understand the profit potention of different industries and ho they can position their respective firms to fain and sustain cokmpetive advantage. Competition is viewed more broadly in the five forces model (rather than defining competition narrowly as the firm's closets comnpetitors to explain and predict performance, comopetition must be viewed more broadly to emcompass othe rforces in the industry). Profit potential is a function of the five comeptive forces (Profit potential is not random nor determined by industry-specific factors)

Describes the risk of potential competitors entering the industry. Potential new entry depresses industry profit potential by reducing the industry's overall profit potential (Incumbent firms may lower prices to make entry appear less attractive which reduces profit potential especially in industries with slow or no overall growth) and by increasing spending among incumbent firms (Incumbent firms spend ore to satisfy their existing customers)

Adavantageous for incumbent firms as they are obstacles that determine how easily a firm can enetr aqn industry. Examples - economies of scale, network effects, customer switching costs, capital requirements, advantages independent of size, government policy, credible threat of retaliation

The costs advantages that accrue to firms with larger outoput because they can spread the fixed costs over more unti, emply technology more fficiently, benefit from a more specialised divison of labour and demand better temrs frok their suppliers. These factors drive down the cost per unit, allowing incumbent firms to enjoy a cost advanatge over new entrants that cannot muster such scale

Captures spressures than industry suplliers can exert on an industry's profit potential. This force reduces a firm's ability to obtain superior performance for two reasons. Powerful suppliers can raise the costs of production by demanding higher prices for their inputs or by reducing the quality of the input factor or service level delivered. Powerful suppliers are a threat to firms because they reduce the industry's profit potential by capturing part of the economic value created

Relates to the pressure an industry's customers can put on the producers' margins by demanding a lower price or higher prodcut quality. When buyers successfully obtain price discounts, it reduces a firm's top line (revenue). When buyers demand higher quality an dmore servcie, it geenrwlaly raises proiduction costs. Strtong buyers ca theirfore reduce industyr profit potential and a firm's profitbility. Powerful buyers are a threat to the producing firms because they reduce the industry's profit by captuiring part of the economic value created

Substitutes meet the smae basic cutomer needs as the industry's product but in a different wat. The threat of substitutes is the idea that products or services available from outside the given industry will come close to meeting the needs of current customers

Describes the intensity with which companies within the same industry jockey for market share and profitability. Can range from genteel to cut-throat. The other forces all exert pressure upon this rivalry. The stronger the forces, the stronger the expected competitve intensity,which in term limits proift potential. Competitors ccan lower prices to attarct customers from rivals or use non-price competition to create more value in terms of product features and design, quality, promotional spending and after-sales servioce and support. Intensity of rivalrey is lrgely determined by; comeptive industry structure, industry growth, strategic commitments, exit barriers

Refers to elements and features common to all industries. Structure is largely captured by; the number and size of its competitors, the firm's degree of pricing power, the type of product or service (commodity or differentiated product), the height of entry barriers

A perfectly competive industry is fragmented and has many small firms, a commodity prodyct, ease of entry, and little or no ability for each individual firm ro raise its prices. The firms are approximately similar in size and resources. Consumers make purchasing decisions solely on price because commdity product offering are more or less indentical. Firms have difficulty in achieving even a tempoary competitve advantage and can achieve only competitive parity.

Has many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers. Firms offer products or service with unique features. When a firm is able to differentiate its producr or service offering, it carves out a niche in the market in which it has some degree of monopoly power over pricing. Firm communicate the degree of product of differentiation through advertising

Consolidated with a few large firms, differentiated products, high barriers to entry, and some degree of pricing power. The degree of pricing power depends on the degree of product differentiation. Comperting firms are interdependent. With only a few comeptitors in the mix, the actions of one firm influence the behaviors of the other. Each competitor in an olipoly, there must consuder the strategic actions of the other comepitors. Due to their strategic interdependence, companies in oligopolies have an incentive to coordinate their strategic action to maximise joint performance, explicit coordination is illegal but tacit coordination isnt. Companies in an oligopoly tend to have some pricing power if they are able to differentiate their offering from those of their competitors. Non-price competition is the preffered mode of comeptition - comepting by offering unique proft features or services rather than competing based on price alone

The government grants one firm the right to be the sole supplier of a product or service. Done to incentivise a company to engage in a venture that would not be profitable if there was more than one supplier.

Large corporate customers contrct with airline to serve all of their employees' travel needs; such powerful buyers further reduce profit margins foir air carriers. Consumers primarly make decisions based on price as air travel is viewed as a commodity with little or no differentiation. In inflation-adjusted dollars, ticket prices have been falling since industry deregulation in 1978. Price comparisons are effortless. Consumers benefit from cut-throat price competition between carriers and capture significant values. Low switching costs and nearly perfect information in real time combine to strengthn buyer power

A product, service or competency that adds value to the orginal product offering when the two are used in tandem. Complements increase demand for the primary prodcut, thereby enhancing the profit potential for the industry and the firm. A company is a complementor to your company if customers value your product or service offering more when they are able to combine it with the other company;s product or service

Who are the players - identify direct competitors and also focus on other external and internal stakeholders necessary to compete in an industry such as customers, employees, regulators and communities. When to enter - consider which stage of the industry cycle the firm should enter. How to enter - take into account entry barriers

Point-in-time snapshot of a moving target. Changing speed of an industryor rate of innovation cannot be determined. Drawbeack implies startegic leaders must repeat their analysis over time to create a more accurate picture of thei industries. Industry structures are not stable of time instead they are dynamic.A consolidated industry tends to be more profitable than a fragemnted one. Firms have a tendancy to change the industry in their favour, making it more consoildated through horizontal mergers

A set of companies that pursue a similar strategy within a specific industry in their quest for competitive adavantage. Strategic groups differ from one another along important dimensionssuch as expenditures of reserach and developement, technology, product diferention, product and service offerings, market segemnts, distribution channels and customer service

Understanding comeptitve behaviour and performance within an industry can be mapped by identifying the most important strategic dimensions (strategic commitments based on managerial actions that are costly and difficult to reverse), choosing to key dimensions for the horisontal and vertical axes, which expose important differences among the competitors, graphing the firms in the strategic group, indicating each firm's market share by the size of the bubble with which it is represented

Restrict movement between stragic groups an dare industry-specific factors that seperate one strategic group from another. Dimensions are mobility barriers and are actions that are coslty and not easily reversed