Strategies for Competing in Industries & Markets

The market value of a firm is determined by its future net cash flows and the cost of capital.

Weighted Average Cost of Capital represents the average cost of financing a firm's assets, considering the proportion of debt and equity.

A method to calculate the present value of a firm using a constant growth rate of future cash flows.

Return on Invested Capital measures how efficiently a company uses its invested capital to generate profits.

Firms benefit from sustainable practices within their ecosystem, strengthening their reputation and securing their right to operate.

Understanding the industry structure (competitors, suppliers, buyers) helps identify how firms behave and the industry's profitability.

A framework to analyze the competitive forces in an industry: threat of new entrants, bargaining power of buyers and suppliers, threat of substitutes, and rivalry among existing competitors.

The ability of one product or service to replace another, used to determine industry boundaries.

Factors that make it difficult for new firms to enter a market, impacting competition and profitability.

These factors include capital requirements, economies of scale, absolute cost advantages, product differentiation, access to distribution channels, legal barriers, and retaliation risk.

The influence buyers have on the prices and conditions of goods or services, impacting the profitability of sellers.

Factors like the importance of the item, product differentiation, competition among buyers, size and concentration of buyers, buyers' information, and possibilities for backward integration influence buyer power.

The influence suppliers have on the prices and conditions of inputs, impacting the profitability of buyers.

Industry analysis can be static, ignore competitor interactions, struggle with reverse causality, struggle to define industry boundaries, and overemphasize industry structure.

Industry analysis has limitations related to its static nature, lack of consideration for competitor interaction, potential for reverse causality, difficulty in defining industry boundaries, and overemphasis on industry structure.

A metric that measures how efficiently an airline is filling its available seating capacity, calculated as the ratio of revenue passenger miles to available seat miles.

The consistency between a company's strategy and its internal and external environments. It means aligning the company's goals, values, resources, and capabilities with the opportunities and threats present in the market.

The process of generating value for customers through production or commerce, exceeding the costs incurred in creating the product or service.

The allocation of the value created among stakeholders, including employees, lenders, landlords, government, owners, and customers.

The difference between the maximum amount a consumer is willing to pay for a good or service and the actual price they pay.

The difference between the price a producer receives for a good or service and the minimum price they are willing to accept.

A firm's ability to create more value than its competitors, leading to a significant advantage in the market.

A competitive advantage that competitors cannot easily replicate or imitate, allowing the firm to maintain its leadership position over time.

A financial ratio that compares the market value of a company's assets to their replacement cost. A value greater than 1 indicates the market values the company's intangible assets positively.

A strategy where a company aims to serve a wide range of customer groups in an industry with a portfolio of related products.

A strategy where a company focuses on serving a specific segment of the market, be it a particular customer group, product type, or geographical area.

The process of dividing a market into distinct groups of customers with similar needs, characteristics, and behaviors. It helps companies understand where they should compete.

The process of creating a clear and distinct image of a company's product or service in the mind of the customer. It defines how a company competes in the market.

The process of creating a unique value proposition that sets a company's offerings apart from its competitors.

A differentiation strategy that appeals to a wide range of customers by focusing on common needs and preferences.

A differentiation strategy that caters to the specific needs and preferences of a targeted customer group.

A group of firms within an industry that follow similar strategies in terms of product range, geographical reach, marketing approach, and other key strategic dimensions.

Dividing a broad industry into smaller, distinct groups based on shared characteristics like geographic location or customer demographics (age, tastes).

The companies that compete within a specific industry. These companies can be large or small, and their products or services might be similar or different.

Competing by lowering prices to attract customers and gain market share. This can affect profit margins and lead to industry-wide price wars.

Competing by focusing on factors other than price, such as product quality, innovation, customer service, brand image, or marketing.

The number of firms competing within a particular industry. A concentrated market means there are fewer competitors, potentially leading to higher prices.

Measures the market share of the largest firms in an industry. A higher CR implies less competition.

A measure of industry concentration, calculated as the sum of the squares of all market shares. A higher HHI signifies less competition.

The likelihood of new companies entering an existing market. This risk can be influenced by factors like barriers to entry (e.g., high capital costs, regulations) and potential profitability of the market.

The airline industry faces high exit barriers primarily due to long-lived assets, such as airplanes, and the 'too big to fail' nature of major airlines. This means getting out of the industry is difficult as assets are expensive to sell or repurpose, and airlines often receive government support due to their impact on the economy.

Passengers have moderate to high power in the airline industry due to increased price sensitivity and access to information through online platforms. They can easily compare prices and choose alternatives, making airlines more responsive to their demands.

Suppliers in the airline industry hold significant power due to limited airplane manufacturers (Boeing and Airbus), strong unions negotiating employee contracts, airport monopolies at major hubs, and a small number of fuel providers. This gives suppliers leverage in setting prices and negotiating favorable terms.

While alternative transportation options exist, they mainly compete for short-distance travel. Videoconferencing poses a growing threat as technology advances and replaces face-to-face meetings for certain purposes.

Segmentation involves dividing an industry into specific markets (niches) by focusing on particular customer groups, product characteristics, or other relevant variables. It provides a more granular view of competition within a broader industry.

These are the most important factors used to divide a market into distinct segments. They can be based on product characteristics, buyer characteristics, or other relevant information. For example, airlines might segment by price sensitivity, travel purpose, or desired level of comfort.

This step involves evaluating each segment's attractiveness based on factors like profitability, growth potential, and competitive intensity. Tools like Porter's Five Forces can be used to assess the competitive landscape within each segment.

These are the essential elements that companies must excel at to succeed in a particular market segment. They differ depending on the segment and can include factors like low costs, customer service, product innovation, or brand reputation.