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EXAM SCOPE (ESSAY C2/4/6 (4 : COMPETITIVE ADVANTAGE (VALUE CREATIONValue…
EXAM SCOPE
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BRIEF EXPLANATION C3/5
3 : INDUSTRY LIFE CYCLE
A useful tool for analyzing the effects of industry evolution on competitive forces is
the industry life cycle model, which identifies five sequential stages in the evolution
of an industry that lead to five distinct kinds of industry environments: the embry-
onic, growth, shakeout, mature, and decline stages (see Figure 3.3). The task facing
managers is to anticipate how the strength of competitive forces will change as the
industry environment evolves and to formulate strategies that take advantage of op-
portunities as they arise and that counter emerging threats.
Industries go through a well-defined life cycle: from
an embryonic stage through growth, shakeout, and
maturity to, eventually, decline. Each stage has dif-
ferent implications for the competitive structure of
the industry, and each gives rise to its own set of op-
portunities and threats.
3 :MACROENVIRONMENT
The macroenvironment affects the intensity of ri-
valry within an industry. Included in the macroenvi-
ronment are the macroeconomic environment, the
global environment, the technological environment,
the demographic and social environment, and the
political and legal environment.
An agency relationship is held to arise whenever one
party delegates decision-making authority or control
over resources to another.
- The essence of the agency problem is that the inter-
ests of principals and agents are not always the same,
and some agents may take advantage of information
asymmetries to maximize their own interests at the
expense of principals.
3 : 5 FORCES
Once the boundaries of an industry have been identified, the task facing man-
agers are to analyze competitive forces in the industry environment to identify opportunities and threats.the five
forces model, helps managers with this analysis.
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(3) the bargaining power of buyers,
(2) the intensity of rivalry among established companies
within an industry,
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(1) the risk of entry
by potential competitors,
Porter argues that the stronger each of these forces, the more limited the ability
of established companies to raise prices and earn greater profits. Within Porter’s
framework, a strong competitive force can be regarded as a threat because it de-
presses profits. A weak competitive force can be viewed as an opportunity because it
allows a company to earn greater profits. The strength of the five forces may change
through time as industry conditions change. The task facing managers is to recog-
nize how changes in the five forces give rise to new opportunities and threats and to
formulate appropriate strategic responses. In addition, it is possible for a company,
through its choice of strategy, to alter the strength of one or more of the five forces to
its advantage.
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DEFINITION C1
COMPETITIVE ADVANTAGE
The advantage over
rivals achieved when a
company’s profitability is
greater than the average
profitability of all firms in
its industry.
SUSTAINED COMPETITIVE ADVANTAGE
The competitive
advantage achieved when
a company is able to
maintain above-average
profitability for a number
of years.
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