BARGAINING POWER OF CUSTOMERS - refers to the relative strength of buyers to affect prices and to influence the amount of product features the firms in the industry must provide. [Source: M. Porter]
BARGAINING POWER OF SUPPLIERS - refers to the relative strength of suppliers to affect the price of the inputs they provide. The greater the bargaining power of suppliers the higher the prices of inputs are likely to be and the more of the industry’s profit will be bargained away. The more suppliers there are and the more alike their product or service, the less bargaining power they will have. [Source: M. Porter]
BARRIERS TO ENTRY - make it difficult for a firm to enter the industry. Examples of barriers to entry include: economies of scale; proprietary product differences; brand identity; switching costs; capital requirements; access to distribution channels; cost advantages independent of scale; government policy; and expected retaliation. [Source: M. Porter]
BENCHMARKING - the process of analyzing and evaluating how other companies perform an activity or process in order to compare and learn from their experience.
BRAND IDENTITY - a trademark or distinctive name identifying a product or company. Superior brand identity can help to both attract new customers and keep current customers (making it more difficult for existing competitors or potential entrants to gain market share).
BUYER PURCHASE CRITERIA - refers to what the buyer (specifically, the decision maker) values (measures) before making a purchase. See Signaling Criteria and Use Criteria. [Source: M. Porter]
BUYER SEGMENT - refers to a strategically relevant buyer type based upon differences in buyer needs and the cost of producing, marketing, distributing, and servicing different buyers. Sample buyer segmentation variables which often help identify corporate buyer types include: buyer’s industry; buyer’s technological sophistication; buyer’s strategy; buyer’s purchasing process; buyer’s size or financial strength; ownership; vertical integration; type of channel; buyer’s location. Sample buyer segmentation variables which often help identify consumer buyer types include: age; sex; nationality; language; marital status; family composition; wealth; income; profession; decision-making unit; occasion; lifestyle; self-image; values; technological sophistication; geographic location; channel. [Source: M. Porter]
BUYER TYPE - encompasses such things as the buyer’s size, industry, strategy, and demographics; the types of end buyers that purchase, or could purchase, the industry’s products. A variable used to define strategically relevant buyer segments (the others are channel and geographic buyer location). [Source: M. Porter]
CHANNEL - the immediate buyer; an alternative means of distribution employed or potentially employed to reach end buyers. For example, a new company with a new food product must persuade the retailer (the channel) to give it space on the supermarket shelf in order to reach the consumer (end buyer). In the insurance and real estate industries, agents and brokers are often used as a distribution channel. A channel is one of the variables used to define strategically relevant buyer segments (the others are buyer type and geographic buyer location).
CHANNEL ABILITY TO INFLUENCE BUYERS’ PURCHASING DECISIONS - refers to the additional buyer power that distribution channels have if they can influence the end-users’ decision-making process. [Source: M. Porter]
COMPETITIVE SCOPE - There are four dimensions of competitive scope. They are segment scope, vertical scope, geographic scope, and industry scope. Competitive scope can have a powerful effect on competitive advantage because it shapes the configuration and economics of the value chain. Broad scope can allow a firm to exploit the benefits of performing more activities internally, and to exploit interrelationships between the value chains that serve different segments, geographic areas or related industries. Narrow scope can allow tailoring of the value chain to serve the target segment in a unique way. [Source: M. Porter]
COMPETITOR RIVALRY - refers to the relative level of competition within an industry. (For scoring: Very Low (5); Low(4); Moderate (3); High (2); Very High (1).)
COMPLEMENTARY PRODUCT - a product which is used in conjunction with another and promotes its use. Complementary products (the opposite of substitutes) raise important strategic issues in terms of: 1) control over complementary products (“we sell both”); bundling (“we sell both together only”); and 3) cross-subsidization (“we sell one to sell the other”). [Source: M. Porter]
CORPORATE LEVEL STRATEGIC PLANNING - has a portfolio orientation. The concern is with allocating resources among the various businesses so that the overall value of the portfolio is improved. Strategic planning at the corporate level also concerns itself with acquisitions, divestitures, internally developed new business ventures, or changing the mix of capital allocated to the company’s existing businesses. Besides organizational and operational restructuring, companies are frequently involved in financial restructuring like swapping debt for equity. (Compare with Strategic Business Unit Planning and Strategic Horizontal Unit Planning. Also see Horizontal Strategy.)
CRITICAL SUCCESS FACTORS - or CSFs, are those things which must go right for the organization to achieve its mission. CSFs are: a simple concept which help focus attention on major concerns; easy to communicate; and easy to monitor. CSFs should be derived from the firm's strategic plans; and they may be established for the company, the business unit, the department, or an individual. CSFs are categorized as those which monitor current results and those which build for the future. Sources of CSFs include: industry CSFs resulting from specific industry characteristics; strategy CSFs resulting from the chosen competitive strategy; environmental CSFs resulting from economic or technological changes; temporal CSFs resulting from internal organizational needs. CSFs should be associated with one or more primary measures for monitoring. [Source: John F. Rockart]
CUSTOMER POWER - refers to the relative amount of influence customers have vis-à-vis firms in the industry. (For scoring, use: Very Low (5); Low (4); Moderate (3); High (2); Very High (1).)
DISTRIBUTION CHANNEL - the immediate buyer; an alternative means of distribution employed or potentially employed to reach end buyers. For example, the manufacturer of a new food product must persuade the retailer (the channel) to give it space on the supermarket shelf in order to reach the consumer (end buyer). In insurance, agents and brokers are often used as a distribution channel. A variable used to define strategically relevant buyer segments (the others are buyer type and geographic buyer location).
ECONOMIC TRENDS - a list of economic trends which are taking place and directly impact the industry’s structure. Some examples: U.S. GNP; world GNP; U.S. inflation; world inflation; U.S. interest rates; world interest rates; growth in number and size of multinationals; frequency of corporate mergers and acquisitions; globalization and volatility of financial markets; etc. Economic trends which impact a business, horizontal unit and corporation are a small subset of the general economic trends occurring in the global economy.
FRUIT-SALAD SYNDROME - A common undesirable condition afflicting many general managers of large corporations. The afflicted are unable or unwilling to view their organization or department as anything other than an indivisible, organizational ‘blob.’ Strategic analysis of a blob makes about as much sense as asking how many calories are in six ounces of fruit salad without knowing what specific fruits are in the fruit salad. Identifying the strategically relevant business units of the organization is the first step back to strategic health and recovery from the fruit-salad syndrome.
IBBCS - Industry Building Blocks Classification System [TM]. A non-redundant list of approximately 14,000 industries which make up the global economy.
INDUSTRY - The term industry is often used loosely to mean almost anything - from industry sector to an actual industry as used by professional planners and marketing professionals. For example, in common language, people talk about the financial services industry, the banking industry, the corporate banking industry, the corporate payments industry, and the wholesale funds transfer industry. Except for the "Wholesale funds transfer industry", all of the other terms represent industry groups at some level. For those familiar with Michael Porter's five forces analysis, an industry is the correct level for developing a five forces analysis. Porter's definition of an industry is: "An industry is a market in which similar or closely related products are sold to buyers" - and one needs to understand the five forces of an industry and weigh the structural components to best define industry boundaries. For those not familiar with Porter's methodologies, terms like "Line of Business", "Product Line" or "Service Line" are a good starting place.
INDUSTRY ATTRACTIVENESS - refers to the relative industry profitability outlook for this industry vis-à-vis the expected average U. S. industry profitability. (For scoring, use: Very Attractive (5); Attractive (4); Neither Attractive Nor Unattractive (3); Slightly Unattractive (2); Very Unattractive (1).)
INDUSTRY GROWTH - a measure of the expected annual change in revenue.
INDUSTRY OVERVIEW - a general description of the industry from a industry analyst’s point of view (rather than from your own company’s point of view.)
INDUSTRY SEGMENT - one cell of an industry segmentation matrix. A product variety linked to a buyer type.
INDUSTRY SEGMENTATION - Industry segmentation is the division of an industry into sections for purposes of developing competitive strategy. Industry segmentation combines customer purchasing behavior (market segmentation) with the behavior of costs, both production costs and the costs of serving different customers. Industry segmentation encompasses the entire value chain. It exposes the differences in structural attractiveness among segments, and the conflicts in serving many segments simultaneously. [Source: Michael Porter]
INDUSTRY SEGMENTATION MATRIX - A matrix which graphically segments an industry into both strategically relevant product varieties and strategically relevant buyer types.
INDUSTRY SIZE - Total annual revenue of firms in the industry.
INDUSTRY STRUCTURE ANALYSIS - involves an analysis of the industry from the perspective of an industry analyst (rather than from the firm’s perspective). This process involves examining the five competitive forces that determine industry profitability [Source: M. Porter]. The five forces are: 1. Industry Competitors (Rivalry Among Existing Firms); 2. Potential Entrants (Threat of New Entrants); 3. Buyers (Bargaining Power of Buyers, including channels); 4. Suppliers (Bargaining Power of Suppliers); 5. Substitutes (Threat of Substitute Products or Services).
INDUSTRY TRENDS - a list of trends taking place within an industry which are important to understanding the industry’s future. Include government and regulatory trends, as well as any other major trend that will impact the industry’s buyers, competitors, or suppliers.
LINE OF BUSINESS - a general term which often refers to a set of one or more highly related products which service a particular customer transaction or business need. In some industries, like insurance, “line of business” also has a regulatory and accounting definition to mean a statutory set of insurance policies. It may or may not be a strategically relevant business unit or SBU.
MARKET SEGMENTATION - is concerned with identifying differences in customer needs and purchasing behavior, allowing a firm to serve segments that match its capabilities with distinct marketing programs. Market segmentation tends to focus on the marketing activities in the value chain. (Market segmentation is a subset of industry segmentation.)
NET PRESENT VALUE - the present value of future cash inflows minus the present value of future cash outflows. (Or simply: the present value of net cash flows.)
PRODUCT - a product or service that provides customers with value that can be purchased on a stand-alone basis.
PRODUCT VARIETIES - a key industry segmentation variable (the other variable is buyer type). Sample product segmentation variables include: features; technology or design; performance; bundled versus unbundled; new versus replacement; product versus ancillary service. [Source: M. Porter]
RETURN ON EQUITY - is the ratio of Net Income divided by the Book Value of Shareholders Equity. ROE is a commonly used measure at the corporate level. (ROI is commonly used at the business unit or divisional level. ROI and ROE are both subject to accounting conventions and distortions. Discounted Cash Flow measurement is often used to overcome accounting distortions because it is an economic measure.)
RETURN ON INVESTMENT - is the ratio of Net Income divided by the Book Value of Assets. ROI is a commonly used measure at the business unit or divisional level. (ROE is commonly used at the corporate level. ROI and ROE are both subject to accounting conventions and distortions. Discounted Cash Flow measurement is often used to overcome accounting distortions because it is an economic measure.)
STRATEGIC BUSINESS UNIT - A relevant entity for business strategy formulation. A collection of activities that are performed to design, produce, market, deliver, and support a product or closely related products (or services). An SBU is a business unit that represents a strategically distinct business (industry) and encompasses products and services where the sources of competitive advantage are similar. There may be related industries that provide services that share customers, technologies, or channels, but they have their own unique requirements for competitive advantage. [Source: M. Porter]
STRATEGIC BUSINESS UNIT (SBU) PLANNING - is product-market driven. The issue is how a sustainable competitive advantage can be established. The optimal strategy for a business unit will be influenced by industry structure and the competitive position of the business in that industry.
STRATEGIC HORIZONTAL UNIT - a cost center, a resource center, or any department or functional area that is not part of a specific business unit. A Strategic Horizontal Unit performs one or more activities for the benefit of two or more business units. The plans of a Strategic Horizontal Unit are outlined in a Statement of Direction.
STRATEGIC HORIZONTAL UNIT (SHU) PLANNING - is appropriate for a cost center, resource center, utility department, or any organizational unit which performs one or more activities for the benefit of two or more business units.
STRATEGIC PLANNING - is the activity of defining a firm’s competitive strategy that will direct its route to competitive advantage that will determine its performance. [Source: M. Porter] See corporate strategic planning, group-level strategic planning, strategic business unit strategic planning, and global strategic planning.
SUBSTITUTE PRODUCT - is one which can perform the same function as the product of the industry. Substitutes represent one of the five industry forces which defines industry structure (and profitability potential). The fewer and less attractive (in terms of price/performance) the substitutes are, the easier it will be for firms in the industry to maintain the industry’s profits, if any exists. (See also Threat of Substitutes.)
SUPPLIER POWER - refers to the relative amount of influence suppliers have vis-à-vis firms in the industry. (For scoring, use: Very Low (5); Low (4); Moderate (3); High (2); Very High (1).)
SUPPLIERS - companies which provide inputs to firms in the industry. (For example: the steel industry, the glass industry and the tire industry are major suppliers to the auto industry.)
TECHNOLOGY TRENDS - a list of technology trends which are taking place and directly impact the industry’s structure. Some examples include: lower hardware prices; lower communication costs; growth in use of expert systems; growth in image technology; growth in non-traditional operating systems; etc. The technology trends which affect the business unit, horizontal unit and corporation are a small subset of the technology trends occurring throughout the world. Although information technology affects most every business, other technology trends are also occurring as well.
THREAT OF NEW ENTRANTS - one of the five industry forces which defines industry structure (and profitability potential). The fewer and less potent the barriers to entry are, the easier it is for firms to enter the industry and capture some of the industry’s profitability, if any exists. Also see Barriers to Entry. (For scoring Threat of New Entrants, use: Very Low (5); Low (4); Moderate (3); High (2); Very High (1).)
THREAT OF SUBSTITUTES - a measure of the likelihood that substitutes will lower demand for the industry’s products and services. (For scoring use: Very Low (5); Low (4); Moderate (3); High (2); Very High (1).)
*See: Michael E. Porter at: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=bio&facId=6532