Analysis of the External Environment

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Strategic Management

Competitiveness and Globalization: Competitiveness and Globalization: Concepts and Cases

Concepts and Cases Seventh edition

STRATEGIC

MANAGEMENT

INPUTS

STRATEGIC

MANAGEMENT

INPUTS

Chapter 2 Chapter 2

Analysis of the External

Environment

Management of Strategy

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K

KNOWLEDGENOWLEDGE OBJECTIVESOBJECTIVES

1.

1. Explain the importance of analyzing and understandingExplain the importance of analyzing and understanding the firm

the firm’’s external environment.s external environment. 2.

2. Define and describe the general environment and theDefine and describe the general environment and the industry environment.

industry environment.

3.

3. Discuss the four activities of the external environmentalDiscuss the four activities of the external environmental analysis process.

analysis process.

4.

4. Name and describe the general environmentName and describe the general environment’’s sixs six segments.

segments.

5.

5. Identify the five competitive forces and explain how theyIdentify the five competitive forces and explain how they determine an industry

determine an industry’’s profit potential.s profit potential.

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K

KNOWLEDGENOWLEDGE OBJECTIVESOBJECTIVES (cont(cont’’d)d)

6.

6. Define strategic groups and describe their influence onDefine strategic groups and describe their influence on the firm.

the firm.

7.

7. Describe what firms need to know about theirDescribe what firms need to know about their

competitors and different methods (including ethical

standards) used to collect intelligence about them.

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FIGURE

(5)

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TABLE

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Industry Environment

•

The set of factors directly influencing a firm and

its competitive actions and competitive

responses



Threat of new entrantsThreat of new entrants



Power of suppliersPower of suppliers



Power of buyersPower of buyers



Threat of product substitutesThreat of product substitutes



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Competitor Analysis

•

Gathering and interpreting

information about all of the

companies that the firm

competes against.

•

Understanding the firm

’

s

competitor environment

complements the insights

provided by studying the

general and industry

environments.

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Analysis of the External Environments

•

General environment



Focused on the futureFocused on the future

•

Industry environment



Focused on factors and conditions influencing a firmFocused on factors and conditions influencing a firm’’ss profitability within an industry

profitability within an industry

•

Competitor environment



Focused on predicting the dynamics of competitorsFocused on predicting the dynamics of competitors’’ actions, responses and intentions

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TABLE

TABLE 2.22.2 Components of the External Environmental AnalysisComponents of the External Environmental Analysis

Scanning • Identifying early signals of environmental changes and trends

Monitoring • Detecting meaning through ongoing

observations of environmental changes and trends

Forecasting • Developing projections of anticipated outcomes based on monitored changes and trends

Assessing • Determining the timing and importance of environmental changes and trends for

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Opportunities and Threats

•

Opportunity



A condition in the generalA condition in the general

environment that, if exploited,

helps a company achieve

strategic competitiveness.

•

Threat



A condition in the generalA condition in the general

environment that may hinder a

company

company’’s efforts to achieves efforts to achieve strategic competitiveness.

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Segments of the General Environment

•

The Demographic Segment



Population sizePopulation size



Age structure_{Age structure}



Geographic distributionGeographic distribution



Ethnic mixEthnic mix



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(cont

’

d)

•

The Economic Segment



Inflation ratesInflation rates



Interest rates_{Interest rates}



Trade deficits or surplusesTrade deficits or surpluses



Budget deficits or surplusesBudget deficits or surpluses



Personal savings ratePersonal savings rate



Business savings ratesBusiness savings rates



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(cont

’

d)

•

The Political/Legal Segment



Antitrust lawsAntitrust laws



Taxation laws_{Taxation laws}



Deregulation philosophiesDeregulation philosophies



Labor training lawsLabor training laws



Educational philosophies andEducational philosophies and policies

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(cont

’

d)

•

The

Sociocultural

Segment



Women in the workplaceWomen in the workplace



Workforce diversity_{Workforce diversity}



Attitudes about quality of worklifeAttitudes about quality of worklife



Concerns about environmentConcerns about environment



Shifts in work and career preferencesShifts in work and career preferences



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(cont

’

d)

•

The Technological Segment



Product innovationsProduct innovations



Applications of knowledge_{Applications of knowledge}



Focus of private and governmentFocus of private and government--supported R&Dsupported R&D expenditures

expenditures



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(cont

’

d)

•

The Global Segment



Important political eventsImportant political events



Critical global marketsCritical global markets



Newly industrialized countriesNewly industrialized countries



Different cultural and institutional_{Different cultural and institutional}

attributes

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Industry Environment Analysis

•

Industry Defined



A group of firms producing products that are close_{A group of firms producing products that are close}

substitutes

•

• Firms that influence one anotherFirms that influence one another

•

• Includes a rich mix of competitive strategies thatIncludes a rich mix of competitive strategies that companies use in pursuing strategic

companies use in pursuing strategic

competitiveness and above

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FIGURE

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Threat of New Entrants: Barriers to Entry

•

Economies of scale

•

Product differentiation

•

Capital requirements

•

Switching costs

•

Access to distribution channels

•

Cost disadvantages independent of scale

•

Government policy

•

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Barriers to Entry

•

Economies of Scale



Marginal improvements in efficiency that a firmMarginal improvements in efficiency that a firm experiences as it incrementally increases its size

experiences as it incrementally increases its size

•

Factors (advantages and disadvantages) related

to large

-

and small

-

scale entry



Flexibility in pricing and market shareFlexibility in pricing and market share



Costs related to scale economiesCosts related to scale economies



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Barriers to Entry (cont

’

d)

•

• Product differentiationProduct differentiation



 Unique productsUnique products



 Customer loyaltyCustomer loyalty



 Products at competitiveProducts at competitive prices

prices

•

• Capital RequirementsCapital Requirements



 Physical facilitiesPhysical facilities



 InventoriesInventories



 Marketing activitiesMarketing activities



 Availability of capitalAvailability of capital

•

• Switching CostsSwitching Costs



 OneOne--time costs customerstime costs customers incur when they buy from a

incur when they buy from a

different supplier

•

• New equipmentNew equipment

•

• Retraining employeesRetraining employees

•

• Psychic costs of ending aPsychic costs of ending a relationship

relationship •

• Access to DistributionAccess to Distribution Channels

Channels



 Stocking or shelf spaceStocking or shelf space



 Price breaksPrice breaks



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Barriers to Entry (cont

’

d)

•

• Cost DisadvantagesCost Disadvantages Independent of Scale

Independent of Scale



 Proprietary productProprietary product technology

technology



 Favorable access to rawFavorable access to raw materials

materials



 Desirable locationsDesirable locations

•

• Government policyGovernment policy



 Licensing and permitLicensing and permit requirements

requirements



 Deregulation of industriesDeregulation of industries

•

• Expected retaliationExpected retaliation



 Responses by existingResponses by existing competitors may depend

competitors may depend

on a firm

on a firm’’s present stake ins present stake in the industry (available

the industry (available

business options)

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Bargaining Power of Suppliers

•

Supplier power increases when:



Suppliers are large and few in number.Suppliers are large and few in number.



Suitable substitute products are not available.Suitable substitute products are not available.



Individual buyers are not large customers of suppliersIndividual buyers are not large customers of suppliers and there are many of them.

and there are many of them.



SuppliersSuppliers’’ goods are critical to the buyersgoods are critical to the buyers’’ marketplace success.

marketplace success.



SuppliersSuppliers’’ products create high switching costs.products create high switching costs.



Suppliers pose a threat to integrate forward intoSuppliers pose a threat to integrate forward into buyers

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Bargaining Power of Buyers

•

Buyer power increases when:



Buyers are large and few in number.Buyers are large and few in number.



Buyers purchase a large portion of an industryBuyers purchase a large portion of an industry’’s totals total output.

output.



BuyersBuyers’’ purchases are a significant portion of apurchases are a significant portion of a supplier

supplier’’s annual revenues.s annual revenues.



Buyers_Buyers’’ switching costs are low.switching costs are low.



Buyers can pose threat to integrate backward into theBuyers can pose threat to integrate backward into the sellers

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Threat of Substitute Products

•

The threat of substitute products increases

when:



Buyers face few switching costs.Buyers face few switching costs.



The substitute productThe substitute product’’s price is lower.s price is lower.



Substitute productSubstitute product’’s quality and performance ares quality and performance are equal to or greater than the existing product.

equal to or greater than the existing product.

•

Differentiated industry products that are valued

by customers reduce this threat.

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Intensity of Rivalry Among Competitors

•

Industry rivalry increases when:



There are numerous or equally balanced competitors.There are numerous or equally balanced competitors.



Industry growth slows or declines.Industry growth slows or declines.



There are high fixed costs or high storage costs.There are high fixed costs or high storage costs.



There is a lack of differentiation opportunities or lowThere is a lack of differentiation opportunities or low switching costs.

switching costs.



When the strategic stakes are high.When the strategic stakes are high.



When high exit barriers prevent competitors fromWhen high exit barriers prevent competitors from leaving the industry.

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Low entry barriers

Interpreting Industry Analyses

Unattractive

Industry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry

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Interpreting Industry Analyses (cont

’

d)

Attractive

Industry

High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry

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Strategic Groups

•

Strategic Group Defined



A set of firms emphasizing similar strategic_{A set of firms emphasizing similar strategic}

dimensions and using similar strategies

•

• Internal competition between strategic group firmsInternal competition between strategic group firms is greater than between firms outside that strategic

is greater than between firms outside that strategic

group.

group. •

• There is more heterogeneity in the performance ofThere is more heterogeneity in the performance of firms within strategic groups.

firms within strategic groups. –

– Similar market positionsSimilar market positions

–

– Similar productsSimilar products

–

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Strategic Groups

•

Strategic Dimensions



Extent of technological leadershipExtent of technological leadership



Product qualityProduct quality



Pricing PoliciesPricing Policies



Distribution channels_{Distribution channels}



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Competitor Analysis

•

Competitor Intelligence



The ethical gathering of needed information and data_{The ethical gathering of needed information and data}

that provides insight into:

•

• A competitorA competitor’’s direction (s direction (future objectivesfuture objectives))

•

• A competitorA competitor’’s capabilities and intentions (s capabilities and intentions (currentcurrent strategy

strategy))

•

• A competitorA competitor’’s beliefs about the industry (s beliefs about the industry (itsits assumptions

assumptions))

•

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FIGURE FIGURE 2.22.2

Competitor

Analysis

Components

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Competitor Analysis (cont

’

d)

•

• How do our goalsHow do our goals compare with our

compare with our

competitors

competitors’’ goals?goals?

•

• Where will the emphasisWhere will the emphasis be placed in the future?

be placed in the future? •

• What is the attitudeWhat is the attitude toward risk?

toward risk?

Future Objectives

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Competitor Analysis (cont

’

d)

•

• How are we currentlyHow are we currently competing?

competing? •

• Does this strategyDoes this strategy

support changes in the

competitive structure?

Future Objectives

Future Objectives

Current Strategy

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Competitor Analysis (cont

’

d)

•

• Do we assume the futureDo we assume the future will be volatile?

will be volatile? •

• Are we operating underAre we operating under a status quo?

a status quo? •

• What assumptions doWhat assumptions do our competitors hold

our competitors hold

about the industry and

themselves?

Future Objectives

Assumptions

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Competitor Analysis (cont

’

d)

•

• What are our strengthsWhat are our strengths and weaknesses?

and weaknesses? •

• How do we rateHow do we rate compared to our

compared to our

competitors?

Future Objectives

Assumptions

Capabilities

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Competitor Analysis (cont

’

d)

•

• What will ourWhat will our

competitors do in the

future?

future? •

• Where do we hold anWhere do we hold an advantage over our

advantage over our

competitors?

competitors? •

• How will this changeHow will this change our relationship with

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Complementors

•

Complementors



The network of companies that sell complementaryThe network of companies that sell complementary products or services or are compatible with the focal

products or services or are compatible with the focal

firm

firm’’s own product or service.s own product or service.

•

• If aIf a complementorcomplementor’’ss product or service adds valueproduct or service adds value to the sale of the focal firm

to the sale of the focal firm’’s product or service, its product or service, it is likely to create value for the focal firm.

is likely to create value for the focal firm. •

• However, if aHowever, if a complementorcomplementor’’ss product or service isproduct or service is in a market into which the focal firm intends to

in a market into which the focal firm intends to

expand, the

expand, the complementorcomplementor can represent acan represent a formidable competitor.

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Ethical Considerations

•

Practices considered both legal and ethical:



Obtaining publicly available informationObtaining publicly available information



Attending trade fairs and shows to obtain competitorsAttending trade fairs and shows to obtain competitors’’ brochures, view their exhibits, and listen to

brochures, view their exhibits, and listen to

discussions about their products

•

Practices considered both unethical and illegal:



BlackmailBlackmail



TrespassingTrespassing



EavesdroppingEavesdropping

