The External Environment

The External Environment - The External Environment:...

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Unformatted text preview: The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 1 The External Environment Environment Economic ner De mo al g ra ph ic ner urall a t Ge ulltur c ocu ciio Soc So Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Environment Technological General Ge al Gl ob En al vi r o Po Po on vir En nm e nt l gal ga Le //Le call nt t ca lliitii me 2 External Environmental Analysis A continuous process which includes q q q q 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 firms’ strategies and their management 3 External Environmental Analysis Analysis of general environment Analysis of industry environment Analysis of competitor environment The External Environment Strategic Intent Strategic Mission 4 Industry Environment A set of factors that directly influences a company and its competitive actions and responses Interaction among these factors determine an industry’s profit potential Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry 5 Analyzing Industry Environment Opportunities and threats are competitive challenges arising for changes in industry conditions. Analytic tools such as the five forces model help managers formulate appropriate strategic responses. 6 Five Forces Model of Competition Identify current and potential competitors and determine which firms serve them Conduct competitive analysis Recognize that suppliers and buyers can become competitors Recognize that producers of potential substitutes may become competitors 7 Five Forces Model of Competition ng s Thr ea mo irm to AF yg fN alr tin ew iv pe R En m tra Co nt s Five Forces of Competition Bargaining Power of Bargaining Buyers Buyers Bar g aini n g Po w Sup pl ier er of s e te titut stitu Subs f Sub at of ts ts eat o Thre Produc Thr Produc 8 Potential Competitors New entrants into an industry threaten incumbent companies. Entry barriers reduce the threat of new and additional competition. 9 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 Expected retaliation 10 Rivalry Among Established Companies The intensity of competitive rivalry in an industry arises from: Industry’s competitive structure. Demand (growth or decline) conditions in industry. Height of industry exit barriers. 11 Rivalry Among Established Companies Industry Competitive Structure Fragmented Many firms. No dominant firm Consolidated One firm or one dominant firm. (monopoly) Few firms, Shared dominance (Oligopoly) The Continuum of Industry Structures 12 Rivalry Among Established Companies (Continued) Demand Conditions vs. 13 Rivalry Among Established Companies (Continued) Height of Exit Barriers in the Industry 14 High Exit Barriers specialized assets (assets with values linked to a particular business or location) fixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets) emotional barriers (career concerns, loyalty to employees, etc.) government and social restrictions Common exit barriers include: 15 Bargaining Power of Suppliers it is dominated by a few large companies satisfactory substitute products are not available to industry firms industry firms are not a significant customer for the supplier group suppliers’ goods are critical to buyers’ marketplace success effectiveness of suppliers’ products has created high switching costs suppliers are a credible threat to integrate forward into the buyers’ industry A supplier group is powerful when: 16 Bargaining Power of Buyers Buyers (customers) are powerful when: they purchase a large portion of an industry’s total output the sales of the product being purchased account for a significant portion of the seller’s annual revenues they could easily switch to another product the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry 17 Threat of Substitute Products Product substitutes are strong threat when: customers face few switching costs substitute product’s price is lower substitute product’s quality and performance capabilities are equal to or greater than those of the competing product 18 Substitute Products The competitive threat of substitute products increases as they come closer to serving similar customer needs. Far Close 19 A Sixth Force: Complementors Complementors: Example: Companies whose products are sold in tandem with another company’s products. Increased supply of a complementary product collaterally increases demand for the primary product. Faster CPU chips fuel sales of personal computers. 20 Strategic Groups Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry 21 Strategic Groups Within Industries The concept of strategic groups Implications of strategic groups Within an industry, a competitor grouping using similar strategies that differ from other industry groups. The closest industry competitors are those in the group. The various industry groups are differentially and competitively advantaged and positioned. Mobility barriers inhibit the movement of competitors from one strategic group to another. 22 Strategic Groups in the Pharmaceutical Industry High Prices Charged Low Low R&D Spending High 23 Strategic Groups in the Pharmaceutical Industry High Prices Charged • Marion Labs • Carter Wallace • INC Pharmaceut’l Low Low Generic Generic Group Group R&D Spending High 24 Strategic Groups in the Pharmaceutical Industry High Proprietary Proprietary Group Group Prices Charged • Merck • Pfizer • Eli Lilly • Marion Labs • Carter Wallace • INC Pharmaceut’l Low Low Generic Generic Group Group R&D Spending High 25 Limitations of the Five Forces and Strategic Group Models Both models are static and ignore innovation. Their focus is on industry and group structures rather than individual companies. Innovation creates change in industry structures, altering the competitive environment. Industry structure cannot fully explain the performance differences between industry competitors. 26 Competitor Environment Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities what drives the competitor as shown by its future objectives what the competitor is doing and can do as revealed by its current strategy What the competitor believes about itself and the industry, as shown by its assumptions What the the competitor may be able to do, as shown by its capabilities 27 Competitor Analysis Future objectives How do our goals compare with our competitors’ goals? Where will the emphasis be placed in the future? What is the attitude toward risk? Future Objectives: 28 Competitor Analysis Future objectives Current strategy How are we currently competing? Does this strategy support changes in the competitive structure? Current Strategy: 29 Competitor Analysis Future objectives Current strategy Assumptions Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves? Assumptions: 30 Competitor Analysis Future objectives Current strategy What are our strengths and weaknesses? How do we rate compared to our competitors? Capabilities: Assumptions Capabilities 31 Competitor Analysis Future objectives Response Response: Current strategy Assumptions Capabilities What will our competitors do in the future? Where do we hold an advantage over our competitors? How will this change our relationship with our competitors? 32 The Role of the General Environment Potential competitors Supplier power Rivalry Buyer power Substitutes Economic Environment 33 General Environment Economic segment Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product 34 The Role of the General Environment Potential competitors Technological Environment Supplier power Rivalry Buyer power Substitutes Economic Environment 35 General Environment Technological Segment Product innovations Applications of knowledge Focus of private and government-supported Focus R&D expenditures R&D New communication technologies 36 The Role of the General Environment Potential competitors Technological Environment Supplier power Rivalry Buyer power Substitutes Economic Environment 37 Social Environment General Environment Sociocultural segment Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences 38 The Role of the General Environment Potential competitors Technological Environment Supplier power Rivalry Buyer power Demographic Environment Social Environment Substitutes Economic Environment 39 General Environment Demographic Segment Population size Age structure Geographic distribution Ethnic mix Income distribution 40 The Role of the General Environment Political and Legal Environment Potential competitors Technological Environment Supplier power Rivalry Buyer power Demographic Environment Social Environment Substitutes Economic Environment 41 General Environment Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies 42 The Role of the General Environment Political and Legal Environment Potential competitors Technological Environment Global Environment Supplier power Rivalry Buyer power Demographic Environment Social Environment Substitutes Economic Environment 43 General Environment Global Segment Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes 44 Globalization and Industry Structure Globalization of Markets 45 Globalization and Industry Structure Globalization Trend implications Globally dispersed production lowers costs and increases quality. Global markets are replacing national markets. No isolated national markets More competitors, more intense competition More rapid innovation and shorter product life cycles 46 ...
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This note was uploaded on 12/21/2010 for the course BUSA 5336 taught by Professor Jeff during the Summer '09 term at UT Arlington.

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