Sm-3

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Analyzing the External Environment of the Firm

Part 1: strategic analysis

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Creating the Environmentally Aware Organization

Adapted from Exhibit 2.1 Inputs to Forecasting

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Environmental Scanning Surveillance of a firm’s external Environmental scanning

environment 





Predict environmental changes to come Detect changes already under way Proactive mode

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Environmental Track evolution of Monitoring Environmental monitoring

Environmental trends Sequences of events Streams of activities

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Competitive Intelligence Define and understand a

Competitive intelligence

firm’s industry Identify rivals’ strengths and weaknesses Intelligence gathering (data) Interpretation of intelligence data

Helps a firm avoid surprises

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What Competitive Is IntelligenceCompetitive Is andIntelligence Is Not Competitive Intelligence Is … • • • •

Information that has been analyzed to the point where you can make a decision. A tool to alert management to early recognition of both threats and opportunities. A means to deliver reasonable assessments. A way of life, a process.

Not …

• •

• •

Adapted from Exhibit 2.2 What Competitive Intelligence Is and Is Not

Spying. Spying implies illegal or unethical activities. It is a rare activity. A crystal ball. Competitive Intelligence is good approximation of reality; it does not predict the future. Database search. Data by itself is not good intelligence. A job for one smart person.

Business Firm

Remote Environment Economic Political Social Technological

Area of total external environment impact

Operating Environment Competitors Creditors Customers Labor Market Suppliers

Operating Environment 



The OE involves the factors in the immediate competitive situation that provide many of the challenges a particular firm faces in attempting to attract or acquire needed resources or in striving to profitably market its goods and services. Also called as competitive or task environment

Operating EnvironmentCompetitive position       

Market share Product line Effective of sales distribution Experience Raw material cost Location & age of facility Caliber of personnel

Customer profiles    

Geographic Demographic Psychographic Buyer Behavior

Suppliers & Creditors : Sources of Resources Dependable relationship b/w a firm’s & its suppliers & creditors are essential to the co. LT Survival and Growth.

Personnel: Nature of the market 

labor

The ability to hold capable employees is prerequisite for a firms success.

 Reputation- compensation package  Employment  Availability

rates

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Environmental Forecasting Plausible (reasonable) projections about

Forecasts Direction of environmental change Scope of environmental change Speed of environmental change Intensity of environmental change

Scenario analysis

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SWOT Analysis

Managers need to analyze The general environment The firm’s industry and competitive environment

SWOT analysis Strengths Weaknesses Opportunities Threats Basic technique for analyzing firm and industry

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The General Environment General Environment

General environmental trends and events Little ability to predict them

Demographic Sociocultural Political/Legal Technological Economic Global

Even less ability to control them Can vary across industries

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Demographic Segment Aging population General Environment

Demographic Sociocultural Political/Legal Technological Economic

Rising affluence Changes in ethnic composition Geographic distribution of population Greater disparities in income levels

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Socio cultural More women in the Segment General Environmen t

Demographic Sociocultural Political/Legal Technological Economic Global

workforce Increase in temporary workers Greater concern for fitness Greater concern for environment Postponement of family formation

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Political/Legal Segment General Environmen t

Demographic Sociocultural Political/Legal Technological Economic Global

FEMAIndustrial policy Repeal of Glass-Steagall Act in 1999 Deregulation of utility and other industries Increases in federally mandated minimum wages Taxation at local, state, federal levels Legislation on corporate governance reforms (Sarbanes-Oxley Act)

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Technological Genetic engineering Segment General Environmen t

Demographic Sociocultural Political/Legal Technological Economic Global

Emergence of Internet technology Computer-aided design/computeraided manufacturing systems (CAD/CAM) Research in synthetic and exotic materials Pollution/global warming Miniaturization of computing technologies Wireless communication

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Economic Segment General Environmen t

Demographic Sociocultural Political/Legal Technological Economic Global

Interest rates Unemployment Consumer Price index Trends in GDP Changes in stock market valuations

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Global Segment General Environmen t

Demographic Sociocultural Political/Legal Technological Economic Global

Increasing global trade Currency exchange rates Emergence of the Indian and Chinese economies Trade agreements among regional blocs Creation of WTO (decreasing tariffs/free trade in services)

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The Competitive Environment Compe titive Enviro nment

Competitors Customers Suppliers

Sometimes called the task or industry environment Includes Competitors (existing and potential) Customers Suppliers

Porter’s Five Forces model

Porter’s Five Forces Model of Industry Competition-Definition A

market assessment tool designed to provide a business with an idea of the complexity of a particular industry.

 Industry

analysis involves reviewing the economic, political and market factors that influence the way the industry develops.

 Major

factors can include the power wielded by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants.

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Porter’s Five Forces Model of Industry Competition

Adapted from Exhibit 2.6 Porter’s Five Forces Model of Industry Competition

The purpose of Five-Forces Analysis 



The five forces are environmental forces that impact on a company’s ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

Porter’s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants

Threat of New Entrants Economies of Scale Barriers to Entry

Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy Expected Retaliation

Porter’s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants Bargaining Power of Suppliers

Bargaining Power of Suppliers Suppliers are likely to be powerful if: Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Supplier industry is dominated by a few firms Suppliers’ products have few substitutes Buyer is not an important customer to supplier Suppliers’ product is an important input to buyers’ product Suppliers’ products are differentiated Suppliers’ products have high switching costs Supplier poses credible threat of forward integration

Porter’s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Bargaining Power of Buyers Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to seller’s sales Purchase accounts for a significant fraction of supplier’s sales Products are undifferentiated Buyers face few switching costs Buyers’ industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality Buyer has full information

Buyers compete with the supplying industry by: * Bargaining down prices * Forcing higher quality * Playing firms off of each other

Porter’s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Threat of Substitute Products Keys to evaluate substitute products: Products with similar function limit the prices firms can charge

Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery

Porter’s Five Forces Model of Competition Threat of Threat of New New Entrants Entrants Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Threat of Substitute Products

Bargaining Power of Buyers

Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways: Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors

Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes High exit barriers

The Five Forces are Unique to Your Industry 

Five-Forces Analysis is a framework for analyzing a particular industry. 

Yet, the five forces affect all the other businesses in that industry.

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The Threat of New Entrants  Profits of established firms in the industry may be eroded by new competitors  High entry barriers lead to low threat of new entries      

Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale

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The Bargaining Power of Buyers Buyers threaten an industry Force down prices Bargain for higher quality or more services Play competitors against each other

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The Bargaining Power of Buyers A buyer group is powerful when It is concentrated or purchases large volumes relative to seller sales The products it purchases from the industry are standard or undifferentiated The buyer faces few switching costs It earns low profits The buyers pose a credible threat of backward integration The industry’s product is unimportant to the quality of the buyer’s products or services

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The Bargaining Power of Suppliers Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services

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The Bargaining Power of Suppliers

A supplier group will be powerful when

The supplier group is dominated by a few companies and is more concentrated than the industry it sells to The supplier group is not obliged to contend with substitute products for sale to the industry The industry is not an important customer of the supplier group

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

The Bargaining Power of Suppliers

A supplier group will be powerful when 





The supplier’s product is an important input to the buyer’s business The supplier group’s products are differentiated or it has built up switching costs for the buyer The supplier group poses a credible threat of forward

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The Threat of Substitute Products and Services 

Substitutes limit the potential returns of an industry

 Ceiling on the prices that firms in that industry can profitably charge  Price/performance ratio

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The Intensity of Rivalry among  Jockeying for in an Industry Competitors  





position Price competition Advertising battles Product introductions Increased customer service

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The Intensity of Rivalry among Interacting factors lead to Competitors in an Industry intense rivalry Numerous or equally balanced competitors Slow industry growth High fixed or shortage costs Lack of differentiation or switching costs Capacity augmented in large increments High exit barriers

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Using Industry Analyses: A Few Caveats Five Forces analysis implicitly assumes a zero-sum game Five Forces analysis is essentially a static analysis Value net Suppliers and customers (the vertical net) Substitutes and complements (the horizontal

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The Value Net

Adapted from Exhibit 2.7 The Value Net

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Evolutionary Trajectories of Industry Change

Dess Exhibit 2.8.CLP

Adapted from Exhibit 2.8 Four Evolutionary Trajectories of Industry Change

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Strategic Groups within Industries Two unassailable assumptions in industry analysis No two firms are totally different No two firms are exactly the same

Strategic groups Cluster of firms that share similar strategies Breadth of product and geographic scope Price/quality Degree of vertical integration

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Strategic Groups within Industries Value of strategic groups as an analytical tool Identify barriers to mobility that protect a group from attacks by other groups Identify groups whose competitive position may be marginal or tenuous Chart the future direction of firms’ strategies Thinking through the implications of each industry trend for the strategic group as a whole

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The World Automobile Industry: Strategic Groups

Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups