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1
Analyzing the External Environment of the Firm
Part 1: strategic analysis
2
Creating the Environmentally Aware Organization
Adapted from Exhibit 2.1 Inputs to Forecasting
3
Environmental Scanning Surveillance of a firm’s external Environmental scanning
environment
Predict environmental changes to come Detect changes already under way Proactive mode
4
Environmental Track evolution of Monitoring Environmental monitoring
Environmental trends Sequences of events Streams of activities
5
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
6
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
13
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
14
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
15
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
16
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
17
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
18
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)
19
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
20
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
21
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)
22
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.
26
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.
40
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
41
The Bargaining Power of Buyers Buyers threaten an industry Force down prices Bargain for higher quality or more services Play competitors against each other
42
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
43
The Bargaining Power of Suppliers Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services
44
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
45
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
46
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
47
The Intensity of Rivalry among Jockeying for in an Industry Competitors
position Price competition Advertising battles Product introductions Increased customer service
48
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
49
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
50
The Value Net
Adapted from Exhibit 2.7 The Value Net
51
Evolutionary Trajectories of Industry Change
Dess Exhibit 2.8.CLP
Adapted from Exhibit 2.8 Four Evolutionary Trajectories of Industry Change
52
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
53
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
54
The World Automobile Industry: Strategic Groups
Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups
Analyzing the External Environment of the Firm
Part 1: strategic analysis
2
Creating the Environmentally Aware Organization
Adapted from Exhibit 2.1 Inputs to Forecasting
3
Environmental Scanning Surveillance of a firm’s external Environmental scanning
environment
Predict environmental changes to come Detect changes already under way Proactive mode
4
Environmental Track evolution of Monitoring Environmental monitoring
Environmental trends Sequences of events Streams of activities
5
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
6
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
13
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
14
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
15
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
16
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
17
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
18
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)
19
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
20
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
21
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)
22
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.
26
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.
40
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
41
The Bargaining Power of Buyers Buyers threaten an industry Force down prices Bargain for higher quality or more services Play competitors against each other
42
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
43
The Bargaining Power of Suppliers Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services
44
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
45
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
46
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
47
The Intensity of Rivalry among Jockeying for in an Industry Competitors
position Price competition Advertising battles Product introductions Increased customer service
48
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
49
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
50
The Value Net
Adapted from Exhibit 2.7 The Value Net
51
Evolutionary Trajectories of Industry Change
Dess Exhibit 2.8.CLP
Adapted from Exhibit 2.8 Four Evolutionary Trajectories of Industry Change
52
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
53
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
54
The World Automobile Industry: Strategic Groups
Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups
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