The External Environment:: Opportunities, Threats, Industry Competition, And Competitor Analysis

Chapter 2 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

Components of the General Environment Economic Demographic

Sociocultural Industry Environment Competitive Environment

Political/ Legal

Global Technological

SWOT Analysis    

Strengths Weaknesses Opportunities Threats

The purpose of SWOT Analysis 

It is an easy-to-use tool for developing an overview of a company’s strategic situation 

It forms a basis for matching your company’s strategy to its situation

SWOT is the starting point 



It provides an overview of the strategic situation. It provides the “raw material” to do more extensive internal and external analysis.

Opportunities 



An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment. Possible Opportunities:    

Emerging customer needs Quality Improvements Expanding global markets Vertical Integration

Threats 



A THREAT is a factor in your company’s external environment that poses a danger to its well-being. Possible Threats:    

New entry by competitors Changing demographics/shifting demand Emergence of cheaper technologies Regulatory requirements

Opportunities and Threats form a basis for EXTERNAL analysis  By examining opportunities, you can 

discover untapped markets, and new products or technologies, or identify potential avenues for diversification. By examining threats, you can identify unfavorable market shifts or changes in technology, and create a defensive posture aimed at preserving your competitive position.

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.

Competitor Analysis The follow-up to Industry Analysis is effective analysis of a firm’s Competitors Industry Environment Competitive Environment

Competitor Analysis Assumptions What assumptions do our competitors hold about the future of industry and themselves? Current Strategy Does our current strategy support changes in the competitive environment? Future Objectives How do our goals compare to our competitors’ goals? Capabilities How do our capabilities compare to our competitors?

Response What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition?

Competitor Analysis Future Objectives How do our goals compare to our competitors’ Where will emphasis goals? be placed in the future? What is the attitude toward risk?

What Drives the competitor?

Competitor Analysis Future Objectives How do our goals compare to our competitors’ Where will emphasis goals?Strategy be Current placed inHow the future? are we currently What is the attitude competing? toward risk? Does this strategy support changes in the competitive structure?

What is the competitor doing? What can the competitor do?

Competitor Analysis Future Objectives

What does the competitor believe about itself and the industry?

How do our goals compare to our competitors’ Where will emphasis goals?Strategy be Current placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does thisDo strategy we assume the future support will changes in the be volatile? competition structure? What assumptions do our

competitors hold about the industry and themselves? Are we assuming stable competitive conditions?

Competitor Analysis Future Objectives

What are the competitor’s capabilities?

How do our goals compare to our competitors’ Where will emphasis goals?Strategy be Current placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this Dostrategy we assume the future supportwill changes in the be volatile? competition Whatstructure? assumptions do our

competitors hold about the Capabilities industry and themselves? What are my competitors’ Are we operating under strengths and weaknesses? a status quo? How do our capabilities compare to our competitors?

Competitor Analysis Response

Future Objectives How do our goals compare to our competitors’ Where will emphasis goals?Strategy be Current placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this Dostrategy we assume the future supportwill changes in the be volatile? competition Whatstructure? assumptions do our

competitors Capabilities hold about the industry and themselves? What are my competitors’ Are we operating strengths under and weaknesses? a status quo? How do our capabilities compare to our competitors?

What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition?

SWOT Analysis    

Strengths Weaknesses Opportunities Threats

The purpose of SWOT Analysis 

It is an easy-to-use tool for developing an overview of a company’s strategic situation 

It forms a basis for matching your company’s strategy to its situation

Strengths 



A STRENGTH is something a company is good at doing or a characteristic that gives it an important capability. Possible Strengths:     

Name recognition Proprietary technology Cost advantages Skilled employees Loyal Customers

Weaknesses 



A WEAKNESS is something a company lacks or does poorly (in comparison to others) or a condition that places it at a disadvantage Possible Weaknesses:    

Poor market image Obsolete facilities Internal operating problems Poor marketing skills

Strengths and Weakness form a basis for INTERNAL analysis  By examining strengths, you can discover



untapped potential or identify distinct competencies that helped you succeed in the past. By examining weaknesses, you can identify gaps in performance, vulnerabilities, and erroneous assumptions about existing strategies.

Competitive Advantage

Discovering Core Competencies

Gained through Core Competencies

Strategic Competitiveness

Core Competencies

Discovering Core Competencies

Above-Average Returns

Sources of Competitive Advantage

Capabilities Teams of Resources

Resources * Tangible * Intangible

* * * *

Criteria of Sustainable Advantages

Value Chain Analysis

Valuable Rare Costly to Imitate Nonsubstitutable

* Outsource

Key Questions for Managers in Internal Analysis How do we assemble bundles of Resources, Capabilities and Core Competencies to create VALUE for customers? And... Will environmental changes make our core competencies obsolete? Are substitutes available for our core competencies? Are our core competencies easily imitated?

Discovering Core Competencies

Resources * Tangible * Intangible

Resources

What a firm Has...

What a firm has to work with: its assets, including its people and the value of its brand name

Resources

What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name

Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers

Resources

What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers

“Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco

Resources Tangible Resources * * * *

Financial Physical Human Resources Organizational

Intangible Resources * Technological * Innovation * Reputation

What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers “Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco

Discovering Core Competencies

Capabilities Teams of Resources

Resources * Tangible * Intangible

Capabilities

What a firm Does...

Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.

Capabilities

What a firm Does...

Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.

Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.

Capabilities

What a firm Does...

Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.

Discovering Core Competencies

Core Competencies Sources of Competitive Advantage

Capabilities Teams of Resources

Resources * Tangible * Intangible

Discovering Core Competencies

Core Competencies

What a firm Does... that is Strategically Valuable

“…are the essence of what makes an organization unique in its ability to provide value to customers.” Leonard-Barton, Bowen, Clark, Holloway & Wheelwright

McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.

Discovering Core Competencies

Core Competencies

Discovering Core Competencies

Sources of Competitive Advantage

Capabilities

Criteria of Sustainable Advantages

Teams of Resources

Resources * Tangible * Intangible

* * * *

Valuable Rare Costly to Imitate Nonsubstitutable

* Outsource

Core Competencies For a strategic capability to be a Core Competency, it must be:

What a firm Does... that is Strategically Valuable

Valuable Rare Costly to Imitate Nonsubstitutable

Core Competencies Core Competencies must be: Valuable

What a firm Does... that is Strategically Valuable

Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

Rare

Capabilities that are possessed by few, if any, current or potential competitors

Costly to Imitate

Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity

Nonsubstitutable

Capabilities that do not have strategic equivalents, such as firmspecific knowledge or trust-based relationships

Discovering Core Competencies

Core Competencies

Discovering Core Competencies

Sources of Competitive Advantage

Capabilities

Criteria of Sustainable Advantages

Teams of Resources

Resources * Tangible * Intangible

* * * *

Valuable Rare Costly to Imitate Nonsubstitutable

Value Chain Analysis

* Outsource

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Primary Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Inbound Logistics

Support Activities

Primary Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Operations

Inbound Logistics

Support Activities

Primary Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Outbound Logistics

Operations

Inbound Logistics

Support Activities

Primary Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Primary Activities

Marketing & Sales

Outbound Logistics

Operations

Inbound Logistics

Support Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Primary Activities

Service

Marketing & Sales

Outbound Logistics

Operations

Inbound Logistics

Support Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Primary Activities

Service

Marketing & Sales

Outbound Logistics

Operations

Inbound Logistics

Procurement

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Technological Development

Primary Activities

Service

Marketing & Sales

Outbound Logistics

Operations

Procurement Inbound Logistics

Support Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Human Resource Management Technological Development

Primary Activities

Service

Marketing & Sales

Outbound Logistics

Operations

Procurement Inbound Logistics

Support Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure Human Resource Management Technological Development

Primary Activities

Service

Marketing & Sales

Outbound Logistics

Operations

Procurement Inbound Logistics

Support Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure

Technological Development

M A R G IN

Primary Activities

Service M A RG IN

Marketing & Sales

Outbound Logistics

Operations

Procurement Inbound Logistics

Support Activities

Human Resource Management

Outsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure

Technological Development

M A R G IN

Primary Activities

Service M A RG IN

Marketing & Sales

Outbound Logistics

Operations

Procurement Inbound Logistics

Support Activities

Human Resource Management

Outsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure Human Resource Management

Operations

Marketing & Sales

Outbound Logistics

Operations

Inbound Logistics

Outbound Logistics

Primary Activities

Service M A RG IN

who can perform these functions more efficiently

Procurement Inbound Logistics

Support Activities

M Human Resource Management Firms often purchase a portion A Technological Development R activities of their value-creating G IN suppliers from specialty external Technological Development Procurement

Marketing & Sales

Service

Strategic Rationales for Outsourcing Improve Business Focus

Lets company focus on broader business issues by having outside experts handle various operational details

Provide Access to World-Class Capabilities

The specialized resources of outsourcing providers makes worldclass capabilities available to firms in a wide range of applications

Accelerate Business Re-Engineering Benefits

Achieves re-engineering benefits more quickly by having outsiders-who have already achieved world-class standards--take over process

Share Risks

Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

Free Resources for Other Purposes

Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively

Core Competencies--Cautions and Reminders Never take for granted that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become Core Rigidities Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

Competitive Advantage

Discovering Core Competencies

Gained through Core Competencies

Strategic Competitiveness

Core Competencies

Discovering Core Competencies

Above-Average Returns

Sources of Competitive Advantage

Capabilities

Criteria of Sustainable Advantages

Teams of Resources

Resources * Tangible * Intangible

* * * *

Valuable Rare Costly to Imitate Nonsubstitutable

Value Chain Analysis

* Outsource