individual assignment

Today’s learning objectives

· Understanding the firm’s external environment

· Define, describe and analyse the general and the industry environment

· Understand how to use the Five Forces model

· Understand strategic groups

Agenda

· The general environment

· The industry environment

· Five forces analysis

· Strategic groups

The general environment

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The external environment

· Turbulent, complex, uncertain, ambiguous

· We have only incomplete knowledge of it

· Sets constrains

· Gives rise to opportunities

¾ Strategy represents a firm’s attempt to adapt to/shape its external environment

The external environment

General environment

Value chain (buyers/suppliers)

Industry

Strategic group

Firm

Environmental analysis

· Scanning

· Keeping up to data with what is happening

· Trying to identify ‘meaningful’ events

· Monitoring

· Following meaningful events more closely

· Forecast

· Try to predict how such meaningful events may influence the future

· Assessing

· Determining how to react to changes in the environment

Elements of the general environment

· Demography

· E.g. population size, structure, distribution, income, etc.

· Economy

· GDP, inflation, interest, etc.

· Political/legal • Laws, political systems, regulations, etc.

· Sociocultural • Attitudes, beliefs, preferences, values, etc.

· Technological • New knowledge domains, technical changes, new technologies, etc.

· Global/regional

· Globalisation, regionalisation, institutional, cross-country, cross-border, etc.

· Natural/Physical

· Climate change, energy consumption, etc.

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The industry environment

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What is an industry?

•

A group of firms producing similar products, for similar

customers with similar resources

•

Defining industry boundaries is crucial in industry and

competitor analysis

•

Various definitions and classifications exist (ANZSIC, GICS,

NACE, SIC, NAICS)

•

Most of these are based on similarity in production

methods

¾

Caution: Similarity in products, similarity in customers and

similarity in resources are all important (not just production

methods)

Five Forces analysis

Competitive

rivalry

Threat of

new entry

Power of

suppliers

Threat of

substitutes

Power of

buyers

Threat of new entrants

· Barriers to entry

· Economies of scale ↑

· Supply (production) and demand side (switching, distribution, differentiation)

· Capital requirements ↑ (but capital can be raised)

· Incumbency advantages ↑

· Government policies ↑ ↓

· Threat of retaliation

· History of retaliation ↑

· Incumbent position and resourcing ↑

· Incumbent ability to compete on price ↑

Power of suppliers

· Concentration of supplier industry ↑

· Suppliers are large and few

· Small revenue dependence of suppliers ↑

· Suppliers products are important (or differentiated) ↑

· Switching suppliers products is costly ↑

· No or only few substitutes for suppliers products exist ↑

· Suppliers can threaten to forward integrate ↑

Power of buyers

· Concentration of buyer industry ↑

· Buyers are large and few (buy large volumes)

· Buyers have low switching costs ↑

· Buyers can threaten to backward integrate ↑

· The products are a significant cost for the buyer ↑

· The seller has undifferentiated products ↑

· Buyers have a high reliance on products (e.g. quality) ↓

· The seller can influence end-users ↓

Threat of substitutes

Substitutes are products that fulfil the same/similar need in a different manner

· Buyers have low switching costs ↑

· Substitutes are cheaper ↑

· Substitutes perform equally or better ↑

· The seller has undifferentiated products ↑

Industry rivalry

· Many competitors ↑

· Competitors equal in size ↑

· Slow industry growth ↑

· High exit barriers ↑

· Rival commitment to/reliance on the industry ↑

· Rivalry is mostly price based ↑

· Price based competition develops when: switching costs are low, products are undifferentiated, high fixed costs, low marginal costs, perishable products, capacity needs to be increased in large chucks

Strategic groups

· Groups of firms within and industry that are relatively similar (e.g., pursue similar strategies) vis-à-vis other groups of firms in the industry

· Usually more intense competition within strategic groups than between strategic groups

· Mobility barriers (similar to entry/exit barriers) intensify competition within groups

· Dimension for categorisation are industry specific and divers

Technological leadership, quality, pricing, distribution, service

Next week

· Competitive dynamics

· Required reading: Chapter 5

· Required reading: Predicting your competitors reactions

· Don’t forget you preparation (poste one comment).

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