Strategic Audit Report

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Welcome to Strategic Management Week 3

Chapter 2 Review

Evaluating a Firm’s External Environment

What is External Environment Analysis?

The Structure-Conduct-Performance Model

Types of Competition

Type Q(Firms) Product Type Barriers

Perfect Competition ↑∑Firms

Homogenous Products

↓Entry/Exit Cost Parity

Monopolistic Competition ↑∑Firms

Heterogenious Products

↓Entry/Exit Cost CA

Oligopoly ↓∑Fims Homogenous Products

↑Entry/Exit Cost CA

Monopoly One Firm ↑Entry/Exit Cost CA

Ethics & Strategy

• Which of these types of competition is most beneficial to society (social welfare)? • What do we want? (low cost, high quality) • What about innovation

• SCP – ID whether competitiveness and intervene – Flipped to learn how to gain competitive advantage – Is that good for society – How do firms create CA/EV (address consumer needs)

General Environment

Demographics & Culture

• What do each of these mean? • How predictable are they? • How can they be measured? • How are they relevant to strategic

management?

Legal/Political & Economic Climate

• What do each of these mean? • How predictable are they? • How can they be measured? • How are they relevant to strategic

management?

Technological Change

• How predictable is this? • How can it be measured? • How is it relevant to strategic management?

Major International Events

• How predictable is this? • How can it be measured? • How is it relevant to strategic management?

There are two parts of the Environment: General (PEST/PESTLE/DPest) & Competitive

Source: Ireland, Hitt & Hoskisson 2006 – Copyright Thompson Business & Professional Publishing

BUYERS

Threat of new entrants

MARKET COMPETITORS

Bargaining power of customers

SUPPLIERS

SUBSTITUTES Rivalry among existing firms

Bargaining power of suppliers

Threat of substitute products or services

Source: Porter (1980)

POTENTIAL ENTRANTS

The Competitive Environment of the Firm and the 5-Forces Framework

P, Q

What do we look for to determine whether rivalry is high?

Rivalry is high when:

• Industry concentration is low • Competitors are very homogeneous • Little product differentiation exists • Excess capacity and exit barriers are present • Scale economies are high and the ratio of fixed

to variable costs is high

What do we look for to determine how high the threat of substitutability is?

The threat of substitutes is high when:

• Buyers have a high propensity to substitute • The relative price and performance of

substitutes is high

What do we look for to determine whether buyers have a high or low power?

When is buyer power high? I

• When price sensitivity of focal industry is high: – Cost of supplier product relative to total costs of

focal industry products high – Product differentiation of supplies low – Competition between focal industry players is high

When is buyer power high? II

• Relative bargaining power of focal firms is high: – Size and concentration of focal industry firms relatives to

suppliers is high – Focal industry firms face little if no switching costs – Focal industry firms know and understand well the cost

structure of suppliers – Focal industry firms can easily integrate backward

What do we look for to determine whether suppliers have a high or low power?

When is supplier power low? I

• When price sensitivity of focal industry is high: – Cost of supplier product relative to total costs of

focal industry products high – Product differentiation of supplies low – Competition between focal industry players is high

When is supplier power low? II

• Relative bargaining power of focal firms is high: – Size and concentration of focal industry firms relatives to

suppliers is high – Focal industry firms face little if no switching costs – Focal industry firms know and understand well the cost

structure of suppliers – Focal industry firms can easily integrate backward

What do we look for to determine how low the threat of entry is?

The threat of entry is low when:

• Economies of scale are present • Incumbents have an absolute cost advantage • High capital is needed to start • Existing products are highly differentiated • Channels of distribution are preempted or difficult to

access • Government and legal barriers exist • Retaliation by established competitors is likely

THREAT OF ENTRY • economies of scale • absolute cost

advantages • capital requirements • product differentiation • access to distribution

channels • governmental and legal

barriers • retaliation by

established producers

THREAT OF SUBSTITUTES

• buyer propensity to substitute • relative price performance of

substitutes

INDUSTRY COMPETITIVENESS

• concentration • product differentiation • excess capacity • ratio of fixed to

variable costs • demand growth • cyclical fluctuations of

demand • exit barriers

BUYER POWER Price sensitivity • cost of purchases • profitability of buyers • importance of the product

to quality of buyers’ product

Bargaining power • size and concentration of buyers

relative to suppliers • buyers’ switching costs • buyers’ information • buyers’ ability to backward

integrate

SUPPLIER POWER Factors determining power of suppliers relative to producers same as those determining power of producers relative to buyers--see “Buyer Power” box.

Generic Drivers of Industry Forces

THREAT OF ENTRY • Erect barriers to entry

by building: – economies of scale – absolute cost

advantages • Influence govt. policy

requirements . . . • Overcome barriers to

entry through: – product

differentiation – . . .

THREAT OF SUBSTITUTES

Improve product’s attractiveness relative to substitutes: • Lower Prices • Product differentiation • Move into new businesses

INDUSTRY COMPETITIVENESS

• Compete on dimensions besides price

• Consolidate ownership • Build a first-mover

advantage . . .

BUYER POWER

Reduce Buyers’ Uniqueness • Forward Vertical Integration • Product Differentiation • Target New Market Segments

SUPPLIER POWER

Reduce Suppliers’ Uniqueness • Backward Vertical Integration • Use Multiple Suppliers

Source: Barney (1997)

Generic Responses to

Industry Forces

Industry Structure

• Fragmented – No dominant firm – Opportunity for consolidation

• Emerging – New created (or re-created industries) – Opportunity to seize 1st mover advtg?

Industry Structure (Cont’d)

• Emerging – New created industries – Re-created industries

• Tech innovation • ∆ in customer needs

• Mature – Opportunities for:

• 1st mover advtg? • Tech leadership • Control strategic assets • Avoid customer-switching

costs

– Threat of: • 1st mover disadvtg? • Loss of flexibility • 2nd mover advtg

Seizing 1st Mover Advantage

-Suarez & Lanzolla, 2005 (HBR)

Seizing 1st Mover Advantage

-Suarez & Lanzolla, 2005 (HBR)

Industry Structure (Cont’d)

• Mature – Slowing ↑Qd – Slowing ↑Qs (via

stagnant production capacity)

– ↑Customer Expertise – ↓New products/services – ↑Int’l competition – ↓∑Profitability

• Mature – Opportunities for:

• Product refinement • Investment in service

quality • Process innovation

Industry Structure (Cont’d)

• Declining – ↓∑Sales – ↑Rivalry

• ↑Buys • ↑Suppliers • ↑Substitutes

• Declining • Leadership • Niche • Harvest • Divestment

Step 1 – Define the industry the firm is in Step 2 - Identify the players:

Competitors, substitutes, suppliers, buyers, and potential entrants

Industry Analysis

Step 3 - Evaluate the 5-forces: Their intensity, the underlying conditions

that drive this intensity, and the implication for the performance of

companies in this industry

Industry Analysis

Step 4 - What would it take for any company to be successful in this industry;

or how can we change the industry forces in our favor; aka industry key

success factors

Industry Analysis

What is this External Environment Analysis?

• Part 1: Describe the External Environment of the Firm

• Part 2: Evaluate this Environment • Part 3: Draw Clear Conclusions: What are the

opportunities and threats in this environment? What are the drivers of these? What are potential strategies to capitalize on the opportunities and neutralize the threats?

External Analysis

– External Analysis • What is the current industry structure/level of competition (perfect

competitionàmonopoly) and what are the consequences (See Table 2.7)

• Describe the General and Competitive Environment - Use at least one of tools described in our textbook (6 category description of the general environment in Figure 2.1, Porter’s 5 Forces, PEST, GDPest, etc.)

• What are the opportunities and threats related to the external environment?

• How does the external environment influence the company’s strategy?