MGT450 2
An.
MGT450_Chapter2.pptx1
CHAPTER
2
THE EXTERNAL ENVIRONMENT:
OPPORTUNITIES, THREATS, INDUSTRY COMPETITION
AND COMPETITOR ANALYSIS
Opening remarks
Company’s strategic actions are affected by
External environment
Internal environment
External environment is the source of:
Opportunities
Threats
The need for monitoring and analyzing external environment
The pace of change
Complexity
Uncertainty
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The general, industry and competitor analysis
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General environment – broader society dimensions ( 7 dimensions)
Demographic, economic, political/legal, sociocultural, technological, physical and global
Out of firm’s control so must monitor and gather information
Industry environment – factors in competitive environment
Threat of new entrants, power of suppliers, power of buyers, threat of product substitutes, intensity of rivalry among competitors
Firm must assess industry’s opportunities for profit potential
Competitor analysis or competitive intelligence – the way firm’s can gather and analyze information on the industry competitors
Identifying their actions, responses and intentions
These three analyses influence and are influenced by the firm’s vision, mission and strategic actions
The general, industry and competitor environments
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Three External Environments include:
General
Industry
Competitor
Segments of the general environment
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DEMOGRAPHIC
Population size
Geographic distribution
ECONOMIC
Nature and direction of the economy in which a firm competes or may compete
SOCIO-CULTURAL
Refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes
Age structure
Ethnic mix
Income distribution
POLITICAL/LEGAL
PHYSICAL
TECHNOLOGICAL
GLOBAL
Arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding the interactions among nations as well as between firms and various local governmental agencies
Concerned with a society's attitudes and cultural values
Includes the institutions and activities involved with creating new knowledge and translating that knowledge into new products, processes, and materials
Includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets
External environmental analysis
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The objective of this analysis is identification of
Opportunities and
Threats
Opportunity – a condition in the external environment that helps a company achieve strategic competitiveness, if exploited
Threat – a condition in the external environment that may diminish company’s efforts towards achieving strategic competitiveness
The four-step process includes
Scanning
Monitoring
Forecasting
Assessing
1. Scanning
Studying all the segments of the general environment
Early signals of changes and general environment trends
Understand trends in the Companies detect changes that are already under way.
How companies like Amazon, Netflix, or Facebook collect early signals?
Ex: amazon.com they welcome people who have visited the site already
How airline companies deal with external environment? What factors do they analyze constantly?
Regulations? Politics? Weather?
Random data are collected
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Scanning and monitoring provide a picture of what has already taken place and what is happening.
2. Monitoring
Observing environmental changes – important trends
Focuses on important trends arising from the scanning phase
Monitoring immigrants trends – effect on grocery stores?
What can we say when monitoring oil prices recent trend?
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3. Forecasting
Forecasting - feasible projections about what might happen and how quickly
Based on the outputs from scanning and monitoring
Very challenging task
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Ex: how long will it take the new technology to reach the market place? Are current lifestyle trends likely to continue?
4. Assessing
The objective – determine the timing and significance of the identified trends and changes
Specification of implications
Inputs – from scanning, monitoring and forecasting
What are the implications of oil prices decline?
For oil producers?
For companies?
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Answer Q’s such as what are the key issues presented by the environment, and what are the implications of such issues for the organizations?
Industry environment analysis
What is industry?
Industry – the group of firms producing products that are close substitutes
In which industry does your chosen company operate?
Work in teams, figure out the industry
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Industry environment analysis
Comparing with general environment, does industry have more or less direct influence on your business?
Industry’s profit potential depends on
Threats of new entrants
The bargaining power of suppliers
The bargaining power of buyers
Product substitutes
Intensity of rivalry among competitors
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Figure 2.2
Michael Porter’s Five forces of competition Model
Threats of new entrants
How do new competitors affect our market share?
What are the good sides of new entrants?
Factors that determine the likelihood of new entrants
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| When firms will enter an industry is a function of two factors | |
| 1 – Barriers to entry | 2- Expected Retaliation |
| Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale (learning or experience curve, proprietary product technology, access to raw materials, favorable locations and government subsidies). Gov’t policy. | Refers to the response existing competitors may take to the emergence of a new competitor. Types of retaliation include dropping prices, offering increased incentives to buy, offering additional service for the same price. Ex: Honda entering enter the market of motorcycles with small engine neglected the barriers of Harley Davidson. Then they competed against them in a larger market. |
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Bargaining power of suppliers
Unfavorable situations with suppliers
Few large companies (concentration)
There are no good substitute products
We are not important buyers
Supplier sells products which are very important to us
High switching costs
Forward integration by the supplier
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Bargaining power of buyers
Unfavorable situations with buyers
Their purchase within the industry is significant
Their purchase accounts for a significant portion of the seller’s sales
They can easily replace the seller
Products are standardized (not differentiated) – backward integration is possible
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Substitute products
Substitutes – goods or services from outside the given industry that perform similar or the same functions as a product that the industry produces
Find substitutes to the following products/services
Coffee –
Plastic containers –
Newspapers –
SMS –
TV -
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Intensity of rivalry among competitors
In what way you are different from them?
Factors affecting the rivalry intensity
Number and power of competitors
Slow growth in the industry
High fixed costs or high storage costs (rebates, discounts)
Lack of differentiation or low switching costs
High strategic stakes
High exit barriers
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Interpreting industry analyses
Industry analysis must be implemented thoroughly, and with careful interpretation of data and information from different sources
The impact of globalization – sometimes it is more important to analyze global factors than just industry factors
What is the outcome of the five forces analysis?
To determine the attractiveness of an industry
How do we know that an industry is attractive?
Based on potential above-average earnings
Strategic groups
Do luxury restaurants compete with fast food restaurants and they are within the same industry?
Strategic group – a set of firms emphasizing similar strategic dimensions to use a similar strategy.
Ex: fast-food and fine-dining based on variables such as preparation time, pricing, and presentation.
Intra-strategic group competition is more intense than inter-strategic competition
Examples of strategic groups dimensions
Technological leadership
Quality of products
Pricing policies
Distribution channels
Customer service
Important notions – mobility barriers, don’t get stuck in the middle
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D
Industry
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Customers
Products
Technology
A
B
C
E
F
G
How do we know that a company belongs to certain industry?
Reciprocal demand elasticity
The reciprocal demand elasticity refers to the ratio of proportional change in the quantity of imports demanded to the proportional change in the price of exports relative to the price of imports.
Same opportunities and threats
D
Strategic groups
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Customers
Products
Technology
A
B
C
E
F
G
Example:
- Pharmaceutical industry
Possible strategic groups:
Medicines for children
Commercial medicines
Special medicines
Prescription medicines
Dimensions:
Positioning skills
R&D expertise
Marketing skills
Competitor analysis
Competitor environment – the last part of external environment analysis
The aims of competitor analysis:
Future objectives
Current strategy
Assumptions about the industry
Strengths and weaknesses
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Competitor analysis
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RESPONSE
- What will our competitors do in the future? – Where do we hold our advantage over our competitors? – How will this change our relationship with our competitors?
Future objectives
Current strategy
Assumptions
How do our goals compare with our competitor goals?
Where will emphasis be placed in the future?
What is the attitude toward risk?
How are we currently competing?
Does their strategy support changes in the competitive structure?
Do we assume the future will be volatile?
Are we operating under a status quo?
What assumptions do our competitors hold about the industry and themselves?
Capabilities
What are our strengths and weaknesses?
How do we rate compared to our competitors?
Competitor analysis
Competitor intelligence – the set of data and information
the firm gathers to better understand and better anticipate competitors’ objectives, strategies, assumptions, and capabilities
Complementors – the network of companies that sell complementary goods or services or are compatible with
the focal firm’s own product or service
Intel and Microsoft (Pentium processors and Windows), or Microsoft and McAfee (Microsoft Windows & McAfee anti-virus).
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Ethical considerations
Laws, regulations, and ethical guidelines when gathering competitor intelligence
Legal and ethical practices:
Obtaining publicly available information
Attending trade fairs
Any examples on unethical or illegal gathering of competitors’ data and information?
What is the difference between legal and ethical practices?
Can something be legal but unethical? Or vice versa?
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