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Week2LectureSlides.pptxBusiness Administration Capstone BUS499
The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis
Welcome to the Business Administration Capstone.
In this lesson we will discuss the external environment: opportunities, threats, industry competition, and competitor analysis.
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Objectives
Upon completion of this lesson, you will be able to:
Identify how the six segments of the general environment affects an industry and its firms
Identify the five forces of competition that impacts an industry
Analyze the external environment for opportunities and threats that impact the firm
When you complete this lesson you will be able to:
Identify how the six segments of the general environment affects an industry and its firms;
Identify the five forces of competition; and
Analyze the external environment for opportunities and threats that impact the firm.
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Supporting Topics
The General, Industry, and Competitive Environments
External Environment Analysis
Segments of the General Environment
Industry Environment Analysis
Interpreting Industry Analysis
Strategic Groups
Competitor Analysis
Ethical Considerations
In order to achieve this objective, the following supporting topics will be covered:
The general, industry, and competitive environments;
External environment analysis;
Segments of the general environment;
Industry environment analysis;
Interpreting industry analysis;
Strategic groups;
Competitor analysis; and
Ethical considerations.
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General, Industry, and Competitor Environments
Six Dimensions of Environmental Segments
An integrated understanding of the external and internal environments is essential for firms to understand the present and predict the future. As shown on the figure on the slide, a firm’s external environment is divided into three major categories: the general, industry, and competitor environments.
The general environment is composed of dimensions in the broader society that influence an industry and the firms within it. We group these dimensions into six environmental segments:
Demographic;
Economic;
Political/legal;
Sociocultural;
Technological, and
Global.
The industry environment is the set of factors that directly influences a firm and its competitive actions and competitive responses:
The threat of new entrants;
The power of suppliers;
The power of buyers;
The threat of product substitutes; and
The intensity of rivalry among competitors.
How companies gather and interpret information about their competitors is called competitor analysis. Understanding the firm’s competitor environment complements the insights provided by studying the general and industry environments.
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External Environmental Analysis
Opportunities
Threats
Scanning
Monitoring
Forecasting
Assessing
Most firms face external environments that are highly turbulent, complex, and global conditions that make interpreting those environments increasingly difficult. To cope with often ambiguous and incomplete environmental data and to increase understanding of the general environment, firms engage in external environmental analysis. The continuous process included four activities:
Scanning;
Monitoring;
Forecasting; and
Assessing.
An important objective of studying the general environment is identifying opportunities and threats. An opportunity is a condition in the general environment that, if exploited, helps a company achieve strategic competitiveness. A threat is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness.
Scanning entails the study of all segments in the general environment. Through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already underway. Scanning often reveals ambiguous, incomplete, or unconnected data and information.
When monitoring, analysts observe environmental changes to see if an important trend is emerging from among those spotted by scanning. Critical to successful monitoring is the firm’s ability to detect meaning in different environmental events and trends.
Scanning and monitoring are concerned with events and trends in the general environment at a point in time. When forecasting, analysts develop feasible projections of what might happen, and how quickly, as a result of the changes and trends detected through scanning and monitoring.
The objective of assessing is to determine the timing and significance of the effects of environmental changes and trends on the strategic management of the firm. Through scanning, monitoring, and forecasting, analysts are able to understand the general environment. Going a step further, the intent of assessment is to specify the implications of that understanding for the organization.
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Check Your Understanding
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Segments of the General Environment
Demographic Segment
Economic Environment
Political/Legal Segment
Sociocultural Segment
Technological Segment
Global Segment
The general environment is composed of segments that are external to the firm. Although the degree of impact varies, these environmental segments affect each industry and its firms. The challenge to the firm is to scan, monitor, forecast, and assess those elements in each segment that are of the greatest importance. These efforts should result in recognition of environmental changes, trends, opportunities, and threats. Opportunities are then matched with a firm’s core competencies.
The demographic segment is concerned with a population size, age structure, geographic distribution, ethnic mix, and income distribution. Often demographic segments are analyzed on a global basis because of their potential effects across countries’ borders and because many firms compete in global markets.
The health of a nation’s economy affects individual firms and industries. For this reason, companies study the economic environment to identify changes, trends, and their strategic implications. The economic environment refers to the nature and direction of the economy in which a firm competes or may compete. Because nations are interconnected as a result of the global economy, firms must scan, monitor, forecast, and assess the health of economies outside their host nation.
The political/legal segment is the 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. Essentially, this segment represents how organizations try to influence government and how governments influence them. As the politics of regulations change, this segment influences the nature of competition through changing the rules.
The sociocultural segment is concerned with a society’s attitudes and cultural values. Because attitudes and values form the cornerstone of a society, they often drive demographic, economic, political/legal, and technological conditions and changes.
Pervasive and diversified in scope, technological changes affect many parts of societies. These effects occur primarily through new products, processes, and materials. The technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, and materials.
The global segment includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets. Globalization of business markets creates both opportunities and challenges for firms.
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Segments of the General Environment, continued
Physical Environment Segment
Deals with potential and actual changes in the physical environment
Business Practices
Environmental sustainability
Energy Consumption
Reduction of Environmental Footprints
The physical environment segment deals with potential and actual changes in the physical environment. This also includes business practices that are put in place to positively respond to and deal with these various changes. In today’s world, firms are recognizing that ecological, social, and economic systems have a heavy influence on what occurs in the physical environment segment. There are areas of the physical environment that firms consider when trying to identify trends within in this segment. Some people argue that global warming is a trend that firms and nations should look into to predict outcomes on society and business ventures. This trend is called green alpha, and it has a goal of trying to increase environmental sustainability.
Another part of the physical environment is energy consumption. An example of this takes place in Canada. The electricity sector right now in Canada is close to seventy five percent clean, and they have the overall goal of having a ninety percent clean electricity sector. Most of this clean power generation comes from hydroelectric produced electricity. Since many companies are looking to increase awareness about sustaining the quality of the physical environment, many of these companies are developing environmentally friendly policies.
We discussed the fact that firms are making efforts to reduce their environmental footprints. Firms that focus on the future can help identify opportunities and possible threats. To achieve this goal, a highly capable management team with a sufficient amount of experience, knowledge, and sensitivity is required to effectively analyze this segment of the environment. It is also critical that a firm chooses its strategic actions wisely, as it can have an effect on the industry environment and its competitors.
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Industry Environment Analysis
Industry
Group of firms producing products that are close substitutes
Five Forces of Competition
An industry is a group of firms producing products that are close substitutes. In the course of competition, these firms influence one another. Typically, industries include a rich mixture of competitive strategies that companies use in pursuing above-average returns. In part, these strategies are chosen because of the influence of an industry’s characteristics. Compared with the general environment, the industry environment often has a more direct effect on the firm’s strategic competitiveness and above-average returns. The intensity of industry competition and an industry’s profit potential are functions of five forces of competition:
The threats posed by new entrants;
The power of suppliers;
The power of buyers;
Product substitutes; and
The intensity of rivalry among competitors.
The five forces model of competition expands the arena for competitive analysis.
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Interpreting Industry Analyses
Effective Industry Analyses
End result of careful studying and interpretation of data
Multiple sources
Unattractive Industry Characteristics
Attractive Industry Characteristics
Effective industry analyses are the end result of careful studying and interpretation of data from multiple sources. There is a lot of industry-specific data available to individual countries that is able to be analyzed. Due to globalization, international markets and rivalries must beincluded in the firm’s analyses. It has been shown that research in some industries shows international variables that serve as determinants of strategic competitiveness. Furthermore, because of the development of global markets, a country’s borders no longer restrict industry structures. We see that movement into international markets enhances the chances of established firms being successfulwith new business ventures.
Analyzing thefive forces in the industry allows firms to determine the industry’s attractiveness based on the potential to earn adequate or superior returns. The stronger the competitive forces are, the lower the profit potential for an industry’s firms. Anunattractive industrymay have the following characteristics:
Low entry barriers;
Suppliers and buyers with strong bargaining positions;
Strong competitive threats from product substitutes; and
Intense rivalry among competitors.
Having these industry characteristics makes it difficult for firms to achieve strategic competitiveness and earn above- average returns.
Looking at an attractive industry, the following characteristicsare exhibited:
High entry barriers;
Suppliers and buyers with little bargaining power; and
Few competitive threats from product substitutes; and Relatively moderate rivalry.
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Strategic Groups
What is a Strategic Group
A set firms that emphasize similar strategic dimensions
Use similar strategies
Strategic Dimensions in a Strategic Group
Limitations of Forming Strategic Groups
Strategic Groups Implications
A set of firms that emphasize similar strategic dimensions and use a similar strategy is called a strategic group. We see that the competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group. As a result of this, intrastrategic group competition is deemed more intense thaninterstrategic group competition.
The strategies performed by performance leaders within groups are very similar to those of other firms in the group. It is important to note that these groups still maintain strategic distinctiveness to gain and sustain a competitive advantage. Some examples of strategic dimensions in a strategic group include the following:
The extent of technological leadership;
Product quality;
Pricing policies;
Distribution channels; and
Customer service.
Thus, membership in a particular strategic group defines the essential characteristics of the firm’s strategy.
The notion of strategic groups can be useful for analyzing an industry’s competitive structure. These analyses can be helpful in diagnosing competition, positioning, and the profitability of firms within an industry. Things that may limit the formation of strategic groups include the following:
High mobility barriers;
High rivalry; and
Low resources.
Research suggests however that after strategic groups are formed, their membership remains relatively stable over time.
To use strategic groups to understand an industry’s competitive structure, the firm must plot the companies’ competitive actions and competitive responses. They must factor in the following strategic dimensions:
Pricing decisions;
Product quality; and
Distribution channels.
This type of analysis tellsfirms how other companies are competing similarly in terms of strategic dimensions.
Strategic groups have severalimplications, which include the following:
First, since firms within a group offer similar products to the same customers, the competitive rivalry among them can be intense. The more intense the rivalry, the greater the threat to each firm’s profitability;
Secondly, the strengths of the five industry forces differ across strategic groups.
Lastly, the closer the strategic groups are in terms of their strategies, the greater is the likelihood of rivalry between the groups.
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Threat of New Entrants
Barriers to Entry
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Expected Retaliation
Identifying new entrants is important because they can threaten the market share of existing competitors. One reason new entrants pose such a threat is that they bring additional production capacity. Unless demand for a good or service is increasing, additional capacity holds consumers’ costs down, resulting in less revenue and lower returns for competing firms. Often, new entrants have a keen interest in gaining a large market share. As a result, new competitors may force existing firms to be more efficient and to learn how to compete on new dimensions.
The likelihood that firms will enter an industry is a function of two factors: barriers to entry and the retaliation expected from current industry participants.
Existing competitors try to develop barriers to entry. Several kinds of potentially significant entry barriers may discourage competitors:
Economies of scale;
Product Differentiation;
Capital requirements;
Switching costs;
Access to distribution channels;
Cost disadvantages independent of scale; and
Government policy.
Firms seeking to enter an industry also anticipate the reactions of firms in the industry. An expectation of swift and vigorous competitive response reduces the likelihood of entry.
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Bargaining Power of Suppliers
Supplier Group Powerful
Dominated by a few large companies
Substitutes not available
Industry firms not a significant customer
Suppliers’ goods are critical to success
High switching costs
Credible threat to integrate forward
Increasing prices and reducing the quality of their products are potential means used by suppliers to exert power over firms competing within an industry. If a firm is unable to recover cost increases by its suppliers through its own pricing structure, its profitability is reduced by its suppliers’ actions.
A supplier group is powerful when:
It is dominated by a few large companies and is more concentrated that the industry to which it sells;
Satisfactory substitute products are not available to industry firms;
Industry firms are not a significant customer for the supplier group;
Suppliers’ goods are critical to buyers’ marketplace success;
The effectiveness of suppliers’ products has created high switching costs for industry firms; and
It posed a credible threat to integrate forward into the buyers’ industry.
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Bargaining Power of Buyers
Customers Powerful
Large portion of industry’s total output
Sales account for significant portion
Switch to another product
Products are standardized
Firms seek to maximize the return on their invested capital. Alternatively, buyers want to buy products at the lowest possible price, the point at which the industry earns the lowest acceptable rate of return on its invested capital. To reduce their costs, buyers bargain for higher quality, greater levels of service, and lower prices. These outcomes are achieved by encouraging competitive battles among the industry’s firms.
Customers are powerful when:
They purchase a large portion of an industry’s total output;
The sales of the product being purchased account for a significant portion of the seller’s annual revenues;
They could switch to another product at little, if any, cost; and
The industry’s products are undifferentiated or standardized, and the buyers pose a credible threat if they were to integrate backward into the sellers’ industry.
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Threat of Substitute Products
Perform similar or the same functions as a product that the industry produces
Strong Threat
Prices may be lower
Performance capabilities are equal or greater
Substitute products are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces. Product substitutes present a strong threat to a firm when customers face few, if any, switching costs and when the substitute product’s price is lower or its quality and performance capabilities are equal to or greater than those of the competing product.
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Intensity of Rivalry Among Competitors
Factors to Affect Intensity
Numerous or equally balanced competitors
Slow industry growth
High fixed costs or high storage costs
Lack of differentiation or low switching costs
High strategic stakes
High exit barriers
Because an industry’s firms are mutually dependent, actions taken by one company usually invite competitive responses. In may industries, firms actively compete against one another. Competitive rivalry intensifies when a firm is challenged by a competitor’s actions or when a company recognizes an opportunity to improve its market position.
The most prominent factors that experience shows to affect the intensity of firm’s rivalries are as follows:
Numerous or equally balanced competitors;
Slow industry growth;
High fixed costs or high storage costs;
Lack of differentiation or low switching costs;
High strategic stakes; and
High exit barriers.
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Competitor Analysis
Future Objectives
Current Strategy
Assumptions
Strengths and Weaknesses
The competitor environment is the final part of the external environment requiring study. Competitor analysis focuses on each company against which a firm directly competes. Intense rivalry creates a strong need to understand competitors. In a competitor analysis, the firm seeks to understand the following:
What drives the competitor, as shown by its future objectives;
What the competitor is doing and can do, as revealed by its current strategy;
What the competitor believes about the industry, as shown by its assumptions; and
What the competitor’s capabilities are, as shown by its strengths and weaknesses.
The results help a firm to understand, interpret, and predict its competitors’ actions and responses. Useful data and information combine to form competitor intelligence.
In competitor analysis, the firm gathers intelligence not only about its competitors, but also regarding public policies in countries around the world. In addition, pay close attention to the complementors of its product and strategy.
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Ethical Considerations
Following Laws and Regulations
The line between legal and ethical practices can be difficult to determine
Practices Considered Legal and Ethical
Respect the principles of common morality and the right of competitors
Appropriate Guidelines
Firms must follow relevant laws and regulations as well as carefully articulated ethical guidelines when gathering competitor intelligence.
Practices considered both legal and ethical include:
Obtaining publicly available information; and
Attending trade fairs and shows to obtain competitors’ brochures, view their exhibits, and listen to discussions about their products.
Some competitor intelligence practice may be legal, but firm must decide whether they are also ethical, given the image it desires as a corporate citizen. The line between legal and ethical practices can be difficult to determine.
An appropriate guideline for competitor intelligence practices is to respect the principles of common morality and the right of competitors not to reveal certain information about their products, operations, and strategic intentions.
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Summary
The General, Industry, and Competitive Environments
External Environment Analysis
Segments of the General Environment
Industry Environment Analysis
Interpreting Industry Analysis
Strategic Groups
Competitor Analysis
Ethical Considerations
We have reached the end of this lesson. Let’s take a look at what we have covered.
First, we discussed external environment. Most firms face external environments that are highly turbulent and complex, and global conditions that make interpreting those environments increasingly difficult. To cope with often ambiguous and incomplete environmental data and to increase understanding of the general environment, firms engage in external environmental analysis. The continuous process included four activities:
Scanning;
Monitoring;
Forecasting; and
Assessing.
Next, we went over general environment. The general environment is composed of segments that are external to the firm. Although the degree of impact varies, these environmental segments affect each industry and its firms. The challenge to the firm is to scan, monitor, forecast, and assess those elements in each segment that are of the greatest importance. These efforts should result in recognition of environmental changes, trends, opportunities, and threats. Opportunities are then matched with a firm’s core competencies.
We then talked about industry environment. An industry is a group of firms producing products that are close substitutes. In the course of competition, these firms influence one another. Typically, industries include a rich mixture of competitive strategies that companies use in pursuing above-average returns.
Later we discussed interpreting industry analyses. We saw that effective industry analyses are the end result of careful studying and interpretation of data from multiple sources. We examined the effect of globalization and how a country’s borders no longer restrict industry structures. We also gained a better understanding of the five forces in the industry that allow firms to determine the industry’s attractiveness. We also looked at the characteristics of unattractive and attractive industries.
Next we talked about strategic groups. We learned that a set of firms that emphasize similar strategic dimensions and use a similar strategy is called a strategic group. We then focused on several examples of strategic dimensions in a strategic group. As our discussion continued, we looked at various factors that can hinder the formation of strategic groups. We also gained an understanding of the industry’s competitive structures and strategic group implications.
We also discussedcompetitor environment. Competitor analysis focuses on each company against which a firm directly competes. Intense rivalry creates a strong need to understand competitors.
We concluded the lesson with a discussion on legal and ethical considerations when gathering competitor intelligence.
This completes this lesson.
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