Hitt, Ireland, Hoskission, Rowe & Sheppard

1. 0 Chapter Three: The External Environment Hitt, Ireland, Hoskission, Rowe & Sheppard Strategic Management N o t e s Competitiveness & Globalization

2. The Strategic Management Process Strategic Objectives & Inputs Ch. 1: Strat. Mgmt. & Com-petitiveness Chapter 3: The External Environment Strategic Competitiveness Strategic Mission & Strategic Intent Chapter 4: The Internal Environment Ch. 2: Strat. Mgmt . & Performance Strategy Implementation Chapter 13: Strategic Leadership Chapter 14: Org. Renewal & Innovation Strategy Formulation Ch. 12: Org. Structure & Controls Chapter 6: Competitive Dynamics Chapter 5: Bus.-Level Strategy Chapter 11: Corporate Governance Chapter 7: Corp.-Level Strategy Chapter 8: Acquisition & Restructuring Chapter 9: International Strategy Chapter 10: Cooperative Strategy Chapter 3: The External Environment Strategic Actions

3. 0 The External Environment Knowledge Objectives • Discuss the four activities of the external environmental analysis process. • Describe the general environment’s six segments. • Identify the five competitive forces and how they determine an industry’s profit potential. • Define strategic groups & their influence on the firm. • Describe what firms need to know about competitors & different methods to collect intelligence on them.

4. Environmental Analysis Process  Scanning Identifying early signals of environmental changes and trends.  Monitoring Detect meaning by ongoing observations of environmental changes and trends.  Forecasting Develop projections of anticipated out-comes based on monitored trends.  Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management. External environmental analysis process should be conducted on a continuous basis. This process includes four activities: http://www.popularmechanics.com/cars/jay-leno/technology/4320759 http://www.liveleak.com/view?i=0b5_1310330270 Enviro. Analysis Process

5. Economic Demographic Political/Legal Global Technological The External Environment Model Environment Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry General General Sociocultural Competitor Environment Environment Environment General External Enviro. Model

6. General Environment Elements Economic • Savings rates • Interest rates • G.D.P. • Trade deficits / • surpluses • Budget deficits • or surpluses Demographic Sociocultural • Population size • Age structure • Ethnic Mix • Geog. Distribution • Income Distribution • Immigration • Enviro. Concerns • Workforce diversity • Work life quality views • Shifts in product / • service preferences • 2 career families Gen. Enviro. Elements Gen. Enviro. Elements

7. General Environment Elements • Views on • Govt. involvement • & De-/ Regulation • Competition Laws • Education policy • Taxation laws • Big political events • Different cultural & • institutional attributes • Critical global markets • Newly industrialized • countries • Focus of R&D • expenditures • Product innovations • Knowledge Resource • Process Innovations • New communication • technologies Political/Legal Global Technological Gen. Enviro. Elements

8. Economic Demographic Political/Legal Global Technological General Environment Elements Environment General General Sociocultural Environment Environment General Gen. Enviro. Elements Gosh Darn P E S T Global Demo. Political Econ. Socio. Tech.

9. Industry & Competitor Environment Analyzing the Competitor Environment involves predicting the dynamics of competitor actions, responses & intentions. The Industry Environment is the set of factors that directly influences a firm, its competitive actions & responses. Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Environment Ind. & Compe-titorEnviro. Ind. & Compe-titorEnviro.

10. I I O O The I/O Model of Superior Returns The Industrial Organization Model suggests that above-average returns for any firm are largely determined by characteristics outside the firm. The I/O model largely focuses on industry attractiveness or structure of the external environment rather than internal characteristics of the firm. The Ind. / Org. Model

11. I/O Model of Superior Returns Action required: External Environment General, Industry & Competitive Environment. Study the external environment, mainly the industry environment. An Attractive Industry Locate an industry with high potential for above-average returns. Industry structure implies above-average returns are possible. Strategy Formulation Select strategy linked to above-average in a selected industry. I.D. a strategy called for by the industry to earn above average returns. Assets & Skills Develop / acquire assets & skills needed to implement the strategy. Assets & skills required to implement a chosen strategy. Strategy Implementation Use the firm’s strengths (its assets or capabilities) to implement the strategy. Select actions linked to effective implementation of the strategy. Superior Returns Select a strategy linked to above-average in a particular industry Maintain selected strategy in order to out-perform industry rivals. The Ind. / Org. Model

12. Threat of Entry Threats from Buyers Threats from Suppliers Competitive Threats Threat of Substitutes Porter’s 5 Competitive Forces Porter’s 5 Forces

13. Porter’s 5 Competitive Forces * Economies of Scale. * Product Differentiation. * Capital Requirements. * Switching Costs. Rivalry Among Competing Firms Threat of New Entrants * Access to Distribution Channels. Five Forces of Competition Cost Disadvantages Independent of Scale. * Bargaining Power of Buyers Bargaining Power of Suppliers * Government Policy. Threat of Substitute Products * Expected Retaliation. Threat of New Entrants Porter’s 5 Forces

14. Porter’s 5 Competitive Forces Suppliers exert power in the industry by threatening to raise prices or to reduce quality. Supplier industry is dominated by a few firms. * * Suppliers’ goods have few substitutes. Buyer is not an important customer to supplier. * Rivalry Among Competing Firms Threat of New Entrants Suppliers’ product is an important input to buyers’ product. * Five Forces of Competition * Suppliers’ products are differentiated. Bargaining Power of Buyers Bargaining Power of Suppliers * Suppliers’ products have high switching costs. Threat of Substitute Products Supplier poses a credible threat of forward integration. * ( ) The reverse also applies! Bargaining Power of Suppliers Suppliers are powerful if: Powerful suppliers can squeeze industry profits if firms are unable to recover cost increases. Porter’s 5 Forces

15. Porter’s 5 Competitive Forces * Buyers are concentrated or purchases are large relative to seller’s sales. * Purchase accounts for a significant fraction of supplier’s sales. Rivalry Among Competing Firms Threat of New Entrants * Products are undifferentiated. * Buyers face few switching costs Five Forces of Competition Buyer presents a credible threat of backward integration. * Bargaining Power of Buyers * Buyers’ industry earns low profits. Threat of Substitute Products * Product unimportant to quality. ( ) The reverse also applies! * Buyer has full information. Bargaining Power of Buyers Buyers are powerful if: Bargaining Power of Suppliers Buyers compete with supplying industry by: Bargaining  Prices. Forcing  quality. Playing firms off of each other. Porter’s 5 Forces

16. Porter’s 5 Competitive Forces Rivalry Among Competing Firms Threat of New Entrants For Example: E-mailed attachments in place of faxes or overnight delivery Five Forces of Competition Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products • ! Substitutes are not direct competitors Threat of Substitute Products Products with similar function limit the prices firms can charge. The key is if the products has an improving price / performance relative to present products. Porter’s 5 Forces

17. Porter’s 5 Competitive Forces * Jockeying for strategic position; * Using price competition; * Staging advertising battles; Rivalry Among Competing Firms * Increasing consumer warranties or service; Threat of New Entrants Making new product introductions. * Five Forces of Competition Price competition often leaves entire industry worse off; * Threat of Substitute Products * Advertising battles may increase total industry demand, but may be costly to smaller competitors. Rivalry Among Competing Firms Reduced rivalry means greater profit. Bargaining Power of Suppliers Bargaining Power of Buyers Intense rivalry often plays out as: Occurswhenafirmispressuredorseesanopportunity: Porter’s 5 Forces

18. Porter’s 5 Competitive Forces Slow growth industry; * High fixed costs; Rivalry Among Competing Firms * Threat of New Entrants High storage costs; * Lack of differentiation or switching costs; * Five Forces of Competition Capacity added in large increments; * Diverse competitors; * High strategic stakes; * Threat of Substitute Products High exit barriers. * Rivalry Among Competing Firms Cutthroatcompetitionis more likely when: Bargaining Power of Suppliers Bargaining Power of Buyers Numerous or equally balanced competitors; * Sales Demand Curve Plant Capacity Overcapacity Over-demand 0 Time Porter’s 5 Forces

19. Porter’s 5 Competitive Forces Rivalry Among Competing Firms Threat of New Entrants Specialized assets; * * Fixed cost of exit (e.g., labour agreements); Five Forces of Competition Strategic interrelationships; * * Emotional barriers; Threat of Substitute Products * Government and social restrictions. Rivalry Among Competing Firms High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable: Bargaining Power of Suppliers Bargaining Power of Buyers Porter’s 5 Forces

20. Strategic Groups A set of firms emphasizing similar strategic dimensions using a similar strategy • The more intense the rivalry of competitors within a group the greater the threat to each firms profitability. • The strengths of the 5 competitive forces differ across strategic groups. Thus firms within various strategic groups have different pricing policies. • The closer groups are in terms of their strategies & dimensions emphasized, the greater the chance competitive rivalry between groups. Strat. Groups & Complements

21. Complementary Groups A set of products that complement each other or may be necessarily be grouped to get optimal use of the product. • These can be high tech ecologies (apps that work across your laptop, phone, tablet…) or low tech brand extensions (axe body spray, shampoo, soap). • May be tightly linked (operating systems & computers) or loosely linked (e.g. optional discretionary apps). • Fits well with the outsourcing and not needing to perform all things for all customers. • Fits with business model notion that value & capture can be separated to better customize products. B O N U S Strat. Groups & Complements

22. Future Objectives: Future objectives Current strategy Competitor Analysis Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, & capabilities. • How do our goals compare with our competitors’ goals? • Where will the emphasis be placed in the future? • What’s the attitude toward risk? Current Strategy: • Howarewecurrentlycompeting? • Does the strategy support changes in the competitive structure? Competitor Analysis

23. Future objectives Current strategy Assumptions Capabilities Competitor Analysis Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, & capabilities. Assumptions: • Do we assume a volatile future? • Do we operate under a status quo? • What assumptions do competitors hold about industry & themselves? Capabilities: • What are our strengths and weaknesses? • How do we rate compared to our competitors? Competitor Analysis

24. Future objectives Current strategy Response Assumptions Capabilities Competitor Analysis Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, & capabilities. Response: • What will our competitors do in the future? • Where do we hold advantages over our competitors? • How will this change our relations with competitors? Competitor Analysis

25. The Strategic Management Process Strategic Objectives & Inputs Ch. 1: Strat. Mgmt. & Com-petitiveness Chapter 3: The External Environment Strategic Competitiveness Strategic Mission & Strategic Intent Chapter 4: The Internal Environment Ch. 2: Strat. Mgmt . & Performance Strategy Implementation Chapter 13: Strategic Leadership Chapter 14: Org. Renewal & Innovation Strategy Formulation Ch. 12: Org. Structure & Controls Chapter 6: Competitive Dynamics Chapter 5: Bus.-Level Strategy Chapter 11: Corporate Governance Chapter 7: Corp.-Level Strategy Chapter 8: Acquisition & Restructuring Chapter 9: International Strategy Chapter 10: Cooperative Strategy Chapter 3: The External Environment Strategic Actions