Chapter 2

1. Chapter 2 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

2. Strategic Competitiveness Sustainable Competitive Advantage Above Average Returns Core Competence Stakeholders Key Words of Chapter 1

3. Importance of understanding what is happening outside of the firm How that can affect the firm’s ability to achieve strategic competitiveness. Importance of firm’s management cope with these changes of environment What we will learn in Chapter2

4. General Environment Industry Environment Opportunity Threat Industry and Strategic Group Key words of chapter 2

5. Have a passion for excellence and hate bureaucracy. Are open to ideas from anywhere and committed to Work-Out. Live quality and drive cost and speed for competitive advantage. Have the self-confidence to involve everyone and behave in a boundaryless fashion. Create a clear, simple,reality-based vision and communicate it to all constituencies. Have enormous energy and the ability to energize others. Stretch, set aggressive goals and reward progress, yet understand accountability and commitment. See change as opportunity, not threat. Have global brains and build diverse and global team. GE Values

6. GE Capital Edison Life-1998.2 Acquisition of former Toho Life Acquisition of Lake-1998.7 Purchase of 80 % of Ryoshin Leasing 1998.8 GE Capital Leasing-1999 Acquisition of Nihon Leasing GE’s expansion in Japanese Market

7. Chapter 2 External Environment Strategic Intent Inputs Strategic Strategic Mission Chapter 3 Internal Environment Strategy Formulation Strategy Implementation Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11 Business-Level Competitive Corporate-Level Corporate Structure Strategy Dynamics Strategy Governance & Control Strategic Actions Chapter 8 Chapter 7 Chapter 9 Chapter 12 Chapter 13 Entrepreneurship & Innovation International Acquisitions & Cooperative Strategic Strategy Restructuring Strategies Leadership Strategic Strategic Outcomes Competitiveness Above Average Feedback Returns The Strategic Management Process

8. Components of the General Environment Economic Demographic Sociocultural Industry Environment Competitive Environment Political/Legal Global Technological

9. Components of the General Environment

10. Scanning Identifying early signals of environmental changes and trends Monitoring Detecting meaning through ongoing observations of environmental changes and trends Forecasting Developing projections of anticipated outcomes based on monitored changes and trends Assessing Determining the timing and importance of environmental changes and trends for firms' strategies and their management External Environmental Analysis The external environmental analysis process should be conducted on a continuous basis. This process includes four activities:

11. Porter’s Five Forces Model of Competition Rivalry Among Competing Firms in Industry Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products

12. Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants

13. Economies of Scale Product Differentiation Barriers to Entry Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy Threat of New Entrants Expected Retaliation

14. Porter’s Five Forces Model of Competition Bargaining Power of Suppliers Threat of New Entrants Threat of New Entrants

15. Supplier industry is dominated by a few firms Suppliers exert power in the industry by: Suppliers’ products have few substitutes * Threatening to raise prices or to reduce quality Buyer is not an important customer to supplier Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases Suppliers’ product is an important input to buyers’ product Suppliers’ products are differentiated Suppliers’ products have high switching costs Supplier poses credible threat of forward integration Bargaining Power of Suppliers Suppliers are likely to be powerful if:

16. Porter’s Five Forces Model of Competition Bargaining Power of Buyers Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers

17. Buyers are concentrated or purchases are large relative to seller’s sales Buyers compete with the supplying industry by: Purchase accounts for a significant fraction of supplier’s sales Products are undifferentiated * Bargaining down prices * Forcing higher quality Buyers face few switching costs * Playing firms off of Buyers’ industry earns low profits each other Buyer presents a credible threat of backward integration Product unimportant to quality Buyer has full information Bargaining Power of Buyers Buyer groups are likely to be powerful if:

18. Porter’s Five Forces Model of Competition Threat of Substitute Products Threat of New Entrants Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers

19. Products with similar functionlimit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery Threat of Substitute Products Keys to evaluate substitute products:

20. Intense rivalry often plays out in the following ways: Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or service Making new product introductions Occurs when a firm is pressured or sees an opportunity Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors Rivalry Among Existing Competitors

21. Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes High exit barriers Rivalry Among Existing Competitors Cutthroatcompetition is more likely to occur when:

22. Specialized assets Fixed cost of exit (e.g., labor agreements) Strategic interrelationships Emotional barriers Government and social restrictions Rivalry Among Existing Competitors High exit barriersare economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.

23. Effects of Entry Barriers and Exit Barriers on Industry Profits Exit Barriers Low High Low Entry Barriers High

24. Effects of Entry Barriers and Exit Barriers on Industry Profits Exit Barriers Low High Low, Stable Returns Low Entry Barriers High

25. Effects of Entry Barriers and Exit Barriers on Industry Profits Exit Barriers Low High Low, Stable Returns Low Entry Barriers High, Stable Returns High

26. Effects of Entry Barriers and Exit Barriers on Industry Profits Exit Barriers Low High Low, Stable Returns Low, Risky Returns Low Entry Barriers High, Stable Returns High

27. Effects of Entry Barriers and Exit Barriers on Industry Profits Exit Barriers Low High Low, Stable Returns Low, Risky Returns Low Entry Barriers High, Stable Returns High, Risky Returns High

28. Boundary of Industry blurred Technology advance New competitors from other indutry Bookstore from internet company Problems of Industry Analysis

29. A group of firms in an industry following the same or similar strategy Have a proper barriers of entry Automobile Mercedes., BMW, Jaguar vs. Toyota, Ford Home Electronics Funai , Aiwa, Sanyo vs. Sony, Panasonic Strategic Group

30. Industry Environment Competitive Environment Competitor Analysis The follow-up to Industry Analysis is effective analysis of a firm’s Competitors

31. Assumptions What assumptions do our competitors hold about the future of industry and themselves? Response Current Strategy What will our competitors do in the future? Does our current strategy support changes in the competitive environment? Where do we have a competitive advantage? Future Objectives How will this change our relationship with our competition? How do our goals compare to our competitors’ goals? Capabilities How do our capabilities compare to our competitors? Competitor Analysis

32. Competitor Analysis Future Objectives What Drives the competitor? How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk?

33. Competitor Analysis Future Objectives What is the competitor doing? How do our goals compare to our competitors’ goals? What can the competitor do? Current Strategy Where will emphasis be placed in the future? How are we currently competing? What is the attitude toward risk? Does this strategy support changes in the competitive structure?

34. Future Objectives How do our goals compare to our competitors’ goals? Current Strategy Where will emphasis be placed in the future? How are we currently competing? What is the attitude toward risk? Does this strategy support changes in the competition structure? Competitor Analysis What does the competitor believe about itself and the industry? Assumptions Do we assume the future will be volatile? What assumptions do our competitors hold about the industry and themselves? Are we assuming stable competitive conditions?

35. Future Objectives How do our goals compare to our competitors’ goals? Current Strategy Where will emphasis be placed in the future? How are we currently competing? What is the attitude toward risk? Assumptions Does this strategy support changes in the competition structure? Do we assume the future will be volatile? What assumptions do our competitors hold about the industry and themselves? Are we operating under a status quo? Competitor Analysis What are the competitor’s capabilities? Capabilities What are my competitors’ strengths and weaknesses? How do our capabilities compare to our competitors?

36. Future Objectives How do our goals compare to our competitors’ goals? Current Strategy Where will emphasis be placed in the future? How are we currently competing? What is the attitude toward risk? Assumptions Does this strategy support changes in the competition structure? Do we assume the future will be volatile? What assumptions do our competitors hold about the industry and themselves? Capabilities What are my competitors’ strengths and weaknesses? Are we operating under a status quo? How do our capabilities compare to our competitors? Competitor Analysis Response What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition?

37. How Nintendo Reshaped the Video Game Landscapeafter their sales declined in 1985 • Customers • Kid’s, Parents • Toys”R”Us, WalMart,others • Control supply of game cartridges • Complementors • Acclaim, Electronic Arts and others • “Sideways-integrate” into software • Business • Limit number of titles per year per license • To keep developers symmetric • Competitors • Atari, Commodore and others • TV, books, sports • Develop cheap hardware and hit games • to start virtuous curve • Move down experience curve • Bring in outside game developers • and require exclusively • Suppliers • Ricoh, Sharp and others(microchips) • Marvel, Disney and others(game characters) • Use trailing-edge technology • Develop the Mario characters internally