Understanding Business Strategy Concepts & Cases

Understanding Business StrategyConcepts & Cases Part 2: Analyzing Environments Chapter 3: Analyzing the External Environment

Analyzing the External Environment • Three parts of a firm’s external environment • The general environment • The industry environment • The competitor environment Analyzing the external environment provides information that helps in the selection of a strategy.

Analyzing the External Environment • Opportunities • Threats • Firms evaluate trends in their general environment, assess the effects of competitive forces in the industry in which they compete, and study competitors to identify the opportunities and threats they face.

Analyzing the External Environment • The general environment • Demographic factors • Economic factors • Political/legal factors • Sociocultural factors • Technological factors • Global factors • Physical trends

Analyzing the External Environment • Demographic trends are changes in population size, age structure, geographic distribution, ethnic mix, and income distribution. • Economic trends concern the direction of the economy in which a firm competes or may choose to compete. • Examples: Gross national product, interest and inflation rates, income growth or decline

Analyzing the External Environment • Political/legal trends pertain to changes in organizations and interest groups that compete for a voice in developing and implementing the body of laws and regulations that guide interactions among firms and nations. • Sociocultural trends deal with changes in a society’s attitudes and cultural values.

Analyzing the External Environment • Technological trends concern changes related to creating new knowledge and translating that knowledge into new products, processes, and materials. • Global trends concern changes in relevant emerging and developed country global markets, important international political events, and critical changes in cultural and institutional characteristics of global markets.

Analyzing the External Environment • Physical environment trends refer to the changes in the physical environment and business practices that are intended to sustain it • Firms commonly focus on the future when studying the general environment... within a particular context…an industry, which is a group of firms producing similar products.

Analyzing the Industry • Michael Porter and the Five Forces Model of Competition • Potential Entrants • Substitute Products • Bargaining Power of Suppliers • Bargaining Power of Buyers • Rivalry among Existing Firms Each force can reduce ability to earn profits.

Potential Entrants • New firms can take market share away from current competitors. • New firms bring additional production capacity. • New firms may force incumbents to learn new ways to compete. • Examples: Delta and American Airlines versus Southwest and JetBlue

Barriers to Entry • Economies of scale are the improvements in efficiency from incremental increases in the size of a firm’s operations. • A significant amount of financial capital is often needed for a firm to establish operations in an industry. • Switching costs are the one-time costs that customers incur when deciding to buy a product from a different supplier.

Barriers to Entry • Over time, customers may decide that an established firm’s product uniquely meets their needs. Such perceptions of uniqueness are defined as Differentiation. • Over time, established firms learn how to build and use effective distribution channels. • Entry can also be limited by government policy through licensing and permit requirements. Example: FCC.

Substitute Products • Goods or services that perform functions similar to an existing product • In general, product substitutes present a strong threat to an incumbent firm when the substitutes are more effective and sold at a lower price.

Bargaining Power of Suppliers • Suppliers tend to be powerful when • There are a few large suppliers and the buying firms’ industry is not concentrated. • Substitute products are not available to the buying firms. • The buying firms are not a significant customer for the suppliers. • The suppliers’ goods are essential to the buyers’ marketplace success. • The suppliers’ products have high switching costs for the buyers. • The suppliers pose a credible threat to integrate forward into the buyers’ industry.

Bargaining Power of Buyers • Buyers or customers tend to be powerful when • They buy a large portion of the selling firm’s total output. • The selling firm is dependent on the buyers for a significant portion of its sales revenue. • They can switch to another seller’s product with few switching costs. • The selling industry’s products are undifferentiated or similar to a commodity. • They present a credible threat to integrate backward into the sellers’ industry.

Rivalry Among Existing Firms • Competitive rivalry is the set of actions and reactions between competitors as they compete for an advantageous market position • Price • Quality • Innovation

Competitive Rivalry in an Industry • Degree of product differentiation among competitors. • Competitors can attract customers by lowering buyers’ switching costs. • In industries in which competing firms are of similar size and have similar competitive capabilities rivalries are intense. • Rivalry usually increases when markets are slow to grow or don’t grow.

Competitive Rivalry in an Industry • Competitive rivalry tends to be high when it is important for competitors to perform well in their chosen markets. • When costs are fixed or storage costs are high, companies will try to spread across a larger volume of output; reducing their inventories by cutting the price of the product.

Competitive Rivalry in an Industry • Barriers to exiting from an industry include the following: • Specialized assets (assets with values linked to a particular business or location) • Fixed costs of exit (such as labor agreements) • Strategic interrelationships (relationships of mutual dependence, such as those between one business and other parts of the company’s operations, including shared facilities and access to financial markets)

Competitive Rivalry in an Industry • Barriers to exiting from an industry include the following: • Emotional barriers (aversion to economically justified business decisions because of fear for one’s career, loyalty to employees, and so forth) • Government and social restrictions (more common outside the United States; often based on government concerns for job losses and regional economic effects)

Competitor Strategic Intent • Strategic intent is the firm’s motivation to leverage its resources and capabilities to reach its vision. • Strength of intent can be measured by examining superior competitor characteristics, like the competitor’s market dependence. • Example: Boeing

Current Competitor Strategy • Gathering data to understand a competitor’s current strategy is critical to conducting a competitor analysis. • Even if research is poor, appropriate analysis of the information is important. • Assessing whether a competitor represents an opportunity or a threat and evaluating the competitor’s strengths and weaknesses are important.

Current Competitor Strategy • Assessing a competitor’s strengths and weaknesses is the final component of a competitor analysis. • A firm will want to avoid a strong competitor, instead attacking a weak one.

Complements to Competitive Action • Complementors are the network of companies that sell goods or services that are complementary to another firm’s good or service. • Complementors are a part of understanding the nature of value creation in an industry. • Examples: digital cameras and computers

Understanding Business Strategy Concepts & Cases