The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

1. The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

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

3. External Environmental Analysis A continuous process which includes • 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

4. External Environmental Analysis Analysis of general environment Analysis of industry environment Analysis of competitor environment The External Environment The External Environment Strategic Intent Strategic Mission

5. Industry Environment • A set of factors that directly influences a company and its competitive actions and responses • Interaction among these factors determine an industry’s profit potential • Threat of new entrants • Power of suppliers • Power of buyers • Product substitutes • Intensity of rivalry

6. Analyzing Industry Environment • Opportunities and threats are competitive challenges arising for changes in industry conditions. • Analytic tools such as thefive forces model help managers formulate appropriate strategic responses.

7. Five Forces Model of Competition • Identify current and potential competitors and determine which firms serve them • Conduct competitive analysis • Recognize that suppliers and buyers can become competitors • Recognize that producers of potential substitutes may become competitors

8. Five Forces Model of Competition Five Forces of Competition Rivalry Among Competing Firms Threat of New Entrants Bargaining Power of Suppliers Threat of Substitute Products Bargaining Power of Buyers

9. Potential Competitors • New entrants into an industry threaten incumbent companies. • Entry barriers reduce the threat of new and additional competition.

10. 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

11. Rivalry Among Established Companies • The intensity of competitive rivalry in an industry arises from: • Industry’s competitive structure. • Demand (growth or decline) conditions in industry. • Height of industry exit barriers.

12. Consolidated One firm or one dominant firm. (monopoly) Fragmented Many firms. No dominant firm Few firms, Shared dominance (Oligopoly) Rivalry Among Established Companies • Industry Competitive Structure The Continuum of Industry Structures

13. Rivalry Among Established Companies (Continued) • Demand Conditions vs.

14. Rivalry Among Established Companies (Continued) • Height of Exit Barriers in the Industry

15. High Exit Barriers • Common exit barriers include: • 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 between one business and other parts of a company’s operation, such as shared facilities and access to financial markets) • emotional barriers (career concerns, loyalty to employees, etc.) • government and social restrictions

16. Bargaining Power of Suppliers • A supplier group is powerful when: • it is dominated by a few large companies • 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 • effectiveness of suppliers’ products has created high switching costs • suppliers are a credible threat to integrate forward into the buyers’ industry

17. Bargaining Power of Buyers • Buyers (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 easily switch to another product • the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry

18. Threat of Substitute Products • Product substitutes are strong threat when: • customers face few switching costs • substitute product’s price is lower • substitute product’s quality and performance capabilities are equal to or greater than those of the competing product

19. Substitute Products • The competitive threat of substitute products increases as they come closer to serving similar customer needs. Far Close

20. A Sixth Force: Complementors • Complementors: • Companies whose products are sold in tandem with another company’s products. • Increased supply of a complementary product collaterally increases demand for the primary product. • Example: • Faster CPU chips fuel salesof personal computers.

21. Strategic Groups Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry

22. Strategic Groups Within Industries • The concept of strategic groups • Within an industry, a competitor grouping using similar strategies that differ from other industry groups. • Implications of strategic groups • The closest industry competitors are those in the group. • The various industry groups are differentially and competitively advantaged and positioned. • Mobility barriers inhibit the movement of competitors from one strategic group to another.

23. High Prices Charged Low High Low R&D Spending Strategic Groups in the Pharmaceutical Industry

24. High Prices Charged Generic Group • Marion Labs • Carter Wallace • INC Pharmaceut’l Low High Low R&D Spending Strategic Groups in the Pharmaceutical Industry

25. High Proprietary Group • Merck • Pfizer • Eli Lilly Prices Charged Generic Group • Marion Labs • Carter Wallace • INC Pharmaceut’l Low High Low R&D Spending Strategic Groups in the Pharmaceutical Industry

26. Limitations of the Five Forces and Strategic Group Models • Both models are static and ignore innovation. • Their focus is on industry and group structures rather than individual companies. • Innovation creates change in industry structures, altering thecompetitive environment. • Industry structure cannot fully explain the performance differences between industry competitors.

27. Competitor Environment Competitor intelligenceis the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities • 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 itself and the industry, as shown by its assumptions • What the the competitor may be able to do, as shown by its capabilities

28. Future Objectives: Future objectives Competitor Analysis • How do our goals compare with our competitors’ goals? • Where will the emphasis be placed in the future? • What is the attitude toward risk?

29. Current Strategy: Future objectives Current strategy Competitor Analysis • How are we currently competing? • Does this strategy support changes in the competitive structure?

30. Assumptions: Future objectives Current strategy Assumptions Competitor Analysis • 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?

31. Capabilities: Future objectives Current strategy Assumptions Capabilities Competitor Analysis • What are our strengths and weaknesses? • How do we rate compared to our competitors?

32. Response Future objectives Current strategy Assumptions Capabilities Competitor Analysis Response: • What will our competitors do in the future? • Where do we hold an advantage over our competitors? • How will this change our relationship with our competitors?

33. Potential competitors Rivalry Supplier power Substitutes The Role of the General Environment Buyer power EconomicEnvironment

34. General Environment • Economic segment • Inflation rates • Interest rates • Trade deficits or surpluses • Budget deficits or surpluses • Personal savings rate • Business savings rates • Gross domestic product

35. Potential competitors Rivalry Supplier power Substitutes The Role of the General Environment Technological Environment Buyer power EconomicEnvironment

36. General Environment • Technological Segment • Product innovations • Applications of knowledge • Focus of private and government-supported R&D expenditures • New communication technologies

37. Potential competitors Rivalry Supplier power Substitutes The Role of the General Environment Technological Environment Buyer power EconomicEnvironment Social Environment

38. General Environment • Sociocultural segment • Women in the workplace • Workforce diversity • Attitudes about quality of worklife • Concerns about environment • Shifts in work and career preferences • Shifts in product and service preferences

39. Potential competitors Rivalry Supplier power Substitutes The Role of the General Environment Technological Environment Buyer power Demographic Environment EconomicEnvironment Social Environment

40. General Environment • Demographic Segment • Population size • Age structure • Geographic distribution • Ethnic mix • Income distribution

41. Potential competitors Rivalry Supplier power Substitutes The Role of the General Environment Political and Legal Environment Technological Environment Buyer power Demographic Environment EconomicEnvironment Social Environment

42. General Environment • Political/Legal Segment • Antitrust laws • Taxation laws • Deregulation philosophies • Labor training laws • Educational philosophies and policies

43. Potential competitors Rivalry Supplier power Substitutes The Role of the General Environment Political and Legal Environment Technological Environment Global Environment Buyer power Demographic Environment EconomicEnvironment Social Environment

44. General Environment • Global Segment • Important political events • Critical global markets • Newly industrialize countries • Different cultural and institutional attributes

45. Globalization and Industry Structure • Globalization of Markets

46. Globalization and Industry Structure • Globalization • Globally dispersed production lowers costs and increases quality. • Global markets are replacing national markets. • Trend implications • No isolated national markets • More competitors, more intense competition • More rapid innovation and shorter product life cycles