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

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The External Environment Opportunities, Threats,
Industry Competition, and Competitor Analysis
Chapter 3
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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
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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

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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
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Industry Environment

• A set of factors that directly influences a
  company and its competitive actions and responses
• Interaction among these factors determine an
  industrys profit potential

• Threat of new entrants
• Power of suppliers
• Power of buyers
• Product substitutes
• Intensity of rivalry

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Analyzing Industry Environment

• Opportunities and threats are competitive
  challenges arising for changes in industry
  conditions.
• Analytic tools such as the five forces model
  help managers formulate appropriate strategic
  responses.

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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

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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
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Potential Competitors

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

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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

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Rivalry Among Established Companies

• The intensity of competitive rivalry in an
  industry arises from
• Industrys competitive structure.
• Demand (growth or decline) conditions in
  industry.
• Height of industry exit barriers.

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Rivalry Among Established Companies

• Industry Competitive Structure

The Continuum of Industry Structures
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Rivalry Among Established Companies (Continued)

• Demand Conditions

vs.
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Rivalry Among Established Companies (Continued)

• Height of Exit Barriers in the Industry

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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 companys operation, such as shared
  facilities and access to financial markets)
• emotional barriers (career concerns, loyalty to
  employees, etc.)
• government and social restrictions

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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

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Bargaining Power of Buyers

• Buyers (customers) are powerful when

• they purchase a large portion of an industrys
  total output
• the sales of the product being purchased account
  for a significant portion of the sellers annual
  revenues
• they could easily switch to another product
• the industrys products are undifferentiated or
  standardized, and buyers pose a credible threat
  if they were to integrate backward into the
  sellers industry

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Threat of Substitute Products

• Product substitutes are strong threat when

• customers face few switching costs
• substitute products price is lower
• substitute products quality and performance
  capabilities are equal to or greater than those
  of the competing product

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Substitute Products

• The competitive threat of substitute products
  increases as they come closer to serving similar
  customer needs.

Close
Far
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A Sixth Force Complementors

• Complementors
• Companies whose products are sold in tandem with
  another companys products.
• Increased supply of a complementary product
  collaterally increases demand for the primary
  product.
• Example
• Faster CPU chips fuel salesof personal computers.

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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

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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.

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Strategic Groups in the Pharmaceutical Industry
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Strategic Groups in the Pharmaceutical Industry
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Strategic Groups in the Pharmaceutical Industry
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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.

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Competitor Environment

• Competitor intelligence is 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

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Competitor Analysis

• Future Objectives

• How do our goals compare with our competitors
  goals?
• Where will the emphasis be placed in the future?
• What is the attitude toward risk?

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Competitor Analysis

• Current Strategy

• How are we currently competing?
• Does this strategy support changes in the
  competitive structure?

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Competitor Analysis

• Assumptions

• 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?

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Competitor Analysis

• Capabilities

• What are our strengths and weaknesses?
• How do we rate compared to our competitors?

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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?

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The Role of the General Environment
Buyer power
EconomicEnvironment
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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

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The Role of the General Environment
Technological Environment
Buyer power
EconomicEnvironment
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General Environment

• Technological Segment

• Product innovations
• Applications of knowledge
• Focus of private and government-supported RD
  expenditures
• New communication technologies

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The Role of the General Environment
Technological Environment
Buyer power
EconomicEnvironment
Social Environment
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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

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The Role of the General Environment
Technological Environment
Buyer power
Demographic Environment
EconomicEnvironment
Social Environment
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General Environment

• Demographic Segment

• Population size
• Age structure
• Geographic distribution
• Ethnic mix
• Income distribution

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The Role of the General Environment
Political and Legal Environment
Technological Environment
Buyer power
Demographic Environment
EconomicEnvironment
Social Environment
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General Environment

• Political/Legal Segment

• Antitrust laws
• Taxation laws
• Deregulation philosophies
• Labor training laws
• Educational philosophies and policies

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The Role of the General Environment
Political and Legal Environment
Technological Environment
Global Environment
Buyer power
Demographic Environment
EconomicEnvironment
Social Environment
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General Environment

• Global Segment

• Important political events
• Critical global markets
• Newly industrialize countries
• Different cultural and institutional attributes

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Globalization and Industry Structure

• Globalization of Markets

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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

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Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution
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Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution
(Continued)
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Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution
(Continued)
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Growth in Demand and Capacity
Competitive Changes During Industry Evolution
(Continued)
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Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution
(Continued)
Demand
Embryonic
Growth
Shakeout
Maturity
Time
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Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution
(Continued)
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Strategies in Fragmented Industries

• Fragmented industry characteristics
• Localized markets with low entry barriers (e.g.,
  Moms Diner).
• Few economies of scale opportunities exist.
• High transportation costs (e.g., sand) for
  products.
• Focus strategies predominate (e.g., customer
  group, region).

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Strategies in Fragmented Industries

• Competing in fragmented industries requires
  strategic consolidation by
• Chaining (Wal-Mart)
• Franchising (McDonalds)
• Horizontal mergers (Dillards)
• Using the Internet (eBay)

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Strategies in Embryonic and Growth Industries

• Three strategies for an innovator competing in a
  newly emerging market/industry
• Develop and market the technology itself.
• Develop and market the technology jointly with
  another company through a strategic alliance.
• License the technology to existing companies and
  let them develop the market.

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Strategies in Embryonic and Growth Industries

• An innovators optimal choice of growth industry
  strategy depends on
• Complementary assets the innovator has that can
  be used to exploit and market the innovation.
• High barriers to imitation by competitors (e.g.,
  patents).
• The capability of competitors to quickly imitate
  the pioneering company.

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Strategy in Embryonic and Growth Industries
(Continued)
Strategies Available to Innovator

• Develop and Market the Innovation Itself
• Develop and Market the Innovation Jointly
• License the Innovation to Others

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Strategy in Mature Industries

• Mature Industries

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Strategies to Manage Rivalry in Mature Industries

• Price signaling
• Leading competitors use price changes to convey
  their intentions to other competitors (i.e.,
  tit-for-tat).
• Price leadership
• One company sets the industry price other
  competitors reference their prices to that price.
• Nonprice competition
• Competition by any means other than price.

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Strategies for Deterring Entry in Mature
Industries
Strategies for Deterring Entry
Product Proliferation
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Product Proliferation in the Restaurant Industry
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Strategies for Deterring Entry in Mature
Industries
Strategies for Deterring Entry
Product Proliferation
Price Cutting
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Strategies for Deterring Entry in Mature
Industries
Strategies for Deterring Entry
Maintain Excess Capacity
Product Proliferation
Price Cutting
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Strategies to Manage Rivalry in Mature Industries
(Continued)

• Price Signaling
• Price Leadership
• Nonprice Competition
• Capacity Control

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Strategies to Manage Rivalry in Mature Industries

• Capacity control strategies
• Preempt rival firms by building capacity ahead of
  anticipated increases in demand.
• Indirect coordination with rival firms to keep
  industry-wide capacity in line with demand.

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Supply and Distribution Strategy in Mature
Industries

• Vertical integration
• Backward towards input suppliers.
• Forward into distribution to consumers.
• Choice of integration depends on
• Need for close relationships with suppliers.
• Japanese vs. American styles
• Need to ensure customer relationships.
• Complexity of product
• Amount of product information required

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Strategy in Declining Industries

• Leadership
• Niche
• Harvest
• Divestment

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Strategies in Declining Industries

• Leadership strategy
• A firm seeks to become dominant in the industry.
• Niche strategy
• Focuses on demand pockets declining more slowly
  than the industry as a whole.
• Harvest strategy
• Limits investment and optimizes cash flow.
• Divestment strategy
• Company exits the industry by selling out early
  to others, avoiding liquidation.

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Factors That Determine the Intensity of
Competition in Declining Industries
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Strategy Selection in a Declining Industry
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Strategy Selection in a Declining Industry
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Strategy Selection in a Declining Industry
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Strategy Selection in a Declining Industry
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Strategy Selection in a Declining Industry
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Strategy Selection in a Declining Industry