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External Environmental Analysis

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Take advantage of opportunities that can lead to higher profits ... Demand and profits in the industry are boosted. When complementors are weak ... – PowerPoint PPT presentation

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Title: External Environmental Analysis


1
External Environmental Analysis
2
Lecture Topics
  • Purpose of External Environmental Analysis
  • Gathering Information for External Environmental
    Analysis
  • General Environment
  • Competitive Environment
  • Key Success Factors
  • Competitive Changes During Industry Evolution
  • Strategic Groups
  • National Competitive Advantage

3
Purpose of External Environmental Analysis
  • Organizations are affected by conditions in the
    environment
  • Managers need to be aware of these conditions in
    order to
  • Take advantage of opportunities that can lead to
    higher profits
  • Reduce the impact of threats that can harm the
    organizations future

4
Gathering Information for External Environmental
Analysis
  • Managers need information in order to know and
    develop an understanding about what is happening
    in the external environment
  • Three approaches to information gathering
  • Scanning general surveillance of environmental
    changes looking for early signals of changes
  • Monitoring close attention to specific
    developments that could affect the organization
  • Competitive Intelligence following actions of
    competitors

5
Two Areas for Analysis
  • General Environment
  • Competitive Environment

6
The General and Competitive Environment
  • General Environment

Demographics
Competitive Environment Threat on new
entrants Bargaining power of suppliers Bargaining
power of buyers Threat of substitute
products Competitive rivalry
Political/Legal
Global
Sociocultural
Technological
Macoreconomic
7
General EnvironmentDemographics
  • Characteristics of a countrys population
  • Size of population and growth rate
  • Age distribution of population
  • Education levels
  • Income distribution
  • Ethnic diversity
  • Geographic distribution

8
General EnvironmentPolitical/Legal
  • Political and legal conditions affecting business
  • Government policies toward business
  • Investment incentives
  • Business regulation labor, environment
  • Education priorities
  • Budget conditions and plans

9
General EnvironmentTechnological
  • Technological developments relevant to a business
  • Telecommunications
  • Internet
  • On-line training
  • Product and process innovations

10
General EnvironmentMacroeconomic
  • Impact of the economy on business
  • Size and change in gross domestic product
  • Per capita income levels
  • Inflation rate
  • Interest rates
  • Foreign trade deficit or surplus
  • Unemployment
  • Rates of saving and investment

11
General EnvironmentSociocultural
  • Influence of values, beliefs, and lifestyles of a
    country on business
  • Family relationships
  • Attitudes about work
  • Living arrangements
  • Styles of entertainment
  • Attitudes toward health

12
General EnvironmentGlobal
  • International developments that can impact a
    business
  • Rise of China as economic power
  • Rising global trade and WTO
  • Intellectual property protection
  • Important political events Iraq war
  • Search for low cost suppliers

13
Competitive Environment
  • The essence of strategy formulation is coping
    with competition.
  • The corporate strategists goal is to find a
    position in the industry where his or her company
    can best defend itself against these forces or
    can influence them in its favor.
  • Managers must understand the conditions of
    competition within their industry
  • Porter Five-Forces Model of Competition
    (determining the attractiveness of an industry)
  • Key Success Factors
  • Competitive Changes During industry Evolution
  • Strategic Groups
  • National Competitive Advantage

14
Defining an Industry
  • Industry
  • A group of companies offering products or
    services that are close substitutes for each
    other
  • Competitors
  • Rival companies that serve the same basic
    customer needs

15
Defining an Industry (contd)
  • Sector
  • A group of closely related industries
  • Market segments
  • Distinct groups of customers within a market that
    can be differentiated from each other based on
    their distinct attributes and demands
  • Changing industry boundaries

16
The Computer Sector Industries and Segments
17
Five Forces Driving Industry Competition
18
Threat of New Entrants
  • Fundamental question how easy is it for another
    company to enter the industry?
  • Factors making easy entry to industry
  • Low economies of scale
  • Low product differentiation
  • Low capital requirements
  • No switching costs for buyer
  • Easy access to distribution channels
  • Little government regulation

19
Supplier Power
  • Fundamental question how badly does a supplier
    need your business?
  • Factors giving power to supplier
  • Supplier industry dominated by few firms
  • Buyer is not important to customer
  • Suppliers product is important input to buyers
    product
  • Suppliers products have high switching costs
  • Supplier can integrate forward and become
    competitor of buyer

20
Threat of Substitutes
  • Fundamental question what other products or
    services could perform the same function as your
    products or services?
  • Factors indicating high threat of substitutes
  • Few switching costs for buyer
  • Price of substitute lower or quality higher than
    for your products
  • Firms offering substitutes have high
    profitability

21
Buyer Power
  • Fundamental questions How badly does a buyer
    need your products or services?
  • Factors contributing to high buyer power
  • Few buyers compared to the number of sellers
  • Buyers purchases high relative to sellers sales
  • Products are undifferentiated
  • Buyer has low switching costs
  • Buyer has low profits
  • Buyer can integrate backward and supply the
    product to itself

22
Competitive Rivalry
  • Fundamental question how intense is competition
    in the industry?
  • Factors leading to high competitive rivalry
  • Numerous or equally balanced competitors
  • High fixed costs
  • Slow industry growth
  • Lack of differentiation or switching costs
  • High strategic stakes
  • High exit barriers

23
A Sixth Force Complementors
  • Not a supplier
  • Offers service or product that affects industrys
    performance
  • When complementors are important and their number
    is increasing
  • Demand and profits in the industry are boosted
  • When complementors are weak
  • Industry growth can slow and profits can be
    limited
  • Example Internet Service Providers
    complementors to eBusiness firms

24
Strategic Implications of theFive
Competitive Forces
  • Competitive environment is unattractive from the
    standpoint of earning good profits when
  • Rivalry is strong
  • Entry barriers are low and entry is likely
  • Competition from substitutes is strong
  • Suppliers and customers have considerable
    bargaining power

25
Strategic Implications of theFive
Competitive Forces
  • Competitive environment is ideal from a
    profit-making standpoint when
  • Rivalry is moderate
  • Entry barriers are high and no firm is likely to
    enter
  • Good substitutes do not exist
  • Suppliers and customers are in a weak bargaining
    position

26
Key Success Factors
  • In many industries, there are certain actions or
    practices that a business must follow in order to
    compete in the industry.
  • May need effort to distinguish company from
    competitors
  • AN INDIVIDUAL COMPANY DOES NOT HAVE KEY SUCCESS
    FACTORS!!!!
  • KEY SUCCESS FACTORS ARE NOT THE SOURCE OF A
    COMPANYS COMPETITIVE ADVANTAGE THEY ARE
    REQUIREMENTS FOR COMPETING IN AN INDUSTRY AND DO
    NOT GIVE ANY FIRM A COMPETITIVE ADVANTAGE

27
Examples of Key Success Factors in Selected
Industries
  • Pharmaceuticals research and personal selling
  • Beer advertising and distribution
  • Restaurant quality food, service, location,
    notoriety
  • Retailer location and priced-for-quality

28
Changes in Competition During Industrys Evolution
  • Over time as an industry evolves, the nature and
    basis of competition changes
  • Managers must anticipate how the forces will
    change as the industry evolves and formulate
    appropriate strategies
  • Five Stages ( similar to product-life cycle)
  • Embryonicintroduction of product
  • Growth
  • Shakeout
  • Mature
  • Declining

29
Stages in the Industry Life Cycle
30
Shakeout Growth in Demand and Capacity
31
Requirements in Each Stage of Industrys Evolution
  • Embryonic Know-how, educating customers,
    opening distribution channels
  • Growth Know-how for continued innovation,
    financing, build demand
  • Shakeout Dominant market position, low cost
    producer, high capacity
  • Maturity low cost production, brand loyalty
  • Declining lowest cost production, reduce
    capacity

32
Limitations of Models for Industry Analysis
  • Life cycle issues
  • The embryonic stage can sometimes be skipped
  • Industry growth can be revitalized
  • The time span of the stages can vary
  • Innovation and change
  • Innovation can unfreeze and reshape industry
    structure
  • An industry may be hypercompetitive, with
    permanent and ongoing change

33
Limitations of Models for Industry Analysis
(contd)
  • Company differences
  • The importance of company differences within an
    industry or strategic group can be
    underemphasized
  • The individual resources and capabilities of a
    company may be more important in determining
    profitability than the industry or strategic group

34
Strategic Groups
  • Companies do not compete against all companies in
    an industry
  • Companies compete against several other companies
    that follow similar strategies
  • A strategic group consists of those rivals with
    similar competitive approaches in an industry
  • Examples ways of competing
  • Price -- Range of products
  • Innovation -- Customers served
  • Research
  • Quality

35
Procedure for Constructing aStrategic Group
Map
  • STEP 1 Identify competitive characteristics
    that differentiate firms in an industry from one
    another
  • STEP 2 Plot firms on a two-variable map using
    pairs of these differentiating characteristics
  • STEP 3 Assign firms that fall in about the same
    strategy space to same strategic group
  • STEP 4 Draw circles around each group, making
    circles proportional to size of groups
    respective share of total industry sales

36
Example Strategic Group Map of the Video
Game Industry
Arcades
Arcade operators
Publishers of games on CD-ROMs
Home PCs
Sony, Sega, Nintendo, several others
Types of Video Game Suppliers/Distribution
Channels
Video game consoles
MSN Gaming Zone, Pogo.com, America Online, HEAT,
Engage, Oceanline, TEN
Online/Internet
Low (Coin-operated equipment)
Medium (Console players cost 100-300)
High (Use PC)
Overall Cost to Players of Video Games
37
Nation-State and Competitive Advantage
  • A country may provide a competitive advantage for
    a company
  • Need to identify national factors in order to
    determine
  • Where most significant competitors will come from
  • Where to locate production activities
  • Porters Diamond of Determinants of National
    Competitive Advantage

38
The Global and National Environments
  • Globalization of production and markets
  • Lower barriers to cross-border trade and
    investment
  • National differences in the cost and quality of
    factors of production
  • Home and foreign markets and competitors are
    blurring
  • Intensified rivalry
  • Intensified rate of innovation
  • Many new markets are open

39
Determinants of National Competitive Advantage
Strategy, Structure, Rivalry
Factor Endowments
Demand Conditions
National Competitive Advantage
Related and Supporting Industries
40
Factor Endowments
  • Availability of traditional factors of
    productionland, labor, capital,
    entrepreneurshipprovide cost advantages to
    companies located in countries possessing those
    factors
  • More significant, countries and their companies
    can create new factors such as a knowledgeable
    workforce and infrastructure that is rare and
    difficult to imitate
  • Factor endowments less important than the speed
    and efficiency of deploying those resources.

41
Demand Conditions
  • Large growing markets provide foundation for
    global competition
  • More significant, sophisticated and demanding
    consumers force companies to innovate and improve
    their products
  • Advances in products, services, and standards
    improve companies knowledge and capabilities for
    selling in other world markets

42
Related and Supporting Industries
  • Provide inputs and capabilities that help a
    company to improve its own products and
    capabilities
  • Helps reduce manufacturing costs through
    cost-effective, timely methods
  • Ongoing exchange of knowledge through research
    and development and joint projects improves both
    suppliers and companies

43
Strategy, Structures, and Rivalry
  • Different management ideologies lead to different
    emphases within a company
  • Japan and Germany both have engineers in top
    management and those countrys companies
    concentrate on process and product improvement
  • Intense domestic rivalry leads to product
    improvements and cost reduction in order to
    compete for domestic customers

44
Conclusions About Determinants of National
Competitive Advantage
  • Firms succeeding in global markets first
    succeeded in intense competition in home
    countries
  • Competitive advantage for global firms comes from
    continuous improvement, innovation, and change.
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