Analysis of the External Environment
Chapter 2 Chapter 2 Analysis of the External Analysis of the External Environment Environment S S TRATEGIC TRATEGIC M M ANAGEMENT ANAGEMENT I NPUTS I NPUTS Strategic Management Strategic Management Management of Strategy Management of Strategy Competitiveness and Globalization: Competitiveness and Globalization: Concepts and Cases Concepts and Cases Seventh edition Concepts and Cases All rights reserved. © © The University of West Alabama The University of West Alabama PowerPoint Presentation by Charlie Cook PowerPoint Presentation by Charlie Cook 2007 Thomson/South 2007 Thomson/South Western. Western. - - Concepts and Cases Michael A. Hitt All rights reserved.
- • R. Duane Ireland • Robert E. Hoskisson
© 2007 Thomson/South-Western. All rights reserved. 2 K K NOWLEDGE NOWLEDGE O O BJECTIVES BJECTIVES 1.
’
’ s profit potential. s profit potential.
’
determine an industry
determine an industry
5. Identify the five competitive forces and explain how they Identify the five competitive forces and explain how they
5.
s six segments. segments.
s six
’
4. Name and describe the general environment Name and describe the general environment
1. Explain the importance of analyzing and understanding Explain the importance of analyzing and understanding
4.
3. Discuss the four activities of the external environmental Discuss the four activities of the external environmental analysis process. analysis process.
3.
2. Define and describe the general environment and the Define and describe the general environment and the industry environment. industry environment.
2.
’ s external environment. s external environment.
’
the firm
the firm
Studying this chapter should provide you with the strategic
management knowledge needed to:© 2007 Thomson/South-Western. All rights reserved. 2 K K NOWLEDGE NOWLEDGE O O BJECTIVES BJECTIVES (cont
(cont ’
’
d)
6. Define strategic groups and describe their influence on Define strategic groups and describe their influence on the firm. the firm.
7.
7. Describe what firms need to know about their Describe what firms need to know about their
competitors and different methods (including ethical
competitors and different methods (including ethical
standards) used to collect intelligence about them.standards) used to collect intelligence about them.
Studying this chapter should provide you with the strategic
management knowledge needed to:© 2007 Thomson/South-Western. All rights reserved. 2 FIGURE FIGURE
2.1
© 2007 Thomson/South-Western. All rights reserved.
2
© 2007 Thomson/South-Western. All rights reserved. 2 TABLE TABLE
2.1
The General Environment: Segments and Elements
- Intensity of rivalry among competitors
© 2007 Thomson/South-Western. All rights reserved. 2 Industry Environment Industry Environment
The set of factors directly influencing a firm and
The set of factors directly influencing a firm and
its competitive actions and competitive its competitive actions and competitive responses responsesThreat of new entrants
Threat of new entrants
Power of suppliers
Power of suppliers
Power of buyers
Power of buyers
Threat of product substitutes
Threat of product substitutes
Intensity of rivalry among competitors
© 2007 Thomson/South-Western. All rights reserved. 2 Competitor Analysis Competitor Analysis
Gathering and interpreting Gathering and interpreting information about all of the information about all of the companies that the firm companies that the firm competes against. competes against.
Understanding the firm Understanding the firm
’
’
s s competitor environment competitor environment complements the insights complements the insights provided by studying the provided by studying the general and industry general and industry environments. environments.s
actions, responses and intentions
’
’
Focused on predicting the dynamics of competitors
Focused on predicting the dynamics of competitors
Competitor environment Competitor environment
profitability within an industry
profitability within an industry
s
’
’
Focused on factors and conditions influencing a firm
Focused on factors and conditions influencing a firm
Industry environment Industry environment
Focused on the future
Focused on the future
General environment General environment
© 2007 Thomson/South-Western. All rights reserved. 2 Analysis of the External Environments Analysis of the External Environments
actions, responses and intentions TABLE TABLE Components of the External Environmental Analysis
2.2 Components of the External Environmental Analysis
2.2 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 © 2007 Thomson/South-Western. All rights reserved. 2
A condition in the general
s efforts to achieve
’
’
company
company
environment that may hinder a
environment that may hinder a
A condition in the general
Threat Threat
helps a company achieve strategic competitiveness. strategic competitiveness.
helps a company achieve
environment that, if exploited,
environment that, if exploited,
A condition in the general
A condition in the general
Opportunity Opportunity
© 2007 Thomson/South-Western. All rights reserved. 2 Opportunities and Threats Opportunities and Threats
s efforts to achieve strategic competitiveness. strategic competitiveness.
© 2007 Thomson/South-Western. All rights reserved. 2 Segments of the General Environment Segments of the General Environment
The Demographic Segment The Demographic Segment
Population size
Population size
Age structure
Age structure
Geographic distribution
Geographic distribution
Ethnic mix
Ethnic mix
Income distribution
Income distribution
- Gross domestic product
Trade deficits or surpluses
Business savings rates
Business savings rates
Personal savings rate
Personal savings rate
Budget deficits or surpluses
Budget deficits or surpluses
Trade deficits or surpluses
Interest rates
© 2007 Thomson/South-Western. All rights reserved. 2 Segments of the General Environment Segments of the General Environment
Interest rates
Inflation rates
Inflation rates
The Economic Segment The Economic Segment
d)
d)
’ ’
(cont (cont
Gross domestic product
policies
Educational philosophies and
Educational philosophies and
Labor training laws
Labor training laws
Deregulation philosophies
Deregulation philosophies
Taxation laws
Taxation laws
Antitrust laws
Antitrust laws
The Political/Legal Segment The Political/Legal Segment
d)
d)
’ ’
(cont (cont
© 2007 Thomson/South-Western. All rights reserved. 2 Segments of the General Environment Segments of the General Environment
policies
Workforce diversity
Shifts in product and service preferences
Shifts in work and career preferences
Shifts in work and career preferences
Concerns about environment
Concerns about environment
Attitudes about quality of worklife
Attitudes about quality of worklife
Workforce diversity
Women in the workplace
© 2007 Thomson/South-Western. All rights reserved. 2 Segments of the General Environment Segments of the General Environment
Women in the workplace
Segment Segment
Sociocultural Sociocultural
The The
d)
d)
’ ’
(cont (cont
Shifts in product and service preferences
New communication technologies
expenditures
expenditures
supported R&D
supported R&D
Focus of private and government
Focus of private and government
Applications of knowledge
Applications of knowledge
Product innovations
Product innovations
The Technological Segment The Technological Segment
d)
d)
’ ’
(cont (cont
© 2007 Thomson/South-Western. All rights reserved. 2 Segments of the General Environment Segments of the General Environment
New communication technologies attributes
© 2007 Thomson/South-Western. All rights reserved. 2 Segments of the General Environment Segments of the General Environment
(cont (cont
’ ’
d)
d)
The Global Segment The Global Segment
Important political events
Important political events
Critical global markets
Critical global markets
Newly industrialized countries
Newly industrialized countries
Different cultural and institutional
Different cultural and institutional
attributes
Includes a rich mix of competitive strategies that
average returns
competitiveness and above
competitiveness and above
companies use in pursuing strategic
companies use in pursuing strategic
Includes a rich mix of competitive strategies that
Firms that influence one another
Firms that influence one another
substitutes
substitutes
A group of firms producing products that are close
A group of firms producing products that are close
Industry Defined Industry Defined
© 2007 Thomson/South-Western. All rights reserved. 2 Industry Environment Analysis Industry Environment Analysis
average returns
© 2007 Thomson/South-Western. All rights reserved. 2 FIGURE FIGURE
2.2
© 2007 Thomson/South-Western. All rights reserved. 2 Threat of New Entrants: Barriers to Entry Threat of New Entrants: Barriers to Entry
Economies of scale Economies of scale
Product differentiation Product differentiation
Capital requirements Capital requirements
Switching costs Switching costs
Access to distribution channels Access to distribution channels
Cost disadvantages independent of scale Cost disadvantages independent of scale
Government policy Government policy
Expected retaliation Expected retaliation
Competitor retaliation
Costs related to scale economies
Costs related to scale economies
Flexibility in pricing and market share
Flexibility in pricing and market share
scale entry scale entry
Factors (advantages and disadvantages) related Factors (advantages and disadvantages) related to large to large
and small and small
experiences as it incrementally increases its size experiences as it incrementally increases its size
Marginal improvements in efficiency that a firm
Marginal improvements in efficiency that a firm
Economies of Scale Economies of Scale
© 2007 Thomson/South-Western. All rights reserved. 2 Barriers to Entry Barriers to Entry
Competitor retaliation
- Product differentiation Product differentiation
- Switching Costs Switching Costs
- Products at competitive
- New equipment
- Retraining employees
- Inventories
•
One One
Price breaks Price breaks
Stocking or shelf space Stocking or shelf space
Channels
Channels
Access to Distribution
Access to Distribution
Psychic costs of ending a Psychic costs of ending a relationship relationship
Retraining employees
New equipment
time costs customers time costs customers incur when they buy from a incur when they buy from a different supplier different supplier
Availability of capital Availability of capital
© 2007 Thomson/South-Western. All rights reserved. 2 Barriers to Entry (cont Barriers to Entry (cont Barriers to Entry (cont
Marketing activities Marketing activities
Inventories
Physical facilities Physical facilities
Capital Requirements
Capital Requirements
Products at competitive prices prices
Customer loyalty Customer loyalty
Unique products Unique products
d)
d)
’
’
Cooperative advertising Cooperative advertising allowances allowances
d) Barriers to Entry (cont
d)
’
’
Cost Disadvantages Expected retaliation
Cost Disadvantages Expected retaliation
Independent of Scale Responses by existing
Independent of Scale Responses by existing
competitors may depend competitors may depend
Proprietary product Proprietary product on a firm s present stake in on a firm s present stake in
’ ’ technology technology the industry (available the industry (available
- Favorable access to raw Favorable access to raw
business options) business options) materials materials
- Desirable locations Desirable locations
Government policy
Government policy
- Licensing and permit Licensing and permit
requirements requirements
- Deregulation of industries Deregulation of industries © 2007 Thomson/South-Western. All rights reserved. 2
- Suppliers are large and few in number.
- Suitable substitute products are not available.
- Individual buyers are not large customers of suppliers
’
’
buyers
buyers
Suppliers pose a threat to integrate forward into
Suppliers pose a threat to integrate forward into
’ products create high switching costs. products create high switching costs.
’
Suppliers
Suppliers
’ marketplace success. marketplace success.
goods are critical to the buyers
goods are critical to the buyers
’
’
Suppliers
Suppliers
Individual buyers are not large customers of suppliers and there are many of them. and there are many of them.
Suitable substitute products are not available.
Suppliers are large and few in number.
Supplier power increases when: Supplier power increases when:
© 2007 Thomson/South-Western. All rights reserved. 2 Bargaining Power of Suppliers Bargaining Power of Suppliers
’ industry. industry.
- Buyers are large and few in number.
- Buyers
’
sellers
sellers
Buyers can pose threat to integrate backward into the
Buyers can pose threat to integrate backward into the
’ switching costs are low. switching costs are low.
’
Buyers
’ s annual revenues. s annual revenues.
’
supplier
supplier
’ purchases are a significant portion of a purchases are a significant portion of a
’
Buyers
Buyers
output.
output.
’ s total s total
’
Buyers purchase a large portion of an industry
Buyers purchase a large portion of an industry
Buyers are large and few in number.
Buyer power increases when: Buyer power increases when:
© 2007 Thomson/South-Western. All rights reserved. 2 Bargaining Power of Buyers Bargaining Power of Buyers
’ industry. industry.
’ s price is lower. s price is lower.
Differentiated industry products that are valued
by customers reduce this threat. by customers reduce this threat.s quality and performance are equal to or greater than the existing product. equal to or greater than the existing product.
s quality and performance are
’
’
Substitute product
’
The substitute product
The substitute product
Buyers face few switching costs.
The threat of substitute products increases The threat of substitute products increases when: when: Buyers face few switching costs.
- Substitute product
Differentiated industry products that are valued
© 2007 Thomson/South-Western. All rights reserved. 2 Threat of Substitute Products Threat of Substitute Products
- There are numerous or equally balanced competitors.
- Industry growth slows or declines.
- There are high fixed costs or high storage costs.
- When the strategic stakes are high.
© 2007 Thomson/South-Western. All rights reserved. 2 Intensity of Rivalry Among Competitors Intensity of Rivalry Among Competitors
Industry rivalry increases when: Industry rivalry increases when:
There are numerous or equally balanced competitors.
Industry growth slows or declines.
There are high fixed costs or high storage costs.
There is a lack of differentiation opportunities or low
There is a lack of differentiation opportunities or low switching costs. switching costs.
When the strategic stakes are high.
When high exit barriers prevent competitors from
When high exit barriers prevent competitors from
leaving the industry. leaving the industry.© 2007 Thomson/South-Western. All rights reserved. 2 Low entry barriers Interpreting Industry Analyses
Interpreting Industry Analyses Unattractive
Unattractive Industry
Industry Suppliers and buyers have strong positions
Strong threats from substitute products Intense rivalry among competitors
Low profit potential
© 2007 Thomson/South-Western. All rights reserved. 2 Interpreting Industry Analyses (cont Interpreting Industry Analyses (cont
’ ’
d)
d) Attractive
Attractive Industry
Industry High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors
High profit potential
Similar products
There is more heterogeneity in the performance of firms within strategic groups. firms within strategic groups.
There is more heterogeneity in the performance of
is greater than between firms outside that strategic group. group.
is greater than between firms outside that strategic
Internal competition between strategic group firms
dimensions and using similar strategies
Internal competition between strategic group firms
dimensions and using similar strategies
A set of firms emphasizing similar strategic
A set of firms emphasizing similar strategic
Strategic Group Defined Strategic Group Defined
- – – Similar market positions Similar market positions
- – –
- – – Similar strategic actions Similar strategic actions
© 2007 Thomson/South-Western. All rights reserved. 2 Strategic Groups Strategic Groups
Similar products
© 2007 Thomson/South-Western. All rights reserved. 2 Strategic Groups Strategic Groups
Strategic Dimensions Strategic Dimensions
Extent of technological leadership
Extent of technological leadership
Product quality
Product quality
Pricing Policies
Pricing Policies
Distribution channels
Distribution channels
Customer service
Customer service
s capabilities and intentions ( current current strategy strategy
) )
A competitor
A competitor
’
’
s beliefs about the industry (
s beliefs about the industry ( its its assumptions assumptions
)
)
A competitor
A competitor
’
’
s
s capabilities and intentions (
’
’
A competitor
© 2007 Thomson/South-Western. All rights reserved. 2 Competitor Analysis Competitor Analysis
Competitor Intelligence Competitor Intelligence
The ethical gathering of needed information and data
The ethical gathering of needed information and data
that provides insight into:
that provides insight into:
A competitor
A competitor
’
’
s direction (
s direction ( future objectives future objectives
) )
A competitor
s
capabilities
capabilities
FIGURE FIGURE
2.2
2.2 Competitor Competitor
Analysis Analysis
Components Components © 2007 Thomson/South-Western. All rights reserved. 2
- How do our goals How do our goals
’
toward risk?
What is the attitude
What is the attitude
be placed in the future?
be placed in the future?
goals?
goals?
’
competitors
competitors
compare with our
compare with our
d)
d)
’ ’
- Where will the emphasis Where will the emphasis
•
© 2007 Thomson/South-Western. All rights reserved. 2 Competitor Analysis (cont Competitor Analysis (cont
toward risk? Future Objectives Future Objectives
- How are we currently How are we currently
- Does this strategy Does this strategy
© 2007 Thomson/South-Western. All rights reserved. 2 Competitor Analysis (cont Competitor Analysis (cont
’ ’
d)
d)
competing?
competing?
support changes in the support changes in the competitive structure?
competitive structure? Future Objectives Future Objectives Current Strategy Current Strategy
- Do we assume the future Do we assume the future
•
•
themselves?
about the industry and
about the industry and
our competitors hold
our competitors hold
What assumptions do
What assumptions do
a status quo?
a status quo?
Are we operating under
Are we operating under
will be volatile?
will be volatile?
d)
d)
’ ’
© 2007 Thomson/South-Western. All rights reserved. 2 Competitor Analysis (cont Competitor Analysis (cont
themselves? Future Objectives Future Objectives Current Strategy Current Strategy Assumptions Assumptions
- What are our strengths What are our strengths
•
© 2007 Thomson/South-Western. All rights reserved. 2 Competitor Analysis (cont Competitor Analysis (cont
’ ’
d)
d)
and weaknesses?
and weaknesses?
How do we rate
How do we rate
compared to our
compared to our
competitors?
competitors? Future Objectives Future Objectives Current Strategy Current Strategy Assumptions Assumptions Capabilities Capabilities
- What will our What will our
advantage over our
our competitors?
our relationship with
our relationship with
competitors?
competitors?
advantage over our
future?
future?
competitors do in the
competitors do in the
d)
d)
’ ’
- Where do we hold an Where do we hold an
- How will this change How will this change
© 2007 Thomson/South-Western. All rights reserved. 2 Competitor Analysis (cont Competitor Analysis (cont
our competitors? Response Response Future Objectives Future Objectives Current Strategy Current Strategy Assumptions Assumptions Capabilities Capabilities
s
s product or service, it is likely to create value for the focal firm. is likely to create value for the focal firm.
However, if a
However, if a
complementor
complementor
’
’
s
product or service is
’
product or service is
in a market into which the focal firm intends to
in a market into which the focal firm intends to
expand, the
expand, the
complementor
complementor
can represent a
s product or service, it
’
can represent a formidable competitor. formidable competitor.
If a
© 2007 Thomson/South-Western. All rights reserved. 2 Complementors Complementors
Complementors Complementors
The network of companies that sell complementary
The network of companies that sell complementary
products or services or are compatible with the focal products or services or are compatible with the focal firm
firm
’
’ s own product or service. s own product or service.
If a
to the sale of the focal firm
complementor
complementor
’
’
s
s
product or service adds value
product or service adds value
to the sale of the focal firm
- Obtaining publicly available information
discussions about their products
Stealing drawings, samples, or documents
Eavesdropping
Eavesdropping
Trespassing
Trespassing
Blackmail
Blackmail
Practices considered both unethical and illegal:
Practices considered both unethical and illegal:
discussions about their products
brochures, view their exhibits, and listen to
brochures, view their exhibits, and listen to
’
’
Attending trade fairs and shows to obtain competitors
Attending trade fairs and shows to obtain competitors
Obtaining publicly available information
Practices considered both legal and ethical: Practices considered both legal and ethical:
© 2007 Thomson/South-Western. All rights reserved. 2 Ethical Considerations Ethical Considerations
Stealing drawings, samples, or documents