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1. CHAPTER 2The External Environment:Opportunities, Threats,Industry Competition,and Competitor Analysis
2. 22 KNOWLEDGE OBJECTIVES Explain the importance of analyzing and understanding the firms external environment.
Define and describe the general environment and the industry environment.
Discuss the four activities of the external environmental analysis process.
Name and describe the general environments six segments.
Identify the five competitive forces and explain how they determine an industrys profit potential.
3. 23 KNOWLEDGE OBJECTIVES (contd) Define strategic groups and describe their influence on the firm.
Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them.
4. 24 FIGURE 2.1 The External Environment
5. 25 General Environment Dimensions in the broader society that influence an industry and the firms within it:
6. 26 TABLE 2.1 The General Environment: Segments and Elements
7. 27 Industry Environment The set of factors directly influencing a firm and its competitive actions and competitive responses
Threat of new entrants
Power of suppliers
Power of buyers
Threat of product substitutes
Intensity of rivalry among competitors
8. 28 Competitor Analysis Gathering and interpreting information about all of the companies that the firm competes against.
Understanding the firms competitor environment complements the insights provided by studying the general and industry environments.
9. 29 Analysis of the External Environments General environment
Focused on the future
Focused on factors and conditions influencing a firms profitability within an industry
Focused on predicting the dynamics of competitors actions, responses and intentions
10. 210 TABLE 2.2 Components of the External Environmental Analysis
11. 211 Opportunities and Threats Opportunity
A condition in the general environment that, if exploited, helps a company achieve strategic competitiveness.
A condition in the general environment that may hinder a companys efforts to achieve strategic competitiveness.
12. 212 Segments of the General Environment The Demographic Segment
13. 213 Segments of the General Environment (contd) The Economic Segment
Trade deficits or surpluses
Budget deficits or surpluses
Personal savings rate
Business savings rates
Gross domestic product
14. 214 Segments of the General Environment (contd) The Political/Legal Segment
Labor training laws
Educational philosophies and policies
15. 215 Segments of the General Environment (contd) The Sociocultural Segment
Women in the workplace
Attitudes about quality of worklife
Concerns about environment
Shifts in work and career preferences
Shifts in product and service preferences
16. 216 Segments of the General Environment (contd) The Technological Segment
Product innovations (Can firm influence? How?)
Applications of knowledge
Focus of private and government-supported R&D expenditures
New communication technologies
17. 217 Segments of the General Environment (contd) The Global Segment
Important political events
Critical global markets
Newly industrialized countries
Different cultural and institutional attributes
18. 218 Industry Environment Analysis Industry Defined
A group of firms producing products that are close substitutes (ex: automotive, airline, grocery retail)
Firms that influence one another
Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns
19. 219 FIGURE 2.2 The Five Forces of Competition Model
21. 221 Threat of New Entrants: Economies of scale
Access to distribution channels
Cost disadvantages independent of scale
22. 222 Barriers to Entry Economies of Scale
Marginal improvements in efficiency that a firm experiences as it incrementally increases its size
Factors (advantages and disadvantages) related to large- and small-scale entry
Flexibility in pricing and market share
Costs related to scale economies
23. 223 Barriers to Entry (contd) Product differentiation
Products at competitive prices
Availability of capital Switching Costs
One-time costs customers incur when they buy from a different supplier
Psychic costs of ending a relationship
Access to Distribution Channels
Stocking or shelf space
Cooperative advertising allowances
24. 224 Barriers to Entry (contd) Cost Disadvantages Independent of Scale
Proprietary product technology
Favorable access to raw materials
Licensing and permit requirements
Deregulation of industries Expected retaliation
Responses by existing competitors may depend on a firms present stake in the industry (available business options)
25. 225 Bargaining Power of Suppliers Supplier power increases when:
Suppliers are large and few in number.
Suitable substitute products are not available.
Individual buyers are not large customers of suppliers and there are many of them.
Suppliers goods are critical to the buyers marketplace success.
Suppliers products create high switching costs.
Suppliers pose a threat to integrate forward into buyers industry.
26. 226 Bargaining Power of Buyers Buyer power increases when:
Buyers are large and few in number.
Buyers purchase a large portion of an industrys total output.
Buyers purchases are a significant portion of a suppliers annual revenues.
Buyers switching costs are low.
Buyers can pose threat to integrate backward into the sellers industry.
27. 227 Threat of Substitute Products The threat of substitute products increases when:
Buyers face few switching costs.
The substitute products price is lower.
Substitute products quality and performance are equal to or greater than the existing product.
Differentiated industry products that are valued by customers reduce this threat.
28. 228 Intensity of Rivalry Among Competitors 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 switching costs.
When the strategic stakes are high.
When high exit barriers prevent competitors from leaving the industry.
29. 229 Interpreting Industry Analyses
30. 230 Interpreting Industry Analyses (contd)
31. 231 Strategic Groups Strategic Group Defined
A set of firms emphasizing similar strategic dimensions and using similar strategies
Internal competition between strategic group firms is greater than between firms outside that strategic group.
There is more heterogeneity in the performance of firms within strategic groups.
Similar market positions
Similar strategic actions
32. 232 Strategic Groups Strategic Dimensions
Extent of technological leadership
(Question: Strategic Group in Automotive?)
33. 233 Competitor Analysis Competitor Intelligence
The ethical gathering of needed information and data that provides insight into:
A competitors direction (future objectives)
A competitors capabilities and intentions (current strategy)
A competitors beliefs about the industry (its assumptions)
A competitors capabilities
34. 234 FIGURE 2.2 Competitor Analysis Components
35. 235 Competitor Analysis (contd)
36. 236 Competitor Analysis (contd)
37. 237 Competitor Analysis (contd)
38. 238 Competitor Analysis (contd)
39. 239 Competitor Analysis (contd)
40. 240 Complementors Complementors
The network of companies that sell complementary products or services or are compatible with the focal firms own product or service.
If a complementors product or service adds value to the sale of the focal firms product or service, it is likely to create value for the focal firm.
However, if a complementors product or service is in a market into which the focal firm intends to expand, the complementor can represent a formidable competitor.
41. 241 Ethical Considerations Practices considered both legal and ethical:
Obtaining publicly available information
Attending trade fairs and shows to obtain competitors brochures, view their exhibits, and listen to discussions about their products
Practices considered both unethical and illegal:
Stealing drawings, samples, or documents