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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis . Overview: The firm’s external environment External environmental analysis General environmental segments Industry environment (and analysis) Porter’s 5 Competitive Forces
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Chapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis • Overview: • The firm’s external environment • External environmental analysis • General environmental segments • Industry environment (and analysis) • Porter’s 5 Competitive Forces • Strategic groups: Definition and influence • Competitors and competitive intelligence
External Environment Analysis • 4 components • Scanning – the study of all segments in the general environment • Monitoring – observing environmental changes to see if an important trend is emerging • Forecasting – the development of feasible projections of what might happen and how quickly as a result of the changes and trends detected • Assessing – determining the timing and significance of the effects of environmental changes and trends on the firm
External Environment Analysis • Opportunity • General environment condition that, if exploited effectively, helps a company achieve strategic competitiveness • Threat • General environment condition that may hinder a company's efforts to achieve strategic competitiveness
The General Environment • The General Environment • The broader society dimensions that influence an industry and the firms within it • Grouped into 7 dimensions OR ‘environmental segments’ • Demographic – population’s size, age structure, geographic distribution, ethnic mix, and income distribution • Economic – nature and direction of economy • Political/Legal – laws and regulations • Sociocultural – society’s attitudes and cultural values • Technological – new technologies and firms that create them • Global – new global markets, existing markets that are changing, and their characteristics • Physical – potential and actual changes in physical environment and business practices
The Industry Environment • Industry Environment • Set of factors directly influencing a firm’s competitive actions/responses • Industry • Definition: Group of firms producing products that are close substitutes • Industry environment, in comparison to the general environment, has more direct effect on firm’s • Strategic competitiveness and • Above-average returns • Intensity of industry competition and industry’s profit potential are a function of 5 forces
Industry Environment Analysis • Threat of New Entrants • Deals with the likelihood that new firms will enter an industry or that an existing member of an industry will enter an additional segment within the larger industry. • Can threaten the market share of existing competitors and may bring additional production capacity • New entry is often via an acquisition • A stronger force when… • Barriers to entry are weak or nonexistent • The expected retaliation by current industry participants is low
Industry Environment Analysis • Bargaining power of suppliers • Usually other business organizations that provide the industry with products and services • A supplier group is powerful when … • It is dominated by a few large companies and is more concentrated than the industry to which they sell • No satisfactory substitutes exist • Industry firms not significant customer to supplier group • Supplier’s goods are critical to buyer’s success • High switching costs due to effectiveness of supplier’s products • Poses credible threat of forward integration
Industry Environment Analysis • Bargaining power of buyers • Usually other business organizations that purchase the outputs of an industry • Customers are powerful when … • They purchase a large portion of industry’s total output • Product sales accounts for a significant portion of seller’s annual revenue • Low switching costs (to other industry product) • Industry products are undifferentiated or standardized and buyers pose a credible threat of backward integration
Industry Environment Analysis • Threat of substitute products • Goods or services from outside a given industry that perform similar or the same functions (i.e., sugar vs. sugar substitute such as NutraSweet) • A strong force when… • Low switching costs • The substitute product’s price is lower or its quality and performance capabilities are equal to or greater than those of the competing product
Industry Environment Analysis • Intensity of Rivalry Among Competitors • Firms operating in the same market, offering similar products, and targeting similar customers • A stronger force when… • Numerous or equally balanced competitors • Slow industry growth • High fixed costs or high storage costs • Lack of differentiation or low switching costs • High strategic stakes • High exit barriers
Industry Environment Analysis • Interpreting Industry Analyses • Five force analysis helps determine an industry’s attractiveness for above average returns • Stronger forces = Lower profit potential • Weaker forces = Higher profit potential • Unattractive industry characterized by • Low entry barriers • Suppliers and buyers with strong bargaining positions • Strong threat from substitute products • Intense rivalry among competitors
Industry Analysis: Strategic Groups • Strategic Groups • Set of firms emphasizing similar strategic dimensions and using a similar strategy • Can be useful for analyzing an industry’s competitive structure • Can also be helpful in diagnosing competition, positioning, and the profitability of firm’s within an industry
Strategic Group Map of Selected Automobile Manufacturers
Industry Analysis: Strategic Groups • Implications • Because firms within a group compete (offer similar products) rivalry can be intense – the greater the rivalry the greater the threat to each firm’s profitability • Strengths of the 5 forces can differ across strategic groups • The closer the strategic groups, in terms of strategy, the greater the likelihood of rivalry
The Competitor Environment and Competitor Analysis • Competitor Environment • Gives details about • A firm’s direct and indirect competitors • The competitive dynamics expected to impact a firm's efforts to generate above-average returns • Competitor analysis • Focused on predicting the dynamics of competitor's actions, responses, and intentions • Focuses on each company which a firm directly competes • Seeks to understand each competitors future objectives, current strategy, assumptions, and capabilities
Competitor Intelligence • Competitor intelligence • Set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities • Follow ethical practices when gathering competitor intelligence • Obtain public information • Attend trade fairs and shows and collect brochures, view exhibits, listen to their discussions • Some practices may be legal, but unethical • Unethical tactics can include • Blackmail, Trespassing, Eavesdropping, Stealing