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Environmental Analysis. Purpose of General Environmental Analysis Gathering Information General Environment Competitive Environment Key Success Factors Competitive Changes During Industry Evolution Strategic Groups National Competitive Advantage Internal Environment. Topics.

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topics

Purpose of General Environmental Analysis

  • Gathering Information
  • General Environment
  • Competitive Environment
    • Key Success Factors
    • Competitive Changes During Industry Evolution
    • Strategic Groups
    • National Competitive Advantage
  • Internal Environment
Topics
purpose of general 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 organization’s future
Purpose of General Environmental Analysis
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
Gathering Information for External Environmental Analysis
sources of environmental data

Internal sources may also be a good source of data on customer needs, attitudes, and behavior. The organization's own records are the best source of data on current objectives, performance, and available resources.

  • The sheer volume of available information on the economy, our population, and business activities is the major strength of most government data sources.
  • The articles and research reports that are available in periodicals and books provide a gamut of information about many organizations, industries, and nations.
  • Commercial sources are almost always relevant to a specific issue because they deal with the actual behaviors of customers in the marketplace.
  • The best approach to secondary data collection is one that blends data and information from a variety of sources.
  • If needed secondary data is not available, out of date, inaccurate or unreliable, or irrelevant to the specific problem at hand, the manager may have little choice but to collect primary data through marketing research.
Sources of Environmental Data
overcoming problems with data collection
One of the most common problems is an incomplete or inaccurate assessment of the situation for which data is being gathered to address.
  • Another common difficulty is the expense of collecting environmental data.
  • A third issue is the time it takes to collect environmental data.
  • A final challenge is finding a way to organize the vast amount of data and information that are collected during the environmental analysis.
Overcoming Problems with Data Collection

3-24

three areas for analysis

General Environment

  • Competitive Environment
  • Internal Environment
Three Areas for Analysis
general competitive environments

General Environment

Demographics

Competitive

Environment

Threat on new entrants

Bargaining power of suppliers

Bargaining power of buyers

Threat of substitute products

Competitive rivalry

Global

Political/Legal

Sociocultural

General & Competitive Environments

Technological

Macoreconomic

8

general environment demographics

Characteristics of a country’s population

    • Size of population and growth rate
    • Age distribution of population
    • Education levels
    • Income distribution
    • Ethnic diversity
    • Geographic distribution
GENERAL EnvironmentDEMOGRAPHICS
general environment political legal

Political and legal conditions affecting business

    • Government policies toward business
    • Investment incentives
    • Business regulation: labor, environment
    • Education priorities
    • Budget conditions and plans
General EnvironmentPOLITICAL/LEGAL
general environment technological

Technological developments relevant to a business

    • Telecommunications
    • Internet
    • On-line training
    • Product and process innovations
General EnvironmentTECHNOLOGICAL
general environment macroeconomic

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
General EnvironmentMACROECONOMIC
general environment sociocultural

Influence of values, beliefs, and lifestyles of a country on business

    • Family relationships
    • Attitudes about work
    • Living arrangements
    • Styles of entertainment
    • Attitudes toward health
General EnvironmentSOCIOCULTURAL
general environment global

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
General EnvironmentGLOBAL
competitive environment

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
COMPETITIVE Environment
slide16

Porter’s Five Forces Model of Competition

Substitute Products

(of firms in

other industries)

Rivalry

Among

Competing

Sellers

Suppliers of Key Inputs

Buyers

Potential

New

Entrants

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
Threat of New Entrants
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
    • Supplier’s product is important input to buyer’s product
    • Supplier’s products have high switching costs
    • Supplier can “integrate forward” and become competitor of buyer
Supplier Power
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
Threat of Substitutes
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 seller’s sales
    • Products are undifferentiated
    • Buyer has low switching costs
    • Buyer has low profits
    • Buyer can “integrate backward” and supply the product to itself
Buyer Power
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
Competitive Rivalry
four basic types of competition

Brand Competitors: market products that are similar in features and benefits to the same customers at similar prices

  • Product Competitors: compete in the same product class, but with products that are different in features, benefits, and price
  • Generic Competitors: market very different products that solve the same problem or satisfy the same basic need
  • Total Budget Competitors: compete for the limited financial resources of the same customers
Four Basic Types of Competition
the 6 w model

Who are our current and potential customers?

  • What do our customers do with our products?
  • Where do our customers purchase our products?
  • When do our customers purchase our products?
  • Why (and how) do our customers select our products?
  • Why do potential customers not purchase our products?
The 6-W Model
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
Key Success Factors
examples of key success factors in selected industries

Pharmaceuticals

    • research and personal selling
  • Beer
    • advertising and distribution
  • Restaurant
    • quality food and service
  • Retailer
    • location and priced-for-quality
Examples of Key Success Factors in Selected Industries
changes in competition during industry s evolution

Over time as an industry evolves, the nature and basis of competition changes

  • Five Stages
    • Embryonic—introduction of product
    • Growth
    • Shakeout
    • Mature
    • Declining
Changes in Competition During Industry’s Evolution
stages of industry life cycle

Demand

Embryonic

Mature

Declining

Shakeout

Growth

Stages of Industry Life Cycle

Time

requirements in each stage of industry s 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
Requirements in Each Stage of Industry’s Evolution
slide29

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
slide30

Strategic Implications of theFive Competitive Forces

  • Competitive environment is idealfrom a profit-making standpointwhen:
    • 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
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
Strategic Groups
procedure for constructing a strategic 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 group’s respective share of total industry sales

Procedure for Constructing aStrategic Group Map
slide33

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

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
  • Porter’s Diamond of Determinants of National Competitive Advantage
Nation-State and Competitive Advantage
determinants of national competitive advantage

Strategy,

Structure &

Rivalry

National Competitive Advantage

Factor

Endowments

Demand

Conditions

Determinants of National Competitive Advantage

Related and

Supporting

Industries

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 country’s companies concentrate on process and product improvement
  • Intense domestic rivalry leads to product improvements and cost reduction in order to compete for domestic customers
Strategy, Structures and Rivalry
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
Demand Conditions
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
Related and Supporting Industries
factor endowments

Availability of traditional factors of production—land, labor, capital, entrepreneurship—provide 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.
Factor Endowments
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.
Conclusions About Determinants of National Competitive Advantage
internal analysis
How can we assess the resource capabilities?
    • Resource Based View
  • Each firm has three basic kinds of Resources
      • Tangible assets
        • Ford’s Cash Reserves
        • 3M’s Patents
        • Georgia Pacific Land holdings
        • Coca Cola’s formula
      • Intangible assets
        • Nike - Brand Name
        • Dell – Reputation
        • GE- Welch’s Leadership
      • Organizational capabilities
        • Dell’s Customer Service
        • Sony’s Product Development
        • 3M’s Innovation
INTERNAL ANALYSIS
how resources become valuable
Competitively Superior
    • Walmart’s Logistics – Allowed better pricing
  • Resource Scarcity
    • OPEC’s Oil Reserves – Finite oil reserves
  • Appropriability
    • Who profits from a resource?
      • “Mickey Mouse does not have an agent”
  • Inimitability
    • Priceline’s pricing for air tickets
    • Wendy’s Drive Through
      • Path dependency - Steinway with Pianos
      • Causal ambiguity – South West Airlines
      • Economic Deterrence
  • Durability
    • How long will the competitive advantage last?
      • Patentable products – longer durability
How resources become valuable
value chain analysis
Disaggregates a business into sets of activities
    • Primary Activities – Inbound logistics --- Operations ----Outbound logistics ---- marketing and Sales and service
    • Support activities – General Administration, HRM, R&D, Systems Development
  • How to do a VCA
    • Identify key activities
    • Allocate costs to each activity
    • Identify the activities that differentiate the firm
    • Examine the Value Chain
      • Different activities may be important – industry and strategy
      • Importance of activities can vary based on a company position in a larger scheme of activities
Value Chain Analysis
making meaningful comparisons
Comparison with past performance
    • Trend analysis – Where are you relative to the past.
    • Stages of Industry Evolution
      • Emergence, Growth, Maturity and Decline
      • Strengths or competencies needed at each stage are different
    • Benchmarking with the competitors
      • Key competitors
      • Best practices irrespective of industry
Making meaningful comparisons