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1
Environmental AnalysisEnvironmental Analysis
TopicsTopicsPurpose of General Environmental AnalysisGathering InformationGeneral EnvironmentCompetitive Environment
◦ Key Success Factors◦ Competitive Changes During Industry Evolution◦ Strategic Groups◦ National Competitive Advantage
Internal Environment
2
Purpose of General Environmental Purpose of General Environmental AnalysisAnalysisOrganizations are affected by conditions
in the environmentManagers 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
3
Gathering Information for Gathering Information for External Environmental AnalysisExternal Environmental AnalysisManagers need information in order to know
and develop an understanding about what is happening in the external environment
Three approaches to information gathering:1. Scanning: general surveillance of environmental
changes; looking for early signals of changes2. Monitoring: close attention to specific
developments that could affect the organization3. Competitive Intelligence: following actions of
competitors
4
Sources of Environmental DataSources 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If needed secondary data is not available, out of date, inaccurate or unreliable, or irrelevant to the specific problem at hand, the manager may have little choice but to collect primary data through marketing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.
5
Overcoming Problems with Data Overcoming Problems with Data CollectionCollection
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.
3-24
Three Areas for AnalysisThree Areas for Analysis
1. General Environment2. Competitive Environment3. Internal Environment
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General & Competitive EnvironmentsGeneral & Competitive EnvironmentsGeneral Environment
8
Competitive
Environment
Threat on new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Competitive rivalry
Demographics
Political/Legal
Technological
Global
Sociocultural
Macoreconomic8
GENERAL EnvironmentGENERAL EnvironmentDEMOGRAPHICSDEMOGRAPHICSCharacteristics of a country’s population
◦Size of population and growth rate◦Age distribution of population◦Education levels◦Income distribution◦Ethnic diversity◦Geographic distribution
9
General EnvironmentGeneral EnvironmentPOLITICAL/LEGALPOLITICAL/LEGALPolitical and legal conditions affecting
business◦Government policies toward business◦Investment incentives◦Business regulation: labor, environment◦Education priorities◦Budget conditions and plans
10
General EnvironmentGeneral EnvironmentTECHNOLOGICALTECHNOLOGICALTechnological developments relevant to a
business◦Telecommunications◦Internet◦On-line training◦Product and process innovations
11
General EnvironmentGeneral EnvironmentMACROECONOMICMACROECONOMIC
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
12
General EnvironmentGeneral EnvironmentSOCIOCULTURALSOCIOCULTURALInfluence of values, beliefs, and lifestyles
of a country on business◦Family relationships◦Attitudes about work◦Living arrangements◦Styles of entertainment◦Attitudes toward health
13
General EnvironmentGeneral EnvironmentGLOBALGLOBALInternational 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
14
COMPETITIVE EnvironmentCOMPETITIVE EnvironmentManagers 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
15
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Porter’s Five Forces Model of Porter’s Five Forces Model of CompetitionCompetition
Substitute Products(of firms in
other industries)
Suppliers of Key Inputs
Buyers
PotentialNew
Entrants
RivalryAmong
CompetingSellers
Threat of New EntrantsThreat of New EntrantsFundamental 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
17
Supplier PowerSupplier PowerFundamental 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 buyer18
Threat of SubstitutesThreat of SubstitutesFundamental 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
19
Buyer PowerBuyer PowerFundamental 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
20
Competitive RivalryCompetitive RivalryFundamental 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
21
Four Basic Types of CompetitionFour Basic Types of Competition1. Brand Competitors: market products that are
similar in features and benefits to the same customers at similar prices
2. Product Competitors: compete in the same product class, but with products that are different in features, benefits, and price
3. Generic Competitors: market very different products that solve the same problem or satisfy the same basic need
4. Total Budget Competitors: compete for the limited financial resources of the same customers
22
The 6-W ModelThe 6-W Model1. Who are our current and potential customers? 2. What do our customers do with our products? 3. Where do our customers purchase our
products?4. When do our customers purchase our
products? 5. Why (and how) do our customers select our
products? 6. Why do potential customers not purchase our
products?
23
Key Success FactorsKey Success FactorsIn 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
24
Examples of Key Success Factors Examples of Key Success Factors in Selected Industriesin Selected IndustriesPharmaceuticals
◦research and personal sellingBeer
◦advertising and distributionRestaurant
◦quality food and serviceRetailer
◦location and priced-for-quality
25
Changes in Competition During Changes in Competition During Industry’s EvolutionIndustry’s EvolutionOver time as an industry evolves, the
nature and basis of competition changes
Five Stages◦Embryonic—introduction of product◦Growth◦Shakeout◦Mature◦Declining
26
Stages of Industry Life CycleStages of Industry Life Cycle
27
Dem
and
Time
Embryonic
Growth
ShakeoutMature Declining
Requirements in Each Stage of Requirements in Each Stage of Industry’s EvolutionIndustry’s EvolutionEmbryonic: Know-how, educating customers,
opening distribution channelsGrowth: Know-how for continued innovation,
financing, build demandShakeout: Dominant market position, low
cost producer, high capacityMaturity: low cost production, brand loyaltyDeclining: lowest cost production, reduce
capacity
28
29
Strategic Implications of theStrategic Implications of theFive Competitive ForcesFive 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
30
Strategic Implications of theStrategic Implications of theFive Competitive ForcesFive 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
Strategic GroupsStrategic GroupsCompanies do not compete against all
companies in an industryCompanies compete against several other
companies that follow similar strategiesA 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
31
Procedure for Constructing aProcedure for Constructing aStrategic Group MapStrategic Group MapSTEP 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
32
Example: Strategic Group Map of Example: Strategic Group Map of the Video Game Industrythe Video Game Industry
Type
s of
Vid
eo G
ame
Supp
liers
/Dis
trib
utio
n C
hann
els
Overall Cost to Players of Video Games
Low(Coin-operated
equipment)
Medium (Console players cost
$100-$300)
High (Use PC)
Arcades
Home PCs
Video game consoles
Online/Internet
Sony, Sega, Nintendo, several
others
Arcade operators Publishers
of games on CD-ROMs
MSN Gaming Zone, Pogo.com,
America Online, HEAT, Engage, Oceanline, TEN
33
Nation-State and Competitive Nation-State and Competitive AdvantageAdvantageA country may provide a competitive
advantage for a companyNeed 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
34
Determinants of National Determinants of National Competitive AdvantageCompetitive Advantage
35
Strategy,Structure &
Rivalry
FactorEndowments
DemandConditions
Related andSupporting Industries
National Competitive Advantage
Strategy, Structures and RivalryStrategy, Structures and RivalryDifferent management ideologies lead to
different emphases within a companyJapan 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
36
Demand ConditionsDemand ConditionsLarge growing markets provide foundation
for global competitionMore 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
37
Related and Supporting Related and Supporting IndustriesIndustriesProvide 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
38
Factor EndowmentsFactor EndowmentsAvailability 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.
39
Conclusions About Conclusions About Determinants of National Determinants of National Competitive AdvantageCompetitive AdvantageFirms succeeding in global markets first
succeeded in intense competition in home countries
Competitive advantage for global firms comes from continuous improvement, innovation, and change.
40
INTERNAL ANALYSISINTERNAL ANALYSISHow can we assess the resource capabilities?
◦Resource Based ViewEach 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
How resources become valuableHow resources become valuableCompetitively Superior
◦ Walmart’s Logistics – Allowed better pricingResource Scarcity
◦ OPEC’s Oil Reserves – Finite oil reservesAppropriability
◦ 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
Value Chain AnalysisValue Chain AnalysisDisaggregates 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
Making meaningful comparisonsMaking meaningful comparisonsComparison 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