External Environment 2nd Lecture MSc Agricultural Economics and Management

External Environment

2nd LectureMSc Agricultural Economics and Management

Introduction

All companies face competition. For resources, customers, sales revenues, and

profits. All companies face uncertain industry

environments. Managers must position the organizations

strategically in order to compete successfully. This is what we call business definition. Requires that managers understand the dynamics of

their firms’ markets before formulating strategies.

Introduction (cont.)

Rapidly growing markets (emerging industries) tend to be less competitive and often attract new entrants. Usually provide sufficient room in competitive space for

making some mistakes.

Mature, concentrated markets provide firms with very little breathing room. Mistakes by one firm can significantly impact entire

industry. One firm’s price reductions can set off industry-wide

price war.

Purpose of External Analysis

To understand the external environment as it affects the enterprise

3 levels of analysis: General changes in business environment Changes within the industry Activities of competitors and other specifics

Selecting analytical tools

Vast range of tools available Usually use several tools but choice is

important Choice depends on:

Data available Nature of issues to be resolved Time and skills available

External Environmental Analysis

A continuous process which includesA continuous process which includes

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

Strategicposition

Assess the nature of theenvironment

Audit environmentalinfluences

Identify keycompetitive forces

Identify keyopportunities and threats

Identifycompetitive position

StrategicStrategicpositionposition

Steps in Environmental Analysis

External Environment

General Environment

Dimensions in the broader society that influence and industry and the firms within it Economic

Sociocultural

Global

Technological

Political/legal

Demographic

General Environment (cont’d) The Economic Segment

Inflation rates

Interest rates

Trade deficits or surpluses

Budget deficits or surpluses

Personal savings rate

Business savings rates

Gross domestic product

General Environment (cont’d) The Sociocultural Segment

Women in the workplace Workforce diversity Attitudes about quality of

worklife Concerns about

environment Shifts in work and career

preferences Shifts in product and

service preferences

General Environment (cont’d) The Global Segment

New global markets Changing existing

markets Important

international events Critical cultural and

institutional characteristics of global markets

General Environment (cont’d)

The Technological Segment

Product innovations

Applications of knowledge

Focus of private and government-supported R&D expenditures

New communication technologies

General Environment (cont’d)

The Political/Legal Segment Antitrust laws Taxation laws Deregulation

philosophies Labor training laws Educational

philosophies and policies

General Environment

The Demographic Segment

Population size

Age structure

Geographic distribution

Ethnic mix

Income distribution

Industry Environment

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

Threat of Substitute Products


Threat of New

Entrants

Threat of New Entrants


Rivalry Among Rivalry Among Competing Firms in Competing Firms in

IndustryIndustry

Bargaining Power of Buyers


Bargaining Power of Suppliers


Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Five Forces Model of Competition

Identify current and potential competitors and Identify current and potential competitors and determine which firms serve themdetermine which firms serve them

Conduct competitive analysisConduct competitive analysis Recognize that suppliers and buyers can become Recognize that suppliers and buyers can become

competitorscompetitors Recognize that producers of potential substitutes Recognize that producers of potential substitutes

may become competitorsmay become competitors


Barriers to entryBarriers to entry Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Switching costsSwitching costs Access to distribution channelsAccess to distribution channels Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy Expected retaliationExpected retaliation


A supplier group is powerful when:A supplier group is powerful when: it is dominated by a few large companiesit is dominated by a few large companies satisfactory substitute products are not available to satisfactory substitute products are not available to

industry firmsindustry firms industry firms are not a significant customer for the industry firms are not a significant customer for the

supplier groupsupplier group suppliers’ goods are critical to buyers’ marketplace suppliers’ goods are critical to buyers’ marketplace

successsuccess effectiveness of suppliers’ products has created high effectiveness of suppliers’ products has created high

switching costsswitching costs suppliers are a credible threat to integrate forward into suppliers are a credible threat to integrate forward into

the buyers’ industrythe buyers’ industry


Buyers (customers) are powerful when:Buyers (customers) are powerful when: they purchase a large portion of an industry’s they purchase a large portion of an industry’s

total outputtotal output the sales of the product being purchased account the sales of the product being purchased account

for a significant portion of the seller’s annual for a significant portion of the seller’s annual revenuesrevenues

they could easily switch to another productthey could easily switch to another product the industry’s products are undifferentiated or the industry’s products are undifferentiated or

standardized, and buyers pose a credible threat if standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s they were to integrate backward into the seller’s industryindustry


Product substitutes are strong threat when:Product substitutes are strong threat when:

customers face few switching costscustomers face few switching costs substitute product’s price is lowersubstitute product’s price is lower substitute product’s quality and performance substitute product’s quality and performance

capabilities are equal to or greater than those of capabilities are equal to or greater than those of the competing productthe competing product

Intensity of Rivalry

Intensity of rivalry is stronger when competitors:Intensity of rivalry is stronger when competitors:

are numerous or equally balancedare numerous or equally balanced experience slow industry growthexperience slow industry growth have high fixed costs or high storage costshave high fixed costs or high storage costs lack differentiation or low switching costslack differentiation or low switching costs experience high strategic stakesexperience high strategic stakes have high exit barriershave high exit barriers

High Exit Barriers

Common exit barriers include:Common exit barriers include: specialized assets (assets with values linked to a specialized assets (assets with values linked to a

particular business or location)particular business or location) fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual strategic interrelationships (relationships of mutual

dependence between one business and other parts dependence between one business and other parts of a company’s operation, such as shared facilities of a company’s operation, such as shared facilities and access to financial markets)and access to financial markets)

emotional barriers (career concerns, loyalty to emotional barriers (career concerns, loyalty to employees, etc.)employees, etc.)

government and social restrictionsgovernment and social restrictions

Effects of Entry Barriers and Exit Barriers on Industry Profits


Entry Barriers

Exit Barriers

High

Low

HighLow

Low, Stable Returns

Low, Stable Returns

Entry Barriers

Exit Barriers

High

Low

HighLow



High, Stable Returns


Entry Barriers

Exit Barriers

High

Low

HighLow

Low, Stable Returns

Low, Stable Returns



Low, Risky Returns

Low, Risky Returns

Entry Barriers

Exit Barriers

High

Low

HighLow

Low, Stable Returns

Low, Stable Returns





High, Risky Returns

High, Risky Returns

Entry Barriers

Exit Barriers

High

Low

HighLow

Low, Stable Returns

Low, Stable Returns



Low, Risky Returns

Low, Risky Returns



Limitations of the Five Forces Model

Attempt to minimize the impact of any of the forces that are acting to make the industry attractive.

Make their industries more attractive by reducing the power of the five forces; or

Shield or protect their companies from the power of the forces.

Certain action may lead to allegations of collusion or other unfair practices (Microsoft vs. Justice Department).

Limitations of the Five Forces Model (cont.)

Model provides “snapshot” of industry at that time, but fails to show how industry is changing. Most managers assume that conditions will

remain relatively stable.

The life cycle model

Few: trial of earlyadopters

Fewcompetitors

Growing adopters: trial of product/service

Entry of competitors

Attempt to achieve trial

Fight for share

Undifferentiatedproducts/services

Growing selectivity of purchase

May be many

Likely price cutting for volume

Shake-out of weakest competitors

Saturation of users

Repeat purchase reliance

Fight to maintain share

Difficulties in gaining/taking share

Emphasis on efficiency/low cost

Drop-offin usage

Exit of somecompetitors

Selectivedistribution

Development Growth Shakeout Maturity Decline

Users/buyers

Competitiveconditions

Industry Analysis (EFE)

External Factor Evaluation MatrixExternal Factor Evaluation MatrixSummarize & evaluate:

CompetitivePoliticalCultural

Technological

EnvironmentalSocial

Governmental

DemographicEconomic


Five-Step process:Five-Step process:

List key external factors (10-20)Opportunities & threats

Assign weight to each (0 to 1.0)Sum of all weights = 1.0

Industry Analysis (EFE) Assign 1-4 rating to each factor

• Firm’s current strategies response to the factor

Multiply each factor’s weight by its rating• Produces a weighted score

Sum the weighted scores for each Determines the total weighted score for the

organization.

Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5

.201.20 Clinton Administration

.202.10 Bad media exposure from FDA

.102.05 Smokeless market SE region U.S.

.153.05 Production limits on tobacco

.202.10 Legislation against the tobacco industry

Threats

.303.10 More social pressure to quit smoking

2.101.00TOTAL

.604.15 Pinkerton leader in discount market

.051.05 Astronomical Internet growth

.153.05 Increased demand

.151.15 Global markets untapped

Weighted

scoreRatingWeight

Key External FactorsOpportunities


Total weighted score of 4.0 =Organization response is outstanding to threats & weaknesses

Total weighted score of 1.0 =Firm’s strategies not capitalizing on opportunities or avoiding threats


The firm in the previous example, has a total weighted score of 2.10 indicating that the firm is below average in its effort to pursue strategies that capitalize on external opportunities and avoid threats.


Important

Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.

Competitor AnalysisCompetitor Analysis

The follow-up to Industry Analysis is The follow-up to Industry Analysis is effective analysis of a firm’s effective analysis of a firm’s

CompetitorsCompetitors

CompetitiveCompetitiveEnvironmentEnvironment



Competitor Environment

All of the companies that the firm competes against.

Strategic Groups

Strategic group: a group of firms in an industry Strategic group: a group of firms in an industry following the same or similar strategy along the following the same or similar strategy along the same strategic dimensionssame strategic dimensions

The strategy followed by a strategic group differs The strategy followed by a strategic group differs from strategies being implemented by other from strategies being implemented by other companies in the industrycompanies in the industry

Strategic Group Analysis

Strategic Group Analysis is useful to: Identify firms with similar strategic characteristics Therefore identify the most direct competitors Identify mobility barriers Identify strategic opportunities (“strategic

spaces”) Strategic threats and problems

It is useful to consider the extent to which organisations differ in terms ofcharacteristics such as:

· Extent of product (or service) diversity· Extent of geographic coverage· Number of market segments served· Distribution channels used· Extent (number) of branding· Marketing effort (e.g. advertising spread, size of salesforce)· Extent of vertical integration· Product or service quality· Technological leadership (a leader or follower)· R&D capability (extent of innovation in product or process)· Cost position (e.g. extent of investment in cost reduction)· Utilisation of capacity· Pricing policy· Level of gearing· Ownership structure (separate company or relationship with parent)· Relationship to influence groups (e.g. government, the City)· Size of organisation

Strategic Groupsin the Personal Computer Industry

Pro

du

ct Q

ual

ity

Customization and Speed of DeliveryLow

Low

High

High

FragmentedPlayers

Packard BellAST Research

Tandy

CompaqHewlett-Packard

IBM

Dell

Exited from market, 1999

Gateway

Apple

Trends in Strategic Groups

Strategic groups can shift over time as market changes

Entire strategic groups can emerge or disappear over time

Industry consolidation alters strategic groups Distinctiveness enhances firm’s sustainable

competitive advantage

Competitor Environment

Competitor intelligenceCompetitor intelligence is the ethical gathering of is the ethical gathering of needed information and data about competitors’ needed information and data about competitors’ objectives, strategies, assumptions, and objectives, strategies, assumptions, and capabilitiescapabilities WWhat drives the competitor as shown by its hat drives the competitor as shown by its future future

objectivesobjectives WWhat the competitor is doing and can do as revealed hat the competitor is doing and can do as revealed

by its by its current strategycurrent strategy What the competitor believes about itself and the What the competitor believes about itself and the

industry, as shown by its industry, as shown by its assumptionsassumptions What the the competitor may be able to do, as shown What the the competitor may be able to do, as shown

by its by its capabilitiescapabilities

Competitor Analysis

Future Objectives:Future objectivesFuture objectives How do our goals compare

with our competitors’ goals? Where will the emphasis be

placed in the future? What is the attitude toward

risk?

Competitor Analysis

Current strategyCurrent strategy

Current Strategy: How are we currently

competing? Does this strategy support

changes in the competitive structure?

Future objectivesFuture objectives

Competitor Analysis

AssumptionsAssumptions

Assumptions: Do we assume the future will

be volatile? Are we operating under a

status quo? What assumptions do our

competitors hold about the industry and themselves?



Competitor Analysis

CapabilitiesCapabilities

Capabilities: What are our strengths and

weaknesses? How do we rate compared to

our competitors?




Competitor Analysis

ResponseResponse

Response: What will our competitors do

in the future? Where do we hold an

advantage over our competitors?

How will this change our relationship with our competitors?CapabilitiesCapabilities




Industry Analysis (CPM)

Competitive Profile Matrix

Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position

(CPM) Procter Avon L’Oreal &

Gamble

2.803.25

3.15

1.00Total

0.1530.20

40.05

10.05Market Share

0.4020.40

20.80

40.20Global Expansion

0.2020.40

40.40

40.10Customer Loyalty

0.4530.45

30.60

40.15Financial Position

0.3030.30

30.40

40.10Management

0.4040.30

30.30

30.10Price Competition

0.3030.40

40.40

40.10Product Quality

0.6030.80

40.20

10.20Advertising

ScoreRating

Score

Rating

Score

Rating

Weight

Critical Success Factor

Documents

External Environment 2nd Lecture MSc Agricultural Economics and Management