External Environmental Analysis

Macro-environment, Industry, and

Competitive Analysis

Macro-environmental Forces

General Environment

• Dimensions in the broader society that

influence and industry and the firms

within it− Economic

− Sociocultural

− Global

− Technological

− Political/legal

− Demographic

Industry Environment

• Set of factors directly influencing a firm

and its competitive actions and

competitive responses

Competitor Environment

• All of the companies that the firm competes

against.

Analysis of the External Environments

• General environment−Focused on the future

• Industry environment−Focused on factors and conditions influencing

a firm’s profitability within an industry

• Competitor environment−Focused on predicting the dynamics of

competitors’ actions, responses and intentions

Opportunities and Threats

• Opportunity−A condition in the general environment that if

exploited, helps a company achieve strategic competitiveness

• Threat−A condition in the general environment that

may hinder a company’s efforts to achieve strategic competitiveness

External Environmental Analysis

• A continuous process which includes

−Scanning for early signals of potential changes and trends in the general environment

−Monitoring changes to see if a trend emerges from among those spotted by scanning

−Forecasting projections of outcomes based on monitored changes and trends

−Assessing the timing and significance of changes and trends on the strategic management of the firm

General Environment

•The Economic Segment

−Inflation rates

−Interest rates

−Trade deficits or surpluses

−Budget deficits or surpluses

−Personal savings rate

−Business savings rates

−Gross domestic product

•The Socio-cultural Segment

−Women in the workplace

−Workforce diversity

−Attitudes about quality of work-life

−Concerns about environment

−Shifts in work and career preferences

−Shifts in product and service preferences

General Environment

•The Global Segment

− Important political events

− Critical global markets

− Newly industrialized countries and emerging markets

− Different cultural and institutional attributes

•The Technological Segment

−Product innovations

−Applications of knowledge

−Focus of private and government-supported R&D expenditures

−New communication technologies

General Environment

•The Political/Legal Segment

−Antitrust laws

−Taxation laws

−Deregulation philosophies

−Labor training laws

−Educational philosophies and policies

•The Demographic Segment

−Population size

−Age structure

−Geographic distribution

−Ethnic mix

−Income distribution

Industry Environment

• Industry Defined−A group of firms producing products that are

close substitutes

• Firms that influence one another

• Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns

The Five Forces of Competition Model

Barriers to entry

• A barrier to entry is any factor that −Increases the costs born by potential

entrants (relative to incumbents), after they enter the market

−Decreases the market share potential entrants might receive upon entering the industry

−Other factors• Trade restrictions (tariffs, quotas, voluntary

export restraints, infant industry protection, embargoes)

• Government regulation of industries• Industry certification boards (CPAs, Actuaries)

• A barrier to entry is any factor that −Increases the costs born by potential

entrants (relative to incumbents), after they enter the market

−Decreases the market share potential entrants might receive upon entering the industry

−Other factors• Trade restrictions (tariffs, quotas, voluntary

export restraints, infant industry protection, embargoes)

• Government regulation of industries• Industry certification boards (CPAs, Actuaries)

Barriers that Increase Cost

• Capital markets (requires inefficient capital

markets)

• Proprietary technology (patents, copyrights,

trade secrets)

• Know-how (knowledge, routines, capabilities)

• Access to raw materials (unanticipated

value)

• Geographic locations

• Economies of scale

• Learning by doing

• Capital markets (requires inefficient capital

markets)

• Proprietary technology (patents, copyrights,

trade secrets)

• Know-how (knowledge, routines, capabilities)

• Access to raw materials (unanticipated

value)

• Geographic locations

• Economies of scale

• Learning by doing

Barriers Limiting Market Share

• Product differentiation

• Advertising/Brand image

• Access to distribution

• Customer switching costs

• Expected retaliation

• Product differentiation

• Advertising/Brand image

• Access to distribution

• Customer switching costs

• Expected retaliation

Barriers to Entry

•Product differentiation

−Unique products

−Customer loyalty

−Products at competitive prices

•Switching Costs

−One-time costs customers incur when they buy from a different supplier

−New equipment

−Retraining employees

−Psychic costs of ending a relationship

•Capital Requirements

−Physical facilities

−Inventories

−Marketing activities

−Availability of capital

•Access to Distribution Channels

−Stocking or shelf space

−Price breaks

−Cooperative advertising allowances

o Economies of Scaleo Marginal improvements in efficiency that a firm experiences as it incrementally increases its size

Barriers to Entry (cont’d)

•Cost Disadvantages

Independent of Scale

−Proprietary product technology

−Favorable access to raw materials

−Desirable locations

•Government policy

−Licensing and permit requirements

−Deregulation of industries

•Expected retaliation−Responses by existing competitors may depend on a firm’s present stake in the industry (available business options)

Power of Suppliers

• Suppliers deliver inputs such as−Labor−Management−Technology−Materials

• Suppliers influence our costs through

the strength of their bargaining

power

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 buyers’ marketplace success

−Suppliers’ products create high switching costs.

−Suppliers pose a threat to integrate forward into buyers’ industry

Buyer/Customer Power & Preferences

• Buyers/Customers influence our

prices through:

−Their ability to exercise bargaining power over us – industrial markets with few buyers

−The strength of their preferences – consumer sovereignty and elasticity of demand

Bargaining Power of Buyers/Customers

• Buyer power increase when:−Buyers are large and few in

number−Buyers purchase a large portion of an

industry’s total output−Buyers’ purchases are a significant portion of

a supplier’s annual revenues−Buyers can switch to another product without

incurring high switching costs−Buyers pose threat to integrate backward into

the sellers’ industry

Threat of Substitute Products

• Substitutes are defined by product function, not by product form

• The threat of substitute products increases when:−Buyers face few switching costs−The substitute product’s price is lower −Substitute product’s quality and performance

are equal to or greater than the existing product−Consumer tastes and preferences

• Differentiated industry products that are valued by customers reduce this threat

Intensity of Rivalry/Threat of Rivalry

• Rivalry is the threat of established

firms competing away their

economic profits−Price competition−Frequent introduction of new products−Intense advertising campaigns−Rapid competitive response

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

Interpreting Industry Analyses

Suppliers and buyers have strong positions

Low entry barriers

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential

UnattractiveIndustry

Interpreting Industry Analyses

High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

High profit potential

AttractiveIndustry

Competitor Analysis

• Competitor Intelligence−The ethical gathering of needed information

and data that provides insight into:

•A competitor’s direction (future objectives)

•A competitor’s capabilities and intentions (current strategy)

•A competitor’s beliefs about the industry (its assumptions)

•A competitor’s capabilities

Competitor Analysis Components