Strategic Management Ch03

© 2006 by Nelson, a division of Thomson Canada Limited. 3-1

The External Environment: Opportunities, Threats, Industry

Competition & Competitor Analysis

Chapter Three

© 2006 by Nelson, a division of Thomson Canada Limited.


The Strategic Management

Process

Chapter 5: Bus.-Level Strategy

Chapter 6:Competitive Dynamics

Chapter 7:Corp.-Level

Strategy

Chapter 8:Acquisition & Restructuring

Chapter 9:International

Strategy

Chapter 10:Cooperative

Strategy

Strategy Formulation

Chapter 11:Corporate

Governance

Ch. 12: Org. Structure & Controls

Chapter 13:Strategic

Leadership

Chapter 14:Org. Renewal & Innovation

Strategy Implementation

StrategicActions

Chapter 3:The External Environment

Chapter 4:The Internal Environment

Strategic Competitiveness

Strategic Mission & Strategic Intent

Strategic Objectives & Inputs

Chapter 1: Strategic

ManagementStrategic

Competitiveness Ch. 2: Strat. Mgmt . &

Performance



The External Environment: Opportunities, Threats, Ind. Competition & Competitor Analysis

Knowledge Objectives

1. Explain the importance of analyzing and understanding the firm’s external environment

2. Describe the general environment & industry environment3. Discuss the 4 activities of the external environmental

analysis process4. Name & describe the general environment’s 6 segments 5. Identifying five competitive forces and how they

determine an industry’s profit potential6. Define strategic groups and their influence on the firm7. Describe what firms need to know about competitors &

different methods used to collect intelligence about them


General

Envi

ronm

ent

General

Environment

Gene

ral

Environment

EconomicEconomic

Political/Legal

Political/Legal

TechnologicalTechnological

Glo

bal

Glo

bal

Dem

ogra

phic

Dem

ogra

phic Sociocultural

Sociocultural

The External Environment

IndustryIndustryEnvironmentEnvironment

Threat of new entrantsPower of suppliers

Power of buyersProduct substitutesIntensity of rivalry

CompetitorCompetitorEnvironmentEnvironment


General

Envi

ronm

ent

General

Environment

Gene

ral

Environment

Dem

ogra

phic

Dem

ogra

phic

Elements of the General Environment

DemographicDemographic• Population size• Age structure• Ethnic Mix • Geographic Distribution• Income Distribution• Immigration


General

Envi

ronm

ent

General

Environment

Gene

ral

Environment


EconomicEconomic• Savings rates • Inflation/interest rate• Gross domestic prod. • Trade deficits or surpluses • Budget deficits or surpluses

EconomicEconomic


General

Envi

ronm

ent

General

Environment

Gene

ral

Environment


SocioculturalSociocultural• Enviro. Concerns• Workforce diversity • Work life quality views• Shifts in product / service preferences • Shifts in 2 career preferences

Sociocultural

Sociocultural


General

Envi

ronm

ent

General

Environment

Gene

ral

Environment


GlobalGlobal• Big political events• Different cultural & institutional attributes• Critical global markets• Newly industrialized countries

Glo

bal

Glo

bal


General

Envi

ronm

ent

General

Environment

Gene

ral

Environment


TechnologicalTechnological• Focus of R&D expenditures• Product innovations• Knowledge Resources• Process Innovations• New communication technologies

TechnologicalTechnological


General

Envi

ronm

ent

General

Environment

Gene

ral

Environment


Political / LegalPolitical / Legal• Labour Laws•Government econ. involvement views• De-/ Regulation views• Competition Laws• Education policy• Taxation laws

Political/Legal

Political/Legal


The Industry EnvironmentThe set of factors that directly influences a firm, it’s

competitive actions & competitive responses:

IndustryIndustryEnvironmentEnvironment

Threat of new entrantsPower of suppliers

Power of buyersProduct substitutesIntensity of rivalry

CompetitorCompetitorEnvironmentEnvironment


Competitor Analysis

Predicting the dynamics of competitor actions, responses and intentions.


The I/O Model of Superior Returns

The Industrial Organization Model suggests that above-average returns for any firm are largely determined by characteristics outside the firm.

The I/O model largely focuses on industry attractiveness or structure of the external environment rather than internal characteristics of the firm. IOIO



External Environment

Competitive Environment

General Environment

Industry Environment

an *

Action required:

Study the external environment, especially the industry environment.


The I/O Model of Superior ReturnsAction required:Action required:Locate an industry with high potential for above-average returns.


General Environment



An Attractive Industry

An industry whose structural characteristics suggest above-average returns are possible

an *




General Environment





Action required:Action required:I.d. strategy called for by the industry to earn above-average returns.

Selection of a strategy linked with above-average returns in a particular industry

StrategyFormulation

an *




General Environment



Action required:Action required:Develop / acquire assets and skills needed to implement the strategy.An Attractive

Industry



StrategyFormulationAssets and Skills

Assets and skills required to implement a chosen strategy

an *




General Environment








Action required:Action required:Use the firm’s strengths (its assets or skills) to implement the strategy.


Selecting strategic actions linked with effective implementation of the chosen strategy

an *




General Environment









Selecting strategic actions linked with effective implementation of the chosen strategy

Action required:Action required:Maintain selected strategy in order to out-perform industry rivals.

Superior ReturnsEarning of above-average returns

an *


The external environmental analysis process should be conducted on a continuous basis.

This process includes four activities:

Scanning Identifying early signals of environmental changes and trends

Monitoring Detect meaning by ongoing observations of

environmental changes and trends

Forecasting Developing projections of anticipated outcomes based on monitored changes and trends

Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management

External Environmental Analysis


Porter’s 5 Forces Model of Competition

The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved.

Threat of New

EntrantsThreat of

Threat of

New Entrants

New EntrantsB

arga

inin

g P

ower

of

Buy

ers

Threat ofSubstitute Products

Bargaining

Pow

er of

Suppliers

Rivalry A

mong

Competing

Firms

Five Forces ofFive Forces ofCompetitionCompetition

The threat of new entrants depends

on barriers to entry


Product Differentiation** Capital Requirements**

Switching Costs**Access to Distribution Channels**

Cost Disadvantages Independent of Scale** Government Policy**

Expected Retaliation**

Economies of Scale**

Barriers to Entry

Threat of New Entrants

*



Bargaining Power of Suppliers

*

Bargaining

Bargaining

Pow

er of P

ower of

SuppliersSuppliers B

arga

inin

g P

ower

of

Buy

ers

Threat of

New Entrants


Rivalry A

mong

Competing

Firms


Threat of New

Entrants

Bargaining Power of suppliers

depends on a number of factors


** Supplier industry is dominated by a few firms.

** Buyer is not an important customer to supplier.

** Suppliers’ product is an important input to buyers’ product.

** Suppliers’ products are differentiated.

Suppliers are likely to be powerful if:

** Suppliers’ products have high switching costs.

** Supplier poses credible threat of forward integration.

Suppliers exert power in the industry by:

** Threatening to raise prices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers’ products have few substitutes.

**


*



Bargaining Power of Buyers

*


Threat of New

Entrants

Bar

gain

ing

Bar

gain

ing

Pow

er o

f P

ower

of

Buy

ers

Buy

ers

Threat of

New Entrants


Bargaining

Pow

er of

Suppliers

Rivalry A

mong

Competing

Firms


Bargaining Power of buyers depends

on a number of factors


** Playing firms off ofeach other

Buyers compete with supplying

industry by:

** Bargaining down prices

** Forcing higher quality

Buyer groups are likely to be powerful if:

** Buyers are concentrated or purchases are large relative to seller’s sales

** Purchase accounts for a significant fraction of supplier’s sales

** Products are undifferentiated

** Buyers face few switching costs

** Buyers’ industry earns low profits

** Buyer presents a credible threat of backward integration

** Product unimportant to quality

** Buyer has full information



Threat of Substitute Products

*



Threat of New

Entrants

Threat ofThreat ofSubstitute Substitute ProductsProducts

Bar

gain

ing

Pow

er o

f B

uyer

s

Threat of

New Entrants

Bargaining

Pow

er of

Suppliers

Rivalry A

mong

Competing

Firms


Substitutes are not direct competitors



Products with similar function limit the prices firms can charge

** Products with improving price / performance tradeoffs relative to present industry products

Keys to evaluating substitute products:

For Example:For Example:

Electronic security systems in place of security guards

Fax machines or e-mailed attachments in place of overnight mail delivery




Rivalry Among Competing Firms

*

Threat of New

Entrants




Rivalry A

mong

Rivalry A

mong

Competing

Competing

Firms

Firms

Bar

gain

ing

Pow

er o

f B

uyer

s

Threat of

New Entrants


Bargaining

Pow

er of

Suppliers


Reduced rivalry means greater profitability


Occurs when a firm is pressured or sees an opportunity

** Price competition often leaves entire industry worse off

Intense rivalry often plays out in the following ways

Jockeying for strategic position**Using price competition**Staging advertising battles**Increasing consumer warranties or service**Making new product introductions**

Advertising battles may increase total industry demand, but may be costly to smaller competitors

**

Rivalry Among Existing Competitors


Cutthroat competition is more likely to occur when

** Numerous or equally balanced competitors

** Slow growth industry

** High fixed costs

** Lack of differentiation or switching costs** High storage costs

** Capacity added in large increments

** High strategic stakes

**High exit barriers

** Diverse competitors



** Specialized assets

High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.

Fixed cost of exit (e.g., labour agreements)**Strategic interrelationships**Emotional barriers**Government and social restrictions**



Strategic Groups

1. The more intense the rivalry of competitors within a group the greater the threat to each firms profitability.

2. The strengths of the 5 competitive forces differ across strategic groups. Thus firms within various strategic groups have different pricing policies.

3. The closer groups are in terms of their strategies & dimensions emphasized, the greater the chance competitive rivalry between groups.

A set of firms emphasizing similar strategic dimensions to use a similar strategy


Competitor Environment

Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, & capabilities.

• What drives the competitor as shown by its future objectives,

• What the competitor is doing and can do as revealed What the competitor is doing and can do as revealed by its by its current strategy,

• What the competitor believes about itself and the industry, as shown by its assumptions,

• 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 capabilities.


Competitor Analysis

Future 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?

Future objectivesFuture objectives


Competitor Analysis

Current strategyCurrent strategy

Current Strategy:Future objectivesFuture objectives

• How are we currently competing?

• Does this strategy support changes in the competitive structure?


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 advan-tage over our competitors?

• How will this change our relationship with our competitors?




CapabilitiesCapabilities


The Strategic Management

Process

Chapter 5: Bus.-Level Strategy

Chapter 6:Competitive Dynamics

Chapter 7:Corp.-Level

Strategy

Chapter 8:Acquisition & Restructuring

Chapter 9:International

Strategy

Chapter 10:Cooperative

Strategy

Strategy Formulation

Chapter 11:Corporate

Governance

Ch. 12: Org. Structure & Controls

Chapter 13:Strategic

Leadership

Chapter 14:Org. Renewal & Innovation


StrategicActions


Chapter 4:The Internal Environment

Strategic Competitiveness

Strategic Mission & Strategic Intent

Strategic Objectives & Inputs

Chapter 1: Strategic

ManagementStrategic

Competitiveness Ch. 2: Strat. Mgmt . &

Performance

