1 MGNT428 – Business Policy & Strategy Dr. Tom Lachowicz, Instructor The External Environment Hitt - Chapter 2.

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MGNT428 – Business PolicyMGNT428 – Business Policy& Strategy& Strategy

Dr. Tom Lachowicz, InstructorDr. Tom Lachowicz, Instructor

The External EnvironmentHitt - Chapter 2

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Knowledge ObjectivesKnowledge Objectives

• Studying this chapter should provide you with the strategic management knowledge needed to:

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

– Define and describe the general environment and the industry environment.

– Discuss the four activities of the external environmental analysis process.

– Name and describe the general environment’s six segments.

– Identify the five competitive forces and explain how they determine an industry’s profit potential.

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Knowledge Objectives (cont’d)Knowledge Objectives (cont’d)

• Studying this chapter should provide you with the strategic management knowledge needed to:

Define strategic groups and describe their influence on the firm.

Describe what firms need to know about their competitors and different methods used to collect intelligence about them.

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Figure 1.1Figure 1.1

Copyright © 2004 South-Western. All rights reserved.

The Hitt Chapters The Hitt Chapters LayoutLayout

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The External The External EnvironmentEnvironment

Figure 2.1Figure 2.1

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General EnvironmentGeneral Environment

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

– Economic

– Sociocultural

– Global

– Technological

– Political/legal

– Demographic

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Industry EnvironmentIndustry Environment

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Analysis of the External EnvironmentsAnalysis 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

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Opportunities and ThreatsOpportunities 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

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External Environmental AnalysisExternal 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

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Components of the External Components of the External Environmental AnalysisEnvironmental Analysis

Table 2.2Table 2.2

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General Environment (cont’d)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

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General Environment (cont’d)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

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General Environment (cont’d)General Environment (cont’d)

• The Global Segment

– Product innovations

– Applications of knowledge

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

– New communication technologies

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General Environment (cont’d)General Environment (cont’d)• The Technological

Segment

– Product innovations

– Applications of knowledge

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

– New communication technologies

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General Environment (cont’d)General Environment (cont’d)

• The Political/Legal Segment

– Antitrust laws

– Taxation laws

– Deregulation philosophies

– Labor training laws

– Educational philosophies and policies

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General EnvironmentGeneral Environment

• The Demographic Segment

– Population size

– Age structure

– Geographic distribution

– Ethnic mix

– Income distribution

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The Industry EnvironmentThe 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

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

Figure 2.2Figure 2.2

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Threat of New Entrants:Threat of New Entrants: Barriers Barriers to Entryto Entry

• Economies of scale• Product differentiation• Capital requirements• Switching costs• Access to distribution channels• Cost disadvantages independent of scale• Government policy• Expected retaliation

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Barriers to EntryBarriers to Entry

• Economies of Scale

– Marginal improvements in efficiency that a firm experiences as it incrementally increases its size

• Advantages and disadvantages of large-scale and small-scale entry

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Barriers to Entry (cont’d)Barriers to Entry (cont’d)

• Product differentiation

– Unique products

– Customer loyalty

– Products at competitive prices

• Capital Requirements

– Physical facilities

– Inventories

– Marketing activities

– Availability of capital

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Barriers to Entry (cont’d)Barriers to Entry (cont’d)

• Switching Costs

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

– New equipment

– Retraining employees

– Psychic costs of ending a relationship

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Barriers to Entry (cont’d)Barriers to Entry (cont’d)

• Access to Distribution Channels

– Stocking or shelf space

– Price breaks

– Cooperative advertising allowances

• Cost Disadvantages Independent of Scale

– Proprietary product technology

– Favorable access to raw materials

– Desirable locations

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Barriers to Entry (cont’d)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

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Barriers to Entry (cont’d)Barriers to Entry (cont’d)

• Expected retaliation– Responses by existing competitors may

depend on a firm’s present stake in the industry (available business options)

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Bargaining Power of SuppliersBargaining 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

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Threat of Substitute ProductsThreat of Substitute Products

• 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

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

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Intensity of Rivalry Among CompetitorsIntensity 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

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Low entry barriers

Interpreting Industry AnalysesInterpreting Industry Analyses

All suggest an:Unattractive

Industry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential

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All suggest an:AttractiveIndustry

High entry barriers

Interpreting Industry AnalysesInterpreting Industry Analyses

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

With high profit potential

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Strategic Groups DefinedStrategic Groups Defined

• A set of firms emphasizing similar strategic dimensions and using similar strategies– Internal competition between strategic group

firms is greater than between firms outside that strategic group

– There is more heterogeneity in the performance of firms within strategic groups

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Strategic GroupsStrategic Groups

• Strategic Dimensions– Extent of technological leadership

– Product quality

– Pricing Policies

– Distribution channels

– Customer service

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Competitor AnalysisCompetitor Analysis

• Competitor (a.k.a. CI) 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

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Components of Components of Competitor AnalysisCompetitor Analysis

Figure 2.3Figure 2.3