2-1 Chapter 2 – The External Environment
Dec 21, 2015
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Knowledge ObjectivesStudying this chapter should provide you with the strategic management knowledge needed to:
1. Explain the importance of analyzing and understanding the firm’s external environment.
2. Define and describe the general environment and the industry environment.
3. Name and describe the general environment’s six segments.
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Knowledge Objectives – cont’dStudying this chapter should provide you with the strategic management knowledge needed to:
4. Identify the five competitive forces and explain how they determine an industry’s profit potential.
5. Describe what firms need to know about their competitors and different methods used to collect intelligence about them.
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The Strategic Management Process
Chapter 10Corporate
Governance
Chapter 11OrganizationalStructure and
Controls
Chapter 13Strategic
Entrepreneurship
Strategy Implementation
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Detroit’s Bet on the Future
Sources: “Chrysler falters as unsold gas guzzlers fill lots”, The Wall Street Journal, September 20, 2006: A14.
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What’s next…?“Most of us never recognize an opportunity until it goes to work in our competitor’s business.”
P. L. Andarr
“Only the paranoid survive.”
Andy Grove,former CEO of Intel
“[T]hat’s not true. The paranoid die because the paranoid take all threats as serious and get very distracted.”
Reed Hastings, CEO of Netflix
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Famous Misinterpretations“Heavier-than-air flying machines are impossible”
Lord Kelvin, British mathematician, physicist, and president of the British Royal Society, 1895
“Any customer can have a car painted any color that he wants so long as it is black.”
Attributed to Henry Ford
“I think there is a world market for about five computers”Thomas J. Watson, chairman of IBM, 1943
“We don’t like their sound. Groups of guitars are on the way out.”Decca Recording Co. executive, turning down the Beatles, 1962
“640K of memory should be enough for anybody.”Bill Gates, co-founder of Microsoft, 1982
“They couldn’t hit an elephant at this dist…”General John B. Sedgwick, last words, Battle of Spotsylvania, 1864
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Agenda1. Analysis of the external environment
2. “Five Forces” of competition model
3. Competitor analysis
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I/O Model: 4 AssumptionsExternal environment imposes pressures and constraints that determine strategies leading to above-average returns
1
2Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies
Resources used to implement strategies are highly mobile across firms3
4Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests (profit-maximizing)
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External Environment Analysis General environment
Focused on opportunities and threats
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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General EnvironmentDimensions in the broader society that influence and industry and the firms within it
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General EnvironmentThe Economic SegmentThe Economic Segment
Nature and direction of economy a firm competes in
Inflation rates
Interest rates
Trade deficits or surpluses
Budget deficits or surpluses
Savings rate
GDP
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General Environment – cont’dThe Sociocultural SegmentThe Sociocultural Segment
Society’s attitudes and cultural values
Women in the workplace
Workforce diversity Attitudes about quality
of worklife Environmental concerns Shifts in work and
career preferences Shifts in product and
service preferences
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General Environment – cont’dThe Global SegmentThe Global Segment
Institutional characteristics of global markets
Important political events
Critical global markets Newly industrialized
countries Different cultural and
institutional attributes WTO, NAFTA, EU,
ASEAN
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General Environment – cont’dThe Technological SegmentThe Technological Segment
Creating new knowledge and products/processes
Product innovations Applications of
knowledge Focus of private and
government-supported R&D expenditures
New communication technologies
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Examples for disruptive technologies:
Internet telephony
Digital photography
Hand-held computers
Discount brokers
E-commerce
Health maintenance
Nanotechnology
General Environment – cont’d
Link: “Future vision” of Vodafone
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General Environment – cont’dThe Political/Legal SegmentThe Political/Legal Segment
Regulatory environment Antitrust laws Taxation laws Deregulation
philosophies Labor training laws Educational
philosophies and policies
Legislation on corporate governance reforms (Sarbanes-Oxley Act)
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General Environment – cont’dThe Demographic SegmentThe Demographic Segment
Population characteristics
Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution
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Agenda1. Analysis of the external environment
2. “Five Forces” of competition model
3. Competitor analysis
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Industry EnvironmentIndustry 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
Sometimes, drawing the industry boundary is problematic(e.g., Whole Foods & Wild Oats)
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Low entry barriers
Interpreting Industry Analyses
UnattractiveIndustry
Suppliers and buyers have strong positions
Strong threats from substitute products
Intense rivalry among competitors
Low profit potential!
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AttractiveIndustry
High entry barriers
Interpreting Industry Analyses
Suppliers and buyers have weak positions
Few threats from substitute products
Moderate rivalry among competitors
High profit potential!
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Barriers to Entry – cont’dEconomies 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
Cost Disadvantages Independent of Scale
Proprietary product technology
Favorable access to raw materials
Desirable locations
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Barriers to Entry – cont’d
Access to Distribution Channels
Stocking or shelf space
Price breaks
Cooperative advertising allowances
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’dSwitching Costs
One-time costs customers incur when they buy from a different supplier
New equipment
Retraining employees
Psychic costs of ending a relationship
Government policy
Licensing and permit requirements
Deregulation of industries
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Barriers to Entry – cont’dExpected retaliation
Responses by existing competitors may depend on a firm’s present stake in the industry (available business options)
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Suppliers’ Bargaining PowerSupplier power increases when:
Suppliers are large and few in number
Suitable substitute products arenot available
Individual buyers are not largecustomers of suppliers and thereare many of them
Suppliers’ goods are critical to buyers’ marketplace success
Suppliers’ products create high switching costs.
Suppliers pose threat to integrate forward into buyers’ industry
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Buyers’ Bargaining PowerBuyer power increase when:
Buyers are large and few in number
Buyers purchase large portion of industry’s total output
Buyers’ purchases are significant portion of supplier’s annual revenues
Buyers can switch to another product without incurring high switching costs
Buyers pose threat to integrate backward into sellers’ industry
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Threat of Substitute ProductsThe threat of substitute products increases when:
Buyers face few switching costs
The substitute product’s price is lower
Substitute product’s quality andperformance are equal to or greaterthan existing product
Differentiated industry products that are valued by customers reduce this threat
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Rivalry Among CompetitorsIndustry 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 differentiationopportunities or low switching costs
Strategic stakes are high
High exit barriers prevent competitors from leaving the industry
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New Trends: The Internet Influence
Sources: Canzer, B. (2003). “E-business: Strategic thinking and practice”, Boston: Houghton Mifflin; Porter, M. E. (2001). “Strategy and the Internet”, Harvard Business Review, March: 63–78; Rangan, S. & Adner, R. (2001). “Profits and the Internet: Seven misconceptions”, MIT Sloan Management Review, Summer: 44–53.
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New Trends: Industry BoundariesThink about the nature of the following industries:
Telecommunications
Computers and peripheral equipment
Consumer electronics
In other words, ABC’s competitors may no longer only include CBS, NBC, CNN, and Fox, but also AT&T, SkyTV, Microsoft, Apple, Sony, and others!
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Agenda1. Analysis of the external environment
2. “Five Forces” of competition model
3. Competitor analysis
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Competitor AnalysisCompetitor Intelligence
The ethical gathering of needed information and data that provides insight into:
• A competitor’s capabilities and intentions (current strategy)
• A competitor’s beliefs about the industry (its assumptions)
• A competitor’s direction (future objectives)