Chapter 3

• 1. The External Environment: 0Opportunities, Threats, Industry Competition andCompetitor AnalysisChapter Three 2006 by Nelson, a division of Thomson Canada Limited. 3-1

2. Chapter 3 External The StrategicStrategic . Inputs EnvironmentStrat. Intent Chapter 4Strat. Mission Management. Internal EnvironmentProcess Strategy Formulation Strategy ImplementationStrategic ActionsChapter 5Chapter 6Chapter 7Chapter 11 Chapter 12Bus. - LevelCompetitive Corp. - Level CorporateStructure StrategyDynamicsStrategyGovernance& Control Chapter 8Chapter 9 Chapter 10Chapter 13 Chapter 14 Acquisitions & InternationalCooperative Strategic Entrepreneurship Restructuring Strategy StrategiesLeadership & Innovation Outcomes Strategic Chapter 2Chapter 1Feedback Above Average StrategicReturns Competitiveness 2006 by Nelson, a division of Thomson Canada Limited. 3-2 3. The External Environment: Opportunities,Threats, Industry Competition and Competitor AnalysisKnowledge Objectives1. Explain the importance of analyzing and understanding the firms external environment.2. Defining and describing the general environment and the industry environment.3. Discuss the four activities of the external environmental analysis process.4. Name and describe the general environments six segments. 2006 by Nelson, a division of Thomson Canada Limited. 3-3 4. The External Environment: Opportunities,Threats, Industry Competition and Competitor AnalysisKnowledge Objectives continued5. Identifying five competitive forces and how they determine an industrys profit potential.6. Define strategic groups and their influence on the firm.7. Describe what firms need to know about their competitors and different methods used to collect intelligence about them. 2006 by Nelson, a division of Thomson Canada Limited. 3-4 5. The External EnvironmentEnvironmentSociocultural alGe nomiicic nerIndustryphEcEconera gr a Environment ono GeThreat of new entrantsmol m Power of suppliersDe cPower of buyers Product substitutes Intensity of rivalry lga ntEn/Le CompetitorGllGo evirnmca lobaEnvironment bal li tionlo vi rPome En nt TechnologicalGeneral 2006 by Nelson, a division of Thomson Canada Limited.3-5 6. General Environment Components 2006 by Nelson, a division of Thomson Canada Limited. 3-6 7. General Environment Components 2006 by Nelson, a division of Thomson Canada Limited. 3-7 8. The Industry EnvironmentThe set of factors that directly influences a firm, its competitive actions & competitive responses:2. The threat of new entrants3. The power of suppliers4. The power of buyers5. The threat of product substitutes6. The intensity of rivalry among competitors 2006 by Nelson, a division of Thomson Canada Limited. 3-8 9. Competitor AnalysisPredicting the dynamics of competitor actions,responses and intentions. 2006 by Nelson, a division of Thomson Canada Limited. 3-9 10. 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. I O The I/O model largely focuses on industry attractiveness or structure of the external environment rather than internal characteristics of the firm. 2006 by Nelson, a division of Thomson Canada Limited. 3-10 11. The I/O Model of Superior ReturnsAction required:Study the externalExternalenvironment,Environmentespecially the General Environmentindustry environment. Industry Environment Competitive Environment 2006 by Nelson, a division of Thomson Canada Limited. 3-11* an 12. The I/O Model of Superior ReturnsAction required:Locate an industry withExternalAn Attractive high potential forEnvironmentIndustryabove-average returns.General EnvironmentIndustry EnvironmentAn industry whoseCompetitive characteristicsstructuralEnvironment above-averagesuggestreturns are possible 2006 by Nelson, a division of Thomson Canada Limited. 3-12* an 13. The I/O Model of Superior ReturnsAction required:I.d. strategy called forExternalby the industry to earnEnvironmentAn Attractive above-average returns.IndustryGeneral EnvironmentStrategyIndustry industry whose An EnvironmentFormulationCompetitive Selection of a strategy structural characteristicsEnvironment above-average suggest linked with above- returns are possibleaverage returns in aparticular industry 2006 by Nelson, a division of Thomson Canada Limited. 3-13 *an 14. The I/O Model of Superior ReturnsAction required: Develop / acquire assetsExternal and skills needed toEnvironmentAn Attractiveimplement the strategy.Industry StrategyGeneral EnvironmentIndustry industry whose An Environment Formulation and SkillsAssetsCompetitive structural characteristicsstrategy Selection of aEnvironment above-average suggest linked with above- skillsAssets and returns areaverage returns into possiblerequired a particular industry a chosenimplementstrategy 2006 by Nelson, a division of Thomson Canada Limited. 3-14 *an 15. The I/O Model of Superior Returns Action required: Use the firms strengthsExternal (its assets or skills) toEnvironmentAn Attractiveimplement the strategy.Industry StrategyGeneral EnvironmentIndustry Environment Formulation An industry whose Assets and SkillsCompetitive structural characteristicsstrategy Selection of aEnvironment above-averageStrategy suggest linked with above- skillsAssets and possiblerequired Implementation returns areaverage returns into a particular industry a chosenimplementSelecting strategic actionsstrategylinked with effective implementation of the chosen strategy 2006 by Nelson, a division of Thomson Canada Limited. 3-15* an 16. The I/O Model of Superior ReturnsAction required:Maintain selectedExternalstrategy in order to out-EnvironmentAn Attractive perform industry rivals.Industry StrategyGeneral EnvironmentIndustry industry whose An Environment Formulation and SkillsAssetsCompetitive structural characteristicsstrategy Selection of aEnvironment above-averageStrategy suggest linked with above- skillsAssets and possiblerequired Implementation returns areaverage returns into aSuperior particular industry a chosenimplement Returns Selecting strategic actionsstrategylinked withEarning of above- effective implementation of theaverage returns chosen strategy 2006 by Nelson, a division of Thomson Canada Limited. 3-16 *an 17. External Environmental AnalysisThe external environmental analysis processshould be conducted on a continuous basis.This process includes four activities: ScanningIdentifying early signals of environmentalchanges and trends Monitoring Detect meaning by ongoing observations of environmental changes and trends Forecasting Developing projections of anticipatedoutcomes based on monitored changes andtrends AssessingDetermining the timing & importance of environmental changes and trends for firms strategies & their management 2006 by Nelson, a division of Thomson Canada Limited. 3-17 18. Porters 5 Forces Model of Competition ThreatThreat of ofNew NewEntrantsEntrantsThe above image Copyright 2001 Corel & Jerry Sheppard All rights reserved. 2006 by Nelson, a division of Thomson Canada Limited.3-18 19. Threat of New Entrants Economies of Scale * BarriersBarriers * Product Differentiationto to Entry Entry * Capital Requirements* Switching CostsAccess to Distribution Channels *Cost Disadvantages Independent of Scale*Government Policy* * Expected Retaliation 2006 by Nelson, a division of Thomson Canada Limited. 3-19* 20. Porters 5 Forces Model of CompetitionThreat ofThreat ofNew NewEntrants EntrantsBargaining Power ofSuppliers 2006 by Nelson, a division of Thomson Canada Limited. 3-20 * 21. Bargaining Power of Suppliers 0Suppliers are likely to be powerful if:Suppliers exert Supplier industry is dominated by a few*power in thefirms.industry by:* Suppliers products have few* Threatening to raise substitutes.prices or to reduce * Buyer is not an important customer toquality supplier. Powerful suppliers * Suppliers product is an important can squeeze industry input to buyers product. profitability if firms are unable to* Suppliers products are differentiated. recover cost *Suppliers products have high increases switching costs. *Supplier poses credible threat offorward integration. 2006 by Nelson, a division of Thomson Canada Limited. 3-21* 22. Porters 5 Forces Model of CompetitionThreat ofThreat ofNew NewEntrants EntrantsBargaining Bargaining Power of Power ofSuppliersBuyers 2006 by Nelson, a division of Thomson Canada Limited. 3-22 * 23. Bargaining Power of BuyersBuyer groups are likely to be powerful if:* Buyers are concentrated or purchases arelarge relative to sellers sales* Purchase accounts for a significantBuyers competefraction of suppliers saleswith supplying* Products are undifferentiatedindustry by:* Buyers face few switching costs * Bargaining down prices* Buyers industry earns low profits * Forcing higher quality* Buyer presents a credible threat ofbackward integration* Playing firms off ofeach other* Product unimportant to quality* Buyer has full information 2006 by Nelson, a division of Thomson Canada Limited.3-23 24. Porters 5 Forces Model of CompetitionThreat ofThreat ofNew NewEntrants EntrantsBargaining Bargaining Power of Power ofSuppliersBuyers Threat of Substitute Products 2006 by Nelson, a division of Thomson Canada Limited.3-24* 25. Threat of Substitute ProductsKeys to evaluating substitute products: Products with improving price /*performance tradeoffs relative toProducts present industry productswith similarfunctionlimit theFor Example:prices firms Electronic security systems incan charge place of security guards Fax machines or e-mailed attachments in place of overnight mail delivery 2006 by Nelson, a division of Thomson Canada Limited. 3-25 26. Porters 5 Forces Model of CompetitionThreat ofThreat ofNew NewEntrants EntrantsBargaining BargainingRivalry Among Competing Power of Power of Firms in IndustrySuppliersBuyers Threat of Substitute Products 2006 by Nelson, a division of Thomson Canada Limited. 3-26 * 27. Rivalry Among Existing CompetitorsIntense 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 introductionsOccurs when a firm is pressured or sees an opportunity* Price competition often leaves entire industry worse off* Advertising battles may increase total industrydemand, but may be costly to smaller competitors 2006 by Nelson, a division of Thomson Canada Limited. 3-27 28. Rivalry Among Existing CompetitorsCutthroat competition is more likely to occur when * Numerous or equally balanced competitors * Slow growth industry * High fixed costs * High storage costs * Lack of differentiation or switching costs * Capacity added in large increments * Diverse competitors * High strategic stakes High exit barriers * 2006 by Nelson, a division of Thomson Canada Limited. 3-28 29. Rivalry Among Existing Competitors High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.Specialized assets** Fixed cost of exit (e.g., labour agreements)* Strategic interrelationships* Emotional barriers* Government and social restrictions 2006 by Nelson, a division of Thomson Canada Limited. 3-29 30. Strategic GroupsA set of firms emphasizing similar strategicdimensions to use a similar strategy 2006 by Nelson, a division of Thomson Canada Limited. 3-30 31. Strategic Groups The more intense the rivalry of competitorswithin a group the greater the threat to eachfirms profitability. The strengths of the 5 competitive forces differacross strategic groups. Thus firms withinvarious strategic groups have different pricingpolicies. The closer groups are in terms of theirstrategies & dimensions emphasized, thegreater the chance competitive rivalry betweengroups. 2006 by Nelson, a division of Thomson Canada Limited. 3-31 32. Competitor EnvironmentCompetitor intelligence is the ethical gathering ofneeded information and data about competitorsobjectives, strategies, assumptions, andcapabilities. What drives the competitor as shown by its futureobjectives, What the competitor is doing and can do as revealedby its current strategy, What the competitor believes about itself and theindustry, as shown by its assumptions, What the the competitor may be able to do, as shownby its capabilities. 2006 by Nelson, a division of Thomson Canada Limited. 3-32 33. Competitor AnalysisFuture Objectives: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? 2006 by Nelson, a division of Thomson Canada Limited. 3-33 34. Competitor AnalysisCurrent Strategy:Future objectives How are we currently competing?Current strategy Does this strategy support changes in the competitive structure? 2006 by Nelson, a division of Thomson Canada Limited. 3-34 35. Competitor AnalysisAssumptions:Future objectives Do we assume the future will be volatile? Are we operating under aCurrent strategy status quo? What assumptions do ourAssumptionscompetitors hold about the industry and themselves? 2006 by Nelson, a division of Thomson Canada Limited. 3-35 36. Competitor AnalysisCapabilities:Future objectives What are our strengths and weaknesses?Current strategy How do we rate compared to our competitors?AssumptionsCapabilities 2006 by Nelson, a division of Thomson Canada Limited. 3-36 37. Competitor AnalysisFuture objectives Response Response:Current strategy What will our competitors do in the future? Where do we hold anAssumptionsadvantage over our competitors? How will this change ourCapabilities relationship with our competitors? 2006 by Nelson, a division of Thomson Canada Limited. 3-37