Strategy and environment

STRATEGY AND EXTERNAL ENVIRONMENT

2–1

Two Most Important Premises

1. Strategy-Context

Internal Environment

External Environment

Strategy

2. Strategy-Time

Present

Future

Strategy

2–2

External Environment

General Environment

Industry

Competitor

External Environment

2–3

General Environment

General Environment

Industry

Strategic Group

Competitors

2–4

The External Environment

2–5

Figure 2.1

General Environment

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

– Economic

– Sociocultural

– Global

– Technological

– Political/legal

– Demographic

2–6

Industry Environment

• Set of factors directly influencing a firm and its competitive actions and competitive responses

– Threat of new entrants

– Power of suppliers

– Power of buyers

– Threat of product substitutes

– Intensity of rivalry among competitors

2–7

Competitor Environment

• All of the companies that the firm competes against.

2–8

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

2–9

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

2–10

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

2–11

General Environment (cont’d) • The Socio-cultural Segment

– Reservations

– 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

2–12

General Environment (cont’d) • The Technological Segment

– Product innovations

– Applications of knowledge

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

– New communication technologies

2–13

General Environment (cont’d) • The Political/Legal Segment

– Antitrust laws

– Taxation laws

– Deregulation philosophies

– Labor training laws

– Educational philosophies and policies

2–14

General Environment • The Demographic Segment

– Population size

– Age structure

– Geographic distribution

– Ethnic mix

– Income distribution

2–15

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

2–16

Threat of New Entrant- Entry Barriers

• Airlines Industry

• Retail Industry

• Power Generation

Substitutes

Tea and Coffee

Aluminum and Copper

Plastic and Glass

Mobile and Landline

Radio and TV

Petrol to Non fossil fuel

Bargaining Power of Suppliers

• PC Manufacturing

• Metals

Bargaining power of Buyers

• Retail

• Bollywood Producer and Multiplex owners

Five Forces and Industry

The Five Forces of Competition Model

2–22

Figure 2.2

Threat of New Entrants: Barriers to Entry

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

2–23

Bargaining Power of Suppliers • Supplier power increases when:

– Suppliers are large and few in number

-concentration E.g. PC vs. Microsoft

– Suitable substitute products are not available. Plastic and steel, Pilots union, Doctors

– Suppliers do not depend heavily on

industry, E.g. Glass and Automobile, Rubber and Tyre, chip manufactures and PC, Coke and Steel, Gas and Power

– Suppliers’ goods are critical to buyers’ marketplace success E.g. Pharma’s patented drugs to hospitals

– Suppliers’ products create high switching costs. E.g. Bloomberg , Automobile ancillaries in J’pur,

– Suppliers pose a threat to integrate forward into buyers’ industry Mfg vs. Retail

2–24

Bargaining Power of Buyers • Buyer power increase when:

– Buyers are large and few in

number (concentration)- E.g.PC vs Chip

– Buyers purchase a large portion of an

industry’s total output E.g. Multiplexes

– Industry products are undifferentiated

– Buyers can switch to another product without incurring high switching costs

– Buyers pose threat to integrate backward into the sellers’ industry E.g. Retailers

2–25

Bargaining Power of Buyers

• Buyer are price sensitive when:

– Products purchased by them are

significant part of cost structure

E.g. Vermont Milk, Aviation fuel

– Buyers earn lower profits (Airlines)

– Quality of buyers’ products are not affected

E.g. Camera for production house are very important

2–26

Threat of Substitute Products • The threat of substitute products increases when:

– Price-Performance (Computer vs. Typewriter,

Video rentals vs. YouTube, Flix vs. Rentals)

– Buyers face few switching costs

concentration (Patented to generic drug)

– Players should be alert to different industry

as threats are likely to come from unexpected

spaces (Teachers-Search Engines, Airlines - Videoconferencing)

2–27

Intensity of Rivalry Among Competitors

• Industry rivalry increases when:

– There are numerous or equally balanced

competitors E.g. Soft Drink

– Industry growth slows declines E.g. Airline in India

– There are high fixed costs and marginal

costs low.

– There is a lack of differentiation opportunities or low switching costs

– When the strategic stakes are high E.g Committment

– When high exit barriers prevent competitors from leaving the industry E.g. Aluminium

– Perishable Products

2–28

Interpreting Industry Analyses

2–29

Low entry barriers

Unattractive Industry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential

Interpreting Industry Analyses

2–30

Attractive Industry

High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

High profit potential