1 the external environment: opportunities, threats, industry competition, and competitor analysis...

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The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

Chapter 3Chapter 3

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General

Envi

ronm

ent

General

Environment

Gen

eral

Environment

EconomicEconomic

Political/Legal

Political/LegalTechnologicalTechnological

Glo

bal

Glo

bal

Dem

ogra

phic

Dem

ogra

phic Sociocultural

Sociocultural

The External Environment

IndustryEnvironment

Threat of new entrantsPower of suppliersPower of buyers

Product substitutesIntensity of rivalry

CompetitorEnvironment

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Industry Environment A set of factors that A set of factors that

directly influences a directly influences a company and its company and its competitive actions and competitive actions and responsesresponses

Interaction among Interaction among these factors determine these factors determine an industry’s profit an industry’s profit potentialpotential

Threat of new entrantsThreat of new entrants Power of suppliersPower of suppliers Power of buyersPower of buyers Product substitutesProduct substitutes Intensity of rivalryIntensity of rivalry

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Analyzing Industry Environment

Opportunities and threats are competitive challenges arising for changes in industry conditions.

Analytic tools such as the five forces model help

managers formulate appropriate strategic

responses.

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Five Forces Model of Competition

Identify current and potential competitors and determine Identify current and potential competitors and determine which firms serve themwhich firms serve them

Conduct competitive analysisConduct competitive analysis Recognize that suppliers and buyers can become Recognize that suppliers and buyers can become

competitorscompetitors Recognize that producers of potential substitutes may Recognize that producers of potential substitutes may

become competitorsbecome competitors

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Threat of New Entrants


Barg

aini

ng P

ower

of

Barg

aini

ng P

ower

of

Supp

liers

Supp

liers

Bargaining Power of Bargaining Power of BuyersBuyers

Threat of Substitute

Threat of Substitute

ProductsProducts

Rivalry Among

Rivalry Among

Competing Firm

s

Competing Firm

s

Five Forces Model of Competition

Five Forces ofFive Forces ofCompetitionCompetition

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Potential Competitors

New entrants into an industry threaten incumbent companies.Entry barriers reduce the threat of new and additional competition.

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Barriers to entryBarriers to entry

Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Switching costsSwitching costs Access to distribution channelsAccess to distribution channels Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy Expected retaliationExpected retaliation

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Rivalry Among Established Companies The intensity of competitive rivalry in an

industry arises from: Industry’s competitive structure. Demand (growth or decline) conditions in industry. Height of industry exit barriers.

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Rivalry Among Established Companies Industry Competitive

Structure

Consolidated

One firm or onedominant firm.

(monopoly)

Fragmented

Many firms.No dominant

firmFew firms,

Shared dominance(Oligopoly)

The Continuum of Industry StructuresThe Continuum of Industry Structures

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Rivalry Among Established Companies (Continued) Demand Conditions

vs.

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Rivalry Among Established Companies (Continued)

Height of Exit Barriers in the Industry

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High Exit Barriers

Common exit barriers include:Common exit barriers include: specialized assets (assets with values linked to a particular specialized assets (assets with values linked to a particular

business or location)business or location) fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual strategic interrelationships (relationships of mutual

dependence between one business and other parts of a dependence between one business and other parts of a company’s operation, such as shared facilities and access company’s operation, such as shared facilities and access to financial markets)to financial markets)

emotional barriers (career concerns, loyalty to employees, emotional barriers (career concerns, loyalty to employees, etc.)etc.)

government and social restrictionsgovernment and social restrictions

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Bargaining Power of Suppliers

A supplier group is powerful when:A supplier group is powerful when:

it is dominated by a few large companiesit is dominated by a few large companies satisfactory substitute products are not available to industry satisfactory substitute products are not available to industry

firmsfirms industry firms are not a significant customer for the supplier industry firms are not a significant customer for the supplier

groupgroup suppliers’ goods are critical to buyers’ marketplace successsuppliers’ goods are critical to buyers’ marketplace success effectiveness of suppliers’ products has created high effectiveness of suppliers’ products has created high

switching costsswitching costs suppliers are a credible threat to integrate forward into the suppliers are a credible threat to integrate forward into the

buyers’ industrybuyers’ industry

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Bargaining Power of Buyers

Buyers (customers) are powerful when:Buyers (customers) are powerful when:

they purchase a large portion of an industry’s total outputthey purchase a large portion of an industry’s total output the sales of the product being purchased account for a the sales of the product being purchased account for a

significant portion of the seller’s annual revenuessignificant portion of the seller’s annual revenues they could easily switch to another productthey could easily switch to another product the industry’s products are undifferentiated or the industry’s products are undifferentiated or

standardized, and buyers pose a credible threat if they standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industrywere to integrate backward into the seller’s industry

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Threat of Substitute Products

Product substitutes are strong threat when:Product substitutes are strong threat when:

customers face few switching costscustomers face few switching costs substitute product’s price is lowersubstitute product’s price is lower substitute product’s quality and performance capabilities are substitute product’s quality and performance capabilities are

equal to or greater than those of the competing productequal to or greater than those of the competing product

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Substitute Products

The competitive threat of substitute products increases as they come closer to serving similar customer needs.

CloseCloseFarFar

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A Sixth Force: Complementors

Complementors: Companies whose products are sold in tandem with

another company’s products. Increased supply of a complementary product

collaterally increases demand for the primary product. Example:

Faster CPU chips fuel salesof personal computers.

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Strategic Groups

Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensionsThe strategy followed by a strategic group differs from strategies being implemented by other companies in the industry

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Strategic Groups Within IndustriesThe concept of strategic groups

Within an industry, a competitor grouping using similar strategies that differ from other industry groups.

Implications of strategic groups The closest industry competitors are those in the group. The various industry groups are differentially and

competitively advantaged and positioned. Mobility barriers inhibit the movement of competitors from one

strategic group to another.

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Strategic Groups in the Pharmaceutical Industry

High

HighLow

Low

Pric

es C

harg

edPr

ices

Cha

rged

R&D SpendingR&D Spending

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High

HighLow

Low

Pric

es C

harg

edPr

ices

Cha

rged


Generic Generic GroupGroup

• Marion Labs• Carter Wallace

• INC Pharmaceut’l

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• Merck• Pfizer

• Eli Lilly

High

HighLow

Low

Pric

es C

harg

edPr

ices

Cha

rged


Proprietary Proprietary GroupGroup

Generic Generic GroupGroup

• Marion Labs• Carter Wallace

• INC Pharmaceut’l

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Limitations of the Five Forces and Strategic Group ModelsBoth models are static and ignore innovation.Their focus is on industry and group structures rather than individual companies.

Innovation creates change in industry structures, altering thecompetitive environment.

Industry structure cannot fully explain the performance differences between industry competitors.

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Competitor Environment

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

what drives the competitor as shown by its what drives the competitor as shown by its future objectivesfuture objectives what the competitor is doing and can do as revealed by its what the competitor is doing and can do as revealed by its

current strategycurrent strategy What the competitor believes about itself and the industry, as What the competitor believes about itself and the industry, as

shown by its shown by its assumptionsassumptions What the the competitor may be able to do, as shown by its What the the competitor may be able to do, as shown by its

capabilitiescapabilities

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Competitor Analysis

Future Objectives:Future objectivesFuture 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?

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Competitor Analysis

Current strategyCurrent strategy

Current Strategy: How are we currently

competing? Does this strategy support

changes in the competitive structure?

Future objectivesFuture objectives

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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?



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Competitor Analysis

CapabilitiesCapabilities

Capabilities: What are our strengths and

weaknesses? How do we rate compared to

our competitors?




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Competitor Analysis

ResponseResponse

Response: What will our competitors do in

the future? Where do we hold an

advantage over our competitors?

How will this change our relationship with our competitors?CapabilitiesCapabilities




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The Role of the General Environment

Potential competitors

Rivalry

Substitutes

Supplier power

Buyer power

EconomicEnvironment

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Economic segmentEconomic segment

General Environment

Inflation ratesInflation rates Interest ratesInterest rates Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses Personal savings ratePersonal savings rate Business savings ratesBusiness savings rates Gross domestic productGross domestic product

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Rivalry

Substitutes

Supplier power

TechnologicalEnvironment

Buyer power

EconomicEnvironment

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General Environment

Technological SegmentTechnological Segment Product innovationsProduct innovations Applications of knowledgeApplications of knowledge Focus of private and government-supported Focus of private and government-supported

R&D expendituresR&D expenditures New communication technologiesNew communication technologies

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Rivalry

Substitutes

Supplier power


Social Environment

Buyer power

EconomicEnvironment

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General Environment

Sociocultural segmentSociocultural 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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Rivalry

Substitutes

Supplier power


DemographicEnvironment

Social Environment

Buyer power

EconomicEnvironment

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General Environment

Demographic Segment Population size Age structure Geographic distribution Ethnic mix Income distribution

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Rivalry

Substitutes

Supplier power

Political and LegalEnvironment



Social Environment

Buyer power

EconomicEnvironment

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General Environment

Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

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Rivalry

Substitutes

Supplier power

Political and LegalEnvironment



Social Environment

Buyer power

EconomicEnvironment

GlobalEnvironment

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General Environment

Global Segment Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes

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Globalization and Industry Structure Globalization

of Markets

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Globalization and Industry Structure Globalization

Globally dispersed production lowers costs and increases quality.

Global markets are replacing national markets.

Trend implications No isolated national markets More competitors, more intense

competition More rapid innovation and shorter product

life cycles

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Stages of the Industry Life Cycle

Time

Dem

and

Embryonic

Competitive Changes During Industry Evolution

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Competitive Changes During Industry Evolution (Continued)

Time

Embryonic

Growth

Dem

and

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Time

Embryonic

Growth Shakeout

Dem

and

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Growth in Demand and Capacity


Uni

ts

Timet1 t2

CapacityCapacity

DemandDemand

ExcessCapacity

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Time

Embryonic

Growth Shakeout Maturity


Dem

and

50



Time

Embryonic

Growth Shakeout Maturity Decline

Dem

and

1 the external environment: opportunities, threats, industry competition, and competitor analysis...

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