chapter 2 [compatibility mode]- strategic management

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Chapter 2:

External Analysis

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THEMACRO-ENVIRONMENT

THEINDUSTRY

External and Internal AnalysisExternal and Internal Analysis

THECOMPANY

STRATEGIC GROUPS

INDUSTRY STAGE of DEVELOPMENT

5 FORCES MODEL (Plus 1)•Rivalry•Barriers to entry•Suppliers•Buyers•Substitutes•Complementors

EXTERNAL

MacroeconomicsEconomicPolitical & LegalTechnologySocio-cultural Demographic

COMPANY STAGE of DEVELOPMENT

VALUE CREATION•Efficiency•Innovation•Customer Responsiveness•Quality

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The external environmental analysis process should be conducted on a continuous basis.

This process includes four activities:

Scanning Identifying early signals of environmental changes and trends

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Monitoring Explore meaning by ongoing observations of environmental changes and trends

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Forecasting Developing projections of anticipated outcomes based on monitored changes and trends

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Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management

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External Environmental AnalysisExternal Environmental Analysis

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Macro-

Environment

EconomicEconomic

TechnologicalTechnological

The External EnvironmentThe External Environment

Industry EnvironmentIndustry Environment

5 FORCES MODEL (Plus 1)Threat of new entrants

Power of suppliers

Power of buyers

Product substitutes

Intensity of rivalry

ComplementorsSTRATEGIC GROUPSINDUSTRY STAGE of DEVELOPMENT

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Macro-

Environment

Elements of the MacroElements of the Macro--environmentenvironment

EconomicEconomic

•Economic systems.•Economic stages.•Savings rates • Inflation/interest rate• Gross domestic prod.• Trade deficits or surpluses• Budget deficits or surpluses.•…….

EconomicEconomic

affecting affecting

how difficult how difficult

or easy to be or easy to be

unsuccessful unsuccessful

and and

profitable profitable

any timeany time

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Environment


Political / LegalPolitical / Legal

•• Labour Laws•Government econ.involvement views

• De-/ Regulation views• Competition Laws• Education policy• Taxation laws

influencing influencing

the nature of the nature of

competition competition --> >

creating creating

opportunities opportunities

and threatsand threats

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2-7Macro-

Environment


SocioculturalSociocultural

•• Enviro. Concerns• Workforce diversity • Work life quality views• Shifts in product / service preferences

• Shifts in 2 career preferences

Driving Driving

economic, economic,

political/legapolitical/lega

l, and l, and

technological technological

conditions conditions

and changes and changes --

> creating > creating

both both

opportunities opportunities

and threatsand threats

2-8Macro-

Environment



•• Focus of R&Dexpenditures

• Product innovations• Knowledge Resources• Process Innovations• New communication technologies


Including the Including the

institutions and institutions and

activities involved activities involved

with creating new with creating new

knowledge and knowledge and

translating that translating that

knowledge into knowledge into

new outputs, new outputs,

products, products,

processes, and processes, and

materials.materials.

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Macro-

Environment


DemographicDemographic

•• Population size• Age structure• Ethnic Mix• Geographic Distribution• Income Distribution• Immigration

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Macro-

Environment


GlobalGlobal

• Big political events• Different cultural & institutional attributes

• Critical global markets• Newly industrialized countries

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The Industry EnvironmentThe Industry Environment

�What is an industry

o An industry is a group of companies offering products/services that are close substitutes.

o The boundary between industries may change as customer needs change or a change in technology

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The Industry EnvironmentThe Industry Environment

�Other concepts

o The sector is the group of closely related industries of which it is a part.

o Market segmentation

- The different groups of customers in an industry

- Each segment has different characteristics and specific needs

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Computer manufacturing sectorComputer manufacturing sector

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The Industry EnvironmentThe Industry EnvironmentThe set of factors that directly influences a firm, it’s

competitive actions & competitive responses:

Industry EnvironmentIndustry Environment

5 FORCES MODEL (Plus 1)Threat of new entrants

Power of suppliers

Power of buyers

Product substitutes

Intensity of rivalry

Complementors

STRATEGIC GROUPS

INDUSTRY STAGE of DEVELOPMENT

� These forces can be strong or weak

� The level of forces can change, when the conditions in the industry of change

� A weak competitive force can be seen as an opportunity to business or business to earn higher profits

� A strong competitive pressure can be seen as a threat if it would reduce the profits of business or sector

� The stronger the force, the more limited to sell products with high price and earning high profit.

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Porter’s 5 Forces Model of CompetitionPorter’s 5 Forces Model of Competition

The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved.

Threat of New

Entrants

Threat ofSubstitute Products

Five Forces ofFive Forces ofCompetitionCompetition

The threat of new entrants depends

on barriers to entry

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Product Differentiation**Capital Requirements**

Switching Costs**Access to Distribution Channels**Cost Disadvantages Independent of Scale**Government Policy**Expected Retaliation**

Economies of Scale**

Barriers to Entry

Threat of New EntrantsThreat of New Entrants

*

Minimum cost that enterprise has to spend when entering any industry.

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• Only a small number of potential competitors• High entry barriers• Current competitors in the industry are struggling to

obtain adequate profit• The prospect of the industry is risky• The growth of the industry is slow and standstill• The competition in the industry will react violently with

the new entry.

Threat of New Threat of New EntrantsEntrants

Threat of new entrants increases as

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• There are a large number of potential competitors• Low entry barriers• Industry with high growth rate and high profit potential• Weak response for new entrants from the companies in

the industry• \When existing companies in the sector are strategically

expanding into new geographic market area.

Threat of New Threat of New EntrantsEntrants

Threat of new entrants decreases as

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Bargaining Power of Suppliers

*



Threat of New

Entrants

Bargaining Power of suppliers

depends on a number of factors

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** Supplier industry is dominated by a few firms.

** Buyer is not an important customer to supplier.

** Suppliers’ product is an important input to buyers’ product.

** Suppliers’ products are differentiated.

Suppliers are likely to be powerful if:

** Suppliers’ products have high switching costs.

** Supplier poses credible threat of forward integration.

Suppliers exert power in the industry by:

** Threatening to raise prices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers’ products have few substitutes.

**

Bargaining Power of SuppliersBargaining Power of Suppliers

*

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Cooperation with suppliers

• The company can conduct strategic cooperation with some suppliers to:

- Reduce inventory and supplying costs- Improve the quality of raw materials, spare parts supplied- Tighten cost savings for both parties

Potential competitive advantage can come up with companies that have good management of the relationships in the supply.

Bargaining Power Bargaining Power of Suppliersof Suppliers

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Bargaining Power of Buyers

*


Threat of New

Entrants



Bargaining Power of buyers depends on a number of factors

1. Consumers or end-users.2. Intermediary distributor

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** Playing firms off ofeach other

Buyers compete with supplying

industry by:

** Bargaining down prices

** Forcing higher quality

Buyer groups are likely to be powerful if:

** There are many small sellers and few large buyers.

** Buyers purchase in large quantities.

** A single buyer is a large customer to a firm.

** Buyers can switch suppliers at low cost.

** Buyers purchase from multiple sellers at once.

** Buyers can easily vertically integrate to compete with suppliers.

** Buyer has full information

Bargaining Power of BuyersBargaining Power of Buyers

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Threat of Substitute Products

*



Threat of New

Entrants

Threat ofThreat ofSubstitute Substitute ProductsProducts


Replaced products and services of other industries

that can satisfy the same needs of customers


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Products with similar function limit the prices firms can charge

** Products with improving price / performance tradeoffs relative to present industry products

Keys to evaluating substitute products:

For Example:For Example:

Electronic security systems in place of security guards

Fax machines or e-mailed attachments in place of overnight mail delivery

Threat of Substitute ProductsThreat of Substitute Products

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Rivalry Among Competing Firms

*

Threat of New

Entrants



Threat of Substitute Products



• Competition between companies within an industry in order to take other competitors’ market share.

• Reduced rivalry means greater profitability

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Occurs when a firm is pressured or sees an opportunity

** Price competition often leaves entire industry worse off

Intense 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 introductions**

Advertising battles may increase total industrydemand, but may be costly to smaller competitors

**

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

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The intensity of competition 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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Competitive Structure

Continuum ofContinuum ofIndustry StructuresIndustry Structures

FragmentedFragmentedMany firms,Many firms,no dominantno dominant

firmfirm

Few firms,Few firms,shared dominanceshared dominance

(oligopoly)(oligopoly)

Consolidated Consolidated Few, even one Few, even one

firm or onefirm or onedominant firmdominant firm

(monopoly)(monopoly)


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** Specialized assets

Height of industry exit barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.

Fixed cost of exit (e.g., labour agreements)**Strategic interrelationships**Emotional barriers**Government and social restrictions**


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ComplementorsComplementors

•Complementors:– Companies whose products are sold with

another company’s products.

– Increased supply of a complementary product accordingly increases demand for the primary product.

•Example:– Faster CPU chips fuel sales

of personal computers.

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Strategic Groups Within IndustriesStrategic Groups Within Industries

• The concept of strategic groups– Within an industry, a competitor grouping using similar

strategies that differ from other industry groups.

•Cluster of firms that share similar strategies� - Breadth of product and geographic scope

� - Price/quality

� - Degree of vertical integration

� - Type of distribution system

• 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 IndustryStrategic Groups in the Pharmaceutical Industry

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The World Automobile Industry: Strategic GroupsThe World Automobile Industry: Strategic Groups

Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups

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Limitations of the Five Forces and Strategic Limitations of the Five Forces and Strategic Group ModelsGroup Models

• Both 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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Industry Stages of DevelopmentIndustry Stages of Development

MATURITY

TIME

SHAKEOUT

REVENUE

The development stage of an industry (or strategic group) tells you a lot about the environment in which a business operates.

Time horizon varies depending on industry dynamics

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The Embryonic StageThe Embryonic Stage

� Beginning to develop

� Perfecting product design

� Slow growth

� High prices

� Undeveloped distribution

� Education of customers

� No/low profits

� Extreme uncertainty

� Limited competition

MATURITYSHAKEOUT

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The Growth StageThe Growth Stage� 1st time demand growing

� Cash intensive; growth takes cash

� Competition not intense, but growing; new entrants attracted by growth

� Scale economies and customer loyalty not yet fully developed

MATURITYSHAKEOUT

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The Shakeout StageThe Shakeout Stage

� Demand approaches saturation

� Number of competitors and competitive intensity at their highest; market share is the goal

� Excess capacity beginning to be evident

� Prices dropping� Margins diminishing;

disappearing for weak companies

MATURITYSHAKEOUT

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The Maturity StageThe Maturity Stage

� Market totally saturated� Weak companies have failed or

been acquired� Demand stabilizes at

demographic growth levels; mainly replacement demand

� Economies of scale, brand loyalty, profit margins at their peaks

� Barriers to entry increase� Oligopoly/con-centration often

emerges

� Stability

MATURITYSHAKEOUT

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The Decline StageThe Decline Stage

� Growth goes negative

� Competitive rivalry increases; struggle for big share of declining market

� Can be like shakeout

� Excess capacity

� Price competition

� Declining profit margins

MATURITYSHAKEOUT

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RegenerationRegeneration

� New markets

� New/modified products

� Innovation

� Like embryonic, except: – Established market presence

– Established capital base– Managing transition from old

base of business to new base of business

MATURITYSHAKEOUT

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Competitor EnvironmentCompetitor Environment

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

• What drives the competitor as shown by its future objectives,

•• What the competitor is doing and can do as revealed What the competitor is doing and can do as revealed by its by its current strategy,

• What the competitor believes about itself and the industry, as shown by its assumptions,

•• What the the competitor may be able to do, as shown What the the competitor may be able to do, as shown by its by its capabilities.

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Competitor AnalysisCompetitor Analysis

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?

Future objectivesFuture objectives

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Current strategyCurrent strategy

Current Strategy:Future objectivesFuture objectives

• How are we currently competing?

• Does this strategy support changes in the competitive structure?

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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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CapabilitiesCapabilities

Capabilities:• What are our strengths and

weaknesses?

• How do we rate compared to our competitors?




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ResponseResponse

Response:• What will our competitors do

in the future?

• Where do we hold an advan-tage over our competitors?

• How will this change our relationship with our competitors?




CapabilitiesCapabilities

chapter 2 [compatibility mode]- strategic management

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