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© 2006 by Nelson, a division of Thomson Canada Limited.3-1 The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis.

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Presentation on theme: "© 2006 by Nelson, a division of Thomson Canada Limited.3-1 The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis."— Presentation transcript:

1 © 2006 by Nelson, a division of Thomson Canada Limited.3-1 The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis Chapter Three

2 © 2006 by Nelson, a division of Thomson Canada Limited.3-2 Chapter 5 Bus. - Level Strategy Chapter 6 Competitive Dynamics Chapter 7 Corp. - Level Strategy Chapter 9 International Strategy Chapter 10 Cooperative Strategies Chapter 8 Acquisitions & Restructuring Chapter 11 Corporate Governance Chapter 12 Structure & Control Chapter 13 Strategic Leadership Chapter 14 Entrepreneurship & Innovation Strategic Inputs Strategic Actions Strategic Outcomes Chapter 4 Internal Environment Chapter 3 External Environment Strat. Intent Strat. Mission The Strategic. Management. Process Strategy Formulation Strategy Implementation Strategic Competitiveness Chapter 1 Feedback Above Average Returns Chapter 2 Above Average Returns Chapter 2 Chapter 3 External Environment

3 © 2006 by Nelson, a division of Thomson Canada Limited.3-3 The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis Knowledge Objectives 1. Explain the importance of analyzing and understanding the firm’s 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 environment’s six segments.

4 © 2006 by Nelson, a division of Thomson Canada Limited.3-4 The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis Knowledge Objectives – continued… 5. Identifying five competitive forces and how they determine an industry’s 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.

5 © 2006 by Nelson, a division of Thomson Canada Limited.3-5 General Environment General Environment General Environment Sociocultural Global Technological Political/Legal Demographic Economic The External Environment IndustryEnvironment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry CompetitorEnvironment

6 © 2006 by Nelson, a division of Thomson Canada Limited.3-6 General Environment Components

7 © 2006 by Nelson, a division of Thomson Canada Limited.3-7 General Environment Components

8 © 2006 by Nelson, a division of Thomson Canada Limited.3-8 The Industry Environment The set of factors that directly influences a firm, it’s competitive actions & competitive responses: 1.The threat of new entrants 2.The power of suppliers 3.The power of buyers 4.The threat of product substitutes 5.The intensity of rivalry among competitors

9 © 2006 by Nelson, a division of Thomson Canada Limited.3-9 Competitor Analysis Predicting the dynamics of competitor actions, responses and intentions.

10 © 2006 by Nelson, a division of Thomson Canada Limited.3-10 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. The I/O model largely focuses on industry attractiveness or structure of the external environment rather than internal characteristics of the firm. I O I O

11 © 2006 by Nelson, a division of Thomson Canada Limited.3-11 The I/O Model of Superior Returns External Environment Competitive Environment General Environment Industry Environment an * Action required: Study the external environment, especially the industry environment.

12 © 2006 by Nelson, a division of Thomson Canada Limited.3-12 The I/O Model of Superior Returns Action required: Locate an industry with high potential for above-average returns. External Environment General Environment Competitive Environment Industry Environment An Attractive Industry An industry whose structural characteristics suggest above-average returns are possible an *

13 © 2006 by Nelson, a division of Thomson Canada Limited.3-13 The I/O Model of Superior Returns External Environment General Environment Competitive Environment Industry Environment An Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Action required: I.d. strategy called for by the industry to earn above-average returns. Selection of a strategy linked with above- average returns in a particular industry Strategy Formulation an *

14 © 2006 by Nelson, a division of Thomson Canada Limited.3-14 The I/O Model of Superior Returns External Environment General Environment Competitive Environment Industry Environment Action required: Develop / acquire assets and skills needed to implement the strategy. An Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Selection of a strategy linked with above- average returns in a particular industry Strategy Formulation Assets and Skills Assets and skills required to implement a chosen strategy an *

15 © 2006 by Nelson, a division of Thomson Canada Limited.3-15 The I/O Model of Superior Returns External Environment General Environment Competitive Environment Industry Environment An Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Selection of a strategy linked with above- average returns in a particular industry Strategy Formulation Assets and Skills Assets and skills required to implement a chosen strategy Action required: Use the firm’s strengths (its assets or skills) to implement the strategy. Strategy Implementation Selecting strategic actions linked with effective implementation of the chosen strategy an *

16 © 2006 by Nelson, a division of Thomson Canada Limited.3-16 The I/O Model of Superior Returns External Environment General Environment Competitive Environment Industry Environment An Attractive Industry An industry whose structural characteristics suggest above-average returns are possible Selection of a strategy linked with above- average returns in a particular industry Strategy Formulation Assets and Skills Assets and skills required to implement a chosen strategy Strategy Implementation Selecting strategic actions linked with effective implementation of the chosen strategy Action required: Maintain selected strategy in order to out- perform industry rivals. Superior Returns Earning of above- average returns an *

17 © 2006 by Nelson, a division of Thomson Canada Limited.3-17 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 Monitoring Detect meaning by ongoing observations of environmental changes and trends  Forecasting Developing projections of anticipated outcomes based on monitored changes and trends  Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management  External Environmental Analysis

18 © 2006 by Nelson, a division of Thomson Canada Limited.3-18 Porter’s 5 Forces Model of Competition The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved. Threat of New Entrants

19 © 2006 by Nelson, a division of Thomson Canada Limited.3-19 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 Entrants *

20 © 2006 by Nelson, a division of Thomson Canada Limited.3-20 Threat of New Entrants Porter’s 5 Forces Model of Competition Bargaining Power of Suppliers *

21 © 2006 by Nelson, a division of Thomson Canada Limited.3-21 * 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 Suppliers *

22 © 2006 by Nelson, a division of Thomson Canada Limited.3-22 Threat of New Entrants Bargaining Power of Suppliers Porter’s 5 Forces Model of Competition Bargaining Power of Buyers *

23 © 2006 by Nelson, a division of Thomson Canada Limited.3-23 * * Playing firms off of each other Buyers compete with supplying industry by: * * Bargaining down prices * * Forcing higher quality Buyer groups are likely to be powerful if:* Buyers are concentrated or purchases are large relative to seller’s sales * Purchase accounts for a significant fraction of supplier’s sales * Products are undifferentiated * Buyers face few switching costs * Buyers’ industry earns low profits * Buyer presents a credible threat of backward integration * Product unimportant to quality * Buyer has full information Bargaining Power of Buyers

24 © 2006 by Nelson, a division of Thomson Canada Limited.3-24 Threat of Substitute Products Porter’s 5 Forces Model of Competition Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers *

25 © 2006 by Nelson, a division of Thomson Canada Limited.3-25 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: Electronic security systems in place of security guards Fax machines or ed attachments in place of overnight mail delivery Threat of Substitute Products

26 © 2006 by Nelson, a division of Thomson Canada Limited.3-26 Threat of New Entrants Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Porter’s 5 Forces Model of Competition Rivalry Among Competing Firms in Industry *

27 © 2006 by Nelson, a division of Thomson Canada Limited.3-27 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 industry demand, but may be costly to smaller competitors* Rivalry Among Existing Competitors

28 © 2006 by Nelson, a division of Thomson Canada Limited.3-28 Cutthroat competition is more likely to occur when * Numerous or equally balanced competitors * Slow growth industry * High fixed costs * Lack of differentiation or switching costs * High storage costs * Capacity added in large increments * High strategic stakes * High exit barriers * Diverse competitors Rivalry Among Existing Competitors

29 © 2006 by Nelson, a division of Thomson Canada Limited.3-29 * Specialized assets High 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* Rivalry Among Existing Competitors

30 © 2006 by Nelson, a division of Thomson Canada Limited.3-30 Strategic Groups A set of firms emphasizing similar strategic dimensions to use a similar strategy

31 © 2006 by Nelson, a division of Thomson Canada Limited.3-31 Strategic Groups 1.The more intense the rivalry of competitors within a group the greater the threat to each firms profitability. 2.The strengths of the 5 competitive forces differ across strategic groups. Thus firms within various strategic groups have different pricing policies. 3.The closer groups are in terms of their strategies & dimensions emphasized, the greater the chance competitive rivalry between groups.

32 © 2006 by Nelson, a division of Thomson Canada Limited.3-32 Competitor Environment Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities. What drives the competitor as shown by its future objectives, What the competitor is doing and can do as revealed by itsWhat the competitor is doing and can do as revealed 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 by itsWhat the the competitor may be able to do, as shown by its capabilities.

33 © 2006 by Nelson, a division of Thomson Canada Limited.3-33 Competitor Analysis Future 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?

34 © 2006 by Nelson, a division of Thomson Canada Limited.3-34 Competitor Analysis Current strategy Current Strategy: Future objectives How are we currently competing? Does this strategy support changes in the competitive structure?

35 © 2006 by Nelson, a division of Thomson Canada Limited.3-35 Competitor Analysis Assumptions Current strategy Future objectives 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?

36 © 2006 by Nelson, a division of Thomson Canada Limited.3-36 Competitor Analysis Capabilities Assumptions Current strategy Future objectives Capabilities: What are our strengths and weaknesses? How do we rate compared to our competitors?

37 © 2006 by Nelson, a division of Thomson Canada Limited.3-37 Competitor Analysis Capabilities Assumptions Current strategy Future objectives Response 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?


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