Presentation on theme: "The External Environment:"— Presentation transcript:
1 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis1
2 SWOT is the starting point It provides an overview of the strategic situation.It provides the “raw material” to do more extensive internal and external analysis.An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment.A THREAT is a factor in your company’s external environment that poses a danger to its well-being.Opportunities and Threats form a basis for EXTERNAL analysisBy examining opportunities, you can discover untapped markets, and new products or technologies, or identify potential avenues for diversification.By examining threats, you can identify unfavorable market shifts or changes in technology, and create a defensive posture aimed at preserving your competitive position.Possible Opportunities:Emerging customer needsProduct InnovationsExpanding global marketsDeclining Interest RatesPossible Threats:New entry by competitorsChanging demographics/shifting demandEmergence of cheaper technologiesRegulatory requirements
4 General Environment Demographic Technological Sociocultural Population size, Age structure, Geographic distribution, Ethnic mix, Income distribution...SocioculturalWorkforce diversity,Attitudes about quality of worklife,Concerns about environment, Shifts in product and service preferences...EconomicInflation rates, Interest rates, Personal savings rate, Exchange Rates, GDP...TechnologicalProduct innovations, Increase in R&D expenditures, New communication technologies...Political / LegalAntitrust laws, Taxation laws, Environmental Protection Law...GlobalCritical global markets, Newly industrialized countries, Different cultural and institutional attributes...
5 Developments in general environment change competitive battle lines. The general environment usually holds both opportunities for and threats to expansion.(+) for(-) forDEMOGRAPHICAging PopulationMedical ServicesTECHNOLOGICALAdvances in Laser TechnologyLong-playing recordsDevelopments in general environment change competitive battle lines.Tekel sold Yeni Rakı for a long time before the privatizationMarket is opened to the competitionThe same environmental trend can have different effects on different industries(+) for(-) forSOCIO-CULTURALGreater health awarenessExercise equipmentsMeat products
6 The impact of an environmental trend often differs significantly for differnt firms within the same industryRestructring of the U.S. economy in the 1980s.Reduced numbers of managersDecrease in travel budgetFull-service airlines are affected negativelyLow-cost, low-service airlines gained adv.Many developments in general environment are difficult to predict, while orhers are predictable.! But even when a trend is easy to predict, it is not always clear what is strategic implications will be.The affects of general environment may differ from one country to another
7 Porter’s Five-Forces of Competition A set of factors that directly influences a company and its competitive actions and responses.Interaction among these factors determine an industry’s profit potential and location of “profit pools”.Need to understand which competitive factors have power, why they have power, and what you might be able to do about it to improve your own position.The five forces are environmental forces that impact on a company’s ability to compete in a given market.The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.
8 Porter’s Five Forces Model of Competition Threat of New Entrants11
9 Threat of New Entrants Barriers to Entry Economies of Scale Product DifferentiationCapital RequirementsSwitching CostsAccess to Distribution ChannelsCost Disadvantages Independent of ScaleGovernment PolicyExpected RetaliationBarriers to Entry12
10 Bargaining Power of Suppliers Porter’s Five ForcesModel of CompetitionThreat ofNew EntrantsBargaining Power of Suppliers14
11 Bargaining Power of Suppliers Suppliers exert power in the industry by:* Threatening to raiseprices or to reduce qualityPowerful suppliers can squeeze industry profitability if firms are unable to recover cost increasesSuppliers are likely to be powerful if:Supplier industry is dominated by a few firmsSuppliers’ products have few substitutesBuyer is not an important customer to supplierSuppliers’ product is an important input to buyers’ productSuppliers’ products are differentiatedSuppliers’ products have high switching costsSupplier poses credible threat of forward integration15
12 Bargaining Power of Buyers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsBargaining Power of BuyersBargaining Power of Suppliers17
13 Bargaining Power of Buyers Buyer groups are likely to be powerful if:Buyers are concentrated or purchases are large relative to seller’s salesProducts are undifferentiatedBuyers face few switching costsBuyers’ industry earns low profitsBuyer presents a credible threat of backward integrationProduct unimportant to qualityBuyer has full informationBuyers compete with the supplying industry by:* Bargaining down prices* Forcing higher quality* Playing firms off ofeach otherBuyer is powerful when:Buyer purchases large proportion of seller’s productsBuyer has the potential to integrate backwardAlternative suppliers are plentifulChanging suppliers costs very littlePurchased product represents a high percentage of a buyer’s costsBuyer earns low profitsPurchased product is unimportant to the final quality or price of a buyer’s products18
14 Bargaining Power of Suppliers Bargaining Power of Buyers Porter’s Five ForcesModel of CompetitionThreat of New EntrantsBargaining Power of SuppliersBargaining Power of BuyersThreat of Substitute Products20
15 Threat of Substitute Products Keys to evaluate substitute products:Products with similar function limit the prices firms can chargeProducts with improving price/performance tradeoffs relative to present industry productsExample:Electronic security systems in place of security guardsFax machines in place of overnight mail deliverySubstitute ProductsThose products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry.“Substitutes” ARE NOT THE SAME as rivals!Burger King IS NOT considered a“substitute” for McDonald’s.A “substitute” for McDonald’s =21
16 Porter’s Five Forces Model of Competition Threat of New EntrantsBargaining Power of SuppliersRivalry Among Competing Firms in IndustryBargaining Power of BuyersThreat of Substitute Products23
17 Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when:Numerous or equally balanced competitorsSlow growth industryHigh fixed costsHigh storage costsLack of differentiation or switching costsCapacity added in large incrementsHigh strategic stakesHigh exit barriers26
18 Five-Forces Analysis -- SO WHAT? Consider how opportunities and threats may result from the five competitive forces.Understand the strength of each competitive force, and underlying reasons for strength.Select niches where forces are weaker, and profit pools are higher.Build strategies that defend yourself against strong competitive forces.Build strategies that influence the forces in your favor.are The Five Forces Unique to Your Industry???
19 Strategic Groups Defined A set of firms emphasizing similar strategic dimensions and using similar strategiesInternal competition between strategic group firms is greater than between firms outside that strategic group
20 Strategic Groups Strategic Dimensions Extent of technological leadershipProduct qualityPricing policiesDistribution channelsCustomer serviceTarget marketsProduct breadthGeographical coverageExtent of diversification or vertical integration . . .
21 Strategic Group Maps A graphical depiction of rival firms, using two dimensions thatreflect important aspects of their strategy andarray the firms into groups.Work best in fragmented industries.Help show close (within group) rivals, crowded and open strategic positions; assist opportunity and threat interpretation (not all groups are affected equally).
22 Steps to Create a Strategic Group Map 1. Identify two important dimensions that help distinguish the competing firms from each other.2. Draw a two-dimensional “map” that places each firm in the appropriate position given the two dimensions you are using.3. Draw circles around firms that cluster together in a similar position.4. Include arrows to indicate any movement of firms from one position to another.DO NOT . . .use unimportant/minor dimensions to create your mapuse correlated dimensions (you will basically get a diagonal array of groups)split one firm apart and map it in numerous positionslimit your thinking to only quantitative dimensions (because some categorical or qualitative dimensions might be useful!)
23 Competitive and Cooperative Dimensions The Primarily Competitive DimensionsNew EntrantsThreat of New EntrantsYour Direct RivalsRivalry Among Competing Firms in IndustryBargaining Power of SuppliersBargaining Power of BuyersThreat of Substitute ProductsSubstitute ProductsThe Primarily Cooperative DimensionsYourSuppliersYourBuyersYour Firm
24 Analyzing the External Environment Environmental ScanningGathering IntelligenceSources of Competitive IntelligenceScenario Planning
25 Environmental Scanning The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporationAIM to avoid strategic surprise and ensure the long-term health of the firm.Environmental uncertainty:The degree of complexity plus the degree of change existing in an organization’s external environment.
26 Competitive Intelligence Information that is relavant to strategy formulation regarding the environmental context within which a firm competesSeveral Uses of Competitive IntelligenceProviding descriptions of the competitive environment (Guide for strategy formulation)Challenging assumptions about the competitive environmentForecasting future developmentsIdentifying and compensating the competitive weaknessesDeterminig the unsustainable strategiesIndentifying the guideline for adjustment to changing environment
27 Sources of Useful Competitive Intelligence Local newspapersGovernmentDatabasesCustomers and suppliersCompetitors
28 The Environment-Strategy Relationship How the external environment shapes strategy?How strategy can influence the external environment?