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Chapter 3 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis The External Environment: Opportunities, Threats,

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Presentation on theme: "Chapter 3 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis The External Environment: Opportunities, Threats,"— Presentation transcript:

1 Chapter 3 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Detailed instructor notes on three topics have been included for this chapter: • How do firms maintain growth during difficult economic times? Bank of America and Nation’s Bank are given as examples with notes regarding past performance and current strategies. These notes begin with the first slide on “External Environment.” • How firms anticipate and deal with new entrants to the market. Wal-Mart’s entrance into the retail grocery business is detailed. These notes begin with the slide titles “Industry Environment,” which is the initial discussion of the five forces of competition. • How firms respond to new competitors (lead, follow, or ignore). Examples of leading, following, and ignoring include: o Universal Studios and Disney o Amazon.com and Barnes and Nobles o Amazon.com and Borders Books o CNN and NBC o CNN and ABC o CNN and CBS These notes begin with the first slide titled “Competitor Analysis.”

2 The External Environment
Economic General Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry General Demographic Sociocultural The External Environment Where do firms find growth in poor economic times? Example: Financial Services Industry (Bank of America and NationsBank) Past Strategies In the 1990s, NationsBank and Bank of America expanded through asset gathering, diversification (i.e., inter-state banking, geographic, product, etc.). In less that ten years they went from a roughly $8 billion to more than $620 billion on $35 billion in revenue in 2001. M&A History 1992 NCNB and C&S Sovran form NationsBank 1994 NationsBank acquires MNC 1995 NationsBank acquires BankSouth 1996 NationsBank acquires Boatman’s Bank & Montgomery Securities 1997 NationsBank acquires Barnet Bank 1998 NationsBank and Bank of America merge Major thrust U.S.-based retail banking: Consumer banking accounts for over 61% of Bank of America revenue and NI. (Continued next slide.) Political/Legal Competitor Environment Global Environment Environment Technological General

3 External Environmental Analysis
A continuous process which includes Scanning: Identifying early signals of environmental changes and trends Monitoring: Detecting meaning through ongoing observations of environmental changes and trends Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies and their management The External Environment (cont.) Where do firms find growth in poor economic times? Example: Financial Services Industry (Bank of America and NationsBank) (cont.) Major Threat Bank of America has had very slow revenue growth the past three years. The goal is to have greater than 10% growth going forward: $30.8 billion $32.5 billion (rate 5.5%) $33.2 billion (rate 3.1% $34.9 billion (rate 5.1%) Key Strategy Leverage demographic and socioeconomic changes in the United States: • Powerful branch network (4,208 as of 12/02) • Powerful ATM network (13,013 as of 12/02) • Do business in states with high minority populations (especially Latin-Americans), namely California, Texas, Florida, Maryland, Arizona, and so on) (Continued next slide.)

4 External Environmental Analysis
Analysis of general environment Analysis of industry environment Analysis of competitor environment The External Environment The External Environment The External Environment (cont.) Where do firms find growth in poor economic times? Example: Financial Services Industry (Bank of America and NationsBank) (cont.) Target Growing Minority Market Expansion into areas where minority population is growing the fastest: • Product development: SafePay, which allows immigrants, specifically Latin Americans, to send cash back home. Competes with Monygram and Western Union. • Targeted Marketing I: Leverage outlets like Univision and Telemundo to reach Latin American population • Targeted Marketing II: Install Spanish-language option ATMs in all key markets • Diversity hiring strategy: Aggressively hire a diverse management-level workforce in order to better reflect the customer base • Customer Service I: Multilingual customer service call centers and branch personnel • Consumer Service II: Multilingual websites Punch Line Bank of America is betting on the demographic changes to generate much needed revenue growth. Strategic Intent Strategic Mission

5 Industry Environment 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 Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Industry Environment Can firms anticipate new entrants to the market? (Grocery Retailing) Example 1: Wal-Mart Question How do we (Wal-Mart) leverage our strengths (fast turnover of goods, low-cost volume buying, etc.) to increase traffic and volume at our stores? In 2000 U.S. grocery sales grew by 3.4%, reaching $570 billion. Answer • Create and expand shelf space for groceries and dry good products. • Expand Supercenter Format to leverage additional shelf space: in 2001, grocery sales accounted for $17.1 billion in sales or 30% of total sales: o First Supercenter store opened in 1988; by 2000 Wal-Mart had 721 Supercenters o Supercenter openings consist of 60%-70% of new store openings within Wal-Mart o Wal-Mart projects 1,400 Supercenters by 2005 Fast Forward What share of the grocery market will Wal-Mart control in 2010?

6 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.

7 Five Forces Model of Competition
Identify current and potential competitors and determine which firms serve them Conduct competitive analysis Recognize that suppliers and buyers can become competitors Recognize that producers of potential substitutes may become competitors Five Forces Model of Competition Can firms anticipate new entrants to the market? (Grocery Retailing) Example 2: Traditional Supermarkets Question Given the low margins and relatively low growth of this industry, should we (traditional supermarkets) expect new entrants into our domain? In 2000 U.S. grocery sales grew by 3.4%, reaching $570 billion. Answer No new entrants are likely. Thus prepare for continued industry consolidation. Specific Case Winn Dixie (now known as WD) is a good example. It has over 1,000 stores in 14 states, primarily in the Southeast, a stronghold for Wal-Mart. WD has responded to Wal-Mart’s challenge by remodeling its stores (over 60% in the franchise), closing unprofitable stores (112 stores in 2001) and other manufacturing / distribution centers, taking a $522 million restructuring charge. Strategic Reaction I Crank up M&A activity to gain economies of scale and lower its cost structure: • In 2000 WD acquired the Gooding’s Markets chain in Orlando. • In 2001 WD acquired 68 stores of Mississippi-based Jitney Jungle. (Continued on next slide.)

8 Five Forces Model of Competition
Five Forces of Competition Rivalry Among Competing Firms Threat of New Entrants Threat of Substitute Products Bargaining Power of Suppliers Five Forces Model of Competition (cont.) Can firms anticipate new entrants to the market? (Grocery Retailing) Example 2: Traditional Supermarkets (cont.) Strategic Reaction II Expand private label items: WD brand items carry higher profit margins than comparable national brands. Fifty-one percent of buying public purchase private label brands “every time” or “fairly often” when they shop. WD can leverage this trend. For example, its WD Chek soda is a market leader in many of WD’s core markets. Fast Forward Will WD still be in existence as an independent company in 2010? Bargaining Power of Buyers

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

10 Threat of New Entrants Barriers to entry Economies of scale
Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation

11 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.

12 Rivalry Among Established Companies
Industry Competitive Structure Consolidated One firm or one dominant firm. (monopoly) Fragmented Many firms. No dominant firm Few firms, Shared dominance (Oligopoly) The Continuum of Industry Structures 5

13 Rivalry Among Established Companies (Continued)
Demand Conditions vs. 6

14 Rivalry Among Established Companies (Continued)
Height of Exit Barriers in the Industry 7

15 High Exit Barriers Common exit barriers include:
specialized assets (assets with values linked to a particular business or location) fixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets) emotional barriers (career concerns, loyalty to employees, etc.) government and social restrictions

16 Bargaining Power of Suppliers
A supplier group is powerful when: it is dominated by a few large companies satisfactory substitute products are not available to industry firms industry firms are not a significant customer for the supplier group suppliers’ goods are critical to buyers’ marketplace success effectiveness of suppliers’ products has created high switching costs suppliers are a credible threat to integrate forward into the buyers’ industry

17 Bargaining Power of Buyers
Buyers (customers) are powerful when: they purchase a large portion of an industry’s total output the sales of the product being purchased account for a significant portion of the seller’s annual revenues they could easily switch to another product the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry

18 Threat of Substitute Products
Product substitutes are strong threat when: customers face few switching costs substitute product’s price is lower substitute product’s quality and performance capabilities are equal to or greater than those of the competing product

19 Substitute Products Far Close
The competitive threat of substitute products increases as they come closer to serving similar customer needs. Far Close

20 A Sixth Force: 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 sales of personal computers.

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

22 Strategic Groups Within Industries
The 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.

23 Strategic Groups in the Pharmaceutical Industry
High Low Prices Charged R&D Spending 18

24 Strategic Groups in the Pharmaceutical Industry
High Low Prices Charged R&D Spending Generic Group Marion Labs Carter Wallace INC Pharmaceut’l 19

25 Strategic Groups in the Pharmaceutical Industry
Merck Pfizer Eli Lilly High Low Prices Charged R&D Spending Proprietary Group Generic Group Marion Labs Carter Wallace INC Pharmaceut’l 20

26 Limitations of the Five Forces and Strategic Group 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 the competitive environment. Industry structure cannot fully explain the performance differences between industry competitors.

27 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 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 its capabilities

28 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? Competitor Analysis How should a firm respond to a new competitor, lead, follow, or ignore? Lead: Universal Studios’ Universal Park, a New Entrant Reaction by Established Firm: Disney Response I In response to Universal Studios building its Universal Park in Orlando, Florida, on Disney’s home turf, Disney aggressively built New Parks, new attractions to retain the buying public’s interest: • In 2000, Disney expanded the MGM Park by adding new rides (Tower of Doom, etc.) • In 2001, Disney completed its newest masterpiece, Disney’s Animal Kingdom, a cross between a traditional zoo and a traditional Disney theme park Response II Disney also expanded from its core Orlando turf by building attractions and/or strengthening attractions at its other theme parks: • In 2000 Disney opened its California Adventure • Disney also added attractions to both its Paris and Tokyo theme parks in order to maintain or expand its market position • Disney is planning on building a new park in Hong Kong in order to tap into the growing affluence of East Asia, especially the Chinese market (Continued on next slide.)

29 Competitor Analysis Current Strategy: Future objectives
How are we currently competing? Does this strategy support changes in the competitive structure? Current strategy Competitor Analysis (cont.) How should a firm respond to a new competitor, lead, follow, or ignore? Follow: Amazon.com, a New Delivery Channel for Books Reaction by Established Firms: Barnes & Nobles and Borders Books Barnes & Nobles After the initial shock and denial, Barnes & Nobles has spawned out its own online bookstore. It also used its brick-and-mortar presence to deliver community experience and worked to establish new joint ventures. For example, Barnes & Nobles used existing assets that Amazon.com does not have to create “community centers” and “places of leisure” with comfy sofas, coffee bars, poetry readings, music recitals, art shows, etc. Borders engaged in even deeper denial and “wait-and-see” tactics. Finally it maintained its current platform by merging with Waldenbooks to imitate Barnes & Nobles’ community centers strategy and by using Amazon.com as its online platform. (Continued next slide.)

30 Competitor Analysis Assumptions: Future objectives Current strategy
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? Current strategy Assumptions Competitor Analysis (cont.) How should a firm respond to a new competitor, lead, follow, or ignore? Follow: CNN, the All-News Cable Television Channel Reaction by Established Firm: NBC NBC NBC tried to “tap” into the growing market for cable news television and follow CNN’s all-day news channel by creating MSNBC, a joint venture with Microsoft, to broaden its news operations. Facts • MSNBC and MSNBC.com launched in 1996 • As of July 2002, MSNBC’s viewership was 76 million • MSNBC revamped its format towards more talk news shows in order to expand its product line and to retain and expand its market share in response to Fox News Note: No financial data available. (Continued on next slide.)

31 Competitor Analysis Capabilities: Future objectives Current strategy
What are our strengths and weaknesses? How do we rate compared to our competitors? Current strategy Assumptions Competitor Analysis (cont.) How should a firm respond to a new competitor, lead, follow, or ignore? Ignore: CNN, the All-News Cable Television Channel Reaction by Established Firms: CBS and ABC Television Broadcast Networks CBS and ABC decided to ignore CNN’s entrance into the marketplace and maintain its core news programming without launching a 24-hour news only channel as a direct reaction to CNN. CBS Lineup • 6:00 Evening News 60 Minutes I and II feature news story programs 48 Hours Investigates feature news story program ABC Lineup • 20/20 feature news story program • Primetime feature news story program • Peter Jenning’s special broadcast shows (e.g., Islam-related show) Capabilities

32 Competitor Analysis Response: Response Future objectives
Current strategy 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? Assumptions Capabilities

33 The Role of the General Environment
Potential competitors Rivalry Substitutes Supplier power Buyer power Economic Environment 16

34 General Environment Economic segment Inflation rates Interest rates
Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product

35 The Role of the General Environment
Technological Environment Potential competitors Rivalry Substitutes Supplier power Buyer power Economic Environment 16

36 General Environment Technological Segment Product innovations
Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies

37 The Role of the General Environment
Technological Environment Potential competitors Rivalry Substitutes Supplier power Buyer power Economic Environment Social Environment 16

38 General Environment Sociocultural 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

39 The Role of the General Environment
Technological Environment Potential competitors Rivalry Substitutes Supplier power Buyer power Demographic Environment Economic Environment Social Environment 16

40 General Environment Demographic Segment Population size Age structure
Geographic distribution Ethnic mix Income distribution

41 The Role of the General Environment
Political and Legal Environment Technological Environment Potential competitors Rivalry Substitutes Supplier power Buyer power Demographic Environment Economic Environment Social Environment 16

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

43 The Role of the General Environment
Political and Legal Environment Technological Environment Potential competitors Rivalry Substitutes Supplier power Global Environment Buyer power Demographic Environment Economic Environment Social Environment 16

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

45 Globalization and Industry Structure
Globalization of Markets 32

46 Globalization and Industry Structure
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

47 Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution Stages of the Industry Life Cycle Time Demand Embryonic 25

48 Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution (Continued) Stages of the Industry Life Cycle Time Embryonic Growth Demand 26

49 Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution (Continued) Stages of the Industry Life Cycle Time Embryonic Growth Shakeout Demand 27

50 Growth in Demand and Capacity
Competitive Changes During Industry Evolution (Continued) Growth in Demand and Capacity Units Time t1 t2 Capacity Demand Excess 28

51 Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution (Continued) Stages of the Industry Life Cycle Demand Embryonic Growth Shakeout Maturity Time 29

52 Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution (Continued) Stages of the Industry Life Cycle Time Embryonic Growth Shakeout Maturity Decline Demand 30

53 Strategies in Fragmented Industries
Fragmented industry characteristics: Localized markets with low entry barriers (e.g., Mom’s Diner). Few economies of scale opportunities exist. High transportation costs (e.g., sand) for products. Focus strategies predominate (e.g., customer group, region).

54 Strategies in Fragmented Industries
Competing in fragmented industries requires strategic consolidation by: Chaining (Wal-Mart) Franchising (McDonald’s) Horizontal mergers (Dillard’s) Using the Internet (eBay)

55 Strategies in Embryonic and Growth Industries
Three strategies for an innovator competing in a newly emerging market/industry: Develop and market the technology itself. Develop and market the technology jointly with another company through a strategic alliance. License the technology to existing companies and let them develop the market.

56 Strategies in Embryonic and Growth Industries
An innovator’s optimal choice of growth industry strategy depends on: Complementary assets the innovator has that can be used to exploit and market the innovation. High barriers to imitation by competitors (e.g., patents). The capability of competitors to quickly imitate the pioneering company.

57 Strategy in Embryonic and Growth Industries (Continued)
Strategies Available to Innovator: Develop and Market the Innovation Itself Develop and Market the Innovation Jointly License the Innovation to Others 6

58 Strategy in Mature Industries
9

59 Strategies to Manage Rivalry in Mature Industries
Price signaling Leading competitors use price changes to convey their intentions to other competitors (i.e., tit-for-tat). Price leadership One company sets the industry price; other competitors reference their prices to that price. Nonprice competition Competition by any means other than price.

60 Strategies for Deterring Entry in Mature Industries
Product Proliferation 10

61 Product Proliferation in the Restaurant Industry
Average Gourmet Candlelight Dining Fast Food Atmospheric Quality of Food McDonald’s Unoccupied Product Space 11

62 Strategies for Deterring Entry in Mature Industries
Product Proliferation Price Cutting 10

63 Strategies for Deterring Entry in Mature Industries
Maintain Excess Capacity Product Proliferation Price Cutting 10

64 Strategies to Manage Rivalry in Mature Industries (Continued)
Price Signaling Price Leadership Nonprice Competition Capacity Control 20

65 Strategies to Manage Rivalry in Mature Industries
Capacity control strategies Preempt rival firms by building capacity ahead of anticipated increases in demand. Indirect coordination with rival firms to keep industry-wide capacity in line with demand.

66 Supply and Distribution Strategy in Mature Industries
Vertical integration Backward towards input suppliers. Forward into distribution to consumers. Choice of integration depends on: Need for close relationships with suppliers. Japanese vs. American styles Need to ensure customer relationships. Complexity of product Amount of product information required

67 Strategy in Declining Industries
Leadership Niche Harvest Divestment 26

68 Strategies in Declining Industries
Leadership strategy A firm seeks to become dominant in the industry. Niche strategy Focuses on demand pockets declining more slowly than the industry as a whole. Harvest strategy Limits investment and optimizes cash flow. Divestment strategy Company exits the industry by selling out early to others, avoiding liquidation.

69 Factors That Determine the Intensity of Competition in Declining Industries

70 Strategy Selection in a Declining Industry
Company Strengths Relative to Remaining Pockets of Demand Intensity of Competition in Declining Industry High Low Few Many 28

71 Strategy Selection in a Declining Industry
Company Strengths Relative to Remaining Pockets of Demand Leadership or Niche Intensity of Competition in Declining Industry High Low Few Many 29

72 Strategy Selection in a Declining Industry
Company Strengths Relative to Remaining Pockets of Demand Leadership or Niche Niche or Harvest Intensity of Competition in Declining Industry High Low Few Many 30

73 Strategy Selection in a Declining Industry
Low Company Strengths Relative to Remaining Pockets of Demand Leadership or Niche Harvest or Divest Niche or Intensity of Competition in Declining Industry High Few Many 31

74 Strategy Selection in a Declining Industry
Low Company Strengths Relative to Remaining Pockets of Demand Leadership or Niche Harvest or Divest Niche or Intensity of Competition in Declining Industry High Few Many 31

75 Strategy Selection in a Declining Industry
Low Company Strengths Relative to Remaining Pockets of Demand Leadership or Niche Harvest or Divest Niche or Intensity of Competition in Declining Industry High Few Many Divest 31


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