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Analyzing the External Environment Chapter 4 Analyzing the External Environment

Learning Objectives After reading this chapter, you should have a good understanding of: The impact of the general environment on a firm’s strategies and performance. How forces in the competitive environment can affect profitability and how a firm can improve its competitive position by increasing its power vis-à-vis these forces. How trends and events in the general environment and forces in the competitive environment are interrelated and affect performance. How the internet and digitally based compatibilities are affecting the five competitive forces and industry profitability. The concept of strategic groups and their strategy and performance implications. 4-3

Question All of the following are segments of the general environment except: a) Legal/Political b) Technological c) Ethical d) Sociocultural Answer: c 4-4

The General Environment Segments of the general environment include: Demographic Sociocultural Legal/Political Technological Economic General Environment 4-5

The General Environment General environmental trends and events: Little ability to predict them Even less ability to control them Can vary across industries General Environment 4-6

Demographic Segment Aging population Rising affluence Changes in ethnic composition Geographic distribution of population Greater disparities in income levels 4-7

Sociocultural Segment More women in the workforce Increase in temporary workers Greater concern for fitness Greater concern for environment Postponement of family formation 4-8

Political/Legal Segment Tort reform Americans with Disabilities Act (ADA) Repeal of Glass-Steagall Act in 1999 Deregulation of utility and other industries Increases in federally mandated minimum wages Taxation at local, state, federal levels Legislation on corporate governance reforms (Sarbanes-Oxley Act) 4-9

Example: Sarbanes-Oxley Sarbanes-Oxley Act is five years young and seems to be having the desired effect Intended to protect from corporate corruption In 1981 about 36% of households invested in the stock market; now 54% Initially the law was "far too bureaucratic" Since been ironed out by the SEC and the Public Company Oversight Accounting Board Sarbanes-Oxley Act is now five years young and seems to be having the desired effect A bill that was intended to protect anyone with a vested interest in a public company--from employees to investors--from corporate corruption In 1981 about 36% of households invested in the stock market; now 54% Initially the law was "far too bureaucratic" and has since been ironed out by the U.S. Securities and Exchange Commission and the Public Company Oversight Accounting Board, which was created by Sarbox www.forbes.com/leadership/2007/08/27/sarbox-regulation-rules-lead-govern-cx_mk_0827oxley.html 4-10

Technological Segment Genetic engineering Emergence of Internet technology Computer-aided design/computer-aided manufacturing systems (CAD/CAM) Research in synthetic and exotic materials Pollution/global warming Miniaturization of computing technologies Wireless communication Nanotechnology 4-11

Technological Segment - Nanotechnology 4-12

Example: Nanotech’s Material Carbon nanotubes become first application to transform nanotechnology Rolled sheets of graphite, with the ends capped with a soccer ball-shaped carbon structure Several times stronger and lighter than steel Electronically, they can be metallic or semiconducting Nanotubes can be made as ballistic conductors or insulators Carbon nanotubes, nanotechnology's dream material, may become the first application to truly transform nanotechnology from an exciting science with great potential to a real commercial force Carbon nanotubes are rolled sheets of graphite, with the ends capped with a soccer ball-shaped carbon structure Nanotubes are several times stronger and lighter than steel Electronically, they can be metallic or semiconducting, depending on structural parameters such as diameter Nanotubes can be made as ballistic conductors or insulators www.forbes.com/personalfinance/2007/05/15/nanotech-arrowhead-intel-pf-guru-in_jw_0515soapbox_inl.html 4-13

Technological Segment – Internet Growth 4-14

Economic Segment Interest rates Unemployment Consumer Price index Trends in GDP Changes in stock market valuations 4-15

The Competitive Environment Segments of the competitive environment include: Competitors Customers Suppliers Sometimes called the task or industry environment Porter’s five forces model Competitive Environment 4-16

Porter’s Five Forces Model of Industry Competition Most common analytical tool for examining competitive environment Five basic competitive forces: Threat of new entrants Bargaining power of buyers Bargaining power of suppliers Threat of substitute products and services Intensity of rivalry among competitors in an industry 4-17

Porter’s Five Forces Model of Industry Competition Five forces model important because: Helps decide if firm should remain in or exit an industry Provides rationale for increasing or decreasing resource commitments Helps assess how to improve firm’s competitive position with regard to each of forces 4-18

Porter’s Five Forces Model of Industry Competition 4-19

Example Porter’s Five Forces Model: BMW Threat of new entrants Very low Threat of substitutes Medium, but growing Power of suppliers Medium Power of buyers Medium, but growing rapidly Rivalry among existing firms Very High Threat of New Entrants - Very Low In order to enter the automotive market, a company would need a large amount of capital and a tremendous amount of tacit and explicit knowledge. Threat of Substitutes - Medium Available substitutes include public transportation such as buses, trains, boats, and aircraft. Power of Suppliers - Medium Some suppliers are smaller and do not have much power over the pricing and distribution of their products. However, there are not that many small part manufacturers in this market. The majority of suppliers to major automotive makers are medium to large businesses and have some flexibility in determining product pricing, delivery, and distribution. Power of Buyers - Medium Buyers in today’s day and age have an immense amount of information available to them regarding the pricing and cost to manufacture a car. Therefore, buyers do have some leverage in being able to negotiate a purchasing price of a car. Competitive Rivalry - Very High There is an intense competition in each segment of the automobile industry from large global companies. Source: Developed from www.bmw.com 4-20

The Threat of New Entrants Profits of established firms in the industry may be eroded by new competitors High entry barriers lead to low threat of new entries Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale 4-21

Question If you are considering opening a new pizza restaurant in your community, what would be the threat of new entrants? How would you evaluate Porter’s other forces for this industry? Explain. The threat of new entrants in the food industry is very high, which is why a majority of new food restaurants fail within their first year. The minimum requirements to open a pizza shop are an oven and a small amount of capital. The potential number of competitors is unlimited due to these factors. Based on other forces also, this industry is not very attractive. 4-22

The Bargaining Power of Buyers Buyers threaten an industry Force down prices Bargain for higher quality or more services Play competitors against each other 4-23

The Bargaining Power of Buyers A buyer group is powerful when It is concentrated or purchases large volumes relative to seller sales The products it purchases from the industry are standard or undifferentiated The buyer faces few switching costs It earns low profits The buyers pose a credible threat of backward integration The industry’s product is unimportant to the quality of the buyer’s products or services 4-24

Question How can suppliers exert power? a) Increase the amount of materials supplied b) Reduce the quality of purchased goods and services c) Threatening to raise prices d) Both B and C Answer: d 4-25

The Bargaining Power of Suppliers Suppliers exert power by threatening to raise prices or reduce the quality goods and services A supplier group will be powerful when It is dominated by a few companies and is more concentrated than the industry it sells to It is not obliged to contend with substitute products for sale to the industry The industry is not an important customer of the supplier group 4-26

The Bargaining Power of Suppliers A supplier group will be powerful when (cont.) The supplier’s product is an important input to the buyer’s business The supplier group’s products are differentiated or it has built up switching costs for the buyer The supplier group poses a credible threat of forward integration 4-27

Question Substitutes of products and services pose a threat to an industry because they: a) Limit the potential returns b) Places a ceiling on the prices that firms can profitably charge c) Affects the price/performance ratio d) All of the above Answer: d 4-28

The Threat of Substitute Products and Services Substitutes limit the potential returns of an industry Ceiling on the prices that firms in that industry can profitably charge Price/performance ratio 4-29

The Intensity of Rivalry among Competitors in an Industry Jockeying for position Price competition Rivals easily match price cuts Advertising battles Expand overall demand or enhance level of product differentiation Product introductions Increased customer service or warranties 4-30

The Intensity of Rivalry among Competitors in an Industry Interacting factors lead to intense rivalry Numerous or equally balanced competitors Slow industry growth High fixed or shortage costs Lack of differentiation or switching costs Capacity augmented in large increments High exit barriers 4-31

Using Industry Analysis: A Few Caveats Company must collect and evaluate a wide variety of information from many sources Globalization trend, information on foreign markets and a wider variety of competitors, suppliers, customers, substitutes, and potential entrants become critical Helps a firm to evaluate profit potential and consider various ways to strengthen position 4-32

Using Industry Analysis: A Few Caveats Five Forces: Assumes zero-sum game Determines how a firm can enhance its position External forces and strategies of individual firms are continually changing Criticized for being a static analysis Key role is played by complements 4-33

How the Internet and Digital Technologies Influences Industry Threat of New Entrants–Disadvantages the industry Lower barriers to entry increases number of new entrants Many internet-based capabilities can be easily imitated 4-34

How the Internet and Digital Technologies Influences Industry Bargaining Power of Buyers Benefits Industry Reduces the power of buyer intermediaries in many distribution channels Disadvantages Industry Switching costs decrease Information availability online empowers ends users 4-35

How the Internet and Digital Technologies Influences Industry Bargaining Power of Suppliers Benefits Industry Online procurement methods can increase bargaining power over suppliers Disadvantages Industry The Internet gives suppliers access to more customers and makes it easer to reach end users Online procurement practices deter competition and reduce differentiating features 4-36

How the Internet and Digital Technologies Influences Industry Threats of Substitutes Benefits Industry Internet-Based increases in overall efficiency can expand industry sales Disadvantages Industry Internet-Based capabilities create more opportunities for substitution Intensity of Rivalry Because location is less important, the number of competitors increases Differences among competitors are harder to perceive online Rivalry tends to focus on price and differentiating features are minimized 4-37

Strategic Groups within Industries Two unassailable assumptions in industry analysis No two firms are totally different No two firms are exactly the same Strategic groups Cluster of firms that share similar strategies Breadth of product and geographic scope Price/quality Degree of vertical integration Type of distribution system 4-38

Strategic Groups within Industries Value of strategic groups as an analytical tool Identify barriers to mobility that protect a group from attacks by other groups Identify groups whose competitive position may be marginal or tenuous Chart the future direction of firms’ strategies Thinking through the implications of each industry trend for the strategic group as a whole 4-39

Strategic Groups within Industries 4-40