The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis 1

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 analysis By 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 needs Product Innovations Expanding global markets Declining Interest Rates Possible Threats: New entry by competitors Changing demographics/shifting demand Emergence of cheaper technologies Regulatory requirements

Components of the General Environment 10

General Environment Demographic Technological Sociocultural Population size, Age structure, Geographic distribution, Ethnic mix, Income distribution... Sociocultural Workforce diversity,Attitudes about quality of worklife,Concerns about environment, Shifts in product and service preferences... Economic Inflation rates, Interest rates, Personal savings rate, Exchange Rates, GDP... Technological Product innovations, Increase in R&D expenditures, New communication technologies... Political / Legal Antitrust laws, Taxation laws, Environmental Protection Law... Global Critical global markets, Newly industrialized countries, Different cultural and institutional attributes...

Developments in general environment change competitive battle lines. The general environment usually holds both opportunities for and threats to expansion. (+) for (-) for DEMOGRAPHIC Aging Population Medical Services TECHNOLOGICAL Advances in Laser Technology Long-playing records Developments in general environment change competitive battle lines. Tekel sold Yeni Rakı for a long time before the privatization Market is opened to the competition The same environmental trend can have different effects on different industries (+) for (-) for SOCIO-CULTURAL Greater health awareness Exercise equipments Meat products

The impact of an environmental trend often differs significantly for differnt firms within the same industry Restructring of the U.S. economy in the 1980s. Reduced numbers of managers Decrease in travel budget Full-service airlines are affected negatively Low-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

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.

Porter’s Five Forces Model of Competition Threat of New Entrants 11

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 Barriers to Entry 12

Bargaining Power of Suppliers Porter’s Five Forces Model of Competition Threat of New Entrants Bargaining Power of Suppliers 14

Bargaining Power of Suppliers 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 are likely to be powerful if: Supplier industry is dominated by a few firms Suppliers’ products have few substitutes Buyer is not an important customer to supplier Suppliers’ product is an important input to buyers’ product Suppliers’ products are differentiated Suppliers’ products have high switching costs Supplier poses credible threat of forward integration 15

Bargaining Power of Buyers Porter’s Five Forces Model of Competition Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers 17

Bargaining Power of Buyers Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to seller’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 Buyers compete with the supplying industry by: * Bargaining down prices * Forcing higher quality * Playing firms off of each other Buyer is powerful when: Buyer purchases large proportion of seller’s products Buyer has the potential to integrate backward Alternative suppliers are plentiful Changing suppliers costs very little Purchased product represents a high percentage of a buyer’s costs Buyer earns low profits Purchased product is unimportant to the final quality or price of a buyer’s products 18

Bargaining Power of Suppliers Bargaining Power of Buyers Porter’s Five Forces Model of Competition Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products 20

Threat of Substitute Products Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery Substitute Products Those 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

Porter’s Five Forces Model of Competition Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products 23

Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments High strategic stakes High exit barriers 26

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???

Strategic Groups Defined A set of firms emphasizing similar strategic dimensions and using similar strategies Internal competition between strategic group firms is greater than between firms outside that strategic group

Strategic Groups Strategic Dimensions Extent of technological leadership Product quality Pricing policies Distribution channels Customer service Target markets Product breadth Geographical coverage Extent of diversification or vertical integration . . .

Strategic Group Maps A graphical depiction of rival firms, using two dimensions that reflect important aspects of their strategy and array 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).

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 map use correlated dimensions (you will basically get a diagonal array of groups) split one firm apart and map it in numerous positions limit your thinking to only quantitative dimensions (because some categorical or qualitative dimensions might be useful!)

Competitive and Cooperative Dimensions The Primarily Competitive Dimensions New Entrants Threat of New Entrants Your Direct Rivals Rivalry Among Competing Firms in Industry Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Substitute Products The Primarily Cooperative Dimensions Your Suppliers Your Buyers Your Firm

Analyzing the External Environment Environmental Scanning Gathering Intelligence Sources of Competitive Intelligence Scenario Planning

Environmental Scanning The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation AIM  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.

Competitive Intelligence Information that is relavant to strategy formulation regarding the environmental context within which a firm competes Several Uses of Competitive Intelligence Providing descriptions of the competitive environment (Guide for strategy formulation) Challenging assumptions about the competitive environment Forecasting future developments Identifying and compensating the competitive weaknesses Determinig the unsustainable strategies Indentifying the guideline for adjustment to changing environment

Sources of Useful Competitive Intelligence Local newspapers Government Databases Customers and suppliers Competitors

The Environment-Strategy Relationship How the external environment shapes strategy? How strategy can influence the external environment?