McGraw-Hill/Irwin Strategic Management, 10/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Session 3 Chapter 4 The External Environmental Analysis Remote/General Industry/Competitive Direct Operating

4-2 Session Objectives To stress the importance of the sectors of the firm’s external environment to strategy formulation. To develop a broader sense of competition and competitive pressures. To understand the purpose of competitive strategy

4-3 The Firm’s External Environment Remote Environment (Global and Domestic) Industry Environment (Global and Domestic) Operating Environment (Global and Domestic ) Economic Social Political Technological Ecological Entry barriers Supplier power Buyer power Substitute availability Competitive rivalry Competitors Creditors Customers Labor Suppliers THE FIRM

4-4 4 Economic Factors Concern nature and direction of economy in which a firm operates Types of factors –General availability of credit –Level of disposable income –Propensity of people to spend –Prime interest rates –Inflation rates –Trends in growth of gross national product

4-5 5 Social Factors Include beliefs, values, opinions, and lifestyles of people Recent social trends –Entry of large numbers of women into labor market –Accelerating interest of consumers and employees in quality-of-life issues –Shift in age distribution of population

4-6 6 Political Factors Define legal and regulatory parameters within which firms must operate Types of factors –Fair-trade decisions –Antitrust laws –Tax programs –Minimum wage legislation –Pollution and pricing policies –Administrative jawboning

4-7 7 Technological Factors Focus on technological changes affecting industry Types of changes –New products –Improvements in existing products –Manufacturing and marketing techniques Role of technological forecasting –Foresees advancements and estimating their impact –Alerts managers to impending challenges and promising opportunities

4-8 8 Ecological Factors Involve relationships among human beings and other living things and air, soil, and water Current concerns –Global warming –Loss of habitat and biodiversity –Air, water, and land pollution Responsibilities of firms –Eliminating toxic by-products of current manufacturing processes –Cleaning up prior environmental damage

4-9 9 Factors Used to Assess the International Environment Economic Env. Level of economic development Population GNP Per capita income Literacy level Social infrastructure Natural resources Climate Membership in economic blocs Monetary and fiscal policies Wage and salary levels Currency convertibility Inflation and interest rates Taxation system Political System Form of government Political ideology Stability of government Strength of opposition parties Social unrest Political strife and insurgency Governmental attitude towards foreign firms Foreign policy

Factors Used to Assess the International Environment Legal Environment Legal tradition Effectiveness of legal system Treaties with foreign nations Patent trademark laws Laws affecting business firms Cultural Env. Customs, norms, values, beliefs Language Attitudes Motivations Social institutions Status symbols Religious beliefs

4-11 Firm’s External Environment

4-12 Industry/Competitive Environment Harvard professor Michael E. Porter propelled the concept of industry environment into the foreground of strategic thought and business planning. The cornerstone of Porter’s work first appeared in the Harvard Business Review, in which he explains the five forces that shape competition in an industry. Porter’s well-defined analytic framework helps strategic managers to link remote factors to their effects on a firm’s operating environment.

4-13 Competitive Forces Shape Strategy The essence of strategy formulation is coping with competition. Intense competition in an industry is neither coincidence nor bad luck. Competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. The corporate strategists’ goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor.

4-14 The Goal of Competitive Strategy To Achieve a Defensible Position Against the Competitive (Five) Forces that Are Constantly Working to Erode Industrywide Profitability

4-15 Competitive Forces Any Entity (Group or Class of Firms) that has the Potential to Erode Profitability Among Firms within an Industry

4-16 Government Influence on the Model We Consider the Influence of Government as Felt through its Role(s) as one of the Five Forces: Government can be a Potential Entrant, Supplier, Buyer, Substitute, or Rival Firm

4-17 Five Forces Driving Industry Competition

4-18 Breakout Groups by Case 1.Define your Industry 2.Most Significant General Environmental Factor 3.Top Two More Significant of the Five Forces You have 15 minutes!

4-19 The Five Forces Threat of Entry Bargaining Power of Suppliers Bargaining Power of Buyers Pressure from Substitute Products Rivalry Among Existing Firms

4-20 Forces Affecting Entry Decision Economies of Scale Product Differentiation Capital Requirements Cost Disadvantages Independent of Size Access to Distribution Channels Government Policy

4-21 Powerful Suppliers A supplier group is powerful if: It is dominated by a few companies and is more concentrated than the industry it sells to Its product is unique or at least differentiated, or if it has built-up switching costs It is not obliged to contend with other products for sale to the industry It poses a credible threat of integrating forward into the industry’s business The industry is not an important customer of the supplier group

4-22 Powerful Buyers A buyer group is powerful if: It is concentrated or purchases in large volumes The products it purchases from the industry are standard The products it purchases from the industry form a component of its product and represent a significant fraction of its cost It earns low profits The industry’s product is unimportant to the quality of the buyers’ products or services The industry’s product does not save the buyer money The buyers pose a credible threat of integrating backward

4-23 Substitute Products By placing a ceiling on the prices it can charge, substitute products or services limit the potential of an industry Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times Substitute products that deserve the most attention strategically are those that are –subject to trends improving their price-performance trade-off with the industry’s product or –produced by industries earning high profits

4-24 Jockeying for Position Intense rivalry occurs when: Competitors are numerous or are roughly equal Industry growth is slow, precipitating fights for market share that involve expansion The product or service lacks differentiation or switching costs Fixed costs are high or the product is perishable, creating strong temptation to cut prices Capacity normally is augmented in large increments Exit barriers are high Rivals are diverse in strategy, origin, and personality

4-25 Industry Analysis & Competitive Analysis An industry is a collection of firms that offer similar products or services. Structural attributes are the enduring characteristics that give an industry its distinctive character. Concentration refers to the extent to which industry sales are dominated by only a few firms. Barriers to entry are the obstacles that a firm must overcome to enter an industry.

4-26 Competitive Analysis 1.How do other firms define the scope of their market? 2.How similar are the benefits the customers derive from the products and services that other firms offer? The more similar the benefits of products or services, the higher the level of substitutability between them. 3.How committed are other firms to the industry?

4-27 Direct/Operating Environment Also called task environment Includes competitor positions and customer profiling based on the following factors: –Geographic –Demographic –Psychographic –Buyer Behavior Also includes suppliers & creditors and HRM

4-28 HR: Nature of the Labor Market Access to personnel is affected by 4 factors: Firm’s reputation as an employer Local employment rates Availability of people with the needed skills Its relationship with labor unions.

4-29 Emphasis on Environmental Factors Differing external elements affect different strategies at different times and with varying strengths Only certainty is that the effect of the remote and operating environments will be uncertain until a strategy is implemented Many managers, particularly in less powerful firms, minimize long-term planning Instead, they allow managers to adapt to new pressures from the environment Absence of strong resources and psychological commitment to a proactive strategy effectively bars a firm from assuming a leadership role in its environment