1. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-1 The Competitive Environment: Assessing Industry Attractiveness by Robert Pitts & David Lei Slides prepared by John P. Orr Cameron University Chapter 2

2. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-2 What you will learn… The nature of the general environment, also known as the macroenvironment Macroenvironment influences over competition between firms and organizations The nature of the industry environment, also known as the competitive environment Slide 1 of 2

3. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-3 What you will learn… The Five Forces that make up the industry environment: –Barriers to entry –Supplier power –Buyer power –Availability of substitutes –Rivalry among firms The concept of Strategic Groups Techniques companies use to monitor changes in the environment Slide 2 of 2

4. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-4 Personal Computer: Key Parts Microprocessor Hard drive CD-ROM or DVD drive Printed circuit boards Keyboard Monitor

5. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-5 The Concept of Environment Environment All external forces, factors, or conditions that exert some degree of impact on the strategies, decisions, and actions taken by the firm Macroenvironment General environment The broad collection of forces or conditions that affect the firm or organization in every industry

6. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-6 Macroenvironment Influences Demographic Political Social/ Cultural Technological Global

7. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-7 The Competitive Environment Industry Attractiveness The potential for profitability in a given industry Industry Structure The interrelationship among the factors in a firm’s competitive or industry environment.

8. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-8 Ex. 2-1. Porter’s Five Forces Model of Industry Attractiveness Potential Entrants SuppliersBuyers Substitutes Bargaining power of suppliers Bargaining power of buyers Threat of substitute products or services Threat of new entrants Industry competitors Rivalry among existing firms

9. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-9 Barriers to Entry Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution channels Absolute cost advantages Proprietary learning curve Access to necessary inputs Government policy Expected retaliation

10. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-10 Determinants of Rivalry Industry growth Fixed (or storage) cost / Value added Intermittent overcapacity Product differences Brand identity Switching costs Concentration and balance Informational complexity Diversity of competitors Exit barriers

11. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-11 Determinants of Substitution Threat Relative price/ Performance of substitutes Switching costs Buyer propensity to substitute

12. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-12 Determinants of Supplier Power Differentiation of inputs Switching costs of suppliers and firms in industry Presence of substitute inputs Supplier concentration Importance of volume to supplier Cost relative to total purchases in the industry Impact of inputs on cost or differentiation Threat of forward integration vs. backward integration

13. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-13 Determinants of Buyer Power Bargaining leverage Buyer concentration vs. firm concentration Buyer volume Buyer switching costs relative to firm switching costs Buyer information Ability to backward integrate Substitute products Slide 1 of 2

14. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-14 Determinants of Buyer Power Pull-through Price sensitivity Price / Total purchases Product differences Brand identity Impact on quality/performance Buyer profits Decision makers’ incentives Slide 2 of 2

15. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-15 Ex. 2-2. Strategic Groups in the Personal Computer Industry Product Quality Customization and Speed of Delivery Low High Fragmented Players Packard Bell AST Research Tandy Compaq Hewlett-Packard IBM Dell Exited from market, 1999 Gateway Apple

16. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-16 Trends in Strategic Groups Strategic groups can shift over time as market changes Entire strategic groups can emerge or disappear over time Industry consolidation alters strategic groups Distinctiveness enhances firm’s sustainable competitive advantage

17. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-17 Monitoring the Environment Environmental Scanning The gathering of information about external conditions for use in formulating strategies Competitor Intelligence Gathering Scanning specifically targeted or directed toward a firm’s rivals

18. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2-18 Advantage and Ethics Legal Requirements Long-Run Consequences –Charges of price-gouging –Threat of regulation –Potential of regulation to stifle innovation