1. External Environmental Analysis

2. Lecture Topics Purpose of External Environmental Analysis
Gathering Information for External Environmental Analysis
General Environment
Competitive Environment
Key Success Factors
Competitive Changes During Industry Evolution
Strategic Groups
National Competitive Advantage

3. Purpose of External Environmental Analysis
Organizations are affected by conditions in the environment
Managers need to be aware of these conditions in order to
Take advantage of opportunities that can lead to higher profits
Reduce the impact of threats that can harm the organization’s future

4. Gathering Information for External Environmental Analysis
Managers need information in order to know and develop an understanding about what is happening in the external environment
Three approaches to information gathering:
Scanning: general surveillance of environmental changes; looking for early signals of changes
Monitoring: close attention to specific developments that could affect the organization
Competitive Intelligence: following actions of competitors

5. Two Areas for Analysis
General Environment
Competitive Environment

6. The General and Competitive Environment
General Environment
Demographics
Competitive
Environment
Threat on new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Competitive rivalry
Global
Political/Legal
Sociocultural
Technological
Macoreconomic

7. General Environment Demographics
Characteristics of a country’s population
Size of population and growth rate
Age distribution of population
Education levels
Income distribution
Ethnic diversity
Geographic distribution

8. General Environment Political/Legal
Political and legal conditions affecting business
Government policies toward business
Investment incentives
Business regulation: labor, environment
Education priorities
Budget conditions and plans

9. General Environment Technological
Technological developments relevant to a business
Telecommunications
Internet
On-line training
Product and process innovations

10. General Environment Macroeconomic
Impact of the economy on business
Size and change in gross domestic product
Per capita income levels
Inflation rate
Interest rates
Foreign trade deficit or surplus
Unemployment
Rates of saving and investment

11. General Environment Sociocultural
Influence of values, beliefs, and lifestyles of a country on business
Family relationships
Attitudes about work
Living arrangements
Styles of entertainment
Attitudes toward health

12. General Environment Global
International developments that can impact a business
Rise of China as economic power
Rising global trade and WTO
Intellectual property protection
Important political events: Iraq war
Search for low cost suppliers

13. Competitive Environment
The essence of strategy formulation is coping with competition.
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.
Managers must understand the conditions of competition within their industry
Porter Five-Forces Model of Competition (determining the attractiveness of an industry)
Key Success Factors
Competitive Changes During industry Evolution
Strategic Groups
National Competitive Advantage

14. Defining an Industry Industry Competitors
A group of companies offering products or services that are close substitutes for each other
Competitors
Rival companies that serve the same basic customer needs

15. Defining an Industry (cont’d)
Sector
A group of closely related industries
Market segments
Distinct groups of customers within a market that can be differentiated from each other based on their distinct attributes and demands
Changing industry boundaries

16. The Computer Sector: Industries and Segments

17. Five Forces Driving Industry Competition

18. Threat of New Entrants
Fundamental question: how easy is it for another company to enter the industry?
Factors making easy entry to industry
Low economies of scale
Low product differentiation
Low capital requirements
No switching costs for buyer
Easy access to distribution channels
Little government regulation

19. Supplier Power
Fundamental question: how badly does a supplier need your business?
Factors giving power to supplier:
Supplier industry dominated by few firms
Buyer is not important to customer
Supplier’s product is important input to buyer’s product
Supplier’s products have high switching costs
Supplier can “integrate forward” and become competitor of buyer

20. Threat of Substitutes
Fundamental question: what other products or services could perform the same function as your products or services?
Factors indicating high threat of substitutes:
Few switching costs for buyer
Price of substitute lower or quality higher than for your products
Firms offering substitutes have high profitability

21. Buyer Power
Fundamental questions: How badly does a buyer need your products or services?
Factors contributing to high buyer power:
Few buyers compared to the number of sellers
Buyers purchases high relative to seller’s sales
Products are undifferentiated
Buyer has low switching costs
Buyer has low profits
Buyer can “integrate backward” and supply the product to itself

22. Competitive Rivalry
Fundamental question: how intense is competition in the industry?
Factors leading to high competitive rivalry:
Numerous or equally balanced competitors
High fixed costs
Slow industry growth
Lack of differentiation or switching costs
High strategic stakes
High exit barriers

23. A Sixth Force: Complementors
Not a supplier
Offers service or product that affects industry’s performance
When complementors are important and their number is increasing
Demand and profits in the industry are boosted
When complementors are weak
Industry growth can slow and profits can be limited
Example: Internet Service Providers “complementors” to eBusiness firms

24. Strategic Implications of the Five Competitive Forces
Competitive environment is unattractive from the standpoint of earning good profits when:
Rivalry is strong
Entry barriers are low and entry is likely
Competition from substitutes is strong
Suppliers and customers have considerable bargaining power

25. Strategic Implications of the Five Competitive Forces
Competitive environment is ideal from a profit-making standpoint when:
Rivalry is moderate
Entry barriers are high and no firm is likely to enter
Good substitutes do not exist
Suppliers and customers are in a weak bargaining position

26. Key Success Factors
In many industries, there are certain actions or practices that a business must follow in order to compete in the industry.
May need effort to distinguish company from competitors
AN INDIVIDUAL COMPANY DOES NOT HAVE KEY SUCCESS FACTORS!!!!
KEY SUCCESS FACTORS ARE NOT THE SOURCE OF A COMPANY’S COMPETITIVE ADVANTAGE – THEY ARE REQUIREMENTS FOR COMPETING IN AN INDUSTRY AND DO NOT GIVE ANY FIRM A COMPETITIVE ADVANTAGE

27. Examples of Key Success Factors in Selected Industries
Pharmaceuticals: research and personal selling
Beer: advertising and distribution
Restaurant: quality food, service, location, notoriety
Retailer: location and priced-for-quality

28. Changes in Competition During Industry’s Evolution
Over time as an industry evolves, the nature and basis of competition changes
Managers must anticipate how the forces will change as the industry evolves and formulate appropriate strategies
Five Stages ( similar to product-life cycle)
Embryonic—introduction of product
Growth
Shakeout
Mature
Declining

29. Stages in the Industry Life Cycle

30. Shakeout: Growth in Demand and Capacity

31. Requirements in Each Stage of Industry’s Evolution
Embryonic: Know-how, educating customers, opening distribution channels
Growth: Know-how for continued innovation, financing, build demand
Shakeout: Dominant market position, low cost producer, high capacity
Maturity: low cost production, brand loyalty
Declining: lowest cost production, reduce capacity

32. Limitations of Models for Industry Analysis
Life cycle issues
The embryonic stage can sometimes be skipped
Industry growth can be revitalized
The time span of the stages can vary
Innovation and change
Innovation can unfreeze and reshape industry structure
An industry may be hypercompetitive, with permanent and ongoing change

33. Limitations of Models for Industry Analysis (cont’d)
Company differences
The importance of company differences within an industry or strategic group can be underemphasized
The individual resources and capabilities of a company may be more important in determining profitability than the industry or strategic group

34. Strategic Groups
Companies do not compete against all companies in an industry
Companies compete against several other companies that follow similar strategies
A strategic group consists of those rivals with similar competitive approaches in an industry
Examples ways of competing:
Price -- Range of products
Innovation -- Customers served
Research
Quality

35. Procedure for Constructing a Strategic Group Map
STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another
STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics
STEP 3: Assign firms that fall in about the same strategy space to same strategic group
STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

36. Example: Strategic Group Map of the Video Game Industry
Arcades
Arcade operators
Publishers of games on CD-ROMs
Home PCs
Sony, Sega, Nintendo, several others
Types of Video Game Suppliers/Distribution Channels
Video game consoles
MSN Gaming Zone, Pogo.com, America Online, HEAT, Engage, Oceanline, TEN
Online/Internet
Low
(Coin-operated equipment)
Medium
(Console players cost $100-$300)
High (Use PC)
Overall Cost to Players of Video Games

37. Nation-State and Competitive Advantage
A country may provide a competitive advantage for a company
Need to identify national factors in order to determine
Where most significant competitors will come from
Where to locate production activities
Porter’s Diamond of Determinants of National Competitive Advantage

38. The Global and National Environments
Globalization of production and markets
Lower barriers to cross-border trade and investment
National differences in the cost and quality of factors of production
“Home” and “foreign” markets and competitors are blurring
Intensified rivalry
Intensified rate of innovation
Many new markets are open

39. Determinants of National Competitive Advantage
Strategy,
Structure,
Rivalry
Factor
Endowments
National Competitive Advantage
Demand
Conditions
Related and
Supporting
Industries

40. Factor Endowments
Availability of traditional factors of production—land, labor, capital, entrepreneurship—provide cost advantages to companies located in countries possessing those factors
More significant, countries and their companies can create new factors such as a knowledgeable workforce and infrastructure that is rare and difficult to imitate
Factor endowments less important than the speed and efficiency of deploying those resources.

41. Demand Conditions
Large growing markets provide foundation for global competition
More significant, sophisticated and demanding consumers force companies to innovate and improve their products
Advances in products, services, and standards improve companies’ knowledge and capabilities for selling in other world markets

42. Related and Supporting Industries
Provide inputs and capabilities that help a company to improve its own products and capabilities
Helps reduce manufacturing costs through cost-effective, timely methods
Ongoing exchange of knowledge through research and development and joint projects improves both suppliers and companies

43. Strategy, Structures, and Rivalry
Different management ideologies lead to different emphases within a company
Japan and Germany both have engineers in top management and those country’s companies concentrate on process and product improvement
Intense domestic rivalry leads to product improvements and cost reduction in order to compete for domestic customers

44. Conclusions About Determinants of National Competitive Advantage
Firms succeeding in global markets first succeeded in intense competition in home countries
Competitive advantage for global firms comes from continuous improvement, innovation, and change.