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The External Environment
www.divandari.com
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The External Environment
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General Environment
Dimensions in the broader society that influence on industry and the firms within it
Economic
Sociocultural
Global
Technological
Political/legal
Demographic
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Industry Environment
Set of factors directly influencing a firm and its competitive actions and competitive responses Threat of new entrants
Power of suppliers
Power of buyers
Threat of product substitutes
Intensity of rivalry
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Competitor Environment
All of the companies that the firm competes against.
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Analysis of the External Environments
General environment Focused on the future
Industry environment Focused on factors and conditions influencing a firm’s profitability
within an industry Competitor environment
Focused on predicting the dynamics of competitors’ actions, responses and intentions
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Opportunities and Threats
Opportunity A condition in the general environment that if
exploited, helps a company achieve strategic competitiveness
Threat A condition in the general environment that may
hinder a company’s efforts to achieve strategic competitiveness
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External Environmental Analysis
A continuous process which includes
Scanning for early signals of potential changes and trends in the general environment
Monitoring changes to see if a trend emerges from among those spotted by scanning
Forecasting projections of outcomes based on monitored changes and trends
Assessing the timing and significance of changes and trends on the strategic management of the firm
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Components of the External Environmental Analysis
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General Environment (cont’d)
The Economic Segment Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product
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General Environment (cont’d)
The Sociocultural Segment Women in the workplace Workforce diversity Attitudes about quality of
worklife Concerns about
environment Shifts in work and career
preferences Shifts in product and service
preferences
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General Environment (cont’d)
The Global Segment
Product innovations
Applications of knowledge
Focus of private and government-supported R&D expenditures
New communication technologies
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General Environment (cont’d)
The Technological Segment
Product innovations
Applications of knowledge
Focus of private and government-supported R&D expenditures
New communication technologies
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General Environment (cont’d)
The Political/Legal Segment
Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and policies
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General Environment
The Demographic Segment
Population size
Age structure
Geographic distribution
Ethnic mix
Income distribution
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External stakeholderInfluence on the business
Business response
Government Regulatory compliance Compliance
Investors Capital providers Risk reduction
Consumers Demand for products or
services
Quality products or
services
Industry Standards of practice Fair dealing
International bodies Best practices Fair dealing
Local communities Operating licenses Community relations
programs
Business partners transparency Fair dealing
Relationships between business and stakeholder
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Industry Environment
Industry Defined A group of firms producing products that are close
substitutes
Firms that influence one another Includes a rich mix of competitive strategies
that companies use in pursuing strategic competitiveness and above-average returns
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The Five Forces of Competition Model
Figure 2.2Figure 2.2
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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
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Barriers to Entry
Economies of Scale Marginal improvements in efficiency that a firm
experiences as it incrementally increases its size Advantages and disadvantages of large-scale and small-
scale
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Barriers to Entry (cont’d)
Product differentiation Unique products
Customer loyalty
Products at competitive prices
Capital Requirements Physical facilities
Inventories
Marketing activities
Availability of capital
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Barriers to Entry (cont’d)
Switching Costs One-time costs customers incur when they buy
from a different supplier
New equipment
Retraining employees
Psychic costs of ending a relationship
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Barriers to Entry (cont’d)
Access to Distribution Channels
Stocking or shelf space
Price breaks
Cooperative advertising allowances
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Barriers to Entry (cont’d)
Cost disadvantages independent of scale Proprietary product technology
Favorable access to raw materials
Desirable locations
Government policy Licensing and permit requirements
Deregulation of industries
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Barriers to Entry (cont’d)
Expected retaliation Responses by existing competitors may depend
on a firm’s present stake in the industry (available business options)
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Low, risky ReturnsLow, stable Returns
High, stable Returns High, risky Returns
Low High
Exit Barriers
Entry Barriers
Low
High
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Bargaining Power of Suppliers
Supplier power increases when:
Suppliers are large and few in number
Suitable substitute products are
not available
Individual buyers are not large customers of suppliers and there are many of them
Suppliers’ goods are critical to buyers’ marketplace success
Suppliers’ products create high switching costs.
Suppliers pose a threat to integrate forward into buyers’ industry
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Supplier
Plan
Customer Customer’sCustomer
Suppliers’Supplier
Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver
Your Company
Source
Return Return ReturnReturn Return Return Return Return
Supply Chain
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Supply Chain
The Firm
Wholesaler Wholesaler
Retailer Retailer Retailer Retailer
1st Tier Supplier 1st Tier Supplier
3rd Tier Supplier
2nd Tier Supplier
3rd Tier Supplier
2nd Tier Supplier
Customer Base
Resources Base
Sell Side
Buy Side
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Firm Competitors
buyers
Suppliers
Competitors
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Bargaining Power of Buyers
Buyer power increase when: Buyers are large and few in number Buyers purchase a large portion of
an industry’s total output Buyers’ purchases are a significant
portion of a supplier’s annual revenues Buyers can switch to another product without
incurring high switching costs Buyers pose threat to integrate backward into the
sellers’ industry
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Threat of Substitute Products
The threat of substitute products
increases when:
Buyers face few switching costs
The substitute product’s price is lower
Substitute product’s quality and performance are equal to or greater than the existing product
Differentiated industry products that are valued by customers reduce this threat
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Intensity of Rivalry Among Competitors
Industry rivalry increases when: There are numerous or equally
balanced competitors Industry growth slows or
declines There are high fixed costs or high
storage costs There is a lack of differentiation opportunities or low
switching costs When high exit barriers prevent competitors from
leaving the industry
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Low entry barriers
Interpreting Industry Analyses
UnattractiveIndustry
Suppliers and buyers have strong positions
Strong threats from substitute products
Intense rivalry among competitors
Low profit potential
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AttractiveIndustry
High entry barriers
Interpreting Industry Analyses
Suppliers and buyers have weak positions
Few threats from substitute products
Moderate rivalry among competitors
High profit potential
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Competitor Analysis
Competitor Intelligence
The ethical gathering of needed information and data that provides insight into:
A competitor’s direction (future objectives)
A competitor’s capabilities and intentions (current strategy)
A competitor’s beliefs about the industry (its assumptions)
A competitor’s capabilities
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Competitor Analysis Components