Class 2The External Environment : Opportunities, Threats,

Industry Competition, and Competitor Analysis

External Environment affects Growth & Profitability.

Rapid change and diffusion in Technology encourage organization to have timely & effective competitive actions & response.

Rapid Socio-cultural change affects labor practices & nature of product demanded by diverse customers.

Government policies & law affects on where & how org. choose to compete/locate.◦ i.e., privatization

In order to understand external environment, data/information related to competitors, customers & other stakeholders, can be used as base of knowledge & capabilities.◦ Choices of action

The General Environment is composed of elements in the broader society that influence and industry & the firms within.◦ Firms cannot directly control general environment’s segments & elements.◦ Successful organization, by gathering the types & amounts of data &

information, is necessarily to know & understand each segments & implications, in order to craft appropriate strategies.

The Industry Environment is the set of factors- the 5 forces of competition- that directly influences a firm & its competitive actions & responses.

Competitor Analysis – is how companies gather and interpret information about their competitors.◦ Understanding the competitor environment complements the insights

provided by studying the general & industry environments.

The process includes 4 activities – scanning, monitoring, forecasting, & assessing, and must be conducted on a continuous basis.

Important objective of studying the general environment is identifying opportunities & threats.

An opportunity is a condition in the general environment that may help a company achieve strategic competitiveness.

A Threat is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness.

Scanning

•Identify early signals of environmental changes & trends

Monitoring

•Detecting meaning through ongoing observations of environmental changes & trends

Forecasting

•Developing projection of anticipated outcomes based on monitored changes & trends

Assessing

•Determining the timing ^ importance of environmental changes & trends for firms; strategies & their management.

Industry Environment-Threats of New Entrants-Power of Suppliers-Power of Buyers-Products Substitutes-Intensity of Rivalry

Competitor Environment

Demographic

Economic

SocioCultural

Political/Legal Global

Technological

Global SegmentImportant political events Critical global market Newly Industrialized

CountryDifferent Cultural &

Institution attributes.

Technological SegmentProduct Innovation Application of knowledge

Focus of private & government supported

R&D expenditure

New communication Technology

SocioCultural SegmentWomen in the

workplace Workforce diversity Attitude about the quality of worklife

Concerns about Environment

Shift in work/career preferences

Political/Legal SegmentAntiTrust Law Taxation Laws Deregulation

philosophies Labor Training LawEducational

Philosophies & Policies

Economic SegmentInflation Rate Interest Rate Trade

Deficits/SurplusPersonal/Business

Savings Rate GDP

Demographic SegmentPopulation size Age Structure Geographic

Distribution Ethnic Mix Income Distribution

The general environment is composed of segments (& their individual elements) that are external to firms.

Degree of impact varies, but these environmental segments affect each industry and the firms within it.

Results of external environment analysis recognize environmental changes, trends, opportunities & threats.

The proper matches, the firm achieves strategic competitiveness & earn above average returns.

The demographic segment is concerned with a population’s size, age, structure, geographic distribution, ethnic mix and income distribution.

The economic segment refers to the nature & direction of the economy in which a firm corporate or may compete.

The political/legal segment is the arena in which organizations & interest groups compete for attention, resources, & the voice of overseeing the body of laws & regulations guiding the interactions among nations.

The sociocultural segment is concerned with a society’s attitudes & cultural values.

The technological segment includes the institutions & activities involved with creating new knowledge & translating that knowledge into new outputs, products, processes, and materials.

The global segment includes relevant new global markets, existing ones that are changing, important international political events, and critical cultural & institutional characteristics of global markets.

An industry is a group of firms producing products that are close substitutes.

Industries include a rich mix of competitive strategies that companies use in pursuing strategic competitiveness & above-average returns.

Compared to general environment, the industry environment has a more direct effect on strategic competitiveness & above-average returns.

The intensity of industry competition & an industry’s profit potential (as measured by the long-run return on invested capital) are a function of five competitive forces.

Industry’s Firms

Threats of New

Entrants

Bargaining Power of Suppliers

Threats of Substitute Products

Bargaining Power of Buyers

Rivalry among

competing Firms

Barrier to entry◦ Economies of Scale

The marginal improvements in efficiency that a firm experiences as it incrementally increases its size.As the quantity of a product produced during a given period increases, the cost of manufacturing each unit decline.

◦ Product Differentiation◦ Capital Requirements◦ Switching Costs◦ Access to Distribution Channels◦ Cost Disadvantages Independent of scale◦ Government Policy

Expected Retaliation

Increasing prices & reducing the quality power of products sold are potential means through which suppliers can exert over firms competing within an industry.

A supplier group is powerful when..It is dominated by a few large companies & is more concentrated than the industry to which it sells;Satisfactory substitute products are not available to industry firms;industry firms are not a significant customer for the supplier group;The effectiveness of suppliers’ products has created high switching costs for industry firms; andSuppliers are a credible threat to integrated forward into the buyers’ industry.

Credibility

Customers (buyer groups) are powerful when..◦ They purchase a large portion of an industry’s total output;◦ The produce being purchased from an industry accounts for a

significant portion of the buyers’ costs;◦ They could switch to another product at little, if any, cost; and◦ The industry’s products are undifferentiated or standardized, and

the buyers pose a credible threat if they were to integrated backward into the sellers’ industry.

Substitute products are different goods or services from outside a given industry that perform similar of the same functions as a product that the industry produces.

Product substitutes are a strong threat to a firm when customers face few switching costs, and when the substitute product’s price is lower or its quality & performance capabilities are equal or greater than those of the competing product.

Differentiating product along dimension that customers value (i.e., price, quality, service after sale, & location) reduces a substitute’s attractiveness.

Industry’s firms are mutually dependent, actions taken by one company usually invite competitive retaliation.

Competitive rivalry intensifies when a firm is challenged by a competitor’s actions or when an opportunity to improve a market position is recognized.

Firms can differentiate their products from competitors’ offerings in term of dimension that customers value & in which the firm have competitive advantage.◦ Visible dimensions on which rivalry is based include price, quality, and innovation etc.

Various factors influencing the intensity of the rivalry between firms.◦ Numerous or Equally Balanced Competitors.◦ Slow Industry Growth◦ High Fixed Costs or High Storage Costs◦ Lack of Differentiation or Low Switching Costs◦ Capacity Augmented in Large Increments◦ Diverse Competitors◦ High Strategic Stakes◦ High Exit Barriers.

A strategic group is a group of firms in an industry following the same or a similar strategy along the same strategic dimensions.

Organizations in a strategic group occupy similar positions in the market, offer similar goods & other organizational features.

The strategies of firms within a group are similar, but they differ from strategies being implemented by companies in the industry’s other strategic groups.

The notion of strategic groups is so popular for analysing an industry’s competitive structure.

Contribution to its popularity is the assertion that strategic group analysis is a basic framework that should be used un diagnosing competition, positioning, & the profitability of firms within an industry.

The benefits & limitations of strategic group analysis should be recognized before the firm uses it to better understand an industry’s structure.