ENVIRONMENT ANALYSIS

Assist. Prof. Dr. Özge Özgen / Department of International Business and Trade

The External Environment:

Opportunities, Threats, Industry Competition, and

Competitor Analysis

SWOT is the starting point

It provides an overview of the strategic situation.

It provides the “raw material” to do more extensive internal and

external analysis.

An OPPORTUNITY is a chance for firm growth or progress due to a

favorable juncture of circumstances in the business environment.

A THREAT is a factor in your company’s external environment that

poses a danger to its well-being.

Possible Opportunities:

Emerging customer needs

Product Innovations

Expanding global markets

Declining Interest Rates

Possible Threats:

New entry by competitors

Changing demographics/shifting

demand

Emergence of cheaper technologies

Regulatory requirements

Components of the General Environment

General Environment

Demographic

Population size, Age structure,

Geographic distribution,

Ethnic mix, Income

distribution...

Sociocultural

Workforce diversity,Attitudes about quality of worklife,Concerns about environment, Shifts in product and service preferences...

Economic

Inflation rates, Interest rates,

Personal savings rate,

Exchange Rates, GDP...

Technological

Product innovations, Increase in

R&D expenditures, New

communication technologies...

Political / Legal

Antitrust laws, Taxation laws,

Environmental Protection Law...

Global

Critical global markets, Newly

industrialized countries,

Different cultural and

institutional attributes...

The general environment usually holds both opportunities

for and threats to expansion.

(+) for (-) for

DEMOGRAPHIC

Aging Population

Medical Services

TECHNOLOGICAL

Advances in Laser Technology

Long-playing records

Developments in general environment change competitive battle lines.

Tekel sold Yeni Rakı for a long time before the privatization

Merket is opened to the competition

The same environmental trend can have different effects on different industries

(+) for (-) for

SOCIO-CULTURAL

Greater health awareness

Exercise equipments Meat products

The impact of an environmental trend often differs

significantly for differnt firms within the same industry

Many developments in general environment are difficult to predict, while orhers are predictable.

The affects of general environment may differ from one country to another

Restructring of the U.S. economy in the 1980s.

Reduced numbers of managers

Decrease in travel budget

Full-service airlines are affected negatively

Low-cost, low-service airlines gained adv.

! But even when a trend is easy to predict, it is not always clear

what is strategic implications will be.

Porter’s Five-Forces of Competition

A set of factors that directly influences a company and its

competitive actions and responses.

Interaction among these factors determine an industry’s

profit potential and location of “profit pools”.

Need to understand which competitive factors have

power, why they have power, and what you might be able

to do about it to improve your own position.

Threat of

New

Entrants

Porter’s Five Forces

Model of Competition New digital tecnologies created new competitors to

traditional telephone companies

Threat of New Entrants

Barriers

to Entry

Economies of Scale

Absolute Cost Advantages

Brand Loyalty

Product Differentiation

Capital Requirements

Switching Costs

Access to Distribution Channels

Government Policy

Economies of Scale vs. Absolute Cost Advantage

Cost reduction is gained

through

Mass production /

standardized output

Bulk purchases of raw

materials

Spreading marketing and

advertising costs / fixed

costs over a large volume

of output

Superior production

operations and processes

Control of inputs such as

labor, materials,

management skills etc.

Largest US supplier of groceries, and the

largest US general retailer. They can buy

in such enormous bulk, and force

suppliers to accept such low prices

''Just in Time'‘

• just the required accessories,

• just the required quantities and

• just the required time need for

production and distribution.

Capital Requirements

Intel (INTC) does have substantial technological

rivals,

But their research and development budget (upwards

of $7 billion annually) and hard to compete with Intel

Million $ Advanced Micro Devices

- AMD

INTEL

Revenues 6,568.0 53,999.0

Profits 491.0 12,942.0

Switching Cost

Which factors are triggering

the switching behavior?

pricing,

inconvenience,

core service failures,

service encounter failures,

employee responses to

service failures,

attraction by competitors,

ethical problem, and

involuntary switching

Switching costs

include not only

monetary terms

Cost of time

Cost of efforts

Uncertanity and risk

What are the costs of

changing your GSM

operator?

Bargaining

Power of

Suppliers

Threat of

New Entrants

Porter’s Five Forces

Model of Competition

Bargaining Power of Suppliers

Suppliers exert power

in the industry by:

* Threatening to raise

prices or to reduce quality

Powerful suppliers

can squeeze industry

profitability if firms

are unable to recover

cost increases

Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firms

Suppliers’ products have few substitutes

Buyer is not an important customer to supplier

Suppliers’ product is an important input to

buyers’ product

Suppliers’ products are differentiated

Suppliers’ products have high switching costs

Supplier poses credible threat of forward

integration

Bargaining

Power of

Buyers

Threat of New

Entrants

Bargaining

Power of

Suppliers

Porter’s Five Forces

Model of Competition

Bargaining Power of Buyers

Buyers compete

with the supplying

industry by:

* Bargaining down prices

* Forcing higher quality

* Playing firms off of

each other

Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large

relative to seller’s sales

Products are undifferentiated

Buyers face few switching costs

Not important product quality

Buyer has full information

Threat of

Substitute

Products

Threat of

New

Entrants

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Porter’s Five Forces

Model of Competition Threat of Substitute Products

Products

with similar

function

limit the

prices firms

can charge

Keys to evaluate substitute products:

Products with improving

price/performance tradeoffs

relative to present industry

products

Example:

Electronic security systems in

place of security guards

Fax machines in place of

overnight mail delivery

Threat of

Substitute

Products

Threat of New

Entrants

Rivalry Among

Competing Firms in

Industry

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Porter’s Five Forces

Model of Competition Cutthroat competition is more likely to occur when:

Rivalry Among Existing Competitors

Numerous or equally balanced competitors

Slow growth industry

High fixed costs

High storage costs

Lack of differentiation or switching costs

Capacity added in large increments

High strategic stakes

High exit barriers

Don’t forget COMPLEMENTORS

Complementors are companies that sell products that

that add value to the products of companies in an

industry because when used together, the products

better satisfy customer demands.

Five-Forces Analysis -- SO WHAT?

Consider how opportunities and threats may result from the

five competitive forces.

Understand the strength of each competitive force, and

underlying reasons for strength.

Select niches where forces are weaker, and profit pools are

higher.

Build strategies that defend yourself against strong

competitive forces.

Build strategies that influence the forces in your favor.

Competitive and Cooperative

Dimensions

Threat of

Substitute

Products

Threat of New

Entrants

Rivalry Among

Competing Firms in

Industry

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Substitute

Products

New Entrants

Yo

ur D

irect

Riv

als

The Primarily

Competitive Dimensions

Your

Buyers

Your

Suppliers Your Firm

The Primarily Cooperative Dimensions

Analyzing the External Environment

Environmental Scanning

Gathering Intelligence

Sources of Competitive Intelligence

Scenario Planning

27

Environmental Scanning

The monitoring, evaluating, and disseminating of information from

the external and internal environments to key people within the

corporation

AIM to avoid strategic surprise and ensure the long-term health of

the firm.

Competitive Intelligence

Several Uses of Competitive Intelligence

Providing descriptions of the competitive environment (Guide

for strategy formulation)

Challenging assumptions about the competitive environment

Forecasting future developments

Identifying and compensating the competitive weaknesses

Determinig the unsustainable strategies

Indentifying the guideline for adjustment to changing

environment

Information that is relavant to strategy formulation regarding the

environmental context within which a firm competes

The Environment-Strategy Relationship

How the external environment shapes strategy?

How strategy can influence the external environment?

Internal Analysis

Distinctive Competencies

Firm specific strengths that allow a

company to differentiate its products from

those offered by rivals

Apple Strong brand name + innovative characteristics

Coca-Cola Strong brand name + formulation of coke

The Role of Resources

Resources

Capital or financial, physical, social or human,

technological, and organizational factor endowments

Tangible and intangible

A firm-specific and difficult to imitate resource is

likely to lead to distinctive competency

Brand name

Reputation

Know-how

Experience etc.

The Role of Capabilities

Capabilities

A company’s skills at coordinating and using its

resources

Capabilities are the product of organizational

structure, processes, and control systems

To have firm-specific and valuable resources

isnot enough!!!

Strategy, Resources, Capabilities, and

Competencies

Competitive Advantage, Value

Creation, and Profitability

Profitability factors

Amount of value customers place on the

company’s products

Price charged

Costs of creating the value

The Value Chain A company is a chain of activities for transforming inputs

into outputs that customers value

The transformation process is composed of primary and

support activities that add value to the product

The Durability of Competitive Advantage

Barriers to Imitation

Imitating Resources

Imitating Capabilities

Capability of Competitors

Strategic commitment

Absorptive capacity

Industry Dynamism

Why Companies Fail

Inertia

Companies find it difficult to change their strategies

and structures

Prior strategic commitments

Limit a company’s ability to imitate and cause

competitive disadvantage

The Icarus paradox

A company can become so specialized based on past

success that it loses sight of market realities

Craftsmen, builders, pioneers, salesmen

The ICARUS Paradox

the son of the master craftsman Daedalus.

attempt to escape from Crete by means of wings that his

father constructed from feathers and wax

fly too close to the sun, and the melting wax caused him

to fall into the sea

Time for refreshment!