SM-IA

8/14/2019 SM-IA

1/66

Chapter 2

The External Environment:

Opportunities, Threats, Industry

Competition, and Competitor Analysis

8/14/2019 SM-IA

2/66

Political/

Legal

Economic

Technological

Global

DemographicSociocultural

CompetitiveCompetitive

EnvironmentEnvironment

Industry

Environment

Components of the General Environment

8/14/2019 SM-IA

3/66

SWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

8/14/2019 SM-IA

4/66

The purpose of SWOT

Analysis It is an easy-to-use tool for developing an

overview of a companys strategic situation

It forms a basis for matching your companysstrategy to its situation

8/14/2019 SM-IA

5/66

SWOT is the starting

point It provides an overview of the strategic

situation.

It provides the raw material to do moreextensive internal and external analysis.

8/14/2019 SM-IA

6/66

Opportunities

An OPPORTUNITY is a chance for firmgrowth or progress due to a favorable

juncture of circumstances in the businessenvironment. Possible Opportunities:

Emerging customer needs Quality Improvements Expanding global markets Vertical Integration

8/14/2019 SM-IA

7/66

Threats

A THREAT is a factor in your companysexternal environment that poses a danger

to its well-being. Possible Threats:

New entry by competitors Changing demographics/shifting demand Emergence of cheaper technologies Regulatory requirements

8/14/2019 SM-IA

8/66

Opportunities and Threats

form a basis for EXTERNALanalysis

By examining opportunities, you candiscover untapped markets, and new

products or technologies, or identifypotential avenues for diversification.

By examining threats, you can identifyunfavorable market shifts or changes intechnology, and create a defensive postureaimed at preserving your competitiveposition.

8/14/2019 SM-IA

9/66

The purpose of

Five-Forces Analysis The five forces are environmental forces

that impact on a companys ability to

compete in a given market.

The purpose of five-forces analysis is to

diagnose the principal competitive

pressures in a market and assess howstrong and important each one is.

8/14/2019 SM-IA

10/66

Threat ofNew

Entrants

Threat of

New

Entrants

Porters Five Forces

Model of Competition

8/14/2019 SM-IA

11/66

Threat of New Entrants

Barriers to

Entry

Expected RetaliationExpected Retaliation

Government PolicyGovernment Policy

Economies of ScaleEconomies of Scale

Product DifferentiationProduct Differentiation

Capital RequirementsCapital Requirements

Switching CostsSwitching Costs

Access to Distribution ChannelsAccess to Distribution Channels

Cost Disadvantages IndependentCost Disadvantages Independent

of Scaleof Scale

8/14/2019 SM-IA

12/66

Bargaining

Power of

Suppliers

Threat ofNew

Entrants

Threat of

New

Entrants

Porters Five Forces


8/14/2019 SM-IA

13/66

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:Suppliers are likely to be powerful if:

Supplier industry is dominated by aSupplier industry is dominated by afew firmsfew firms

Suppliers products have few substitutesSuppliers products have few substitutes

Buyer is not an important customer toBuyer is not an important customer tosuppliersupplier

Suppliers product is an importantSuppliers product is an importantinput to buyers productinput to buyers product

Suppliers products are differentiatedSuppliers products are differentiated

Suppliers products have highSuppliers products have highswitching costsswitching costs

Supplier poses credible threat ofSupplier poses credible threat of

forward integrationforward integration

8/14/2019 SM-IA

14/66

Bargaining

Power of

Buyers

Threat ofNew

Entrants

Threat of

New

Entrants

Bargaining

Power of

Suppliers

Porters Five Forces


8/14/2019 SM-IA

15/66

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:Buyer groups are likely to be powerful if:

Buyers are concentrated or purchasesBuyers are concentrated or purchases

are large relative to sellers salesare large relative to sellers sales

Purchase accounts for a significantPurchase accounts for a significantfraction of suppliers salesfraction of suppliers sales

Products are undifferentiatedProducts are undifferentiated

Buyers face few switching costsBuyers face few switching costs

Buyers industry earns low profitsBuyers industry earns low profits

Buyer presents a credible threat ofBuyer presents a credible threat ofbackward integrationbackward integration

Product unimportant to qualityProduct unimportant to quality

Buyer has full informationBuyer has full information

8/14/2019 SM-IA

16/66

Threat of

Substitute

Products

Threat ofNew

Entrants

Threat of

New

Entrants

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Porters Five Forces


8/14/2019 SM-IA

17/66

Threat of Substitute Products

Products

with similar

functionlimit the

prices firms

can charge

Keys to evaluate substitute products:Keys to evaluate substitute products:

Products with improvingProducts with improving

price/performance tradeoffsprice/performance tradeoffs

relative to present industryrelative to present industryproductsproducts

Example:Example:

Electronic security systems inElectronic security systems inplace of security guardsplace of security guards

Fax machines in place ofFax machines in place of

overnight mail deliveryovernight mail delivery

8/14/2019 SM-IA

18/66

Threat of

Substitute

Products

Threat ofNew

Entrants

Threat of

New

Entrants

Rivalry Among

Competing Firms

in Industry

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Porters Five Forces


8/14/2019 SM-IA

19/66

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:

Jockeying for strategic positionJockeying for strategic position

Using price competitionUsing price competition

Staging advertising battlesStaging advertising battles

Making new product introductionsMaking new product introductions

Increasing consumer warranties or serviceIncreasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, butAdvertising battles may increase total industry demand, but

may be costly to smaller competitorsmay be costly to smaller competitors

8/14/2019 SM-IA

20/66

CutthroatCutthroatcompetitioncompetition is more likely to occur when:is more likely to occur when:

Rivalry Among Existing Competitors

Numerous or equally balanced competitorsNumerous or equally balanced competitors

Slow growth industrySlow growth industry

High fixed costsHigh fixed costs

Lack of differentiation or switching costsLack of differentiation or switching costs

High storage costsHigh storage costs

Capacity added in large incrementsCapacity added in large increments

High strategic stakesHigh strategic stakes

High exit barriersHigh exit barriers

Diverse competitorsDiverse competitors

8/14/2019 SM-IA

21/66

The Five Forces are

Unique to Your Industry Five-Forces Analysis is a framework for

analyzing a particular industry. Yet, the five forces affect all the other

businesses in that industry.

8/14/2019 SM-IA

22/66

Competitor Analysis

The follow-up to Industry Analysis isThe follow-up to Industry Analysis is

effective analysis of a firmseffective analysis of a firms CompetitorsCompetitors

CompetitiveCompetitive

EnvironmentEnvironment

Industry

Environment

8/14/2019 SM-IA

23/66

Competitor Analysis

AssumptionsAssumptions

What assumptions do ourcompetitors hold about the futureof industry and themselves?

Current StrategyCurrent Strategy

Does our current strategy supportchanges in the competitiveenvironment?

Future ObjectivesFuture Objectives

How do our goals compare to ourcompetitors goals?

CapabilitiesCapabilities

How do our capabilities compare

to our competitors?

Response

What will ourcompetitors do in thefuture?

Where do we have acompetitiveadvantage?

How will this changeour relationship withour competition?

8/14/2019 SM-IA

24/66

Future Objectives

How do our goals

compare to our

competitors goals?Where will emphasis be

placed in the future?

What is the attitudetoward risk?

What Drives the

competitor?

Competitor Analysis

8/14/2019 SM-IA

25/66

What is the competitor doing?

What can the competitor do?

Future Objectives

How do our goals

compare to our



What is the attitude

toward risk?

Current Strategy

How are we currently

competing?Does this strategy

support changes in the

competitive structure?

Competitor Analysis

8/14/2019 SM-IA

26/66

What does the competitor believe

about itself and the industry?

Future Objectives

How do our goals

compare to our




toward risk?

Current Strategy




competition structure?

Do we assume the future

will be volatile?

Are we assuming stable

competitive conditions?

What assumptions do our

competitors hold about the

industry and themselves?

Assumptions

Competitor Analysis

8/14/2019 SM-IA

27/66

What are the competitors

capabilities?

Future Objectives

How do our goals

compare to our




toward risk?

Current Strategy






will be volatile?

Are we operating under

a status quo?




Assumptions

What are my competitors

strengths and weaknesses?

How do our capabilities

compare to our

competitors?

CapabilitiesCapabilities

Competitor Analysis

8/14/2019 SM-IA

28/66

Future Objectives

How do our goals

compare to our




toward risk?

Current Strategy






will be volatile?

Are we operating under

a status quo?




Assumptions

Response

What will our competitors

do in the future?

Where do we have a

competitive advantage?

How will this change ourrelationship with our

competition?

Capabilities

What are my competitors

strengths and weaknesses?

How do our capabilities

compare to our

competitors?

Competitor Analysis

8/14/2019 SM-IA

29/66

SWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

8/14/2019 SM-IA

30/66

The purpose of SWOT

Analysis It is an easy-to-use tool for developing an

overview of a companys strategic situation

It forms a basis for matching your companysstrategy to its situation

8/14/2019 SM-IA

31/66

Strengths

A STRENGTH is something a company isgood at doing or a characteristic that givesit an important capability.

Possible Strengths: Name recognition Proprietary technology

Cost advantages Skilled employees Loyal Customers

8/14/2019 SM-IA

32/66

Weaknesses

A WEAKNESS is something a company

lacks or does poorly (in comparison to

others) or a condition that places it at a

disadvantage

Possible Weaknesses: Poor market image

Obsolete facilities Internal operating problems

Poor marketing skills

8/14/2019 SM-IA

33/66

Strengths and Weakness

form a basis for INTERNALanalysis By examining strengths, you can discover

untapped potential or identify distinct

competencies that helped you succeed in

the past.

By examining weaknesses, you can

identify gaps in performance,vulnerabilities, and erroneous assumptions

about existing strategies.

Competitive

Di i C

8/14/2019 SM-IA

34/66

Resources

* Tangible

* Intangible

Capabilities

Teams ofResources

Sources of

CoreCompetencies

CompetitiveAdvantage

StrategicCompetitiveness

Above-AverageReturns


Gained throughCore Competencies

DiscoveringCore

Competencies

Discovering Core

Competencies

Criteria of

SustainableAdvantages

Value

ChainAnalysis

Valuable

Rare

Costly to ImitateNonsubstitutable

*

*

**

* Outsource

K Q ti f M

8/14/2019 SM-IA

35/66

How do we assembleHow do we assemblebundlesbundles of Resources,of Resources,Capabilities and Core Competencies to createCapabilities and Core Competencies to create

VALUEVALUEfor customers?for customers?

Will environmental changes make our coreWill environmental changes make our corecompetencies obsolete?competencies obsolete?

And...And...

Are substitutes available for our coreAre substitutes available for our corecompetencies?competencies?

Are our core competencies easily imitated?Are our core competencies easily imitated?

Key Questions for Managers

in Internal Analysis

Di i C

8/14/2019 SM-IA

36/66

Resources

* Tangible

* Intangible

Discovering Core

Competencies

8/14/2019 SM-IA

37/66

What a firm has to work with:What a firm has to work with:

itsits assetsassets, including its, including its peoplepeople andand

the value of itsthe value of its brand namebrand name

What a firmWhat a firmHasHas......Resources

8/14/2019 SM-IA

38/66

Resources representResources represent inputs into ainputs into afirms production processfirms production process......

such as capital equipment, skills ofsuch as capital equipment, skills of

employees, brand names, financesemployees, brand names, financesand talented managersand talented managers

What a firmWhat a firmHasHas......


its assets, including its peopleits assets, including its people

and the value of its brand nameand the value of its brand name

Resources

8/14/2019 SM-IA

39/66


its assets, including its peopleits assets, including its people

and the value of its brand nameand the value of its brand name

Resources represent inputs into aResources represent inputs into a

firms production process...firms production process...such as capital equipment, skillssuch as capital equipment, skills

of employees, brand names,of employees, brand names,

finances and talented managersfinances and talented managers

Some genius invented the Oreo. Were justSome genius invented the Oreo. Were just

living off the inheritance.living off the inheritance.F. Ross Johnson,F. Ross Johnson,

Former President & CEO,Former President & CEO,

RJR NabiscoRJR Nabisco

What a firmWhat a firmHasHas......Resources

8/14/2019 SM-IA

40/66

Tangible Resources

Financial*

Physical*

Human Resources*

Organizational*

What a firm Has...

What a firm has to work with:

its assets, including its peopleand the value of its brand name

Resources represent inputs into a

firms production process...such as capital equipment, skills

of employees, brand names,

finances and talented managersIntangible Resources

Technological*

Innovation*

Reputation*

Some genius invented the Oreo.

Were just living off the inheritance.

F. Ross Johnson,Former President & CEO, RJR Nabisco

Resources

Discovering Core

8/14/2019 SM-IA

41/66

Resources

* Tangible

* Intangible

Capabilities

Teams ofResources

Discovering Core

Competencies

8/14/2019 SM-IA

42/66

What a firmDoes...

Capabilities represent:Capabilities represent:the firms capacity or ability tothe firms capacity or ability to integrateintegrate

individual firm resourcesindividual firm resources to achieve a desiredto achieve a desired

objective.objective.

Capabilities

8/14/2019 SM-IA

43/66

What a firmDoes...

Capabilities develop over time as a result ofcomplexinteractions that take advantage of the interrelationships

between a firms tangible and intangible resources that

are based on the development, transmission and

exchange or sharing of information and knowledge ascarried out by the firm's employees.

Capabilities represent:

the firms capacity or ability to integrate individual

firm resources to achieve a desired objective.

Capabilities

8/14/2019 SM-IA

44/66

What a firmDoes...

Capabilities represent:

the firms capacity or ability to integrate individual

firm resources to achieve a desired objective.

Capabilities develop over time as a result of complex

interactions that take advantage of the interrelationships

between a firms tangible and intangible resources that arebased on the development, transmission and exchange or

sharing of information and knowledge as carried out by the

firm's employees.

Capabilities become important when they are combinedCapabilities become important when they are combinedinin unique combinationsunique combinations which create core competencieswhich create core competencies

which havewhich have strategic valuestrategic value and can lead toand can lead to competitivecompetitive

advantageadvantage..

Capabilities

Discovering Core

8/14/2019 SM-IA

45/66

Resources

* Tangible

* Intangible

Capabilities

Teams of

Resources

Discovering Core

Competencies

Sources of

CoreCompetencies


DiscoveringCore

Competencies

What a firm DoesCore Competencies

8/14/2019 SM-IA

46/66

What a firmDoes...

that is Strategically

Valuable

are the essence of what makes an organizationare the essence of what makes an organization

unique in its ability to provide value tounique in its ability to provide value to

customers.customers.Leonard-Barton, Bowen, Clark, Holloway & WheelwrightLeonard-Barton, Bowen, Clark, Holloway & Wheelwright

McKinsey & Co. recommends identifying three to fourMcKinsey & Co. recommends identifying three to four

competencies to use in framing strategic actions.competencies to use in framing strategic actions.

Core Competencies

Discovering Core

8/14/2019 SM-IA

47/66

Resources

* Tangible

* Intangible

Capabilities

Teams of

Resources

Sources of

CoreCompetencies


DiscoveringCore

Competencies

Criteria of


Valuable

Rare


*

*

**

Discovering Core

Competencies

* Outsource

Core Competencies What a firm Does

8/14/2019 SM-IA

48/66

For a strategic capability to be aFor a strategic capability to be a

Core Competency, it must be:Core Competency, it must be:

Core Competencies

Valuable

Rare

Costly to Imitate

Nonsubstitutable

What a firmDoes...that is Strategically

Valuable

What a firm DoesCore Competencies

8/14/2019 SM-IA

49/66

Core Competencies must be:

NonsubstitutableCapabilities that do not have strategic equivalents, such as firm-

specific knowledge or trust-based relationships

What a firmDoes...that is Strategically

Valuable

Core Competencies

Valuable

Rare

Costly to Imitate

Capabilities that other firms cannot develop easily, usually due tounique historical conditions, causal ambiguity or social complexity

Capabilities that are possessed by few, if any, current or potentialcompetitors

Capabilities that either help a firm to exploit opportunities tocreate value for customers or to neutralize threats in theenvironment

Discovering Core

8/14/2019 SM-IA

50/66

Resources

* Tangible

* Intangible

Capabilities

Teams of

Resources

Sources of

CoreCompetencies


DiscoveringCore

Competencies

Value

Chain

Analysis

* Outsource

Valuable

Rare


*

*

**

Criteria of


Discovering Core

Competencies

Value Chain Analysis

8/14/2019 SM-IA

51/66

Support

Activities

Primary Activities

Value Chain AnalysisIdentifying Resources and Capabilities That Can Add Value


8/14/2019 SM-IA

52/66

Support

Activities

Primary Activities

Inbou

nd

Inbou

nd

Logistics

Logistics



8/14/2019 SM-IA

53/66

Support

Activities

Primary Activities

Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations



8/14/2019 SM-IA

54/66

Support

Activities

Primary Activities

Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbound

Outbo

und

Logistics

Logistics



8/14/2019 SM-IA

55/66

Support

Activities

Primary Activities

Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbound

Outbo

und

Logistics

Logistics

Marketing

Marketing

&Sales

&Sa

les



8/14/2019 SM-IA

56/66

Support

Activities

Primary Activities

Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbound

Outbo

und

Logistics

Logistics

Marketing

Marke

ting

&Sales

&Sa

les

Service

Service



8/14/2019 SM-IA

57/66

Support

Activities

Primary Activities

Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbound

Outbo

und

Logistics

Logistics

Marketing

Marke

ting

&Sa

les

&Sa

les

Service

Service

ProcurementProcurement



8/14/2019 SM-IA

58/66

Support

Activities

Primary Activities

Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbound

Outbo

und

Logistics

Logistics

Marketing

Marke

ting

&Sa

les

&Sa

les

Service

Service


Technological DevelopmentTechnological Development



8/14/2019 SM-IA

59/66

Support

Activities

Primary Activities



Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbo

und

Outbo

und

Logistics

Logistics

Marketing

Marke

ting

&Sa

les

&Sa

les

Service

Service

Human Resource ManagementHuman Resource Management



8/14/2019 SM-IA

60/66

Support

Activities

Primary Activities



Firm InfrastructureFirm Infrastructure


Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbo

und

Outbo

und

Logistics

Logistics

Marketing

Marke

ting

&Sa

les

&Sa

les

Service

Service



8/14/2019 SM-IA

61/66

Support

Activities

Primary Activities





Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbo

und

Outbo

und

Logistics

Logist

ics

Marketing

Marke

ting

&Sa

les

&Sa

les

Service

Service

MARG

IN

MARG

IN

MARGIN

MARGIN


OutsourcingOutsourcing

8/14/2019 SM-IA

62/66

Support

Activities

Primary Activities

gg





Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbo

und

Outbo

und

Logistics

Logist

ics

Marketing

Marke

ting

&Sa

les

&Sa

les

Service

Service

MARG

IN

MARG

IN

MARGIN

MARGIN

Strategic Choice to Purchase Some Activities From Outside Suppliers

OutsourcingOutsourcing

8/14/2019 SM-IA

63/66

Support

Activities

Primary Activities





Inbou

nd

Inbou

nd

Logistics

Logistics

Operations

Operations

Outbo

und

Outbo

und

Logistics

Logist

ics

Marke

ting

Marke

ting

&Sa

les

&Sa

les

Service

Service

MARG

IN

MARG

IN

InboundInbound

LogisticsLogistics

OperationsOperations

OutboundOutboundLogisticsLogistics

ServiceService

MarketingMarketing

& Sales& Sales




MARGIN

MARGIN

Firms often purchase a portionportion

of their value-creating activities

from specialty external suppliers

who can perform these functions

more efficientlymore efficiently

OutsourcingOutsourcingStrategic Choice to Purchase Some Activities From Outside Suppliers

Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing

8/14/2019 SM-IA

64/66

Lets company focus on broader business issues by having outside

experts handle various operational details

g gg g

Improve Business Focus

Permits firm to redirect efforts from non-core activities toward thosethat serve customers more effectively

Free Resources for Other Purposes

Provide Access to World-Class Capabilities

Accelerate Business Re-Engineering Benefits

Share Risks

The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications

Achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process

Reduces investment requirements and makes firm more flexible,dynamic and better able to adapt to changing opportunities

Core Competencies--Cautions and Reminders

8/14/2019 SM-IA

65/66

Core Competencies Cautions and Reminders

Never take for granted that core competencies will

continue to provide a source of competitive advantage

All core competencies have the potential to become

Core Rigidities

Core Rigidities are former core competencies that sow

the seeds of organizational inertia and prevent the firm

from responding appropriately to changes in the

external environment

Strategic myopia and inflexibility can strangle the firms

ability to grow and adapt to environmental change or

competitive threats


Discovering Core

8/14/2019 SM-IA

66/66

Resources

* Tangible

* Intangible

Capabilities

Teams of

Resources

Sources of

CoreCompetencies


Strategic

CompetitivenessAbove-Average

Returns

Advantage

Gained throughCore Competencies

DiscoveringCore

Competencies

Value

Chain

Analysis

Valuable

Rare

*

*

Criteria of

Sustainable

Advantages

Discovering Core

Competencies

Documents

SM-IA