Chapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis

1. Chapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis • Overview: • The firm’s external environment • External environmental analysis • General environmental segments • Industry environment (and analysis) • Porter’s 5 Competitive Forces • Strategic groups: Definition and influence • Competitors and competitive intelligence

2. External Environment Analysis • 4 components • Scanning – the study of all segments in the general environment • Monitoring – observing environmental changes to see if an important trend is emerging • Forecasting – the development of feasible projections of what might happen and how quickly as a result of the changes and trends detected • Assessing – determining the timing and significance of the effects of environmental changes and trends on the firm

3. External Environment Analysis • Opportunity • General environment condition that, if exploited effectively, helps a company achieve strategic competitiveness • Threat • General environment condition that may hinder a company's efforts to achieve strategic competitiveness

4. The External Environment:General, Industry, and Competitor

5. The General Environment • The General Environment • The broader society dimensions that influence an industry and the firms within it • Grouped into 7 dimensions OR ‘environmental segments’ • Demographic – population’s size, age structure, geographic distribution, ethnic mix, and income distribution • Economic – nature and direction of economy • Political/Legal – laws and regulations • Sociocultural – society’s attitudes and cultural values • Technological – new technologies and firms that create them • Global – new global markets, existing markets that are changing, and their characteristics • Physical – potential and actual changes in physical environment and business practices

6. The Industry Environment • Industry Environment • Set of factors directly influencing a firm’s competitive actions/responses • Industry • Definition: Group of firms producing products that are close substitutes • Industry environment, in comparison to the general environment, has more direct effect on firm’s • Strategic competitiveness and • Above-average returns • Intensity of industry competition and industry’s profit potential are a function of 5 forces

7. The Five Forces of Competition Model

8. Industry Environment Analysis • Threat of New Entrants • Deals with the likelihood that new firms will enter an industry or that an existing member of an industry will enter an additional segment within the larger industry. • Can threaten the market share of existing competitors and may bring additional production capacity • New entry is often via an acquisition • A stronger force when… • Barriers to entry are weak or nonexistent • The expected retaliation by current industry participants is low

9. Industry Environment Analysis • Bargaining power of suppliers • Usually other business organizations that provide the industry with products and services • A supplier group is powerful when … • It is dominated by a few large companies and is more concentrated than the industry to which they sell • No satisfactory substitutes exist • Industry firms not significant customer to supplier group • Supplier’s goods are critical to buyer’s success • High switching costs due to effectiveness of supplier’s products • Poses credible threat of forward integration

10. Industry Environment Analysis • Bargaining power of buyers • Usually other business organizations that purchase the outputs of an industry • Customers are powerful when … • They purchase a large portion of industry’s total output • Product sales accounts for a significant portion of seller’s annual revenue • Low switching costs (to other industry product) • Industry products are undifferentiated or standardized and buyers pose a credible threat of backward integration

11. Industry Environment Analysis • Threat of substitute products • Goods or services from outside a given industry that perform similar or the same functions (i.e., sugar vs. sugar substitute such as NutraSweet) • A strong force when… • Low switching costs • The substitute product’s price is lower or its quality and performance capabilities are equal to or greater than those of the competing product

12. Industry Environment Analysis • Intensity of Rivalry Among Competitors • Firms operating in the same market, offering similar products, and targeting similar customers • A stronger force when… • Numerous or equally balanced competitors • Slow industry growth • High fixed costs or high storage costs • Lack of differentiation or low switching costs • High strategic stakes • High exit barriers

13. Industry Environment Analysis • Interpreting Industry Analyses • Five force analysis helps determine an industry’s attractiveness for above average returns • Stronger forces = Lower profit potential • Weaker forces = Higher profit potential • Unattractive industry characterized by • Low entry barriers • Suppliers and buyers with strong bargaining positions • Strong threat from substitute products • Intense rivalry among competitors

14. Industry Analysis: Strategic Groups • Strategic Groups • Set of firms emphasizing similar strategic dimensions and using a similar strategy • Can be useful for analyzing an industry’s competitive structure • Can also be helpful in diagnosing competition, positioning, and the profitability of firm’s within an industry

15. Strategic Group Map of Selected Automobile Manufacturers

16. Strategic Group Map of Selected Retail Chains

17. Industry Analysis: Strategic Groups • Implications • Because firms within a group compete (offer similar products) rivalry can be intense – the greater the rivalry the greater the threat to each firm’s profitability • Strengths of the 5 forces can differ across strategic groups • The closer the strategic groups, in terms of strategy, the greater the likelihood of rivalry

18. The Competitor Environment and Competitor Analysis • Competitor Environment • Gives details about • A firm’s direct and indirect competitors • The competitive dynamics expected to impact a firm's efforts to generate above-average returns • Competitor analysis • Focused on predicting the dynamics of competitor's actions, responses, and intentions • Focuses on each company which a firm directly competes • Seeks to understand each competitors future objectives, current strategy, assumptions, and capabilities

19. Competitor Analysis Components

20. Competitor Intelligence • Competitor intelligence • Set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities • Follow ethical practices when gathering competitor intelligence • Obtain public information • Attend trade fairs and shows and collect brochures, view exhibits, listen to their discussions • Some practices may be legal, but unethical • Unethical tactics can include • Blackmail, Trespassing, Eavesdropping, Stealing