External Environment

External Environment Mohammad Arief

Economic Sociocultural Environment Demographic Industry Environment General General Global Competitor Environment Environment Political/Legal Environment General Technological External and Internal Analyses By studying the external environment, firms identify what they might choose to do Opportunities and threats

External and InternalAnalyses By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage) The Firm

General Environment Components

The Industry Environment The set of factors that directly influences a firm, it’s competitive actions & competitive responses: • The threat of new entrants • The power of suppliers • The power of buyers • The threat of product substitutes • The intensity of rivalry among competitors

Competitor Analysis Predicting the dynamics of competitor actions, responses and intentions.

Macro-environmental Forces

External Environmental Analysis  Scanning Identifying early signals of environmental changes and trends  Monitoring Detect meaning by ongoing observations of environmental changes and trends  Forecasting Developing projections of anticipated outcomesbased on monitored changes and trends  Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management The external environmental analysis process should be conducted on a continuous basis. This process includes four activities:

External Environmental Analysis The external environmental analysis process should be conducted on a continuous basis. This process includes four activities:

Porter’s 5 Forces Model of Competition Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Threat of Substitute Products Threat of New Entrants

Threat of New Entrants * Economies of Scale Barriers to Entry Barriers to Entry * Product Differentiation * Capital Requirements * Switching Costs * Access to Distribution Channels Cost Disadvantages Independent of Scale * * Government Policy * Expected Retaliation

Bargaining Power of Suppliers Supplier industry is dominated by a few firms. * Suppliers exert power in the industry by: * Suppliers’ products have few substitutes. *Threatening to raise Buyer is not an important customer to supplier. * prices or to reduce quality 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. * 0 Suppliers are likely to be powerful if: Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Bargaining Power of Buyers Buyer groups are likely to be powerful if: • Buyers are concentrated or purchases are large relative to seller’s sales • Purchase accounts for a significant fraction of supplier’s sales • Products are undifferentiated • Buyers face few switching costs • Buyers’ industry earns low profits • Buyer presents a credible threat of backward integration • Product unimportant to quality • Buyer has full information Buyers compete with supplying industry by: • Bargaining down prices • Forcing higher quality • Playing firms off each other

Threat of Substitute Products Keys to evaluating substitute products: Products with improving price / performance tradeoffs relative to present industry products * Products with similarfunction limit the prices firms can charge For Example: Electronic security systems in place of security guards Fax machines or e-mailed attachments in place of overnight mail delivery

Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways • Jockeying for strategic position • Using price competition • Staging advertising battles • Increasing consumer warranties or service • Making new product introductions Occurswhenafirmispressuredorseesanopportunity • Price competition often leaves entire industry worse off • Advertising battles may increase total industrydemand, but may be costly to smaller competitors

Rivalry Among Existing Competitors Cutthroatcompetitionis more likely to occur when • 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 • Diverse competitors • High strategic stakes • High exit barriers

Rivalry Among Existing Competitors High Exit Barriersare economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable. • Specialized assets • Fixed cost of exit (e.g., labour agreements) • Strategic interrelationships • Emotional barriers • Government and social restrictions

Competitor Environment Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities. • What drives the competitor as shown by its future objectives, • What the competitor is doing and can do as revealed by its current strategy, • What the competitor believes about itself and the industry, as shown by its assumptions, • What the the competitor may be able to do, as shown by its capabilities.

Future Objectives: Future objectives Competitor Analysis • How do our goals compare with our competitors’ goals? • Where will the emphasis be placed in the future? • What is the attitude toward risk?

Current Strategy: Future objectives Current strategy Competitor Analysis • How are we currently competing? • Does this strategy support changes in the competitive structure?

Assumptions: Future objectives Current strategy Assumptions Competitor Analysis • Do we assume the future will be volatile? • Are we operating under a status quo? • What assumptions do our competitors hold about the industry and themselves?

Capabilities: Future objectives Current strategy Assumptions Capabilities Competitor Analysis • What are our strengths and weaknesses? • How do we rate compared to our competitors?

Future objectives Current strategy Assumptions Response Capabilities Competitor Analysis Response: • What will our competitors do in the future? • Where do we hold an advantage over our competitors? • How will this change our relationship with our competitors?

External Environment