Chapter 2 – The External Environment

1. Chapter 2 –The External Environment

2. The Strategic Management Process Strategy Implementation Chapter 10CorporateGovernance Chapter 11OrganizationalStructure andControls Chapter 13StrategicEntrepreneurship

3. Detroit’s Bet on the Future Sources: “Chrysler falters as unsold gas guzzlers fill lots”, The Wall Street Journal, September 20, 2006: A14.

4. What’s next…? “Most of us never recognize an opportunity until it goes to work in our competitor’s business.” P. L. Andarr “Only the paranoid survive.” Andy Grove, former CEO of Intel “[T]hat’s not true. The paranoid die because the paranoid take all threats as serious and get very distracted.” Reed Hastings, CEO of Netflix

5. Famous Misinterpretations • “Heavier-than-air flying machines are impossible” Lord Kelvin, British mathematician, physicist, and president of the British Royal Society, 1895 • “Any customer can have a car painted any color that he wants so long as it is black.”Attributed to Henry Ford • “I think there is a world market for about five computers”Thomas J. Watson, chairman of IBM, 1943 • “We don’t like their sound. Groups of guitars are on the way out.”Decca Recording Co. executive, turning down the Beatles, 1962 • “640K of memory should be enough for anybody.”Bill Gates, co-founder of Microsoft, 1982 • “They couldn’t hit an elephant at this dist…”General John B. Sedgwick, last words, Battle of Spotsylvania, 1864

6. Agenda • Analysis of the external environment • “Five Forces” of competition model • Competitor analysis

7. External environment imposes pressures and constraints that determine strategies leading to above-average returns 1 2 3 4 I/O Model: 4 Assumptions Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies Resources used to implement strategies are highly mobile across firms Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests (profit-maximizing)

8. The External Environment

9. General Environment • Dimensions in the broader society that influence and industry and the firms within it

10. General Environment • The Economic Segment • Nature and direction of economy a firm competes in • Inflation rates • Interest rates • Trade deficits or surpluses • Budget deficits or surpluses • Savings rate • GDP

11. General Environment – cont’d • The Sociocultural Segment • Society’s attitudes and cultural values • Women in the workplace • Workforce diversity • Attitudes about quality of worklife • Environmental concerns • Shifts in work and career preferences • Shifts in product and service preferences

12. General Environment – cont’d Source: Business Week, March, 2007: 4.

13. General Environment – cont’d • The Global Segment • Institutional characteristics of global markets • Important political events • Critical global markets • Newly industrialized countries • Different cultural and institutional attributes • WTO, NAFTA, EU, OPEC

14. General Environment – cont’d • The Technological Segment • Creating new knowledge and products/processes • Product innovations • Applications of knowledge • Focus of private and government-supported R&D expenditures • New communication technologies

15. General Environment – cont’d • Examples for disruptive technologies: • Internet telephony • Digital photography • Hand-held computers • Discount brokers • E-commerce • Fiber Optic

16. General Environment – cont’d • The Political/Legal Segment • Regulatory environment • Antitrust laws • Taxation laws • Deregulation philosophies • Labor training laws • Educational philosophies and policies • Legislation on corporate governance reforms (Sarbanes-Oxley Act)

17. General Environment – cont’d • The Demographic Segment • Population characteristics • Population size • Age structure • Geographic distribution • Ethnic mix • Income distribution

18. General Environment – cont’d

19. Agenda • Analysis of the external environment • “Five Forces” of competition model • Competitor analysis

20. Five Forces of Competition …explain industry profitability!

21. UnattractiveIndustry Interpreting Industry Analyses Low entry barriers (i.e. High threat of new entrants) Suppliers and buyers have strong positions Strong threats from substitute products Low profit potential! Intense rivalry among competitors

22. AttractiveIndustry Interpreting Industry Analyses High entry barriers Suppliers and buyers have weak positions Few threats from substitute products High profit potential! Moderate/low rivalry among competitors

23. Barriers to Entry – cont’d • Economies of Scale • Marginal improvements in efficiency that a firm experiences as it incrementally increases its size • Cost Disadvantages Independent of Scale • Proprietary product technology • Favorable access to raw materials • Desirable locations

24. Barriers to Entry – cont’d • Product Differentiation • Unique products • Customer loyalty • Capital Requirements • Physical facilities • Inventories • Marketing activities • Availability of capital • Access to Distribution Channels • Stocking or shelf space • Price breaks

25. Barriers to Entry – cont’d • Switching Costs • One-time costs customers incur when they buy from a different supplier • New equipment • Psychic costs of ending a relationship • Government policy • Licensing and permit requirements • Deregulation of industries • Expected retaliation • Responses by existing competitors may depend on a firm’s present stake in the industry (available business options)

26. Suppliers’ Bargaining Power • Supplier power increases when: • Suppliers are large and few in number • Suitable substitute products arenot available • Individual buyers are not largecustomers of suppliers and thereare many of them • Suppliers’ goods are critical to buyers’ marketplace success • Suppliers’ products create high switching costs. • Suppliers pose threat to integrate forward into buyers’ industry

27. Buyers’ Bargaining Power • Buyer power increase when: • Buyers are large and few in number • Buyers purchase large portion of industry’s total output • Buyers’ purchases are significant portion of supplier’s annual revenues • Buyers can switch to another product without incurring high switching costs • Buyers pose threat to integrate backward into sellers’ industry

28. Threat of Substitute Products • The threat of substitute products increases when: • Buyers face few switching costs • The substitute product’s price is lower • Substitute product’s quality andperformance are equal to or greaterthan existing product • Differentiated industry products that are valued by customers reduce this threat

29. Rivalry Among Competitors • Industry rivalry increases when: • There are numerous or equally balanced competitors • Industry growth slows or declines • There are high fixed costs or high storage costs • There is a lack of differentiationopportunities or low switching costs • Strategic stakes are high • High exit barriers prevent competitors from leaving the industry

30. New Trends: The Internet Influence Sources: Canzer, B. (2003). “E-business: Strategic thinking and practice”, Boston: Houghton Mifflin; Porter, M. E. (2001). “Strategy and the Internet”, Harvard Business Review, March: 63–78; Rangan, S. & Adner, R. (2001). “Profits and the Internet: Seven misconceptions”, MIT Sloan Management Review, Summer: 44–53.

31. New Trends: Industry Boundaries • Think about the nature of the following industries: • Telecommunications • Computers and peripheral equipment • Consumer electronics • In other words, ABC’s competitors may no longer only include CBS, NBC, CNN, and Fox, but also AT&T, SkyTV, Microsoft, Apple, Sony, and others!

32. Agenda • Analysis of the external environment • “Five Forces” of competition model • Competitor analysis

33. Competitor Analysis • Competitor Intelligence • The ethical gathering of needed information and data that provides insight into: • A competitor’s capabilities and intentions (current strategy) • A competitor’s beliefs about the industry (its assumptions) • A competitor’s direction (future objectives)

34. Competitor Analysis Components

35. Ethical Considerations • Practices considered both legal and ethical: • Obtaining publicly available information • Attending trade fairs and shows to obtain competitors’ brochures, view their exhibits, and listen to discussions about their products • Practices considered both unethical and illegal: • Blackmail • Trespassing • Eavesdropping • Stealing drawings, samples, or documents