The External Environment: Opportunities and Threats

1. The External Environment: Opportunities and Threats

2. Hierarchy of External Influences • Social • Economic • Technical • Global • Political/Legal Remote Environment Competitive Environment Firm • Five Forces • Competitor Intelligence • Industry Structure • Strategic Groups • Political/Legal

3. Stakeholders • Shareholders • Government • Financial Community • Host Community • Ecological Environment • Society in General Remote Environment Competitive Environment Firm • Rivals • Customers • Suppliers • Employees • Managers • Board Members

4. How is the industry defined? Size Growth Key Players: Rivals, customers, suppliers, government agencies Structure Performance Industry Vital Statistics

5. Life Cycle Stage Growth Rate Time

6. Concentrated Structure

7. Fragmented Structure

8. Porter’s Five Forces Model of Competition Threat of New Entrants Threat of New Entrants Prices (+) or (-) influence... Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products Costs

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

10. Suppliers are likely to be powerful if: Supplier industry is dominated by a few firms -- Microprocessors * Suppliers’ products have few substitutes -- Intel, PowerPC * 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 -- Nike * Bargaining Power of Suppliers Powerful suppliers can squeeze industry profits if firms are unable to recover cost increases

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

12. Threat of Substitute Products Keys to evaluate substitute products: Products with improving price/performance tradeoffs relative to present industry products Products with similar function limit the prices firms can charge * For Example: • On-line trading in place of stock brokers • Plastic vs. glass vs. aluminum containers for soft drinks

13. Intensity of Rivalry Among Existing Competitors Plays out in the following ways: Jockeying for strategic position * Using price competition -- AT&T vs. MCI * Staging advertising battles -- Bud vs. Miller * Increasing consumer warranties or service * Making new product introductions *

14. Intensity of Rivalry Among Existing Competitors Cutthroatcompetition is more likely to occur when: Numerous or equally balanced competitors * Slow growth industry -- Heavy trucks * High fixed costs * High storage costs * Lack of differentiation -- Long distance phone svc. * Capacity added in large increments * Diverse competitors * High strategic stakes * High exit barriers *

15. Environmental Scanning Grid

16. Strategic Group MapDepartment Stores High Quality Upscale Branded Chains Wholesale Clubs Low Quality Closeout Low Price High Price

17. Strategic Group Map: Beer (Pre-light / Pre-microbrew) Dark/Full Guinness Amber Regular Heineken Miller Bud Old Swill Light Low Price High Price

18. Strategic Group Map: Beer Dark/Full Guinness Blackened Voodoo Anchor Porter Killian’s Brown Lowenbrau Dark Amber Regular Killian’s Red Red Wolf Amber Bock Lowenbrau Sam Adams Bass Ale Pilsner Urquell Old Swill Bud Miller Amstel Cardinal Miller Lite Bud Ice Milwaukee’s Best Light Light Low Price High Price