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Chapter 2

Chapter 2. The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis. “ Computers in the future may weigh no more than 1.5 tons”. “ Computers in the future may weigh no more than 1.5 tons”

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Chapter 2

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

  2. “Computers in the future may weigh no more than 1.5 tons”

  3. “Computers in the future may weigh no more than 1.5 tons” • Popular Science Magazine, forecasting the relentless march of Science - 1949

  4. In 1968, a 100 megabyte hard drive weighed 4,500 pounds cost more than $130,000

  5. “I think there is a world market for maybe five computers” • Thomas Watson, Chairman of IBM, 1943

  6. “But what….is it good for?” • Engineer at IBM, commenting on the microchip, 1968

  7. “The idea is interesting and well-formed, but in order to earn better than a “C” the idea must be feasible” • Yale University Professor in response to Fred W. Smith’s paper proposing an overnight delivery service

  8. FedEx now delivers well over 7.5 million packages a day – 2.7 billion a year

  9. “We don’t like their music and guitar music is on the way out” • Decca Records Company in rejecting the Beatles, 1962

  10. “ Who the hell wants to hear actors talk” H. M. Warner, 1927

  11. “There is no reason why anyone would want a computer in their home” Ken Olson, president, chairman, and founder of Digital Equipment Corporation, 1977

  12. “This ‘telephone” has too many shortcoming to be seriously considered a means of communication. The device is inherently of no value to us.” Internal Memo, Western Union, 1876

  13. “Everything that can be invented has been invented” Charles H. Duell, Commissioner of the U.S. Patents Office, 1899

  14. “640K of RAM ought to be enough for anybody” Bill Gates, 1981

  15. Subway opens a new store every 3 hours Starbucks every 11 hours Quiznos every 16 hours WSJ, Oct 1, 2003

  16. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler CEO, January 2002

  17. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler CEO, January 2002 September 2003, “The Big Three” became GM, Ford, and Toyota

  18. “Nothing important happened today” Journal entry made by King George III, July 4, 1776, the day the United States declared independence from England

  19. Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness. Michael Porter • When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact. Warren Buffett • Skate to where the puck is going, not to where the puck has been. Wayne Gretsky

  20. External Analysis • It’s not recognizing that change will occur that is the problem, it’s figuring out: • what will happen? • how it will affect us? • what to do about it? Therefore, forecasting is necessary to predict direction and the effect of change

  21. External Analysis • 1) Analyze the environments • General • Industry • Competitive • 2) Identification of key success factors

  22. Components of External Analysis Scanning – Identifying early signals Monitoring – Following signals or change identifies in scanning to identify patterns Forecasting – Projections of what might happen Assessing – Determining the timing and significance of forecasted change

  23. General Environment Industry Environment Potential Entrants Economic Technical Competitive Rivalry Substitute Products Demographic Political & Legal Bargaining Power of Suppliers Bargaining Power of Buyers Global Sociocultural

  24. General Environment • Demographic • Economic • Political • Socioculture • Technical • Global

  25. 1) Demographic Segment • Characteristics of the population • e.g., age, race, gender, sexual orientation and social classes • Ethnic structure • Income distribution • Geographic distribution

  26. 2) Economic Segment • General health/wellbeing of the local, regional, national or global economy. • e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs

  27. 3) Political/Legal Segments • Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.

  28. 4) SocioculturalSegment • Attitudes of society towards work, careers, products, services and consumer activism. • e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.

  29. 5) Technological Segment • Changes in technology that affect the workplace, and the products and services consumers expect • e.g., Information technologies, entertainment technologies, product technologies.

  30. 6) Global Segment New and existing markets around the world, and changes in the political, cultural and institutional terrain.

  31. General Environment • Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance • Cast a wide net and to identify the emerging trends • Then determine which factors are relevant, and how these changes will have an effect upon the firm.

  32. General Environment Industry Environment Potential Entrants Economic Technical Competitive Rivalry Substitute Products Demographic Political & Legal Bargaining Power of Suppliers Bargaining Power of Buyers Global Sociocultural

  33. ROIC Across Industries 1995-2004

  34. Porter’s Five Forces • Competitive Rivalry • Power of Buyers • Power of Suppliers • Potential Entrants • Substitute Products Each of these forces affect costs/prices, therefore, profitability

  35. Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Suppliers of Key Inputs Buyers Potential New Entrants

  36. Porter’s 5-forces is all about margins { Price What factors increase/decrease margins within an industry, thus affecting profitability. Profits Costs

  37. When industry structural variables are weak…... Prices can be kept high { Profits can soar Costs can be kept low

  38. When industry structural variables are strong Prices will be pushed down { Profits shrink Costs will rise

  39. Suppose you had to start a new business and start generating revenues… … today … in a week … in 2 months … in 1 year What kind of businesses might you start?

  40. Potential New Entrants • Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents. • Firms can create “barriers to enter” • Barriers of entry are desirable for entrenched firms

  41. Barriers to Entry • Economies of scale • Product differentiation & loyalty • Capital & resource requirement • Switching costs • Distribution • Cost disadvantage independent of size • Regulatory policies • Access to technology & know-how • Learning, costs, experience curves • Threat of retaliation

  42. Suppliers • Who are you key suppliers? • Suppliers are a strong competitive force when: • Only a few suppliers exist and is more concentrated than industry to which it is selling • Few substitutes available to the industry firm • Industry not important buyers to supplier group • Supplier group provides a product crucial to production process, and/or significantly affects buyers’ product quality • It is costly for buyers to switch suppliers • Forward integration by suppliers is a credible threat • Suppliers can supply at a lower cost

  43. Buyers • Who are your key buyers? - who provides our revenues? • Can they force: • lower prices, higher quality and service – affect the terms and conditions of the exchange? • When do you, as a consumer, have power? • Two issues • Price sensitivity • Can you actually bargain

  44. Buyers • What affect buyers’ power? • Volume/Frequency of purchase • When buyers represent a large portion of sellers revenues • When buyers can easily switch to another product • When the product the buyers are buying is undifferentiated • When buyers can self-source or backwards integration • Criticality • Buyers’ knowledge • Buyers’ profitability

  45. Substitutes • Product/service which fulfills similar need • Price cap • 3 Questions • Are they available? • Can we switch? • Price-performance relationship?

  46. Substitutes and Business Definition • How we define our business defines our substitutes and our rivals Carbonated Soft Drink Soft Drinks Beverages Many Substitutes Few Substitutes Few Rivals Many Rivals

  47. Rivalry and Profitability • Industry profitability is a collective good. • Collective good is served by coordination • Are there industries were pricing is coordinated? • Incentive to violate

  48. Usually the most powerfulof the five forces • How actively and aggressively are rivals employing competitive weapons in jockeying for a stronger market position and increasing sales? • Is price competition vigorous? • Active efforts to improve quality? • Are rivals racing to offer better performance features? better customer service? • Lots of advertising/sales promotions? • Active efforts to build a stronger dealer network? • Active product innovation? • Active use of other weapons of rivalry?

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