Competing for ADVANTAGE

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Chapter 3 The External Environment:Opportunities, Threats, Industry Competition, and Competitor Analysis

PART IISTRATEGIC ANALYSIS

The Strategic Management Process

External Environments

Key Terms

General environment

Composed of dimensions in the broader society that influence an industry and the firms within it

Industry environment

Set of factors that directly influence a firm and its competitive actions and competitive responses

Competitor environment

Details about direct and indirect competitors and the competitive dynamics expected impact a firm's efforts to generate above-average returns

The External Environment

External Environmental Analysis

Key Terms

Opportunity

Condition in the external environment that, if exploited, helps a company achieve value creation

Threat

Condition in the general environment that may hinder a company's efforts to achieve value creation

External Environment Analysis Key Terms

Scanning

Studying all segments in the general environment

Monitoring Observing scanned environmental changes to identify important emerging trends

Forecasting Developing feasible projections of potential events

AssessingDetermining the timing and significance of the effects of environmental changes and trends on the strategic management of the firm

Components of External Environmental Analysis

The General Environment

The Demographic Segment

Key Terms

Demographic segment

Segment of the environment concerned with a population's size, age structure, geographic distribution, ethnic mix, and income distribution

Demographic Characteristics

Population size

Age structure

Geographic distribution

Ethnic mix

Income distribution

The Economic Segment

Key Terms

Economic segment

Nature and direction of the economy in which a firm competes or may compete

Economic Factors

Gross National Product (GNP)

Interest rates

Inflation/Deflation

Foreign exchange rates

Trade balances

The Political Segment

Key Terms

Political/legal segment

Arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding the interactions among nations

The Sociocultural Segment

Key Terms

Sociocultural segment

Segment of the environment concerned with a society's attitudes and cultural values

Sociocultural Considerations

HealthcareWorkforce diversityChanging attitudes toward workSaving and retirement planningConcern for the environmentConcern for quality of work lifeResidential decisions Shifts in product/service

preferences

The Technological Segment

Key Terms

Technological segment

Segment of the environment that includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, and materials

Technological Issues

Rapid pace of technological change

Impact of the Internet on business practices

Impact of wireless communications on business practices.

Internal development versus external sources of new technology

The Global Segment

Key Terms

Global segment

Segment of the environment that includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets

Global Interdependence

Increase and ease in the flow of goods, services, financial capital, and knowledge across borders

Opening of economically maturing markets

Extended reach and potential for firms

Global Challenges

The low cost of goods developed in countries with extremely low wage rates threatens industries in higher wage nations.

There are risks are associated with investing in less economically mature markets.

Different sociocultural and institutional attributes need to be recognized when expanding into global markets.

The Physical Environment Segment

Key Terms

Physical environment segment

Segment of the environment that involves changes to the physical environment and business practices to respond to or prevent those changes

Industry Environment Analysis

Key Terms

Industry

Group of firms producing products that are close substitutes

Market microstructure

Term referring to competition for the a group of customers who value location and firm capabilities when making buying decisions

Five Forces Model of Competition

Five Competitive Forces

Threat of new entrants Bargaining power of

suppliers Bargaining power of buyers Threat of substitute

products Intensity of rivalry among

competitors

New Entrants

Threat to current competitors Market share Production capacity Earnings

Likelihood of entry Barriers Expected retaliation

Market Entry Barriers

Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost advantages independent

of scale Government policy Expected retaliation

Bargaining Power of Suppliers

Supplier concentration

No substitutes

Small customers

Critical product

High switching cost

Threat of forward integration

Bargaining Power of Buyers

Large buyers in industry

Large portion of firm’s sales

Low switching costs

Standardized product

Threat of backward integration

Threat of Substitute Products

Few switching costs

Lower price

Equal or higher quality and performance capabilities

Competitive Rivalry

Intensifies when a firm is challenged or recognizes an opportunity to

improve its market position

Visible dimensions:- Price- Quality- Innovation

Intensity of Rivalry

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

Complementors

Key Terms

Complementors

Companies that sell complementary goods or services that are compatible with the focal firm's own product or services

Interpreting Industry Analysis

Unattractive Industry

Attractive Industry

Low entry barriers High entry barriers

Powerful buyers Limited buyer power

Powerful suppliers Limited supplier power

Good product substitutes Poor product substitutes

Intense rivalry Moderate rivalry

Interpreting Industry Analysis

The five forces competitive analysis suggests the attractiveness of an industry and determines the potential for above-average returns over the long-term based on the level of competition observed.

Analysis of Direct Competitors

Key Terms

Strategic group

Set of firms emphasizing similar strategic dimensions which result in the use of similar strategies

Strategic dimensions

Areas that firms in a strategic group treat similarly

Strategic Groups

The strengths of the five industry forces differ across strategic groups.

Strategic groups differ in performance.

Strategic group membership remains relatively stable over time, enhancing analysis.

Patterns of competition are evident within strategic groups.

Strategic Group Dynamics

Intra-strategic group rivalry is more intense than inter-strategic group rivalry.

Organizations in a strategic group: Occupy similar positions in the market Offer similar goods to a similar set of

customers Often use similar production technology and

organizational processes The more similar strategies are across

strategic groups, the greater the level of expected rivalry.

Understanding Competitors and Their Intentions

Key Terms

Competitor intelligence

Set of data and information the firm gathers to better understand and better anticipate competitors' objectives, strategies, assumptions, and capabilities

Components ofCompetitor Analysis

ETHICAL QUESTION

How can a firm use its “code of ethics” as it analyzes the external

environment?

ETHICAL QUESTION

What ethical issues, if any, may be relevant to a firm’s monitoring of its external environment? Does use of

the Internet to monitor the environment lead to additional ethical

issues? If so, what are they?

ETHICAL QUESTION

What is an ethical issue associated with each segment of a firm’s

general environment? Are firms across the globe doing enough to

deal with this issue?

ETHICAL QUESTION

Why are ethical practices critical in the relationships between a firm

and its suppliers?

ETHICAL QUESTION

In an intense rivalry, especially one that involves competition in the global

marketplace, how can the firm gather competitor intelligence ethically while

maintaining its competitiveness?

ETHICAL QUESTION

What do you believe determines whether an intelligence-gathering

practice is or is not ethical? Do you see this changing as the world’s economies

become more interdependent? If so, why? Do you see this changing

because of the Internet? If so, how?