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Objectives - Analysis of Environment

• General environment– Focused on the futurefuture

• Industry environment– Focused on industry-specificindustry-specific factors

influencing firm profitability

• Competitor environment– Focused on competitive dynamicscompetitive dynamics– competitors’ capabilities, intentions,

actions, responses

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Analysis of Environment

Is a continuous process

Scan: Identify signals of changes and trendsMonitor: interpret changes & trends Forecast: future scenarios from monitoringAssess: timing and importance of forecast to current or prospective firm strategies

Which PEOPLE in the firm should do this?What limits the effectiveness of this process?

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• Your firm is interdependent with BROAD institutional dynamics:– Demographic– Economic– Political/legal– Sociocultural– Technological– Global

Analysis of Environment

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Demographic trends in …

Population sizeAge structureSkills/educationGeographic distributionEthnic mixIncome distribution

Analysis of Environment

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Economic segment (examples)

Inflation/interest rates (hurdle costs)Trade deficits or surplusesBudget deficits or surplusesConsumption, savings, tax ratesGDP, business cycles

Analysis of Environment

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Political/Legal Segment (examples)

Antitrust laws (Whole Foods) Tax laws (incentives)Regulatory philosophies (SOX)Labor/training laws (EEOC)Educational policies (gov backed student

loans)

Analysis of Environment

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Sociocultural segment (examples)

Opportunity cost of work (leisure)Social concerns (greening, alcohol, meat)Shifts in social preferences (on-line

networking)Shifts in product/service preferences

(track my child; Care Trak Int’l)

Analysis of Environment

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Technological Segment (examples)

Process architectures (McD, FedEx)New General Purpose Technologies (IT)Private / Public R&D (Human Genome Project)Converging technologies (VOIP, bioinformatics)Standard setting (cell phone interoperability)

Analysis of Environment

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Global

Trade regions as boundariesCritical global marketsLocating product & factor marketscultural and institutional attributesIP & property rights

Environmental Analysis

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Segment dynamics– Demographic– Economic– Political/legal– Sociocultural– Technological– Global

• Generate economic effects on industries/firms (S/D, & factor costs)

Environmental Analysis

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Industry Environment

• Interdependence among firms competing for similar customers

• Competitive actions and responses.• Interactions among factors determine

industry profit potential.

1. Threat of new entrants2. Power of suppliers3. Power of buyers4. Product substitutes5. Intensity of rivalry

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• Define the industry - current and potential customers and the firms that serve them.

• Analyze industry and competitors.• Note:

– Suppliers and buyers can become competitors through integration.

– Producers of potential substitutes may become competitors.

Industry Environment

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5 Forces Industry Analysis

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Threat of New EntrantsBarriers to entry

Economies of scaleProduct differentiationCapital requirementsSwitching costsAccess to distribution channelsCost disadvantages independent of scale (e.g., sites, subsidies, learning)Government policyExpected retaliation

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Learning effects

• World War 2 - same plants, same rate of output - lower costs over time

• Important for complex products and processes where humans can learn

• A possible source of ‘first-mover’ advantage

• Boston Consulting Group focused on the experience curve and learning effects

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Economies ofScale Versus Learning

Output

Cost($ per unitof output)

Economies of Scale – reversible.

AC1

B

A

AC2

LearningC

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Bargaining Power of Suppliers

• A supplier group is powerful when:it is dominated by a few large companies;satisfactory substitute products are not available to industry firms;industry firms are not a significant customer for the supplier group;suppliers’ goods are critical to buyers’ marketplace success;effectiveness of suppliers’ products has created high switching costs;suppliers are a credible threat to integrate forward into the buyers’ industry.

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• they purchase a large portion of an industry’s total output• the sales of the product being purchased account for a significant portion of the seller’s annual revenues• they could easily switch to another product• the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry

Bargaining Power of Buyers

• Buyers (customers) are powerful when:

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Threat of Substitute Products

• Product substitutes are strong threat Product substitutes are strong threat when:when:

• customers face few switching costs• substitute product’s price is lower• substitute product’s quality and performance capabilities are equal to or greater than those of the competing product

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Intensity of Rivalry• Intensity of rivalry is stronger when competitors:

• are numerous or equally balanced• experience slow industry growth• have high fixed costs or high storage costs• lack differentiation or have low switching costs• experience high strategic stakes• have high exit barriers

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High Exit Barriers• Common exit barriers include:• specialized assets (assets with values linked to a particular business or location)• fixed costs of exit such as labor agreements• strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets)• emotional barriers (career concerns, loyalty to employees, etc.)• government and social restrictions

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Industry Scope

• What is an industry?• Useful to consider chain of related

products (complements) when assessing industry attractiveness

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THE PC INDUSTRY’S PROFIT POOL

Value chain focusAxes

Vertical—operating marginHorizontal—share of industry

40%

30

20

10

00 100%

share of industry revenuemicroprocessors

other components personal computerssoftware

peripherals

services

The value chain for the PC industry includes six key activities; the profitability of the activities varies widely. Manufacturers compete in the largest but least-profitable segment of the chain.

Orit Gadiesh and James L. GilbertHarvard Business ReviewMay-June 1998

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The Profit Pool Lens

The profit pool is the total profit earned in an industry at all points along the industry’s value chain

Segment profitability may vary by customer group, product category, geographic market, or distribution channelProfit concentration may be very different than revenue concentrationShape of the profit pool reflects the competitive dynamics of a business

Interactions of companies and customersCompetitive strategies of competitors

Product pools are not stagnant

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THE U.S. AUTO INDUSTRY’S PROFIT POOL

100%

opera

ting m

arg

in

source: Harvard Business Review, May-June 1998auto rental

25%

15

10

5

00

share of industry revenueauto manufacturing

new car dealers used car dealers

auto loansauto insurance

aftermarket parts

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leasingwarranty

gasolineservice repair

The automotive industry encompasses many value-chain activities. The way that profits and revenues are distributed among these activities varies greatly. The most profitable areas of the car business are not the ones that generate the biggest revenues.

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Profit Pools: Company Examples

Firms

Automakers

U-Haul

Elevators (OTIS)

Harley Davidson

Polaroid

Core Business

Auto manufacturing

Truck Rental

Elevator Manufacturing

Motorcycles

Instant Photography Cameras

Sources of Highest ROI

Auto leasing, insurance

Packing materials, storage

Service

Accessories (consumer products), leasing, service, restaurants

Film

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Implications

Focusing on growth and market share can lead a company to choose unprofitable segments of an industry

Today’s deep revenue pool may be tomorrow’s dry hole.The goal should be to focus on profitable opportunitiesIndustry should be considered more broadly than traditional definition

Automobile industry includesComponent manufacture and supplyNew car assembly and deliveryNew car warrantee and serviceNew car financing, leasing, and insuranceUsed car sales and service

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Strategic Groups

Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions.The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry.

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Competitor behavior

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

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Competitor Analysis

CapabilitiesCapabilities

AssumptionsAssumptions

Current strategyCurrent strategy

Future objectivesFuture objectives ResponseResponse

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?

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Assessing competitive Strength vis a vis Rivals

1. List industry key success factors and other relevant measures of competitive strength

2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong)

3. Decide whether to use a weighted or unweighted rating system

4. Sum individual ratings to get overall measure of competitive strength for each rival

5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage

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An Unweighted Competitive Strength Assessment

KSF/Strength Measure

Quality/product performance

Reputation/image

Manufacturing capability

Technological skills

Dealer network/distribution

New product innovation

Financial resources

Relative cost position

Customer service capability

Overall strength rating

ABC Co. Rival 1 Rival 2

8 5 10

8 7 10

2 10 4

10 1 7

9 4 10

9 4 10

5 10 7

5 10 3

5 7 10

61 58 71

Rival 3

1

1

5

3

5

5

3

1

1

25

Rival 4

6

6

1

8

1

1

1

4

4

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Rating Scale: 1 = Very weak; 10 = Very strong

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A Weighted Competitive Strength Assessment

KSF/Strength Measure

Quality/product performance

Reputation/image

Manufacturing capability

Technological skills

Dealer network/distribution

New product innovation

Financial resources

Relative cost position

Customer service capability

Rival 1 Rival 2

5/0.50 10/1.00

7/0.70 10/1.00

10/1.00 4/0.40

1/0.05 7/0.35

4/0.20 10/0.50

4/0.20 10/0.50

10/1.00 7/0.70

10/3.50 3/1.05

7/1.05 10/1.50

ABC Co.

8/0.80

8/0.80

2/0.20

10/0.50

9/0.45

9/0.45

5/0.50

5/1.75

5/0.75

Rival 3

1/0.10

1/0.10

5/0.50

3/0.15

5/0.25

5/0.25

3/0.30

1/0.35

1/0.15

Rival 4

6/0.60

6/0.60

1/0.10

8/0.40

1/0.05

1/0.05

1/0.10

4/1.40

4/1.60

Weight

0.10

0.10

0.10

0.05

0.05

0.05

0.10

0.35

0.15

Sum of weights 1.00

Overall strength rating 6.20 8.20 7.00 2.10 2.90

Rating Scale: 1 = Very weak; 10 = Very strong

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Why Do a Competitive Strength Assessment ?

Reveals firm’s competitive position

Pinpoints the company’s competitive strengths and weaknesses

Identifies competitive advantage, parity, or disadvantage

Identifies possible offensive attacks

Identifies possible defensive actions