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

Transcription

1 Strategic Management Ch.2 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Hitt, Michael, Ireland, Duance, and Hoskisson Strategic Management Ch.2 1 / 65 Topics in This Lesson The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 2 / 65

2 Strategic Management Ch.2 The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 The General, Industry, and Competitor Environments 3 / 65 Three parts of the external environment 1. General 2. Industry 3. Competitor Strategic Management Ch.2 The General, Industry, and Competitor Environments 4 / 65

3 The external environment Economic Physical Demographic Industry Environment Threat of New Entrants Power of Suppliers Power of Buyers Product Substitutes Intensity of Rivalry Sociocultural Political/Legal Competitor Environment Global Technological Strategic Management Ch.2 The General, Industry, and Competitor Environments 5 / 65 The General Environment Dimensions in the broader society that influences an industry and the firms within it The dimensions are grouped into seven environmental segments: 1. Demographic 2. Economic 3. Political/legal 4. Sociocultural 5. Technological 6. Global 7. Physical Can t directly control the general environment s segments Success: Learn how to gather information needed to understand all segments Learn the implications for selecting and implementing the firm s strategies Strategic Management Ch.2 The General, Industry, and Competitor Environments 6 / 65

4 Industry environment Set of factors that directly influences a firm and its competitive actions and responses Includes the following factors: Threat of new entrants Power of suppliers Power of buyers Threat of product substitutes Intensity of rivalry among competitors Success = Locate a position within an industry where: Favorably influence the five factors or Defend against their influence Strategic Management Ch.2 The General, Industry, and Competitor Environments 7 / 65 Competitor Environment Competitor analysis: how companies gather and interpret information about their competitors Learning as much as possible about its major competitors. Strategic Management Ch.2 The General, Industry, and Competitor Environments 8 / 65

5 Strategic Management Ch.2 The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 External Environmental Analysis 9 / 65 Four parts of external environmental analysis 1. Scanning 2. Monitoring 3. Forecasting 4. Assessing Strategic Management Ch.2 External Environmental Analysis 10 / 65

6 External environmental analysis Scanning Identify early signals of environmental changes and trends Study of all segments in the general environment Detect changes that are already under way Reveal ambiguous, incomplete or uncontrolled data and information Strategic Management Ch.2 External Environmental Analysis 11 / 65 External environmental analysis Monitoring Observe environmental changes and see if an important trend is emerging Effective monitoring requires the firm to: Identify important stakeholders Understand its reputation among these stakeholders as the foundation for serving their unique needs Strategic Management Ch.2 External Environmental Analysis 12 / 65

7 External environmental analysis Forecasting Develop projections of anticipated outcomes based on monitored changes and trends Analysts develop feasible projections of: What might happen How quickly things might happen Strategic Management Ch.2 External Environmental Analysis 13 / 65 External environmental analysis Assessing Determine the timing and importance of environmental changes and trends for firms strategies and their management Scanning, monitoring, and forecasting allows you to understand the general environment Assessment specifies the implications of that understanding Is an identified trend in the external environment an opportunity or a treat? Strategic Management Ch.2 External Environmental Analysis 14 / 65

8 Strategic Management Ch.2 The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 Segments of the General Environment 15 / 65 Segments of the General Environment 1. Demographic 2. Economic 3. Political/legal 4. Sociocultural 5. Technological 6. Global 7. Physical Strategic Management Ch.2 Segments of the General Environment 16 / 65

9 Segments of the General Environment Demographic Elements of the demographic segment: Population size Age structure Geographic distribution Ethnic mix Income distribution Economic segment Strategic Management Ch.2 Segments of the General Environment 17 / 65 Segments of the General Environment Political/Legal Segment Arena where organizations and interest groups compete How organizations try to influence governments How they try to understand the influences of those governments on their strategic actions Strategic Management Ch.2 Segments of the General Environment 18 / 65

10 Segments of the General Environment Sociocultural Segment Concerned with a society s attitudes and cultural values Attitudes and values form the cornerstone of a society Drives demographic economic, political/legal, and technological conditions and changes. Strategic Management Ch.2 Segments of the General Environment 19 / 65 Segments of the General Environment Technology Segment Includes the institutions and activities involved with: Creating new knowledge and Translating that knowledge into new outputs, products, processes, and materials. Rapid pace Early adopters Scan the external environment Identify newly emerging technologies Strategic Management Ch.2 Segments of the General Environment 20 / 65

11 Segments of the General Environment Global Segment Includes the following: Relevant new global markets Existing markets that are changing Important international political events Critical cultural and institutional characteristics of global markets Strategic Management Ch.2 Segments of the General Environment 21 / 65 Segments of the General Environment Physical Environment Potential and actual changes in the physical environment and business practices Positively respond to and deal with those changes Ecological, social, and economic systems interactively influence Strategic Management Ch.2 Segments of the General Environment 22 / 65

12 Strategic Management Ch.2 The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 Industry Environment Analysis 23 / 65 What is an Industry? A group of firms producing products that are close substitutes. These firms influence one another while in competition Industries include a rich mixture of competitive strategies that companies use in pursuing above average returns Strategies are chosen because of the influence of an industry s characteristics Strategic Management Ch.2 Industry Environment Analysis 24 / 65

13 The Five Forces of Competition An industry s profit potential is a function of five forces of competition. The Five Forces of Competition Model: 1. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitute products 5. Rivalry among competing firms Strategic Management Ch.2 Industry Environment Analysis 25 / 65 Five Forces of Competition Model Threat of new entrants Two factors determining if a firm will enter an industry 1. Barriers to entry Firms competing in an industry try to develop entry barriers to discourage potential competitors. 2. Retaliation expected from current industry participants Companies who seek to enter an industry, also anticipate the reaction of firms in the industry. Strategic Management Ch.2 Industry Environment Analysis 26 / 65

14 Five Forces of Competition Model Threat of new entrants Types of potentially significant entry barriers to discourage competition from entering a market Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy Strategic Management Ch.2 Industry Environment Analysis 27 / 65 Five Forces of Competition Model Bargaining Power of Suppliers Suppliers exert power over firms competing within an industry by: Increasing prices Reducing the quality of their products If a firm is unable to recover cost increases by it suppliers through its own pricing structure Their profitability by its suppliers actions Strategic Management Ch.2 Industry Environment Analysis 28 / 65

15 Five Forces of Competition Model Bargaining Power of Suppliers Boeing (Airplane supplier) Strategic Management Ch.2 Industry Environment Analysis 29 / 65 Five Forces of Competition Model Bargaining Power of Suppliers A supplier group is powerful when: It is dominated by a few large companies and is more concentrated than the industry to which it sells 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 The effectiveness of suppliers product has created high switching costs for industry firms It poses a credible threat to integrate forward into the buyers industry. Credibility is enhanced when suppliers have substantial resources and provide a high differentiated product Strategic Management Ch.2 Industry Environment Analysis 30 / 65

16 Five Forces of Competition Model Bargaining Power of Buyers Firms seek to maximize the return on their invested capital. Buyers want to buy products at the lowest possible price: The point at which the industry earns the lowest acceptable rate of return on its invested capital. Ways buyers reduce costs: Bargain for higher quality Bargain for greater levels of service Bargain for lower prices These outcomes are achieved by encouraging competitive battles among the industry firms. Strategic Management Ch.2 Industry Environment Analysis 31 / 65 Five Forces of Competition Model Bargaining Power of Buyers Strategic Management Ch.2 Industry Environment Analysis 32 / 65

17 Five Forces of Competition Model Bargaining Power of Buyers Customers (buyer groups) are powerful when: 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 switch to another product at little, if any, cost. The industry products are undifferentiated or standardized, and the buyers pose a credible threat if they were to integrate backward into the sellers industry. Strategic Management Ch.2 Industry Environment Analysis 33 / 65 Five Forces of Competition Model Bargaining Power of Buyers Customers (buyer groups) are powerful when: 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 switch to another product at little, if any, cost. The industry products are undifferentiated or standardized, and the buyers pose a credible threat if they were to integrate backward into the sellers industry. Strategic Management Ch.2 Industry Environment Analysis 34 / 65

18 Five Forces of Competition Model Threat of Substitute Products Sugar Sugar Substitute Strategic Management Ch.2 Industry Environment Analysis 35 / 65 Five Forces of Competition Model Threat of Substitute Products Goods or services from outside a given industry that perform similar or the same functions as a product that they industry produces. Product substitutes pose a strong threat to a firm when: Customers face few, if any, switching costs and When the substance products price is lower or its quality and performance capabilities are equal to or greater than those of the competing product. Reduce a substitute s attractiveness by differentiating a product along dimensions that customers value: Quality Service after the sale Location Strategic Management Ch.2 Industry Environment Analysis 36 / 65

19 Five Forces of Competition Rivalry Among Competing Firms Competitive rivalry intensifies: When a firm is challenged by a competitor s actions or When a company recognizes an opportunity to improve its market position Common dimensions rivalries are based: Price Service after the sale Innovation Strategic Management Ch.2 Industry Environment Analysis 37 / 65 Five Forces of Competition Rivalry Among Competing Firms The most prominent factors affecting the intensity of firms rivalries 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 Strategic Management Ch.2 Industry Environment Analysis 38 / 65

20 Five Forces of Competition Rivalry Among Competing Firms Common exit barriers include: Specialized assets Fixed costs of exit Strategic interrelationships Emotional barriers Government and social restrictions Strategic Management Ch.2 Industry Environment Analysis 39 / 65 Strategic Management Ch.2 The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 Interpreting Industry Analyses 40 / 65

21 Unattractive vs. Attractive Industry Unattractive industry I Low entry barriers I Suppliers and buyers with strong bargaining positions I Strong competitive threats from product substitutes I Intense rivalry among competitors Attractive industry I High entry barriers I Suppliers and buyers with little bargaining power I Few competitive threats from product substitutes I Relatively moderate rivalry Strategic Management Ch.2 Interpreting Industry Analyses 41 / 65 Quick Quiz Is the Life Insurance industry attractive or unattractive for you to enter? Strategic Management Ch.2 Interpreting Industry Analyses 42 / 65

22 Strategic Management Ch.2 The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 Strategic Groups 43 / 65 Strategic Groups A set of firms that emphasize similar strategic dimensions and use a similar strategy. Competition between firms within a strategic group is great More heterogeneity Performance leaders within groups are: Able to follow strategies similar to those other firms in the group Yet maintain strategic distinctiveness to gain and sustain a competitive advantage Strategic Management Ch.2 Strategic Groups 44 / 65

23 Strategic Management Ch.2 The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 Competitor Analysis 45 / 65 Competitor Analysis Components Future Objectives Current Strategy Assumptions Capabilities Response Strategic Management Ch.2 Competitor Analysis 46 / 65

24 Competitor Analysis Components Future Objectives What drives the competitor? How do our goals compare with our competitors goals? Where will emphasis be placed in the future? What is the attitude toward risk? Strategic Management Ch.2 Competitor Analysis 47 / 65 Competitor Analysis Components Current Strategy What is the competitor doing and can do? How are we currently competing? Does their strategy support changes in the competitive structure? Strategic Management Ch.2 Competitor Analysis 48 / 65

25 Competitor Analysis Components Assumptions What does the competitor believe about the industry? Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves? Strategic Management Ch.2 Competitor Analysis 49 / 65 Competitor Analysis Components Capabilities What are the competitor s capabilities? What are our strengths and weaknesses? How do we rate compared to our competitors? Strategic Management Ch.2 Competitor Analysis 50 / 65

26 Competitor Analysis Components 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? Strategic Management Ch.2 Competitor Analysis 51 / 65 Strategic Management Ch.2 The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 Ethical Considerations 52 / 65

27 Practices that are legal and ethical include: 1. Obtaining publicly available information Court records Competitors help wanted advertisements Annual reports Financial reports of publicly held corporations Uniform Commercial Code filings 2. Attending trade fairs and shows to: Obtain competitors brochures View their exhibits Listen to discussions about their products Strategic Management Ch.2 Ethical Considerations 53 / 65 Practices that are unethical and often illegal Strategic Management Ch.2 Ethical Considerations 54 / 65

28 Practices that are unethical and often illegal Blackmail Trespassing Eavesdropping Stealing drawings, samples or documents Strategic Management Ch.2 Ethical Considerations 55 / 65 Strategic Management Ch.2 The General, Industry, and Competitor Environments External Environmental Analysis Segments of the General Environment Industry Environment Analysis Interpreting Industry Analyses Strategic Groups Competitor Analysis Ethical Considerations Practice Problem Strategic Management Ch.2 Practice Problem 56 / 65

29 Practice Problem SDM Fall 2013 Question 6 The description of Frenz coffee company is provided in Section 4 of the Case Study. Visit SOA.org Past Exams and Solutions Fall 2013 SDM Case Study AM Strategic Management Ch.2 Practice Problem 57 / 65 Practice Problem SDM Fall 2013 Question 6 The description of Frenz coffee company is provided in Section 4 of the Case Study. The five forces of competition model has the following elements: 1. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitute products 5. Rivalry among competing firms (a) (8 points) Analyze Frenz using the five forces of competition model. (b) (2 points) Assess Frenz s ability to earn above-average profits based on the analysis in part (a). Justify your assessment. Time Target Strategic Management = 30 minutes Ch.2 Practice Problem 58 / 65

30 Solution 6a) Threat of new entrants Economies of scale Frenz has a well-established marketing function built over many years of investment that is difficult for new entrants to build/copy which reduces the threat of new entrants. Product differentiation Frenz has innovative products which differentiates itself from its competitors, thus reducing the threat of new entrants Capital requirements Capital requirements to enter the coffee industry are low which increase the threat of new entrants. Strategic Management Ch.2 Practice Problem 59 / 65 Solution 6a) continued 1. Threat of new entrants Switching costs Frenz has an effective loyalty card program which incentivizes customers to not switch to competitors, thus reducing the threat from new entrants. Access to distribution channels Frenz has nurtured its relationship with its distributors, creating switching costs for them and reducing the threat from new entrants. Cost disadvantages independent of scale Frenz has favorable access to its raw materials (high-end coffee beans) through its exclusive arrangement with the Vietombia government reducing the threat from new entrants Strategic Management Ch.2 Practice Problem 60 / 65

31 Solution 6a) continued 2. Bargaining Power of Suppliers Arrangement with government Frenz s exclusive arrangement with the Vietombia government allows it to become the supplier thus reducing the bargaining power of other suppliers 3. Bargaining Power of Buyers Loyalty Program Frenz s loyalty program increasing switching costs for buyers thus reducing their bargaining power Strategic Management Ch.2 Practice Problem 61 / 65 Solution 6a) continued 4. Threat of Substitute Products Differentiated products Frenz has innovative, differentiated products which reduces a substitute s attractiveness and its threat New Products Frenz can quickly roll out new products which reduces the threat of substitutes 5. Intensity of Rivalry among Competitors Slow Industry Growth The coffee industry is growing in third world countries where there is less pressure to take customers from competitors and reduces the intensity of rivalry High Fixed Costs or High Storage Costs Storage costs are low because coffee/tea can be kept for long periods of time which reduces the intensity of rivalry Lack of Differentiation or Low Switching Costs Frenz has differentiated products which reduces the intensity of rivalry Strategic Management Ch.2 Practice Problem 62 / 65

32 Practice Problem SDM Fall 2013 Question 6 The description of Frenz coffee company is provided in Section 4 of the Case Study. The five forces of competition model has the following elements: 1. Threat of new entrants 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of substitute products 5. Rivalry among competing firms (a) (8 points) Analyze Frenz using the five forces of competition model. (b) (2 points) Assess Frenz s ability to earn above-average profits based on the analysis in part (a). Justify your assessment. Time Target Strategic Management = 24 minutes Ch.2 Practice Problem 63 / 65 Solution 6b) Frenzs has a strong ability to earn above average profits because most of the factors below are beneficial to Frenz: Economies of Scale reduced the threat of entrants, therefore it increased Frenzs ability to earn above-average profits. Product Differentiation reduced the threat of entrants, therefore it increased Frenzs ability to earn above-average profits. Capital Requirements increased the threat of entrants, therefore it reduced Frenzs ability to earn above-average profits. Switching Costs reduced the threat of entrants, therefore it increased Frenzs ability to earn above-average profits. Access to Distribution Channels reduced the threat of entrants, therefore it increased Frenzs ability to earn above-average profits. Cost Disadvantages Independent of Scale reduced the threat of entrants, therefore it increased Frenzs ability to earn above-average profits Strategic Management Ch.2 Practice Problem 64 / 65

33 Solution 6b) continued Arrangement with government reduced the bargaining power of the suppliers therefore it increased Frenzs ability to earn above-average profits. Loyalty Program reduced the bargaining power of the buyers therefore it increased Frenzs ability to earn above-average profits. Differentiated products reduced the threat of substitute products therefore it increased Frenzs ability to earn above-average profits. New Products reduced the threat of substitute products therefore it increased Frenzs ability to earn above-average profits. Slow Industry Growth reduced the intensity of competition therefore it increased Frenzs ability to earn above-average profits. High Fixed Costs or High Storage Costs reduced the intensity of competition therefore it increased Frenzs ability to earn above-average profits. Lack of Differentiation or Low Switching Costs reduced the intensity of competition therefore it increased Frenzs ability to earn above-average profits. Strategic Management Ch.2 Practice Problem 65 / 65