The External EnvironmentThe External Environment

Chapter TwoChapter Two

BA 495.005BA 495.005

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Today’s AgendaToday’s Agenda

• Introduction of External AnalysisIntroduction of External Analysis• Environmental AnalysisEnvironmental Analysis

Opportunities & ThreatsOpportunities & Threats SegmentsSegments

• Industry AnalysisIndustry Analysis Porter’s Five ForcesPorter’s Five Forces

• Competitor AnalysisCompetitor Analysis• Wrap-upWrap-up

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Introduction of External Analysis

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Three Aspects of External AnalysisThree Aspects of External Analysis• General environmentGeneral environment

What should the firm be anticipating that will impact the way they What should the firm be anticipating that will impact the way they do business?do business?

What changes will impact their customers?What changes will impact their customers?

• Industry environmentIndustry environment What factors and conditions influence a firm’s profitability within What factors and conditions influence a firm’s profitability within

their industry?their industry?

This is industry-specific, not firm-specificThis is industry-specific, not firm-specific

• Competitor environmentCompetitor environment What are the strengths and weaknesses of competitors?What are the strengths and weaknesses of competitors?

How can we predict the dynamics of competitors’ actions, How can we predict the dynamics of competitors’ actions, responses and intentions?responses and intentions?

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Components: External Environmental Components: External Environmental AnalysisAnalysisScanning • Identifying early signals of

environmental changes and trends

Monitoring • Detecting meaning through ongoing observations of environmental changes and trends

Forecasting • Developing projections of anticipated outcomes based on monitored changes and trends

Assessing • Determining the timing and importance of environmental changes and trends for firms’ strategies and their management

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The General Environment

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General EnvironmentGeneral Environment

• Dimensions in the broader society that influence Dimensions in the broader society that influence an industry and the firms within it:an industry and the firms within it:

DemographicDemographic

EconomicEconomic

Political/legalPolitical/legal

SocioculturalSociocultural

TechnologicalTechnological

GlobalGlobal

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Segments of the General EnvironmentSegments of the General Environment

The Demographic SegmentThe Demographic Segment

Population sizePopulation size

Age structureAge structure

Geographic distributionGeographic distribution

Ethnic mixEthnic mix

Income distributionIncome distribution

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Segments of the General EnvironmentSegments of the General Environment

The Economic SegmentThe Economic Segment

Inflation ratesInflation rates

Interest ratesInterest rates

Trade deficits or surplusesTrade deficits or surpluses

Budget deficits or surplusesBudget deficits or surpluses

Personal savings ratePersonal savings rate

Business savings ratesBusiness savings rates

Gross domestic productGross domestic product

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Segments of the General EnvironmentSegments of the General Environment

The Political/Legal SegmentThe Political/Legal Segment

Antitrust lawsAntitrust laws

Taxation lawsTaxation laws

Deregulation philosophiesDeregulation philosophies

Labor training lawsLabor training laws

Educational philosophies Educational philosophies and policiesand policies

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Segments of the General Environment Segments of the General Environment

The Sociocultural SegmentThe Sociocultural Segment Women in the workplaceWomen in the workplace

Workforce diversityWorkforce diversity

Attitudes about quality of Attitudes about quality of worklifeworklife

Concerns about environmentConcerns about environment

Shifts in work and career Shifts in work and career preferencespreferences

Shifts in product and service Shifts in product and service preferencespreferences

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Segments of the General EnvironmentSegments of the General Environment

The Technological The Technological SegmentSegment Product innovationsProduct innovations

Applications of Applications of knowledgeknowledge

Focus of private and Focus of private and government-supported government-supported R&D expendituresR&D expenditures

New communication New communication technologiestechnologies

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Segments of the General EnvironmentSegments of the General Environment

The Global SegmentThe Global Segment

Important political Important political eventsevents

Critical global marketsCritical global markets

Newly industrialized Newly industrialized countriescountries

Different cultural and Different cultural and institutional attributesinstitutional attributes

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Industry Analysis

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Industry Environment AnalysisIndustry Environment Analysis

• Industry defined: A group of firms producing Industry defined: A group of firms producing products that are close substitutesproducts that are close substitutes

• Industry environment: The set of factors directly Industry environment: The set of factors directly influencing a firm and its competitive actions and influencing a firm and its competitive actions and competitive responsescompetitive responses

Threat of new entrantsThreat of new entrants

Power of suppliersPower of suppliers

Power of buyersPower of buyers

Threat of product substitutesThreat of product substitutes

Intensity of rivalry among competitorsIntensity of rivalry among competitors

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Porter’s Five ForcesPorter’s Five Forces

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Threat of New Entrants: Barriers to Threat of New Entrants: Barriers to EntryEntry• Economies of Scale: Marginal Economies of Scale: Marginal

improvements in efficiency that improvements in efficiency that a firm experiences as it a firm experiences as it incrementally increases its sizeincrementally increases its size

• Product differentiationProduct differentiation Unique productsUnique products Customer loyaltyCustomer loyalty

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Threat of New Entrants: Barriers to Threat of New Entrants: Barriers to EntryEntry• Capital RequirementsCapital Requirements

Physical facilitiesPhysical facilities InventoriesInventories Marketing activitiesMarketing activities

• Switching Costs: One-time costs customers Switching Costs: One-time costs customers incur when they buy from a different supplierincur when they buy from a different supplier New equipmentNew equipment Retraining employeesRetraining employees Psychic costs of ending a relationshipPsychic costs of ending a relationship

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Threat of New Entrants: Barriers to Threat of New Entrants: Barriers to EntryEntry• Access to Distribution ChannelsAccess to Distribution Channels

Stocking or shelf spaceStocking or shelf space Price breaksPrice breaks Cooperative advertising allowancesCooperative advertising allowances

• ““Second Mover” DisadvantagesSecond Mover” Disadvantages

Proprietary product technologyProprietary product technology

Favorable access to raw materialsFavorable access to raw materials

Desirable locationsDesirable locations

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Threat of New Entrants: Barriers to Threat of New Entrants: Barriers to EntryEntry• Government policyGovernment policy• Expected retaliationExpected retaliation

The stronger the expected reaction, the more The stronger the expected reaction, the more compelling the barrier to entrycompelling the barrier to entry• Lots of fixed assets and/or resourcesLots of fixed assets and/or resources• Slow industry growthSlow industry growth

Retaliation minimized by good customer Retaliation minimized by good customer segmentation and targetingsegmentation and targeting

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Bargaining Power of SuppliersBargaining Power of Suppliers

• Supplier power increases when:Supplier power increases when: Suppliers are large and few in number.Suppliers are large and few in number.

Suitable substitute products are not available.Suitable substitute products are not available.

Individual buyers are not large customers of suppliers Individual buyers are not large customers of suppliers and there are many of them.and there are many of them.

Suppliers’ goods are critical to the buyers’ Suppliers’ goods are critical to the buyers’ marketplace success.marketplace success.

Suppliers’ products create high switching costs.Suppliers’ products create high switching costs.

Suppliers pose a threat to integrate forward into Suppliers pose a threat to integrate forward into buyers’ industry.buyers’ industry.

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Bargaining Power of BuyersBargaining Power of Buyers

• Buyer power increases when:Buyer power increases when:

Buyers are large and few in number.Buyers are large and few in number.

Buyers purchase a large portion of an industry’s total Buyers purchase a large portion of an industry’s total output.output.

Buyers’ purchases are a significant portion of the Buyers’ purchases are a significant portion of the firm’s annual revenues.firm’s annual revenues.

Buyers’ switching costs are low.Buyers’ switching costs are low.

Buyers can pose threat to integrate backward into the Buyers can pose threat to integrate backward into the sellers’ industry.sellers’ industry.

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Threat of Substitute ProductsThreat of Substitute Products

• The threat of substitute products increases The threat of substitute products increases when:when:

Buyers face few switching costs.Buyers face few switching costs.

The substitute product’s price is lower.The substitute product’s price is lower.

Substitute product’s quality and performance are Substitute product’s quality and performance are equal to or greater than the existing product.equal to or greater than the existing product.

• Differentiated industry products that are valued Differentiated industry products that are valued by customers reduce this threat.by customers reduce this threat.

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Intensity of Rivalry Among CompetitorsIntensity of Rivalry Among Competitors

• Industry rivalry increases when:Industry rivalry increases when: There are numerous or equally balanced competitors.There are numerous or equally balanced competitors.

Industry growth slows or declines.Industry growth slows or declines.

There are high fixed costs or high storage costs.There are high fixed costs or high storage costs.

There is a lack of differentiation opportunities or low There is a lack of differentiation opportunities or low switching costs.switching costs.

When the strategic stakes are high.When the strategic stakes are high.

When high exit barriers prevent competitors from When high exit barriers prevent competitors from leaving the industry.leaving the industry.

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Low entry barriers

Interpreting Industry AnalysesInterpreting Industry Analyses

UnattractiveUnattractiveIndustryIndustry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential

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Interpreting Industry AnalysesInterpreting Industry Analyses

AttractiveAttractiveIndustryIndustry

High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

High profit potential

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Sample Industry EvaluationsSample Industry Evaluations

• StarbucksStarbucks

• Apple’s iPod Apple’s iPod

• Regence Blue CrossRegence Blue Cross

(Group health insurance)(Group health insurance)

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Competitor Analysis

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Competitor AnalysisCompetitor Analysis• What other alternatives do your customers What other alternatives do your customers

consider when making a purchase decision?consider when making a purchase decision?• Competitor Intelligence: The ethical gathering of Competitor Intelligence: The ethical gathering of

needed information and data that provides needed information and data that provides insight into:insight into:

• A competitor’s direction (A competitor’s direction (future objectivesfuture objectives))

• A competitor’s capabilities and intentions (A competitor’s capabilities and intentions (current current strategystrategy))

• A competitor’s beliefs about the industry (A competitor’s beliefs about the industry (itsits assumptionsassumptions))

• A competitor’s A competitor’s capabilitiescapabilities

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Competitor AnalysisCompetitor Analysis

• How do our goals compare How do our goals compare with our competitors’ goals?with our competitors’ goals?

• Where will the emphasis be Where will the emphasis be placed in the future?placed in the future?

• What is the attitude toward What is the attitude toward risk?risk?

• What investments are our What investments are our competitors making today?competitors making today?

Future ObjectivesFuture Objectives

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Competitor AnalysisCompetitor Analysis

• How are we currently How are we currently competing?competing? In what product/services?In what product/services? In what markets?In what markets? Based on what attributes?Based on what attributes?

Future ObjectivesFuture Objectives

Current StrategyCurrent Strategy

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Competitor AnalysisCompetitor Analysis

• Do we assume the Do we assume the future will be volatile?future will be volatile?

• What assumptions do What assumptions do our competitors hold our competitors hold about the industry and about the industry and themselves?themselves?

Future ObjectivesFuture Objectives

Current StrategyCurrent Strategy

AssumptionsAssumptions

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Competitor AnalysisCompetitor Analysis

• What are our strengths What are our strengths and weaknesses?and weaknesses?

• How do we rate How do we rate compared to our compared to our competitors?competitors?

Future ObjectivesFuture Objectives

Current StrategyCurrent Strategy

AssumptionsAssumptions

CapabilitiesCapabilities

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Competitor Analysis (cont’d)Competitor Analysis (cont’d)

• What will our What will our competitors do in the competitors do in the future?future?

• Where do we hold an Where do we hold an advantage over our advantage over our competitors now and in competitors now and in the future?the future?

• How will this change How will this change our relationship with our relationship with our competitors?our competitors?

ResponseResponseFuture ObjectivesFuture Objectives

Current StrategyCurrent Strategy

AssumptionsAssumptions

CapabilitiesCapabilities

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ComplementorsComplementors

• Complementors: The network of companies that Complementors: The network of companies that sell complementary products or services or are sell complementary products or services or are compatible with the focal firm’s own product or compatible with the focal firm’s own product or service.service. If a complementor’s product or service adds value to If a complementor’s product or service adds value to

the sale of the focal firm’s product or service, it is the sale of the focal firm’s product or service, it is likely to create value for the focal firm.likely to create value for the focal firm.

However, if a complementor’s product or service is in However, if a complementor’s product or service is in a market into which the focal firm intends to expand, a market into which the focal firm intends to expand, the complementor can represent a formidable the complementor can represent a formidable competitor.competitor.

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Ethical ConsiderationsEthical Considerations

• Practices considered both legal and ethical:Practices considered both legal and ethical: Obtaining publicly available informationObtaining publicly available information

Attending trade fairs and shows to obtain competitors’ Attending trade fairs and shows to obtain competitors’ brochures, view their exhibits, and listen to brochures, view their exhibits, and listen to discussions about their productsdiscussions about their products

• Practices considered both unethical and illegal:Practices considered both unethical and illegal: BlackmailBlackmail

TrespassingTrespassing

EavesdroppingEavesdropping

Stealing drawings, samples, or documentsStealing drawings, samples, or documents

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Wrap-up

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Wrap-upWrap-up

• Introduction of External AnalysisIntroduction of External Analysis• Environmental AnalysisEnvironmental Analysis

Opportunities & ThreatsOpportunities & Threats SegmentsSegments

• Industry AnalysisIndustry Analysis Porter’s Five ForcesPorter’s Five Forces

• Competitor AnalysisCompetitor Analysis• QuestionsQuestions