the external environment: opportunities, threats, industry competition, and competitor analysis the...

The External Environment:

Opportunities, Threats, Industry Competition,

and Competitor Analysis

The External Environment:

Opportunities, Threats, Industry Competition,

and Competitor Analysis

SWOT is the starting point It provides an overview of the strategic situation.

It provides the “raw material” to do more extensive internal and external analysis.

An OPPORTUNITY is a chance for firm growth or progress due to a favorable

juncture of circumstances in the business environment.

A THREAT is a factor in your company’s external environment that poses a danger

to its well-being.

Possible Opportunities: Emerging customer needs Product Innovations Expanding global markets Declining Interest Rates

Possible Threats: New entry by competitors Changing demographics/shifting demand Emergence of cheaper technologies Regulatory requirements

Components of the General EnvironmentComponents of the General Environment

General Environment

Demographic Population size, Age structure,

Geographic distribution, Ethnic mix, Income distribution...

Sociocultural Workforce diversity,Attitudes

about quality of worklife,Concerns about environment, Shifts in product and service preferences...

Economic Inflation rates, Interest rates,

Personal savings rate, Exchange Rates, GDP...

Technological Product innovations, Increase in

R&D expenditures, New communication technologies...

Political / Legal Antitrust laws, Taxation laws,

Environmental Protection Law...

Global Critical global markets, Newly

industrialized countries, Different cultural and institutional attributes...

The general environment usually holds both opportunities for and threats to expansion.

(+) for (-) for

DEMOGRAPHIC

Aging Population

Medical Services

TECHNOLOGICAL

Advances in Laser Technology

Long-playing records

Developments in general environment change competitive battle lines.

Tekel sold Yeni Rakı for a long time before the privatization

Market is opened to the competition

The same environmental trend can have different effects on different industries

(+) for (-) for

SOCIO-CULTURAL

Greater health awareness

Exercise equipments Meat products

The impact of an environmental trend often differs significantly for differnt firms within the same industry

Many developments in general environment are difficult to predict, while orhers are predictable.

The affects of general environment may differ from one country to another

Restructring of the U.S. economy in the 1980s.

Reduced numbers of managers

Decrease in travel budget

Full-service airlines are affected negatively

Low-cost, low-service airlines gained adv.

!! But even when a trend is easy to predict, it is not always clear what is strategic implications will be.

Porter’s Five-Forces of Competition

A set of factors that directly influences a company and its

competitive actions and responses.

Interaction among these factors determine an industry’s

profit potential and location of “profit pools”.

Need to understand which competitive factors have

power, why they have power, and what you might be able

to do about it to improve your own position.

Threat of New

Entrants

Threat of New

Entrants

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Threat of New EntrantsThreat of New Entrants

Barriers to EntryBarriers to Entry

Economies of Scale

Product Differentiation

Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Government Policy

Expected Retaliation

Bargaining Power of Suppliers


Threat of New Entrants



Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power Suppliers exert power in the industry by:in the industry by:Suppliers exert power Suppliers exert power in the industry by:in the industry by:

* * Threatening to raiseThreatening to raise* * Threatening to raiseThreatening to raiseprices or to reduce qualityprices or to reduce qualityprices or to reduce qualityprices or to reduce quality

Powerful suppliers Powerful suppliers can squeeze industry can squeeze industry profitability if firms profitability if firms are unable to recover are unable to recover cost increasescost increases

Powerful suppliers Powerful suppliers can squeeze industry can squeeze industry profitability if firms profitability if firms are unable to recover are unable to recover cost increasescost increases

Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firmsSupplier industry is dominated by a few firms

SSuppliers’ products have few substitutesuppliers’ products have few substitutes

Buyer is not an important customer to supplierBuyer is not an important customer to supplier

Suppliers’ product is an important input to Suppliers’ product is an important input to

buyers’ productbuyers’ product

Suppliers’ products are differentiatedSuppliers’ products are differentiated

Suppliers’ products have high switching costsSuppliers’ products have high switching costs

Supplier poses credible threat of forward Supplier poses credible threat of forward

integrationintegration

Bargaining Power of Buyers







Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete with the supplying

industry by:

Buyers compete with the supplying

industry by:

* * Bargaining down pricesBargaining down prices* * Bargaining down pricesBargaining down prices

* Forcing higher quality* Forcing higher quality* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off of* Playing firms off of* Playing firms off ofeach othereach othereach othereach other

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large Buyers are concentrated or purchases are large

relative to seller’s salesrelative to seller’s sales

Products are undifferentiatedProducts are undifferentiated

Buyers face few switching costsBuyers face few switching costs

Buyers’ industry earns low profitsBuyers’ industry earns low profits

Buyer presents a credible threat of backward Buyer presents a credible threat of backward

integrationintegration

Product unimportant to qualityProduct unimportant to quality

Buyer has full informationBuyer has full information

Threat of Substitute Products


Threat of New

Entrants

Threat of New

Entrants






Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

Keys to evaluate substitute products:Keys to evaluate substitute products:

Products with improving Products with improving price/performance tradeoffs price/performance tradeoffs relative to present industry relative to present industry productsproducts

Example:Example:

Electronic security systems in Electronic security systems in place of security guardsplace of security guards

Fax machines in place of Fax machines in place of overnight mail deliveryovernight mail delivery





Rivalry Among Competing Firms in

Industry


Industry






CutthroatCutthroat competitioncompetition is more likely to occur when: is more likely to occur when:

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Numerous or equally balanced competitors

Slow growth industry

High fixed costs

High storage costs

Lack of differentiation or switching costs

Capacity added in large increments

High strategic stakes

High exit barriers

Five-Forces Analysis -- SO WHAT?

Consider how opportunities and threats may result from the

five competitive forces.

Understand the strength of each competitive force, and

underlying reasons for strength.

Select niches where forces are weaker, and profit pools are

higher.

Build strategies that defend yourself against strong

competitive forces.

Build strategies that influence the forces in your favor.

Strategic Groups Defined

A set of firms emphasizing similar strategic dimensions

and using similar strategies

Internal competition between strategic group firms is

greater than between firms outside that strategic group

Strategic Groups Strategic Dimensions

Extent of technological leadership

Product quality

Pricing policies

Distribution channels

Customer service

Target markets

Product breadth

Geographical coverage

Extent of diversification or vertical integration . . .

Strategic Group Maps

A graphical depiction of rival firms,

using two dimensions that

reflect important aspects of their strategy and

array the firms into groups.

Work best in fragmented industries.

Help show close (within group) rivals, crowded and open strategic positions; assist opportunity and threat

interpretation (not all groups are affected equally).

Steps to Create a Strategic Group Map

1. Identify two important dimensions that help distinguish the

competing firms from each other.

2. Draw a two-dimensional “map” that places each firm in the

appropriate position given the two dimensions you are using.

3. Draw circles around firms that cluster together in a similar

position.

4. Include arrows to indicate any movement of firms from one

position to another.

Competitive and Cooperative Dimensions






Industry


Industry





Substitute Products

Substitute Products

New EntrantsNew Entrants

Yo

ur D

irect

Riv

als

The Primarily Competitive Dimensions

Your BuyersYour

BuyersYour

SuppliersYour

Suppliers Your Firm

The Primarily Cooperative Dimensions

Analyzing the External Environment

Environmental Scanning

Gathering Intelligence

Sources of Competitive Intelligence

Scenario Planning

25

Environmental Scanning

The monitoring, evaluating, and disseminating of information from

the external and internal environments to key people within the

corporation

AIM to avoid strategic surprise and ensure the long-term health of

the firm.

Competitive Intelligence

Several Uses of Competitive Intelligence Providing descriptions of the competitive environment (Guide

for strategy formulation) Challenging assumptions about the competitive environment Forecasting future developments Identifying and compensating the competitive weaknesses Determinig the unsustainable strategies Indentifying the guideline for adjustment to changing

environment

Information that is relavant to strategy formulation regarding the

environmental context within which a firm competes

Sources of Useful Competitive Intelligence

Local newspapers Government Databases Customers and suppliers Competitors

The Environment-Strategy Relationship

How the external environment shapes strategy?

How strategy can influence the external environment?

the external environment: opportunities, threats, industry competition, and competitor analysis the...

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