ENVIRONMENT ANALYSIS. The External Environment: Components of the General Environment. SWOT is the starting point. General Environment

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1 ENVIRONMENT ANALYSIS The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Assist. Prof. Dr. Özge Özgen / Department of International Business and Trade SWOT is the starting point Components of the General Environment 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 General Environment The general environment usually holds both opportunities for and threats to expansion. 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... DEMOGRAPHIC Aging Population TECHNOLOGICAL Advances in Laser Technology Medical Services (+) for (-) for Long-playing records Developments in general environment change competitive battle lines. Tekel sold Yeni Rakı for a long time before the privatization Merket is opened to the competition The same environmental trend can have different effects on different industries SOCIO-CULTURAL Greater health awareness (+) for (-) for Exercise equipments Meat products

2 The impact of an environmental trend often differs significantly for differnt firms within the same industry Porter s Five-Forces of Competition 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. A set of factors that directly influences a company and its competitive actions and responses. Many developments in general environment are difficult to predict, while orhers are predictable.! But even when a trend is easy to predict, it is not always clear what is strategic implications will be. The affects of general environment may differ from one country to another 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. New digital tecnologies created new competitors to traditional telephone companies New New Economies of Scale vs. Absolute Cost Advantage Barriers to Entry Economies of Scale Absolute Cost Advantages Brand Loyalty Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost reduction is gained through Mass production / standardized output Bulk purchases of raw materials Spreading marketing and advertising costs / fixed costs over a large volume of output Superior production operations and processes Control of inputs such as labor, materials, management skills etc. ''Just in Time' just the required accessories, just the required quantities and just the required time need for production and distribution. Government Policy Largest US supplier of groceries, and the largest US general retailer. They can buy in such enormous bulk, and force suppliers to accept such low prices

3 Capital Requirements Intel (INTC) does have substantial technological rivals, But their research and development budget (upwards of $7 billion annually) and hard to compete with Intel Million $ Advanced Micro Devices - AMD INTEL Revenues 6, ,999.0 Profits ,942.0 Switching Cost Which factors are triggering the switching behavior? pricing, inconvenience, core service failures, service encounter failures, employee responses to service failures, attraction by competitors, ethical problem, and involuntary switching What are the costs of changing your GSM operator? Switching costs include not only monetary terms Cost of time Cost of efforts Uncertanity and risk New exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases are likely to be powerful if: Supplier industry is dominated by a few firms products have few substitutes Buyer is not an important customer to supplier product is an important input to buyers product products are differentiated products have high switching costs Supplier poses credible threat of forward integration Buyer groups are likely to be powerful if: New are concentrated or purchases are large relative to seller s sales are undifferentiated face few switching costs compete with the supplying industry by: Not important product quality Buyer has full information * down prices * Forcing higher quality * Playing firms off of each other

4 New with similar function limit the prices firms can charge Keys to evaluate substitute products: with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery New Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs Rivalry Among Competing Firms in Industry High storage costs Lack of differentiation or switching costs Capacity added in large increments High strategic stakes High exit barriers Don t forget COMPLEMENTORS Complementors are companies that sell products that that add value to the products of companies in an industry because when used together, the products better satisfy customer demands. 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.

5 Competitive and Cooperative Dimensions New Rivalry Among Competing Firms in Industry The Primarily Competitive Dimensions New Your Direct Rivals Analyzing the External Environment Environmental Scanning Gathering Intelligence Sources of Competitive Intelligence Scenario Planning The Primarily Cooperative Dimensions Your Your Firm Your 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. 27 Competitive Intelligence Information that is relavant to strategy formulation regarding the environmental context within which a firm competes 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 The Environment-Strategy Relationship How the external environment shapes strategy? How strategy can influence the external environment? Internal Analysis

6 Distinctive Competencies Firm specific strengths that allow a company to differentiate its products from those offered by rivals Apple Strong brand name + innovative characteristics Coca-Cola Strong brand name + formulation of coke The Role of Resources Resources Capital or financial, physical, social or human, technological, and organizational factor endowments Tangible and intangible A firm-specific and difficult to imitate resource is likely to lead to distinctive competency Brand name Reputation Know-how Experience etc. The Role of Capabilities Strategy, Resources, Capabilities, and Competencies Capabilities A company s skills at coordinating and using its resources Capabilities are the product of organizational structure, processes, and control systems To have firm-specific and valuable resources isnot enough!!! Competitive Advantage, Value Creation, and Profitability Profitability factors Amount of value customers place on the company s products Price charged Costs of creating the value The Value Chain A company is a chain of activities for transforming inputs into outputs that customers value The transformation process is composed of primary and support activities that add value to the product

7 The Durability of Competitive Advantage Barriers to Imitation Imitating Resources Imitating Capabilities Capability of Competitors Strategic commitment Absorptive capacity Industry Dynamism Why Companies Fail Inertia Companies find it difficult to change their strategies and structures Prior strategic commitments Limit a company s ability to imitate and cause competitive disadvantage The Icarus paradox A company can become so specialized based on past success that it loses sight of market realities Craftsmen, builders, pioneers, salesmen The ICARUS Paradox Time for refreshment! the son of the master craftsman Daedalus. attempt to escape from Crete by means of wings that his father constructed from feathers and wax fly too close to the sun, and the melting wax caused him to fall into the sea

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