What affects our business from the outside? External Environmental Analysis. The External Environment

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1 Chapter 2 The External : Opportunities, Threats, and Industry Competition, and Competitor Analysis What affects our business from the outside? 1 External al Analysis A continuous process which includes Scanning: 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 2 The External General Demographic Global Sociocultural Industry Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Technological General Economic General Political/Legal 3

2 External al Analysis Analysis of general environment Analysis of industry environment Analysis of competitor environment The External Strategic Intent Strategic Mission 4 General Sociocultural segment Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences 5 General Economic segment Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal & Business savings rates Gross domestic product 6

3 General Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies 7 General Technological Segment Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies 8 General Global Segment Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes 9

4 General Demographic Segment Population size Age structure Geographic distribution Ethnic mix Income distribution 10 Industry 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. Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry 11 Five Forces Model of Competition Identify current and potential competitors and determine which firms serve them. Conduct competitive analysis. Recognize that suppliers and buyers can become competitors. Recognize that producers of potential substitutes may become competitors. 12

5 Porter s Five Forces Model of Competition Rivalry Among Competing Firms Threat of New Entrants Threat of Substitute Products Five Forces of Competition Bargaining Power of Buyers Suppliers Bargaining Power of 13 Threat of New Entrants Barriers to entry Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Government policy Expected retaliation 14 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 15

6 Bargaining Power of Buyers Buyers (customers) 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 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 16 Threat of Substitute Products Product substitutes are strong threat 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 17 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 low switching costs experience high strategic stakes have high exit barriers 18

7 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 19 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. 20 Competitor 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 21

8 Competitor Analysis Future Objectives: How do our goals compare with our competitors goals? Where will the emphasis be placed in the future? What is the attitude toward risk? 22 Competitor Analysis Current strategy Current Strategy: How are we currently competing? Does this strategy support changes in the competitive structure? 23 Competitor Analysis Current strategy Assumptions Assumptions: 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? 24

9 Competitor Analysis Current strategy Capabilities: What are our strengths and weaknesses? How do we rate compared to our competitors? Assumptions Capabilities 25 Competitor Analysis Response Current strategy Assumptions Capabilities 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? 26