External Environmental Analysis

Lecture Topics
Purpose of External Environmental Analysis Gathering Information for External Environmental Analysis General Environment Competitive Environment Key Success Factors Competitive Changes During Industry Evolution Strategic Groups National Competitive Advantage
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Purpose of External Environmental Analysis

Organizations are affected by conditions in the environment Managers need to be aware of these conditions in order to
Take advantage of opportunities that can lead to higher profits Reduce the impact of threats that can harm the organizations future
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Gathering Information for External Environmental Analysis

Managers need information in order to know and develop an understanding about what is happening in the external environment Three approaches to information gathering:
Scanning: general surveillance of environmental changes; looking for early signals of changes Monitoring: close attention to specific developments that could affect the organization Competitive Intelligence: following actions of competitors
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Two Areas for Analysis

General Environment Competitive Environment

The General and Competitive Environment

General Environment Demographics

Competitive Global Environment Threat on new entrants Political/Legal

Bargaining power of suppliers

Bargaining power of buyers Threat of substitute products Sociocultural Competitive rivalry Technological

Macoreconomic
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General Environment Demographics

Characteristics of a countrys population
Size of population and growth rate Age distribution of population Education levels Income distribution Ethnic diversity Geographic distribution
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General Environment Political/Legal

Political and legal conditions affecting business
Government policies toward business Investment incentives Business regulation: labor, environment Education priorities Budget conditions and plans
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General Environment Technological

Technological developments relevant to a business
Telecommunications Internet On-line training Product and process innovations

General Environment Macroeconomic

Impact of the economy on business
Size and change in gross domestic product Per capita income levels Inflation rate Interest rates Foreign trade deficit or surplus Unemployment Rates of saving and investment
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General Environment Sociocultural

Influence of values, beliefs, and lifestyles of a country on business
Family relationships Attitudes about work Living arrangements Styles of entertainment Attitudes toward health
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General Environment Global

International developments that can impact a business
Rise of China as economic power Rising global trade and WTO Intellectual property protection Important political events: Iraq war Search for low cost suppliers
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Competitive Environment
The essence of strategy formulation is coping with competition. The corporate strategists goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor. Managers must understand the conditions of competition within their industry
Porter Five-Forces Model of Competition (determining the attractiveness of an industry) Key Success Factors Competitive Changes During industry Evolution Strategic Groups National Competitive Advantage

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Defining an Industry
Industry
A group of companies offering products or services that are close substitutes for each other

Competitors
Rival companies that serve the same basic customer needs

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Defining an Industry (contd)

Sector
A group of closely related industries

Market segments
Distinct groups of customers within a market that can be differentiated from each other based on their distinct attributes and demands

Changing industry boundaries

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The Computer Sector: Industries and Segments

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Five Forces Driving Industry Competition

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Threat of New Entrants

Fundamental question: how easy is it for another company to enter the industry? Factors making easy entry to industry
Low economies of scale Low product differentiation Low capital requirements No switching costs for buyer Easy access to distribution channels Little government regulation

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Supplier Power
Fundamental question: how badly does a supplier need your business? Factors giving power to supplier:
Supplier industry dominated by few firms Buyer is not important to customer Suppliers product is important input to buyers product Suppliers products have high switching costs Supplier can integrate forward and become competitor of buyer
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Threat of Substitutes
Fundamental question: what other products or services could perform the same function as your products or services? Factors indicating high threat of substitutes:
Few switching costs for buyer Price of substitute lower or quality higher than for your products Firms offering substitutes have high profitability

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Buyer Power
Fundamental questions: How badly does a buyer need your products or services? Factors contributing to high buyer power:
Few buyers compared to the number of sellers Buyers purchases high relative to sellers sales Products are undifferentiated Buyer has low switching costs Buyer has low profits Buyer can integrate backward and supply the product to itself
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Competitive Rivalry
Fundamental question: how intense is competition in the industry? Factors leading to high competitive rivalry:
Numerous or equally balanced competitors High fixed costs Slow industry growth Lack of differentiation or switching costs High strategic stakes High exit barriers

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A Sixth Force: Complementors

Not a supplier Offers service or product that affects industrys performance When complementors are important and their number is increasing
Demand and profits in the industry are boosted

When complementors are weak

Industry growth can slow and profits can be limited

Example: Internet Service Providers complementors to eBusiness firms

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Strategic Implications of the Five Competitive Forces

Competitive environment is unattractive from the standpoint of earning good profits when:
Rivalry is strong

Entry barriers are low and entry is likely

Competition from substitutes is strong Suppliers and customers have considerable bargaining power
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Strategic Implications of the Five Competitive Forces

Competitive environment is ideal from a profit-making standpoint when:
Rivalry is moderate Entry barriers are high and no firm is likely to enter Good substitutes do not exist Suppliers and customers are in a weak bargaining position
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Key Success Factors

In many industries, there are certain actions or practices that a business must follow in order to compete in the industry. May need effort to distinguish company from competitors AN INDIVIDUAL COMPANY DOES NOT HAVE KEY SUCCESS FACTORS!!!! KEY SUCCESS FACTORS ARE NOT THE SOURCE OF A COMPANYS COMPETITIVE ADVANTAGE THEY ARE REQUIREMENTS FOR COMPETING IN AN INDUSTRY AND DO NOT GIVE ANY FIRM A COMPETITIVE ADVANTAGE 26

Examples of Key Success Factors in Selected Industries

Pharmaceuticals: research and personal selling Beer: advertising and distribution Restaurant: quality food, service, location, notoriety Retailer: location and priced-for-quality

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Changes in Competition During Industrys Evolution

Over time as an industry evolves, the nature and basis of competition changes Managers must anticipate how the forces will change as the industry evolves and formulate appropriate strategies Five Stages ( similar to product-life cycle)
Embryonicintroduction of product Growth Shakeout Mature Declining
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Stages in the Industry Life Cycle

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Shakeout: Growth in Demand and Capacity

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Requirements in Each Stage of Industrys Evolution

Embryonic: Know-how, educating customers, opening distribution channels Growth: Know-how for continued innovation, financing, build demand Shakeout: Dominant market position, low cost producer, high capacity Maturity: low cost production, brand loyalty Declining: lowest cost production, reduce capacity
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Limitations of Models for Industry Analysis

Life cycle issues
The embryonic stage can sometimes be skipped Industry growth can be revitalized The time span of the stages can vary

Innovation and change

Innovation can unfreeze and reshape industry structure An industry may be hypercompetitive, with permanent and ongoing change
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Limitations of Models for Industry Analysis (contd)

Company differences
The importance of company differences within an industry or strategic group can be underemphasized The individual resources and capabilities of a company may be more important in determining profitability than the industry or strategic group
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Strategic Groups
Companies do not compete against all companies in an industry Companies compete against several other companies that follow similar strategies A strategic group consists of those rivals with similar competitive approaches in an industry Examples ways of competing:
Price Innovation Research Quality -- Range of products -- Customers served

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Procedure for Constructing a Strategic Group Map

STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics STEP 3: Assign firms that fall in about the same strategy space to same strategic group STEP 4: Draw circles around each group, making circles proportional to size of groups respective share of total industry sales
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Example: Strategic Group Map of the Video Game Industry

Types of Video Game Suppliers/Distribution Channels
Arcades
Arcade operators Publishers of games on CD-ROMs

Home PCs Sony, Sega, Nintendo, several others

Video game consoles

Online/Internet

MSN Gaming Zone, Pogo.com, America Online, HEAT, Engage, Oceanline, TEN

Low (Coin-operated equipment)

Medium (Console players cost $100-$300)

High (Use PC)

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Overall Cost to Players of Video Games

Nation-State and Competitive Advantage

A country may provide a competitive advantage for a company Need to identify national factors in order to determine
Where most significant competitors will come from Where to locate production activities

Porters Diamond of Determinants of National Competitive Advantage

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The Global and National Environments

Globalization of production and markets
Lower barriers to cross-border trade and investment National differences in the cost and quality of factors of production Home and foreign markets and competitors are blurring Intensified rivalry Intensified rate of innovation Many new markets are open
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Determinants of National Competitive Advantage

Strategy, Structure,

Rivalry

Factor
Endowments

National Competitive Advantage

Demand
Conditions

Related and Supporting Industries

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Factor Endowments
Availability of traditional factors of productionland, labor, capital, entrepreneurshipprovide cost advantages to companies located in countries possessing those factors More significant, countries and their companies can create new factors such as a knowledgeable workforce and infrastructure that is rare and difficult to imitate Factor endowments less important than the speed and efficiency of deploying those resources.
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Demand Conditions
Large growing markets provide foundation for global competition More significant, sophisticated and demanding consumers force companies to innovate and improve their products Advances in products, services, and standards improve companies knowledge and capabilities for selling in other world markets
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Related and Supporting Industries

Provide inputs and capabilities that help a company to improve its own products and capabilities Helps reduce manufacturing costs through cost-effective, timely methods Ongoing exchange of knowledge through research and development and joint projects improves both suppliers and companies
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Strategy, Structures, and Rivalry

Different management ideologies lead to different emphases within a company Japan and Germany both have engineers in top management and those countrys companies concentrate on process and product improvement Intense domestic rivalry leads to product improvements and cost reduction in order to compete for domestic customers
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Conclusions About Determinants of National Competitive Advantage

Firms succeeding in global markets first succeeded in intense competition in home countries Competitive advantage for global firms comes from continuous improvement, innovation, and change.
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