external environmental analysis

External Environmental Analysis

yunan@muraelpiji.com

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Lecture TopicsPurpose of External Environmental

AnalysisGathering Information for External

Environmental AnalysisGeneral EnvironmentCompetitive EnvironmentKey Success FactorsCompetitive Changes During Industry

EvolutionStrategic GroupsNational 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 organization’s 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

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The General and Competitive Environment

General Environment

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Competitive

Environment

Threat on new entrants

Bargaining power of suppliers

Bargaining power of buyers

Threat of substitute products

Competitive rivalry

Demographics

Political/Legal

Technological

Global

Sociocultural

Macoreconomic

General EnvironmentDemographics Characteristics of a country’s population

Size of population and growth rate Age distribution of population Education levels Income distribution Ethnic diversity Geographic distribution

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General EnvironmentPolitical/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 EnvironmentTechnological Technological developments relevant to

a business Telecommunications Internet On-line training Product and process innovations

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General EnvironmentMacroeconomic 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 EnvironmentSociocultural 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 EnvironmentGlobal 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 (cont’d) 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 EntrantsFundamental 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 PowerFundamental 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 Supplier’s product is important input to

buyer’s product Supplier’s products have high switching costs Supplier can “integrate forward” and become

competitor of buyer

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Threat of SubstitutesFundamental 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 PowerFundamental 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 seller’s 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 RivalryFundamental 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: ComplementorsNot a supplierOffers service or product that affects

industry’s performanceWhen complementors are important

and their number is increasing Demand and profits in the industry are

boostedWhen 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 theFive 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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• 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

Strategic Implications of theFive Competitive Forces

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 COMPANY’S COMPETITIVE ADVANTAGE – THEY ARE REQUIREMENTS FOR COMPETING IN AN INDUSTRY AND DO NOT GIVE ANY FIRM A COMPETITIVE ADVANTAGE

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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 Industry’s 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) Embryonic—introduction 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 Industry’s 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 (cont’d) 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 -- Range of products Innovation -- Customers served Research Quality

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Procedure for Constructing aStrategic Group MapSTEP 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 group’s respective share of total industry sales

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36Example: Strategic Group Map of the Video Game Industry

Typ

es o

f V

ideo

Gam

e S

up

pli

ers/

Dis

trib

uti

on

Ch

ann

els

Overall Cost to Players of Video Games

Low(Coin-operated

equipment)

Medium (Console players cost

$100-$300)

High (Use PC)

Arcades

Home PCs

Video game consoles

Online/Internet

Sony, Sega, Nintendo, several

others

Arcade operators Publishers

of games on CD-ROMs

MSN Gaming Zone, Pogo.com,

America Online, HEAT, Engage, Oceanline, TEN

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

Porter’s Diamond of Determinants of National Competitive Advantage

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The Global and National EnvironmentsGlobalization 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

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Strategy,

Structure,

Rivalry

Factor

Endowments

Demand

Conditions

Related and

Supporting

Industries

National Competitive Advantage

Factor EndowmentsAvailability of traditional factors of

production—land, labor, capital, entrepreneurship—provide 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 country’s 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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