McGraw-Hill/IrwinMcGraw-Hill/IrwinStrategic Management, 10/eStrategic Management, 10/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Session 6 Chapter 4

External Environmental AnalysisRemote/GeneralIndustry/CompetitiveDirect /Operating/Task

4-2

Session Objectives

• To stress the importance of the sectors of the firm’s external environment to strategy formulation.

• To develop a broader sense of competition and competitive pressures.

• To understand the purpose of competitive strategy

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The Firm’s External Environment Remote Environment (Global and Domestic)

Industry Environment (Global and Domestic)

Operating Environment (Global and Domestic)

• Economic • Social

• Political • Technological

• Ecological

• Entry barriers • Supplier power

• Buyer power • Substitute availability

• Competitive rivalry

• Competitors• Creditors

• Customers • Labor

• Suppliers

THE FIRMTHE FIRM

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4Economic Factors

• Concern nature and direction of economy in which a firm operates

• Types of factors– General availability of credit

– Level of disposable income

– Propensity of people to spend

– Prime interest rates

– Inflation rates

– Trends in growth of gross national product

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5Social Factors

• Include beliefs, values, opinions, and lifestyles of people

• Recent social trends

– Entry of large numbers of women into labor market

– Accelerating interest of consumers and employees in quality-of-life issues

– Shift in age distribution of population

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6Political Factors

• Define legal and regulatory parameters within which firms must operate

• Types of factors– Fair-trade decisions

– Antitrust laws

– Tax programs

– Minimum wage legislation

– Pollution and pricing policies

– Administrative jawboning

4-7

7Technological Factors

• Focus on technological changes affecting industry

• Types of changes– New products

– Improvements in existing products

– Manufacturing and marketing techniques

• Role of technological forecasting– Foresees advancements and estimating their impact

– Alerts managers to impending challenges and promising opportunities

4-8

8Ecological Factors

• Involve relationships among human beings and other living things and air, soil, and water

• Current concerns– Global warming– Loss of habitat and biodiversity– Air, water, and land pollution

• Responsibilities of firms– Eliminating toxic by-products of current

manufacturing processes– Cleaning up prior environmental damage

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Firm’s External Environment

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Industry/Competitive Environment

• Michael E. Porter’s Five Forces Model the concept of industry environment as integral to strategic thought and business planning.

• The five forces shape competition in an industry. • The framework helps strategic managers link

remote factors to their effects on a firm’s operating environment.

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Competitive Forces Shape Strategy

• The essence of strategy formulation is to better cope with competition.

• Competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry.

• 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.

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The Goal of Competitive Strategy

To Achieve a Defensible Position Against the Competitive (Five) Forces that Are Constantly Working to Erode Industrywide Profitability

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Competitive Forces

Any Entity (Group or Class of Firms) that has the Potential to

Erode Profitability Among Firms within an Industry

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Government Influence on the Model

We Consider the Influence of Government as Felt through its

Role(s) as one of the Five Forces: Government can be a Potential

Entrant, Supplier, Buyer, Substitute, or Rival Firm

4-15Industry Analysis

& Competitive Analysis• An industry is a collection of firms that offer

similar products or services.

• Structural attributes are the enduring characteristics that give an industry its distinctive character.

• Concentration refers to the extent to which industry sales are dominated by only a few firms.

• Barriers to entry are the obstacles that a firm must overcome to enter an industry.

4-16 Five Forces Driving Industry Competition

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Let’s Hear from Dr. Porter

• http://www.youtube.com/watch?v=mYF2_FBCvXw&feature=results_video&playnext=1&list=PL72A65662D7647704

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Breakout Groups by Case

• 1. Define your Industry

• 2. Most Significant General Environmental Factor

• 3. Top Two More Significant of the Five Forces

You have 15 minutes!

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The Five Forces

• Threat of Entry

• Bargaining Power of Suppliers

• Bargaining Power of Buyers

• Pressure from Substitute Products

• Rivalry Among Existing Firms

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Forces Affecting Entry Decision

• Economies of Scale

• Product Differentiation

• Capital Requirements

• Cost Disadvantages Independent of Size

• Access to Distribution Channels

• Government Policy

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Powerful Suppliers

A supplier group is powerful if:• It is dominated by a few companies and

is more concentrated than the industry it sells to

• Its product is unique or at least differentiated, or if it has built-up switching costs

• It is not obliged to contend with other products for sale to the industry

• It poses a credible threat of integrating forward into the industry’s business

• The industry is not an important customer of the supplier group

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Powerful Buyers

A buyer group is powerful if: • It is concentrated or purchases in

large volumes • The products it purchases from the industry are standard• The products it purchases from the industry form a

component of its product and represent a significant fraction of its cost

• It earns low profits• The industry’s product is unimportant to the quality of the

buyers’ products or services • The industry’s product does not save the buyer money • The buyers pose a credible threat of integrating backward

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Substitute Products

• By placing a ceiling on the prices it can charge, substitute products or services limit the potential of an industry

• Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times

• Substitute products that deserve the most attention strategically are those that are

– subject to trends improving their price-performance trade-off with the industry’s product or

– produced by industries earning high profits

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Jockeying for Position

Intense rivalry occurs when: • Competitors are numerous or are roughly equal• Industry growth is slow, precipitating fights for market

share that involve expansion• The product or service lacks differentiation or switching

costs• Fixed costs are high or the product is perishable, creating

strong temptation to cut prices • Capacity normally is augmented in large increments• Exit barriers are high• Rivals are diverse in strategy, origin, and personality

4-25Direct/Operating/Task Environment

• Also called task environment

• Includes competitor positions relative to the five forces and profiling based on the following factors:

– Geographic– Demographic– Psychographic– Buyer Behavior

• Also includes suppliers & creditors and HRM

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HR: Nature of the Labor Market

Access to personnel is affected by 4 factors:

• Firm’s reputation as an employer

• Local employment rates

• Availability of people with the needed skills

• Its relationship with labor unions.

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Emphasis on Environmental Factors

• Differing external elements affect different strategies at different times and with varying strengths

• Only certainty is that the effect of the remote and operating environments will be uncertain until a strategy is implemented

• Many managers, particularly in less powerful firms, minimize long-term planning

• Instead, they allow managers to adapt to new pressures from the environment

• Absence of strong resources and psychological commitment to a proactive strategy effectively bars a firm from assuming a leadership role in its environment