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Environmental AnalysisEnvironmental Analysis

TopicsTopicsPurpose of General Environmental Analysis

Gathering Information

General Environment

Competitive Environment

◦ Key Success Factors

◦ Competitive Changes During Industry Evolution

◦ Strategic Groups

◦ National Competitive Advantage

Internal Environment

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Purpose of General Environmental Purpose of General Environmental AnalysisAnalysis

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 Gathering Information for External Environmental AnalysisExternal 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:1. Scanning: general surveillance of environmental

changes; looking for early signals of changes

2. Monitoring: close attention to specific developments that could affect the organization

3. Competitive Intelligence: following actions of competitors

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Sources of Environmental DataSources of Environmental Data Internal sources may also be a good source of data on customer needs,

attitudes, and behavior. The organization's own records are the best source of data on current objectives, performance, and available resources.

The sheer volume of available information on the economy, our population, and business activities is the major strength of most government data sources.

The articles and research reports that are available in periodicals and books provide a gamut of information about many organizations, industries, and nations.

Commercial sources are almost always relevant to a specific issue because they deal with the actual behaviors of customers in the marketplace.

The best approach to secondary data collection is one that blends data and information from a variety of sources.

If needed secondary data is not available, out of date, inaccurate or unreliable, or irrelevant to the specific problem at hand, the manager may have little choice but to collect primary data through marketing research.

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Overcoming Problems with Data Overcoming Problems with Data CollectionCollection

One of the most common problems is an incomplete or inaccurate assessment of the situation for which data is being gathered to address.

Another common difficulty is the expense of collecting environmental data.

A third issue is the time it takes to collect environmental data.

A final challenge is finding a way to organize the vast amount of data and information that are collected during the environmental analysis.

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Three Areas for AnalysisThree Areas for Analysis

1. General Environment2. Competitive Environment3. Internal Environment

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General & Competitive EnvironmentsGeneral & Competitive EnvironmentsGeneral 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

Macoreconomic8

GENERAL EnvironmentGENERAL EnvironmentDEMOGRAPHICSDEMOGRAPHICSCharacteristics 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 EnvironmentGeneral EnvironmentPOLITICAL/LEGALPOLITICAL/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 EnvironmentGeneral EnvironmentTECHNOLOGICALTECHNOLOGICALTechnological developments relevant to a

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

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General EnvironmentGeneral EnvironmentMACROECONOMICMACROECONOMIC

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 EnvironmentGeneral EnvironmentSOCIOCULTURALSOCIOCULTURALInfluence 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 EnvironmentGeneral EnvironmentGLOBALGLOBALInternational 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 EnvironmentCOMPETITIVE Environment

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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Porter’s Five Forces Model of Porter’s Five Forces Model of CompetitionCompetition

Substitute Products(of firms in

other industries)

Suppliers of Key Inputs

Buyers

PotentialNew

Entrants

RivalryAmong

CompetingSellers

Threat of New EntrantsThreat 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 PowerSupplier 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 SubstitutesThreat 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 PowerBuyer 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 RivalryCompetitive 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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Four Basic Types of CompetitionFour Basic Types of Competition

1. Brand Competitors: market products that are similar in features and benefits to the same customers at similar prices

2. Product Competitors: compete in the same product class, but with products that are different in features, benefits, and price

3. Generic Competitors: market very different products that solve the same problem or satisfy the same basic need

4. Total Budget Competitors: compete for the limited financial resources of the same customers

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The 6-W ModelThe 6-W Model1. Who are our current and potential customers?

2. What do our customers do with our products?

3. Where do our customers purchase our products?

4. When do our customers purchase our products?

5. Why (and how) do our customers select our products?

6. Why do potential customers not purchase our products?

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Key Success FactorsKey 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

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Examples of Key Success Factors Examples of Key Success Factors in Selected Industriesin Selected Industries

Pharmaceuticals◦research and personal selling

Beer◦advertising and distribution

Restaurant◦quality food and service

Retailer◦location and priced-for-quality

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Changes in Competition During Changes in Competition During Industry’s EvolutionIndustry’s Evolution

Over time as an industry evolves, the nature and basis of competition changes

Five Stages◦Embryonic—introduction of product◦Growth◦Shakeout◦Mature◦Declining

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Stages of Industry Life CycleStages of Industry Life Cycle

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Dem

and

Time

Embryonic

Growth

ShakeoutMature Declining

Requirements in Each Stage of Requirements in Each Stage of Industry’s EvolutionIndustry’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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Strategic Implications of theStrategic Implications of theFive Competitive ForcesFive 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 theStrategic Implications of theFive Competitive ForcesFive 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

Strategic GroupsStrategic GroupsCompanies do not compete against all

companies in an industryCompanies compete against several other

companies that follow similar strategiesA 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 aProcedure for Constructing aStrategic Group MapStrategic 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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Example: Strategic Group Map of Example: Strategic Group Map of the Video Game Industrythe 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

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Nation-State and Competitive Nation-State and Competitive AdvantageAdvantage

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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Determinants of National Determinants of National Competitive AdvantageCompetitive Advantage

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Strategy,Structure &

Rivalry

FactorEndowments

DemandConditions

Related andSupporting Industries

National Competitive Advantage

Strategy, Structures and RivalryStrategy, 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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Demand ConditionsDemand ConditionsLarge growing markets provide foundation

for global competitionMore 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 Related and Supporting IndustriesIndustriesProvide 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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Factor EndowmentsFactor 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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Conclusions About Conclusions About Determinants of National Determinants of National Competitive AdvantageCompetitive AdvantageFirms 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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INTERNAL ANALYSISINTERNAL ANALYSISHow can we assess the resource capabilities?

◦Resource Based View

Each firm has three basic kinds of Resources Tangible assets

◦ Ford’s Cash Reserves◦ 3M’s Patents◦ Georgia Pacific Land holdings◦ Coca Cola’s formula

Intangible assets◦ Nike - Brand Name◦ Dell – Reputation◦ GE- Welch’s Leadership

Organizational capabilities◦ Dell’s Customer Service◦ Sony’s Product Development◦ 3M’s Innovation

How resources become valuableHow resources become valuableCompetitively Superior

◦ Walmart’s Logistics – Allowed better pricingResource Scarcity

◦ OPEC’s Oil Reserves – Finite oil reservesAppropriability

◦ Who profits from a resource? “Mickey Mouse does not have an agent”

Inimitability◦ Priceline’s pricing for air tickets◦ Wendy’s Drive Through

Path dependency - Steinway with Pianos Causal ambiguity – South West Airlines Economic Deterrence

Durability◦ How long will the competitive advantage last?

Patentable products – longer durability

Value Chain AnalysisValue Chain AnalysisDisaggregates a business into sets of activities

◦ Primary Activities – Inbound logistics --- Operations ----Outbound logistics ---- marketing and Sales and service

◦ Support activities – General Administration, HRM, R&D, Systems Development

How to do a VCA◦ Identify key activities◦ Allocate costs to each activity◦ Identify the activities that differentiate the firm◦ Examine the Value Chain

Different activities may be important – industry and strategy Importance of activities can vary based on a company

position in a larger scheme of activities

Making meaningful comparisonsMaking meaningful comparisons

Comparison with past performance◦Trend analysis – Where are you relative to the

past.◦Stages of Industry Evolution

Emergence, Growth, Maturity and Decline Strengths or competencies needed at each stage are

different

◦Benchmarking with the competitors Key competitors Best practices irrespective of industry