Strategy: A View from the Top Chapter 3: Analyzing the External Strategic Environment
Strategic Management The External Environment ...
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Strategic Management Strategic Management The External Environment Opportunities, Threats, Competition, and Competitor Analysis By Madireddy Venkat 7/19/2016 Created by Madireddy Venkat, [email protected] 1
Transcript of Strategic Management The External Environment ...
Strategic Management
Strategic ManagementThe External EnvironmentOpportunities, Threats, Competition, and Competitor Analysis
By
Madireddy Venkat
7/19/2016Created by Madireddy Venkat, [email protected] 1
Strategic Management
Strategic Management Process
• Is the full set of commitments, decisions, andactions required for a firm to achieve strategiccompetitiveness and earn above averagereturns.
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Strategic Management
The I/O Model of Above average returns
• From the 1960s through 1990s the externalenvironment was thought to be the primarydeterminant of strategies that firms selected to besuccessful.
• The I/O Model of above average returns explainsthe external environments dominant influence on afirms strategic actions.
• The model specifies that the industry or segmentof an industry in which a company chooses tocompete has a stronger influence on performancethan do the choices managers make inside theirorganizations.
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Strategic Management
• The firms performance is believed to bedetermined primarily by a range of industryproperties, including economies of scale,barriers to market entry, diversification, productdifferentiation, and the degree of concentrationof firms in the industry.
• This module examines the tools and conceptsneeded to conduct an external strategicmanagement audit (sometimes calledenvironmental scanning or industry analysis).
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Strategic Management
Five forces Model
• The five forces model of competition is ananalytical tool used to help firms find theindustry that is the most attractive for them.
• This model suggest that an industry’sprofitability is a function of interactions amongfive forces: Suppliers, buyers, competitiverivalry among firms currently in the industry,product substitutes, and potential entrants tothe industry.
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Strategic Management
The I/O Model of Above average returns
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The External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
Superior Returns
Study the External Environment, specially
the industry environment.
Locate and industry with high potential for
above average returns
Identify the strategy called for by the
attractive industry to earn returns
Develop or acquire assets and skills needed to
implement the strategy.
Use the firms strength (its assets and skills) to
implement the strategy.
Strategic Management
The External Environment
• The firms strategic actions are influenced by the conditions in three parts:
• General Environment• Industry Environment• Competitor Environment
• The General Environment is further divided into segments:• Demographic Segment• Economic Segment• Political Segment• Socio-cultural segment• Technological Segment• Global Segment• Physical Environment segment
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Strategic Management
Industry Environment
• The industry environment is the set of factorsthat directly influences a firm and itscompetitive actions and responses: the threatof new entrants, the power of suppliers, thepower of buyers, the threat of productsubstitutes and the intensity of rivalry amongstcompetitors.
• In total the interactions among these fivefactors determine an industry’s profit potential;in turn the industry’s profit potential influencesthe choices each firm makes about its strategicaction.
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Strategic Management
Competitor Analysis
• How companies gather and interpretinformation about their competitors is calledcompetitors analysis.
• Understanding the firms competitorenvironment complements the insightsprovided by studying the general and industryenvironments.
• For example: JSW Steel needs to learn asmuch as it can about its two competitors –SAIL and Tata Steel – while also learning aboutits general and industry environments.
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Strategic Management
Industry Environment Analysis – In Detail
• Industry is a group of firms producing productsor services that are close substitutes.
• An industry’s profit potential is a function of fiveforces of competition: The threats posed bynew entrants, the power of suppliers, thepower of buyers, product substitutes and theintensity of rivalry among competitors.
• Michael Porter’s five forces model ofcompetitive analysis (or industry analysis) isthe widely used approach for developingstrategies in many industries.
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Strategic Management
• When studying industries firms must alsorecognize that suppliers can become a firmscompetitors (by integrating forward) as can buyers(by integrating backward).
• Example: Several firms have integrated forward inthe pharmaceutical industry by acquiringdistributors or wholesalers.
• We now examine five forces the firm analyses tounderstand the profitability potential within theindustry in which it competes or may choose tocompete.
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Porter’s Five Forces
• Threat of new entrants
• Bargaining Power of suppliers
• Bargaining Power of buyers
• Threat of substitute products
• Intensity of rivalry among competitors
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Strategic Management
Threat of New Entrants
• The likelihood of firms will enter an industry is afunction of two factors:
• Barriers to entry• Retaliation expected from current industry participants.
• Entry barriers make it difficult for new firms to enteran industry and place them at a competitivedisadvantage.
• Incumbents who are competing successfully wantto maintain high entry barriers in order todiscourage potential competitors form deciding toenter the industry.
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• When the threat is high, incumbents must holddown their prices or boost investment to deternew competitors.
• Example: In specialty coffee retailing, relativelylow entry barriers mean that Starbucks mustinvest aggressively in modernizing stores andmenus.
• Other examples we can think off…….
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Barriers to entry
• Entry barriers are advantages that incumbentshave relative to new entrants. There are sevenmajor sources:
1. Economies of scale.
2. Product differentiation
3. Capital requirements
4. Switching costs
5. Access to distribution channels
6. Cost disadvantages Independent of scale
7. Restrictive government policy
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Strategic Management
Economies of scale
• These are derived from incremental efficiencyimprovement through operating larger plants andsystems as firm grows larger.
• Example: Maruti and Bajaj have attainedunbeatable cost positions through their scale ofproduction.
• Reliance is an example where managementconsciously went in for very large plant sizescomparable to global companies, making it nearlyimpossible for other Indian producers to competeon costs.
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Strategic Management
Product Differentiation
• Overtime customers may come to believe that afirms product is unique.
• Example: Companies like HUL, Proctor andGamble and Infosys spend a great deal of moneyon advertising and marketing to convince potentialcustomers of their products distinctiveness and ofthe value buying their brands provides.
• Customers valuing a products uniqueness tend tobecome loyal to both the company andproducts/service.
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Strategic Management
• New entrants have often allocate manyresources to overcome existing customerloyalties.
• To combat the perception of uniqueness, newentrants frequently offer products at lowerprices.
• Example: Nirma detergent challenging HULsbrands notably Surf, and Promise brand oftoothpaste challenged the dominance ofColgate.
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Strategic Management
Capital Requirements:
• Competing in a new industry requires a firm tohave resources to invest.
• In addition to physical facilities, capital isneeded for inventories, marketing and otherbusiness functions.
• Even if industry is attractive the capital requiredfor entry may not be available.
• Example: Steel, Oil exploration, airlines areindustries that need large capital
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Strategic Management
Switching costs:
• Switching costs are the one time costscustomers incur when they buy from a differentsupplier.
• If switching costs are too high, a new entrantmust offer either a substantially lower price or amuch better product to attract buyers.
• Example: ERP is an example of a service withvery high switching costs. Once a companyhas installed SAPs ERP, for example, the costsof moving to a new vendor are astronomical.
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Strategic Management
Access to Distribution Channels:
• Over time industry participants developeffective means of distributing products.
• Once a relationship with its distributors hasbeen built, a firm will nurture it, this creatingswitching costs for the distributors.
• Access to distribution channels can be a strongentry barrier for new entrants, particularly inconsumer nondurable goods.
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Cost disadvantages Independent of scale:
• Sometimes established companies have costadvantages that new entrants cannot duplicate.
• Example: Favorable access to raw materials,desirable location.
• New entrants have to reduce the strategicrelevance of these factors.
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Government Policy:
• Through licensing and permit requirements,governments can also control entry into anindustry.
• Liquor retailing, radio and TV broadcasting areexamples of industries in which governmentactions affect entry possibilities.
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Expected Retaliation:
• Companies seeking to enter an industry alsoanticipate the reactions of firms in the industry.
• Vigorous retaliation can be expected when theexisting firm has major stake in the industry,when it has substantial resources, and whenindustry growth is slow or constrained.
• Example: Any firm entering the Airline orMobile phone industry at the current time canexpect significant retaliation.
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Strategic Management
2. Bargaining Power of Suppliers
• Increasing prices and reducing the quality of their productsare potential means suppliers use to exert power over firmscompeting within an industry.
A supplier group is powerful when:
• Satisfactory substitute products are not available.
• Suppliers goods are critical to buyers marketplace success.
• It poses a credible threat to integrate forward into the buyersindustry.
• It is dominated by few large companies and is moreconcentrated than the industry to which it sells.
• Example: In steel industry, firms that do not have captivemining facilities such as JSW steel, are at the mercy ofmining companies that supply iron ore.
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3. Bargaining Power of Buyers
• Buyers want to buy products at the lowest possibleprice – the price at which the industry earns the lowestacceptable rate of return on the invested capital.
Customers are powerful when:
• They purchase large portion of an industry’s totaloutput.
• The sale of the product being purchased account forsignificant portion of the sellers annual revenues.
• The industry products are undifferentiated orstandardized, and the buyers pose a credible threat ifthey were to integrate backward into the sellersindustry.
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Strategic Management
4. Threat of substitute products
• Substitute products are goods or services fromoutside a given industry that perform similar orthe same functions as a product that theindustry produces.
• Newspaper firms have experienced significantdecline in circulation over the past decade ormore.
• The declines are due to substitute outlets fornew including Internet sources, cable televisionnews channels, and email and cell phonealerts.
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5. Intensity of Rivalry Among Competitors
• Because an industry’s firms are mutuallydependent, actions taken by one companyusually invite competitive responses.
• Firms within industries are rarelyhomogeneous, they differ in resources andcapabilities and seek to differentiatethemselves from competitors.
• Common dimensions on which rivalry is basedinclude price, service after the sale, andinnovation.
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Strategic Management
• The most prominent factors that, according to experience, affect the intensity of firms rivalries are discussed here, they are:
• Numerous or Equally Balanced competitors
• Slow Industry Growth
• High Fixed Costs or High Storage costs
• Lack of Differentiation or Low Switching Costs.
• High Strategic Stakes
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• Numerous or Equally Balanced Competitors
• With multiple competitors, it is common for a fewfirms to believe they can act without eliciting aresponse.
• However evidence suggests that other firmsgenerally aware of competitors actions, oftenchoosing to respond to them.
• At other extreme industries with only a few firms ofequivalent size and power also tend to have strongrivalries.
• Example: Competitive battle between Pepsi andCoca-coal exemplify intense rivalry betweenrelatively equal competitors.
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Slow Industry Growth
• Growing markets reduce pressure to takecustomers from competitors.
• However, rivalry in no-growth or slow-growthmarkets becomes more intense as firms battle toincrease their market share by attractingcompetitors customers.
• Typically battles to protect market share are fierce
• Example: In the case of airline and the soft drinksindustry companies try to win each otherscustomers.
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High Fixed Costs or High Storage Costs
• When companies have high fixed costs theytend to maximize their productive capacity andthereby spread costs across large volume ofoutput.
• When firms do this excess capacity is created,and to then reduce inventories companiestypically try to cut the price of product and offerdiscounts to customers.
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Strategic Management
Lack of Differentiation or Low Switching Costs
• When buyers find a differentiated product that satisfiestheir needs, they frequently purchase the productloyalty over time.
• Industries with competitors that have differentiatedproducts have less rivalry, which results in lowercompetition.
• When buyers view products or services ascommodities, rivalry intensifies.
• In this instance buyers purchasing decisions are basedo price.
• Example: Rivalry between Dell and HP is strong andthese companies are always trying to differentiate theirofferings.
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High Strategic Stakes:
• Competitive rivalry is likely to be high when it isimportant for several of the competitors to performwell in the market.
• Example: Although diversified and is a marketleader in other businesses, Samsung has targetedmarket leadership in the consumer electronicsmarket and is doing well.
• This market is quite important to Sony and othermajor competitors, such as Hitachi, NEC andMitsubishi, suggesting that rivalry among thesecompanies will remains strong.
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High Exit Barriers:
• Sometimes companies continue competing in anindustry even though the returns on their investedcapital are low or negative.
• Firms making this choice in all likelihood face high exitbarriers, which include economic, strategic andemotional factors causing them to remain in anindustry when the profitability of doing so isquestionable.
• Example: Exit barriers are especially high in the airlineindustry.
• Due to government regulations on closing down firms,exit barriers are high in all industries in India.
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Interpreting Industry Analysis
• The stronger the competitive forces are, thelower the profit potential for an industry’s firm.
• An unattractive industry has low entry barriers,supplier and buyers with strong bargainingpositions, strong competitive threats fromproduct substitutes, and intense rivalry amongcompetitors.
• An attractive industry has high entry barriers,suppliers and buyers with little bargainingpower, few competitive threats from productsubstitutes, and relatively moderate rivalry.
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Competitor Analysis
• Competitor analysis focuses on each companyagainst which a firm directly competes.
• Example: Airtel, Vodafone, Reliance and BSNL
• Example: Coca-cola and Pepsi
• Example DHL and Fedex
• All the above companies are keenly interestedin understanding their competitors objectives,strategies, assumptions and capabilities.
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In a competitor analysis, the firm seeks tounderstand the following:
• What drives the competitor, as shown by itfuture objectives.
• What the competitor is doing and can do, asrevealed by its current strategy.
• What the competitor believes about theindustry, as shown by its assumptions.
• What the competitors capabilities are, asshown by it strengths and weaknesses
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Competitor Intelligence:
• Useful data and information combine to formCompetitor Intelligence: the set of data andinformation the firm gathers to betterunderstand and better anticipate competitorsobjectives, strategies, assumptions andcapabilities.
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Competitor Analysis Components
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Future ObjectivesHow do our goals compare with our competitors goals?
Where will emphasis be placed in the future?
What is the attitude toward risk?
Current StrategyHow are we currently competing?
Does their strategy support changes in the competitive
structure?
AssumptionsDo 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?
CapabilitiesWhat are our strengths and weaknesses?
How do we rate compared to our competitors?
ResponseWhat 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?
Strategic Management
Complementor's:
• When gathering competitive intelligence, firms mustalso pay attention to the complementor's of its productsand strategy.
• Complementor's are companies or network ofcompanies that sell complementary goods or servicesthat are compatible with the firms goods or service.
• Example: Intel and Microsoft are the widely recognizedcomplimentors (Microsoft slogan “Intel inside”)
• Example: Alliances among airline operator’s (Ex: StarAlliance and SkyTeam Alliance) find these companiessharing their route structures and customer loyaltyprograms as a means of complementing each other’soperations.
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![Chapter [3] Strategic Analysis The analysis of company’s external environment and internal situation is called Strategic Analysis. Issues to be considered.](https://static.fdocuments.us/doc/165x107/56649d925503460f94a78b67/chapter-3-strategic-analysis-the-analysis-of-companys-external-environment.jpg)
