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The External Environment: Opportunities, Threats,
Industry Competition and Competitor Analysis
Chapter Three
© 2006 by Nelson, a division of Thomson Canada Limited. 3-2
Chapter 5Bus. - Level
Strategy
Chapter 6Competitive
Dynamics
Chapter 7Corp. - Level
Strategy
Chapter 9International
Strategy
Chapter 10CooperativeStrategies
Chapter 8Acquisitions &Restructuring
Chapter 11
CorporateGovernance
Chapter 12Structure& Control
Chapter 13Strategic
Leadership
Chapter 14Entrepreneurship & Innovation
Str
ateg
icIn
pu
ts
Str
ateg
icA
ctio
ns
Str
ateg
ic O
utc
om
esChapter 4Internal
Environment
Chapter 3External
Environment Strat. Intent
Strat. Mission
The Strategic .
Management .
Process
Strategy Formulation Strategy Implementation
Strategic Competitiveness
Chapter 1 FeedbackFeedback
Above Average Returns
Chapter 2Above Average
Returns
Chapter 2
Chapter 3External
Environment
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The External Environment: Opportunities, Threats, Industry Competition and Competitor
Analysis
Knowledge Objectives1. Explain the importance of analyzing and
understanding the firm’s external environment.2. Defining and describing the general
environment and the industry environment.3. Discuss the four activities of the external
environmental analysis process.4. Name and describe the general environment’s
six segments.
© 2006 by Nelson, a division of Thomson Canada Limited. 3-4
The External Environment: Opportunities, Threats, Industry Competition and Competitor
Analysis
Knowledge Objectives – continued…
5. Identifying five competitive forces and how they determine an industry’s profit potential.6. Define strategic groups and their influence on
the firm.7. Describe what firms need to know about their
competitors and different methods used to collect intelligence about them.
© 2006 by Nelson, a division of Thomson Canada Limited. 3-5
General
Environment
General
Environment
General
Environm
ent
SocioculturalSociocultural
GlobalGlobal
TechnologicalTechnologicalPolitical/Legal
Political/Legal
Demographic
Demographic E
conomic
Econom
ic
The External Environment
IndustryIndustryEnvironmentEnvironment
Threat of new entrantsThreat of new entrantsPower of suppliersPower of suppliersPower of buyersPower of buyers
Product substitutesProduct substitutesIntensity of rivalryIntensity of rivalry
CompetitorCompetitorEnvironmentEnvironment
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General Environment Components
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General Environment Components
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The Industry Environment
The set of factors that directly influences a firm, it’s competitive actions & competitive responses:
1. The threat of new entrants
2. The power of suppliers
3. The power of buyers
4. The threat of product substitutes
5. The intensity of rivalry among competitors
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Competitor Analysis
Predicting the dynamics of competitor actions, responses and intentions.
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The I/O Model of Superior Returns
The Industrial Organization Model suggests that above-average returns for any firm are largely determined by characteristics outside the firm.
The I/O model largely focuses on industry attractiveness or structure of the external environment rather than internal characteristics of the firm. IOIO
© 2006 by Nelson, a division of Thomson Canada Limited. 3-11
The I/O Model of Superior Returns
External Environment
Competitive Environment
General Environment
Industry Environment
an *
Action required:
Study the external environment, especially the industry environment.
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The I/O Model of Superior ReturnsAction required:Action required:Locate an industry with high potential for above-average returns.
External Environment
General Environment
Competitive Environment
Industry Environment
An Attractive Industry
An industry whose structural characteristics suggest above-average returns are possible
an *
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The I/O Model of Superior Returns
External Environment
General Environment
Competitive Environment
Industry Environment
An Attractive Industry
An industry whose structural characteristics suggest above-average returns are possible
Action required:Action required:I.d. strategy called for by the industry to earn above-average returns.
Selection of a strategy linked with above-average returns in a particular industry
StrategyFormulation
an *
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The I/O Model of Superior Returns
External Environment
General Environment
Competitive Environment
Industry Environment
Action required:Action required:Develop / acquire assets and skills needed to implement the strategy.An Attractive
Industry
An industry whose structural characteristics suggest above-average returns are possible
Selection of a strategy linked with above-average returns in a particular industry
StrategyFormulationAssets and Skills
Assets and skills required to implement a chosen strategy
an *
© 2006 by Nelson, a division of Thomson Canada Limited. 3-15
The I/O Model of Superior Returns
External Environment
General Environment
Competitive Environment
Industry Environment
An Attractive Industry
An industry whose structural characteristics suggest above-average returns are possible
Selection of a strategy linked with above-average returns in a particular industry
StrategyFormulationAssets and Skills
Assets and skills required to implement a chosen strategy
Action required:Action required:Use the firm’s strengths (its assets or skills) to implement the strategy.
Strategy Implementation
Selecting strategic actions linked with effective implementation of the chosen strategy
an *
© 2006 by Nelson, a division of Thomson Canada Limited. 3-16
The I/O Model of Superior Returns
External Environment
General Environment
Competitive Environment
Industry Environment
An Attractive Industry
An industry whose structural characteristics suggest above-average returns are possible
Selection of a strategy linked with above-average returns in a particular industry
StrategyFormulationAssets and Skills
Assets and skills required to implement a chosen strategy
Strategy Implementation
Selecting strategic actions linked with effective implementation of the chosen strategy
Action required:Action required:Maintain selected strategy in order to out-perform industry rivals.
Superior ReturnsEarning of above-average returns
an *
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The external environmental analysis process should be conducted on a continuous basis.
This process includes four activities:
Scanning Identifying early signals of environmental changes and trends
Monitoring Detect meaning by ongoing observations of
environmental changes and trends
Forecasting Developing projections of anticipated outcomes based on monitored changes and trends
Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management
External Environmental Analysis
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Porter’s 5 Forces Model of Competition
The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved.
Threat of New Entrants
Threat of New
Entrants
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Product Differentiation** Capital Requirements**
Switching Costs**Access to Distribution Channels**
Cost Disadvantages Independent of Scale** Government Policy**
Expected Retaliation**
Economies of Scale**Barriers to Entry
Barriers to Entry
Threat of New Entrants
*
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Threat of New
Entrants
Threat of New
Entrants
Porter’s 5 Forces Model of Competition
Bargaining Power of Suppliers
*
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** Supplier industry is dominated by a few firms.
** Buyer is not an important customer to supplier.
** Suppliers’ product is an important input to buyers’ product.
** Suppliers’ products are differentiated.
Suppliers are likely to be powerful if:
** Suppliers’ products have high switching costs.
** Supplier poses credible threat of forward integration.
Suppliers exert power in the industry by:
** Threatening to raise prices or to reduce quality
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Suppliers’ products have few substitutes.
**
Bargaining Power of Suppliers
*
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Threat of New
Entrants
Threat of New
Entrants
Bargaining Power of Suppliers
Porter’s 5 Forces Model of Competition
Bargaining Power of Buyers
*
© 2006 by Nelson, a division of Thomson Canada Limited. 3-23
** Playing firms off ofeach other
Buyers compete with supplying
industry by:
** Bargaining down prices
** Forcing higher quality
Buyer groups are likely to be powerful if:
** Buyers are concentrated or purchases are large relative to seller’s sales
** Purchase accounts for a significant fraction of supplier’s sales
** Products are undifferentiated
** Buyers face few switching costs
** Buyers’ industry earns low profits
** Buyer presents a credible threat of backward integration
** Product unimportant to quality
** Buyer has full information
Bargaining Power of Buyers
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Threat of Substitute Products
Porter’s 5 Forces Model of Competition
Threat of New
Entrants
Threat of New
Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
*
© 2006 by Nelson, a division of Thomson Canada Limited. 3-25
Products with similar function limit the prices firms can charge
** Products with improving price / performance tradeoffs relative to present industry products
Keys to evaluating substitute products:
For Example:For Example:
Electronic security systems in place of security guards
Fax machines or e-mailed attachments in place of overnight mail delivery
Threat of Substitute Products
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Threat of New
Entrants
Threat of Substitute Products
Threat of New
Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Porter’s 5 Forces Model of Competition
Rivalry Among Competing Firms in Industry
*
© 2006 by Nelson, a division of Thomson Canada Limited. 3-27
Occurs when a firm is pressured or sees an opportunity
** Price competition often leaves entire industry worse off
Intense rivalry often plays out in the following ways
Jockeying for strategic position**Using price competition**Staging advertising battles**Increasing consumer warranties or service**Making new product introductions**
Advertising battles may increase total industry demand, but may be costly to smaller competitors
**
Rivalry Among Existing Competitors
© 2006 by Nelson, a division of Thomson Canada Limited. 3-28
Cutthroat competition is more likely to occur when
** Numerous or equally balanced competitors
** Slow growth industry
** High fixed costs
** Lack of differentiation or switching costs** High storage costs
** Capacity added in large increments
** High strategic stakes
**High exit barriers
** Diverse competitors
Rivalry Among Existing Competitors
© 2006 by Nelson, a division of Thomson Canada Limited. 3-29
** Specialized assets
High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.
Fixed cost of exit (e.g., labour agreements)**Strategic interrelationships**Emotional barriers**Government and social restrictions**
Rivalry Among Existing Competitors
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Strategic Groups
A set of firms emphasizing similar strategic dimensions to use a similar strategy
© 2006 by Nelson, a division of Thomson Canada Limited. 3-31
Strategic Groups
1. The more intense the rivalry of competitors within a group the greater the threat to each firms profitability.
2. The strengths of the 5 competitive forces differ across strategic groups. Thus firms within various strategic groups have different pricing policies.
3. The closer groups are in terms of their strategies & dimensions emphasized, the greater the chance competitive rivalry between groups.
© 2006 by Nelson, a division of Thomson Canada Limited. 3-32
Competitor Environment
Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities.
• What drives the competitor as shown by its future objectives,
• What the competitor is doing and can do as revealed What the competitor is doing and can do as revealed by its by its current strategy,
• What the competitor believes about itself and the industry, as shown by its assumptions,
• What the the competitor may be able to do, as shown What the the competitor may be able to do, as shown by its by its capabilities.
© 2006 by Nelson, a division of Thomson Canada Limited. 3-33
Competitor Analysis
Future Objectives:Future objectivesFuture objectives • How do our goals compare
with our competitors’ goals?
• Where will the emphasis be placed in the future?
• What is the attitude toward risk?
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Competitor Analysis
Current strategyCurrent strategy
Current Strategy:Future objectivesFuture objectives
• How are we currently competing?
• Does this strategy support changes in the competitive structure?
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Competitor Analysis
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectivesAssumptions:• Do 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?
© 2006 by Nelson, a division of Thomson Canada Limited. 3-36
Competitor Analysis
CapabilitiesCapabilities
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectivesCapabilities:• What are our strengths and
weaknesses?
• How do we rate compared to our competitors?
© 2006 by Nelson, a division of Thomson Canada Limited. 3-37
Competitor Analysis
CapabilitiesCapabilities
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectives ResponseResponse
Response:• What 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?
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