Chapter 2 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

Chapter 2 The External Environment:Opportunities, Threats, Industry Competition, and Competitor AnalysisMichael A. HittR. Duane IrelandRobert E. Hoskisson©2000 South-Western College PublishingThe StrategicManagementProcessChapter 3InternalEnvironmentChapter 2ExternalEnvironmentStrategic IntentStrategic MissionStrategy FormulationStrategy ImplementationChapter 4Business-LevelStrategyChapter 5CompetitiveDynamicsChapter 6Corporate-LevelStrategyChapter 8InternationalStrategyChapter 9CooperativeStrategiesChapter 7Acquisitions &RestructuringChapter 10CorporateGovernanceChapter 11Structure& ControlChapter 12StrategicLeadershipChapter 13Entrepreneurship & InnovationStrategicInputsFeedbackStrategicOutcomesStrategicActionsStrategicCompetitivenessAbove AverageReturnsPolitical/LegalEconomicTechnologicalGlobalDemographicSocioculturalCompetitiveEnvironmentIndustry EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentExternal Environmental AnalysisThe external environmental analysis process should be conducted on a continuous basis. This process includes four activities:ScanningMonitoringForecastingAssessingIdentifying early signals of environmental changes and trendsDetecting meaning through ongoing observations of environmental changes and trendsDeveloping projections of anticipated outcomes based on monitored changes and trendsDetermining the timing and importance of environmental changes and trends for firms' strategies and their managementTop 10 U.S. States MovingToward Digital EconomyStates in the top 10 of those that are trying to transform themselves to the realities and needs of a digital economy may experience an influx of high-tech companies and skilled workers as well as increases in tax revenuesExternal Environmental AnalysisThreat of New EntrantsThreat of New EntrantsPorter’s Five Forces Model of CompetitionThreat of New EntrantsBarriers to EntryExpected RetaliationGovernment PolicyEconomies of ScaleProduct DifferentiationCapital RequirementsSwitching CostsAccess to Distribution ChannelsCost Disadvantages Independent of ScaleBargaining Power of SuppliersThreat of New EntrantsThreat of New EntrantsPorter’s Five Forces Model of CompetitionBargaining Power of SuppliersSuppliers exert power in the industry by:* Threatening to raiseprices or to reduce qualityPowerful suppliers can squeeze industry profitability if firms are unable to recover cost increasesSuppliers are likely to be powerful if:Supplier industry is dominated by a few firmsSuppliers’ products have few substitutesBuyer is not an important customer to supplierSuppliers’ product is an important input to buyers’ productSuppliers’ products are differentiatedSuppliers’ products have high switching costsSupplier poses credible threat of forward integrationBargaining Power of BuyersThreat of New EntrantsThreat of New EntrantsBargaining Power of SuppliersPorter’s Five Forces Model of CompetitionBargaining Power of BuyersBuyers compete with the supplying industry by:* Bargaining down prices* Forcing higher quality* Playing firms off ofeach otherBuyer groups are likely to be powerful if:Buyers are concentrated or purchases are large relative to seller’s salesPurchase accounts for a significant fraction of supplier’s salesProducts are undifferentiatedBuyers face few switching costsBuyers’ industry earns low profitsBuyer presents a credible threat of backward integrationProduct unimportant to qualityBuyer has full informationThreat of Substitute ProductsThreat of New EntrantsThreat of New EntrantsBargaining Power of BuyersBargaining Power of SuppliersPorter’s Five Forces Model of CompetitionThreat of Substitute ProductsProducts with similar function limit the prices firms can chargeKeys to evaluate substitute products:Products with improving price/performance tradeoffs relative to present industry productsExample:Electronic security systems in place of security guardsFax machines in place of overnight mail deliveryThreat of Substitute ProductsThreat of New EntrantsThreat of New EntrantsRivalry Among Competing Firms in IndustryBargaining Power of BuyersBargaining Power of SuppliersPorter’s Five Forces Model of CompetitionRivalry Among Existing CompetitorsIntense rivalry often plays out in the following ways:Jockeying for strategic positionUsing price competitionStaging advertising battlesMaking new product introductionsIncreasing consumer warranties or serviceOccurs when a firm is pressured or sees an opportunityPrice competition often leaves the entire industry worse offAdvertising battles may increase total industry demand, but may be costly to smaller competitorsCutthroat competition is more likely to occur when:Rivalry Among Existing CompetitorsNumerous or equally balanced competitorsSlow growth industryHigh fixed costsLack of differentiation or switching costsHigh storage costsCapacity added in large incrementsHigh strategic stakesHigh exit barriersDiverse competitorsHigh exit barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.Specialized assetsFixed cost of exit (e.g., labor agreements)Emotional barriersGovernment and social restrictionsStrategic interrelationshipsRivalry Among Existing CompetitorsEffects of Entry Barriers and Exit Barriers on Industry ProfitsEntry BarriersExit BarriersHighLowHighLowLow, Stable ReturnsEntry BarriersExit BarriersHighLowHighLowEffects of Entry Barriers and Exit Barriers on Industry ProfitsHigh, Stable ReturnsEntry BarriersExit BarriersHighLowHighLowLow, Stable ReturnsEffects of Entry Barriers and Exit Barriers on Industry ProfitsLow, Risky ReturnsEntry BarriersExit BarriersHighLowHighLowLow, Stable ReturnsHigh, Stable ReturnsEffects of Entry Barriers and Exit Barriers on Industry ProfitsHigh, Risky ReturnsEntry BarriersExit BarriersHighLowHighLowLow, Stable ReturnsHigh, Stable ReturnsLow, Risky ReturnsEffects of Entry Barriers and Exit Barriers on Industry ProfitsCompetitor AnalysisThe follow-up to Industry Analysis is effective analysis of a firm’s CompetitorsCompetitiveEnvironmentIndustry EnvironmentCompetitor AnalysisAssumptionsWhat assumptions do our competitors hold about the future of industry and themselves?Current StrategyDoes our current strategy support changes in the competitive environment?Future ObjectivesHow do our goals compare to our competitors’ goals?CapabilitiesHow do our capabilities compare to our competitors?ResponseWhat will our competitors do in the future?Where do we have a competitive advantage?How will this change our relationship with our competition?Future ObjectivesHow do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?What is the attitude toward risk?What Drives the competitor?Competitor AnalysisWhat is the competitor doing?What can the competitor do?Future ObjectivesHow do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?What is the attitude toward risk?Current StrategyHow are we currently competing?Does this strategy support changes in the competitive structure?Competitor AnalysisWhat does the competitor believe about itself and the industry?Future ObjectivesHow do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?What is the attitude toward risk?Current StrategyHow are we currently competing?Does this strategy support changes in the competition structure?Do we assume the future will be volatile?Are we assuming stable competitive conditions?What assumptions do our competitors hold about the industry and themselves?AssumptionsCompetitor AnalysisWhat are the competitor’s capabilities?Future ObjectivesHow do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?What is the attitude toward risk?Current StrategyHow are we currently competing?Does this strategy support changes in the competition structure?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?AssumptionsWhat are my competitors’ strengths and weaknesses?How do our capabilities compare to our competitors?CapabilitiesCompetitor AnalysisFuture ObjectivesHow do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?What is the attitude toward risk?Current StrategyHow are we currently competing?Does this strategy support changes in the competition structure?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?AssumptionsResponseWhat will our competitors do in the future?Where do we have a competitive advantage?How will this change our relationship with our competition?CapabilitiesWhat are my competitors’ strengths and weaknesses?How do our capabilities compare to our competitors?Competitor Analysis