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strategic management
3rd edition
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  • 1. The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis Chapter Three© 2006 by Nelson, a division of Thomson Canada 3-1
  • 2. Chapter 3 External The Strategic . Inputs Environment Strat. Intent Strategic Chapter 4 Strat. Mission Management . Internal Environment Process Strategy Formulation Strategy Implementation Chapter 5 Chapter 6 Chapter 7 Chapter 11 Chapter 12 Bus. - Level Competitive Corp. - Level Corporate Structure StrategyStrategic Dynamics Strategy Governance & Control Chapter 8 Chapter 9 Chapter 10 Chapter 13 Chapter 14 Acquisitions & International Cooperative Strategic Entrepreneurship Restructuring Strategy Strategies Leadership & Innovation Outcomes Strategic Chapter 2 Chapter 1 Feedback Above Average Strategic Returns Competitiveness © 2006 by Nelson, a division of Thomson Canada 3-2
  • 3. The External Environment: Opportunities,Threats, Industry Competition and Competitor AnalysisKnowledge 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 3-3
  • 4. The External Environment: Opportunities,Threats, Industry Competition and Competitor AnalysisKnowledge 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 3-4
  • 5. The External Environment Environment Sociocultural ral Ge ne Industry ner Demographic Environment Ge Economic a Threat of new entrants l Power of suppliers Power of buyers Product substitutes Intensity of rivalry ntEn Competitor me Global Political/Legal vir Environment on on vir me En nt Technological General © 2006 by Nelson, a division of Thomson Canada 3-5
  • 6. General Environment Components © 2006 by Nelson, a division of Thomson Canada 3-6
  • 7. General Environment Components © 2006 by Nelson, a division of Thomson Canada 3-7
  • 8. The Industry EnvironmentThe set of factors that directly influences a firm, it’s competitive actions & competitive responses:1. The threat of new entrants2. The power of suppliers3. The power of buyers4. The threat of product substitutes5. The intensity of rivalry among competitors © 2006 by Nelson, a division of Thomson Canada 3-8
  • 9. Competitor Analysis Predicting the dynamics of competitor actions, responses and intentions. © 2006 by Nelson, a division of Thomson Canada 3-9
  • 10. 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. I O The I/O model largely focuses on industry attractiveness or structure of the external environment rather than internal characteristics of the firm. © 2006 by Nelson, a division of Thomson Canada 3-10
  • 11. The I/O Model of Superior Returns Action required: Study the externalExternal environment,Environment especially the General Environment industry environment. Industry Environment Competitive Environment © 2006 by Nelson, a division of Thomson Canada 3-11 * an
  • 12. The I/O Model of Superior Returns Action required: Locate an industry withExternal An Attractive high potential forEnvironment Industry above-average returns. General Environment Industry Environment An industry whose Competitive characteristics structural Environment above-average suggest returns are possible © 2006 by Nelson, a division of Thomson Canada 3-12 * an
  • 13. The I/O Model of Superior Returns Action required: I.d. strategy called forExternal by the industry to earnEnvironment An Attractive above-average returns. Industry General Environment Strategy Industry industry whose An Environment Formulation Competitive Selection of a strategy structural characteristics Environment above-average suggest linked with above- returns are possible average returns in a particular industry © 2006 by Nelson, a division of Thomson Canada 3-13 * an
  • 14. The I/O Model of Superior Returns Action required: Develop / acquire assetsExternal and skills needed toEnvironment An Attractive implement the strategy. Industry Strategy General Environment Industry industry whose An Environment Formulation and Skills Assets Competitive structural characteristicsstrategy Selection of a Environment above-average suggest linked with above- skills Assets and returns areaverage returns into possiblerequired a particular industry a chosen implement strategy © 2006 by Nelson, a division of Thomson Canada 3-14 * an
  • 15. The I/O Model of Superior Returns Action required: Use the firm’s strengthsExternal (its assets or skills) toEnvironment An Attractive implement the strategy. Industry Strategy General Environment Industry Environment Formulation An industry whose Assets and Skills Competitive structural characteristicsstrategy Selection of a Environment above-average Strategy suggest linked with above- skills Assets and possiblerequired Implementation returns areaverage returns into a particular industry a chosen implementSelecting strategic actions strategylinked with effective implementation of the chosen strategy © 2006 by Nelson, a division of Thomson Canada 3-15 * an
  • 16. The I/O Model of Superior Returns Action required: Maintain selectedExternal strategy in order to out-Environment An Attractive perform industry rivals. Industry Strategy General Environment Industry industry whose An Environment Formulation and Skills Assets Competitive structural characteristicsstrategy Selection of a Environment above-average Strategy suggest linked with above- skills Assets and possiblerequired Implementation returns areaverage returns into a Superior particular industry a chosen implement Returns Selecting strategic actions strategylinked withEarning of above- effective implementation of the average returns chosen strategy © 2006 by Nelson, a division of Thomson Canada 3-16 * an
  • 17. External Environmental AnalysisThe external environmental analysis processshould 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 © 2006 by Nelson, a division of Thomson Canada 3-17
  • 18. Porter’s 5 Forces Model of Competition Threat Threat of ofNew New Entrants Entrants The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved. © 2006 by Nelson, a division of Thomson Canada 3-18
  • 19. Threat of New Entrants Economies of Scale * BarriersBarriers * Product Differentiationto to Entry Entry * Capital Requirements * Switching Costs Access to Distribution Channels * Cost Disadvantages Independent of Scale * Government Policy * * Expected Retaliation © 2006 by Nelson, a division of Thomson Canada 3-19 *
  • 20. Porter’s 5 Forces Model of Competition Threat of Threat of New New Entrants EntrantsBargaining Power ofSuppliers © 2006 by Nelson, a division of Thomson Canada 3-20 *
  • 21. Bargaining Power of Suppliers Suppliers are likely to be powerful if:Suppliers exert Supplier industry is dominated by a few *power in the firms.industry by: * Suppliers’ products have few* Threatening to raise substitutes. prices or to reduce * Buyer is not an important customer to quality supplier. Powerful suppliers * Suppliers’ product is an important can squeeze industry input to buyers’ product. profitability if firms are unable to * Suppliers’ products are differentiated. recover cost * Suppliers’ products have high increases switching costs. * Supplier poses credible threat of forward integration. © 2006 by Nelson, a division of Thomson Canada 3-21 *
  • 22. Porter’s 5 Forces Model of Competition Threat of Threat of New New Entrants EntrantsBargaining Bargaining Power of Power ofSuppliers Buyers © 2006 by Nelson, a division of Thomson Canada 3-22 *
  • 23. Bargaining Power of BuyersBuyer groups are likely to be powerful if:* Buyers are concentrated or purchases are large relative to seller’s sales* Purchase accounts for a significant Buyers compete fraction of supplier’s sales with supplying* Products are undifferentiated industry by:* Buyers face few switching costs * Bargaining down prices* Buyers’ industry earns low profits * Forcing higher quality* Buyer presents a credible threat of backward integration * Playing firms off of each other* Product unimportant to quality* Buyer has full information © 2006 by Nelson, a division of Thomson Canada 3-23
  • 24. Porter’s 5 Forces Model of Competition Threat of Threat of New New Entrants EntrantsBargaining Bargaining Power of Power ofSuppliers Buyers Threat of Substitute Products © 2006 by Nelson, a division of Thomson Canada 3-24 *
  • 25. Threat of Substitute Products Keys to evaluating substitute products: Products with improving price / * performance tradeoffs relative toProducts present industry productswith similarfunctionlimit the For Example:prices firms Electronic security systems incan charge place of security guards Fax machines or e-mailed attachments in place of overnight mail delivery © 2006 by Nelson, a division of Thomson Canada 3-25
  • 26. Porter’s 5 Forces Model of Competition Threat of Threat of New New Entrants EntrantsBargaining Bargaining Rivalry Among Competing Power of Power of Firms in IndustrySuppliers Buyers Threat of Substitute Products © 2006 by Nelson, a division of Thomson Canada 3-26 *
  • 27. Rivalry Among Existing CompetitorsIntense 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 introductionsOccurs when a firm is pressured or sees an opportunity* Price competition often leaves entire industry worse off* Advertising battles may increase total industry demand, but may be costly to smaller competitors © 2006 by Nelson, a division of Thomson Canada 3-27
  • 28. Rivalry Among Existing CompetitorsCutthroat competition is more likely to occur when * Numerous or equally balanced competitors * Slow growth industry * High fixed costs * High storage costs * Lack of differentiation or switching costs * Capacity added in large increments * Diverse competitors * High strategic stakes High exit barriers * © 2006 by Nelson, a division of Thomson Canada 3-28
  • 29. Rivalry Among Existing Competitors High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable. Specialized assets * * Fixed cost of exit (e.g., labour agreements) * Strategic interrelationships * Emotional barriers * Government and social restrictions © 2006 by Nelson, a division of Thomson Canada 3-29
  • 30. Strategic GroupsA set of firms emphasizing similar strategic dimensions to use a similar strategy © 2006 by Nelson, a division of Thomson Canada 3-30
  • 31. Strategic Groups1. 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 3-31
  • 32. Competitor EnvironmentCompetitor intelligence is the ethical gathering ofneeded information and data about competitors’objectives, strategies, assumptions, andcapabilities.• What drives the competitor as shown by its future objectives,• What the competitor is doing and can do as revealed 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 by its capabilities. © 2006 by Nelson, a division of Thomson Canada 3-32
  • 33. Competitor AnalysisFuture objectivesFuture objectives Future 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? © 2006 by Nelson, a division of Thomson Canada 3-33
  • 34. Competitor AnalysisFuture objectivesFuture objectives Current Strategy: • How are we currently competing?Current strategyCurrent strategy • Does this strategy support changes in the competitive structure? © 2006 by Nelson, a division of Thomson Canada 3-34
  • 35. Competitor AnalysisFuture objectivesFuture objectives Assumptions: • Do we assume the future will be volatile?Current strategyCurrent strategy • Are we operating under a status quo? • What assumptions do our Assumptions Assumptions competitors hold about the industry and themselves? © 2006 by Nelson, a division of Thomson Canada 3-35
  • 36. Competitor AnalysisFuture objectivesFuture objectives Capabilities: • What are our strengths and weaknesses?Current strategyCurrent strategy • How do we rate compared to our competitors? Assumptions Assumptions Capabilities Capabilities © 2006 by Nelson, a division of Thomson Canada 3-36
  • 37. Competitor AnalysisFuture objectivesFuture objectives Response Response Response:Current strategyCurrent strategy • What will our competitors do in the future? • Where do we hold an Assumptions Assumptions advantage over our competitors? • How will this change our Capabilities Capabilities relationship with our competitors? © 2006 by Nelson, a division of Thomson Canada 3-37