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Class3_EVALUATING A COMPANYS EXTERNAL ENVIRONMENT.ppt
- 1. 1 | 1 Main Components ofthe Strategy- Making Process
- 2. EVALUATING A COMPANY’S EXTERNALENVIRONMENT
- 3. 3–3 External Environment Analysis(Cont’d) External Environment Analysis (Cont’d) ♦ 4 components of External 4 components of External Environment Analysis Environment Analysis ● Scanning Scanning ● Monitoring Monitoring ● Forecasting Forecasting ● Assessing Assessing
- 4. 3–4 External Environment: External Environment: General,Industry and Competitor General, Industry and Competitor ♦ External environments include three External environments include three components: components: ● General General ● Industry Industry ● Competitor Competitor
- 5. 3–5 The External Environment TheExternal Environment {The General {The General Environment} Environment}
- 6. 3–6 External Environment: External Environment: General,Industry and Competitor (Cont’d) General, Industry and Competitor (Cont’d) ♦ The General Environment The General Environment ● The broader society dimensions that The broader society dimensions that influence an industry and the firms influence an industry and the firms within it within it ● Grouped into 7 dimensions OR Grouped into 7 dimensions OR ‘environmental segments’ Each segment ‘environmental segments’ Each segment composed of elements composed of elements
- 7. 3–7 Segments of theGeneral Environment Segments of the General Environment ♦ 7 Segments 7 Segments ● Demographic Demographic ● Economic Economic ● Political/Legal Political/Legal ● Sociocultural Sociocultural ● Technological Technological ● Global Global ● Physical Environment Physical Environment
- 8. 3–8 External Environment: External Environment: General,Industry and Competitor General, Industry and Competitor (Cont’d) (Cont’d) ♦ Industry Environment Industry Environment ● Set of factors directly influencing Set of factors directly influencing A firm’s competitive actions/responses A firm’s competitive actions/responses Relates to Porter’s 5 Forces – see upcoming slides Relates to Porter’s 5 Forces – see upcoming slides Competitor analysis: gather and interpret competitor Competitor analysis: gather and interpret competitor information information
- 9. 3–9 Industry Environment Analysis IndustryEnvironment Analysis ♦ Industry Industry ● Definition: Group of firms producing products Definition: Group of firms producing products that are close substitutes that are close substitutes ● Industry environment, in comparison to the Industry environment, in comparison to the general environment, has more direct effect of general environment, has more direct effect of firm’s firm’s Strategic competitiveness and Strategic competitiveness and Above-average returns Above-average returns ● Intensity of industry competition and industry’s Intensity of industry competition and industry’s profit potential are a function of 5 forces (See profit potential are a function of 5 forces (See next slide) next slide)
- 10. 3–10 The Five-Forces Model ofCompetition: A Key Analytical Tool
- 11. 3–11 WHAT KINDS OFCOMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING, AND HOW STRONG ARE THEY? ♦ The Five Competitive Forces: ● Competition from rival sellers ● Competition from potential new entrants ● Competition from substitute products producers ● Supplier bargaining power ● Customer bargaining power
- 12. 3–12 Industry Environment Analysis IndustryEnvironment Analysis (Cont’d) (Cont’d) ♦ Porter’s 5 Forces Porter’s 5 Forces ● 1/5: Intensity of Rivalry Among Competitors 1/5: Intensity of Rivalry Among Competitors High exit barriers (Cont’d) High exit barriers (Cont’d) 1. Specialized assets 1. Specialized assets 2. Fixed costs of exit (i.e., labor 2. Fixed costs of exit (i.e., labor agreements) agreements) 3. Strategic interrelationships (i.e., one 3. Strategic interrelationships (i.e., one business depends on another) business depends on another) 4. Emotional barriers (i.e., loyalty to 4. Emotional barriers (i.e., loyalty to employees, etc.) employees, etc.) 5. Government and social restrictions 5. Government and social restrictions
- 13. 3–13 Competitive Pressures ThatAct to Increase Competitive Pressures That Act to Increase the Rivalry among Competing Sellers the Rivalry among Competing Sellers ♦ Buyer demand is growing slowly or declining. ♦ It is becoming less costly for buyers to switch brands. ♦ Industry products are becoming more alike. ♦ There is unused production capacity, andor products have high fixed costs or high storage costs. ♦ The number of competitors is increasing andor they are becoming more equal in size and competitive strength. ♦ The diversity of competitors is increasing. ♦ High exit barriers stop firms from exiting the industry.
- 14. 3–14 3.4 Factors Affecting the Strengthof Rivalry
- 15. 3–15 Matching Strategy toCompetitive Matching Strategy to Competitive Conditions Conditions 1. Pursuing avenues that shield the firm from as many competitive pressures as possible. 2. Initiating actions calculated to shift competitive forces in the firm’s favor by altering underlying factors driving the five forces. 3. Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker.
- 16. 3–16 Industry Environment Analysis IndustryEnvironment Analysis (Cont’d) (Cont’d) ♦ Porter’s 5 Forces Porter’s 5 Forces ● 2/5: Bargaining power of suppliers 2/5: Bargaining power of suppliers They are powerful when … They are powerful when … 1. Few large companies and more concentrated 1. Few large companies and more concentrated than the than the industry to which they sell industry to which they sell 2. No substitutes 2. No substitutes 3. Industry firms not significant customer to 3. Industry firms not significant customer to supplier gp supplier gp 4. Supplier’s goods are critical to buyer’s success 4. Supplier’s goods are critical to buyer’s success 5. High switching costs due to effectiveness of 5. High switching costs due to effectiveness of supplier’s products supplier’s products 6. Threat of forward integration 6. Threat of forward integration
- 17. 3–17 Competitive Pressures Stemmingfrom Competitive Pressures Stemming from Supplier Bargaining Power Supplier Bargaining Power ♦ Supplier Bargaining Power Considerations: ● Ready availability of supplier products ● Criticality of supplier products as industry inputs ● Number of suppliers of standardcommodity items ● Buyers’ costs for switching among suppliers ● Availability of substitutes for suppliers’ products ● Fraction of supplier sales due to industry demand ● Ratio of suppliers relative to industry buyers ● Backward integration into suppliers’ industry
- 18. 3–18 3.7 Factors Affecting the Bargaining Powerof Suppliers
- 19. 3–19 Industry Environment Analysis(Cont’d) Industry Environment Analysis (Cont’d) ♦ Porter’s 5 Forces Porter’s 5 Forces ● 3/5: Bargaining power of buyers 3/5: Bargaining power of buyers They are powerful when … They are powerful when … 1. Purchase large portion of industry’s 1. Purchase large portion of industry’s total output total output 2. Product sales accounts for significant 2. Product sales accounts for significant seller annual revenue seller annual revenue 3. Low switching costs (to other industry 3. Low switching costs (to other industry product) product) 4. Industry products are undifferentiated 4. Industry products are undifferentiated or standardized or standardized 5. Threat of backward integration 5. Threat of backward integration
- 20. 3–20 Competitive Pressures Stemmingfrom Competitive Pressures Stemming from Buyer Buyer Bargaining Power and Price Sensitivity Bargaining Power and Price Sensitivity ♦ Buyer Bargaining Power Considerations: ● Buyer costs for switching to competing sellers ● Degree to which industry products are commoditized ● Number and size of buyers relative to sellers ● Strength of buyer demand for sellers’ products ● Buyer knowledge of products, costs and pricing ● Backward integration of buyers into sellers’ industry ● Buyer discretion in delaying purchases ● Buyer price sensitivity due to low profits, size of purchase, and consequences of purchase
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- 22. 3–22 Industry Environment Analysis(Cont’d) Industry Environment Analysis (Cont’d) ♦ Porter’s 5 Forces Porter’s 5 Forces ● 4/5: Threat of substitute products 4/5: Threat of substitute products Goods or services outside of given industry Goods or services outside of given industry perform same or similar functions at a perform same or similar functions at a competitive price (i.e., plastic has replaced competitive price (i.e., plastic has replaced steel in many applications) steel in many applications) ● 5/5: Intensity of Rivalry Among Competitors 5/5: Intensity of Rivalry Among Competitors Numerous or equally balanced competitors Numerous or equally balanced competitors Slow industry growth Slow industry growth High fixed costs or high storage costs High fixed costs or high storage costs Lack of differentiation or low switching costs Lack of differentiation or low switching costs High strategic stakes High strategic stakes High exit barriers High exit barriers
- 23. 3–23 Competitive Pressures fromthe Sellers of Substitute Products ♦ Substitute Products Considerations: ● Ready availability of substitutes ● Pricing, quality, performance, and other relevant attributes of substitutes ● Switching costs that buyers incur ♦ Indicators of Substitutes’ Competitive Strength: ● Increasing rate of growth in sales of substitutes ● Substitute producers adding output capacity ● Increasing profitability of substitute producers
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- 25. 3–25 Industry Environment Analysis IndustryEnvironment Analysis (Cont’d) (Cont’d) ♦ Porter’s 5 Forces Porter’s 5 Forces ● 5/5: New entrants 5/5: New entrants Can threaten market share of existing competitors Can threaten market share of existing competitors May bring additional production capacity May bring additional production capacity Function of two factors Function of two factors 1: Barriers to entry 1: Barriers to entry Economies of scale Economies of scale Product differentiation Product differentiation Capital requirements Capital requirements Switching costs Switching costs Access to distribution channels Access to distribution channels Cost advantages independent of scale Cost advantages independent of scale Gov’t policy Gov’t policy 2: Expected retaliation 2: Expected retaliation
- 26. 3–26 Competitive Pressures Associated CompetitivePressures Associated with the Threat of New Entrants with the Threat of New Entrants ♦ Entry Threat Considerations: ● Strength of barriers to entry ● Expected reaction of incumbent firms ● Attractiveness of a particular market’s growth in demand and profit potential ● Capabilities and resources of potential entrants ● Entry of existing competitors into market segments in which they have no current presence
- 27. 3–27 Market Entry BarriersFacing New Entrants Market Entry Barriers Facing New Entrants ♦ Economies of scale in production, distribution, advertising, or other areas of operation ♦ Experience and learning curve effects ♦ Unique cost advantages of industry incumbents ♦ Strong brand preferences and customer loyalty ♦ Strong “network effects” in customer demand ♦ High capital requirements ♦ Building a network of distributors or dealers and securing adequate space on retailers’ shelves ♦ Restrictive government policies
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- 29. 3–29 WHAT FACTORS AREDRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE? ♦ Strategic Analysis of Industry Dynamics: 1. Identifying the drivers of change. 2. Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive. 3. Determining what strategy changes are needed to prepare for the impacts of the anticipated change.
- 30. 3–30 3.3 The MostCommon Drivers of Industry Change 1. Changes in the long-term industry growth rate 2. Increasing globalization 3. Changes in who buys the product and how they use it 4. Technological change 5. Emerging new Internet capabilities and applications 6. Product and marketing innovation 7. Entry or exit of major firms 8. Diffusion of technical know-how across companies and countries 9. Improvements in efficiency in adjacent markets 10. Reductions in uncertainty and business risk 11. Regulatory influences and government policy changes 12. Changing societal concerns, attitudes, and lifestyles
- 31. 3–31 WHAT ARE THEKEY FACTORS FOR FUTURE COMPETITIVE SUCCESS? ♦ Key Success Factors ● Are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry. ● Vary from industry to industry, and over time within the same industry, as drivers of change and competitive conditions change.
- 32. 3–32 First-Mover Advantage First-Mover Advantage ♦Definition Definition ● Pioneer: Firm that enters/creates a market first Pioneer: Firm that enters/creates a market first ● Market Entry: Product launch at a large scale Market Entry: Product launch at a large scale ● Advantage: Long-term competitive advantage Advantage: Long-term competitive advantage (sustainable) (sustainable) ♦ Typical Examples Typical Examples Coca Cola Coca Cola Sony Walkman Sony Walkman Polaroid Polaroid
- 33. 3–33 First-Mover Advantage First-Mover Advantage ♦“ “Be first to market” is one of the most Be first to market” is one of the most enduring strategic principles in marketing. enduring strategic principles in marketing.
- 34. 3–34 First-Mover Advantage First-Mover Advantage ♦Increasing returns suggests that timing of entry can Increasing returns suggests that timing of entry can be very important. First movers don’t always have be very important. First movers don’t always have the advantage. the advantage. ♦ There are a number of advantages and There are a number of advantages and disadvantages to being a first mover, early follower disadvantages to being a first mover, early follower or late entrant. These categories are defined as or late entrant. These categories are defined as follows: follows: ● First movers First movers are the first entrants to sell in a new are the first entrants to sell in a new product or service category (“ product or service category (“pioneers pioneers”) ”) ● Early followers Early followers are early to market are early to market but not first but not first. . ● Late entrants Late entrants do not enter the market until the product do not enter the market until the product begins to penetrate the mass market or later. begins to penetrate the mass market or later. 5-34
- 35. 3–35 First-Mover Advantages First-Mover Advantages ♦Beinga first mover can confer the Being a first mover can confer the advantages of: advantages of: ●Brand loyalty and technological leadership Brand loyalty and technological leadership ●Preemption of scarce assets Preemption of scarce assets ●Exploiting buyer switching costs Exploiting buyer switching costs ●Reaping increasing returns advantages. Reaping increasing returns advantages.
- 36. 3–36 First-Mover Disadvantages First-Mover Disadvantages ●High research and development expenses High research and development expenses ● Undeveloped supply and distribution channels Undeveloped supply and distribution channels ● Immature enabling technologies and complements Immature enabling technologies and complements ● Uncertainty of customer requirements Uncertainty of customer requirements
- 37. 3–37 First-Mover Advantages andDisadvantages First-Mover Advantages and Disadvantages ● The market often perceives first movers as having The market often perceives first movers as having advantages because it has misperceived who was first. advantages because it has misperceived who was first.
- 38. 3–38 Identification of KeySuccess Factors 1. What product attributes and service features buyers strongly affect buyers when choosing between the competing brands of sellers? 2. What resources and competitive capabilities are required for a firm to execute a successful strategy in the marketplace? 3. What shortcomings will put a firm at a significant competitive disadvantage?
- 39. 3–39 External Environment: External Environment: General,Industry and Competitor General, Industry and Competitor (Cont’d) (Cont’d) ♦ Competitor Environment Competitor Environment ● Gives details about Gives details about A firm’s direct and indirect competitors A firm’s direct and indirect competitors The competitive dynamics expected to impact a firm's The competitive dynamics expected to impact a firm's efforts to generate above-average returns efforts to generate above-average returns
- 40. 3–40 Strategic Groups Strategic Groups ♦Strategic Groups Strategic Groups ● Set of firms emphasizing similar strategic Set of firms emphasizing similar strategic dimensions to use a similar strategy dimensions to use a similar strategy ● Implications Implications Because firms within a group compete (offer Because firms within a group compete (offer similar products) rivalry can be intense – the similar products) rivalry can be intense – the greater the rivalry the greater the threat to greater the rivalry the greater the threat to each firm’s profitability each firm’s profitability Strengths of the 5 forces differs across Strengths of the 5 forces differs across strategic groups strategic groups The closer the strategic groups, in terms of The closer the strategic groups, in terms of strategy, the greater the likelihood of rivalry strategy, the greater the likelihood of rivalry
- 41. 3–41 HOW ARE INDUSTRYRIVALS POSITIONED—WHO IS STRONGLY POSITIONED AND WHO IS NOT? ♦ A Strategic Group ● Is a cluster of industry rivals that have similar competitive approaches and market positions: Have comparable product-line breadth Sell in the same price/quality range Emphasize the same distribution channels Use the same product attributes to buyers Depend on identical technological approaches Offer similar services and technical assistance
- 42. 3–42 Using Strategic GroupMaps to Assess the Market Positions of Key Competitors ♦ Constructing a strategic group map: ● Identify the competitive characteristics that differentiate firms in the industry. ● Plot the firms on a two-variable map using pairs of differentiating competitive characteristics. ● Assign firms occupying about the same map location to the same strategic group. ● Draw circles around each strategic group, making the circles proportional to the size of the group’s share of total industry sales revenues.
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- 44. 3–44 Positioning Map Positioning Map Positioning mapfor large luxury SUVs
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- 49. 3–49 Competitor Analysis Components CompetitorAnalysis Components
- 50. 3–50 Competitor Analysis Competitor Analysis ♦Competitor analysis and organization Competitor analysis and organization response: response: ● What drives competitors What drives competitors Shown by organization's future objectives Shown by organization's future objectives ● What the competitor is doing and can do What the competitor is doing and can do Revealed in organization's current strategy Revealed in organization's current strategy ● What the competitor believes about the industry What the competitor believes about the industry Shown in organization's assumptions Shown in organization's assumptions ● What the competitor’s capabilities are What the competitor’s capabilities are Shown by organization's strengths and Shown by organization's strengths and weaknesses weaknesses
- 51. 3–51 Competitor Analysis (Cont’d) CompetitorAnalysis (Cont’d) ♦ Competitor intelligence Competitor intelligence ● Set of data and information the firm Set of data and information the firm gathers to better understand and gathers to better understand and anticipate competitors' objectives, anticipate competitors' objectives, strategies, assumptions, and capabilities strategies, assumptions, and capabilities
- 52. 3–52 Intelligence Collection (Cont’d) IntelligenceCollection (Cont’d) ♦ Follow ethical practices when gathering Follow ethical practices when gathering competitor intelligence competitor intelligence ● Obtain public information Obtain public information ● Attend trade fairs and shows and collect Attend trade fairs and shows and collect brochures, view exhibits, listen to their brochures, view exhibits, listen to their discussions discussions ♦ Some practices may be legal, but unethical Some practices may be legal, but unethical ♦ Unethical tactics can include Unethical tactics can include ● Blackmail Blackmail ● Trespassing Trespassing ● Eavesdropping Eavesdropping ● Stealing drawings, samples or documents Stealing drawings, samples or documents