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© Lucas Wenger 2018
Welcome to Strategic Management
Week 3
Chapter 2 Review
Evaluating a Firm’s External Environment
© Lucas Wenger 2018
What is External Environment Analysis?
© Lucas Wenger 2018
The Structure-Conduct-Performance Model
© Lucas Wenger 2018
Types of Competition
Type Q(Firms) Product Type Barriers
Perfect
Competition ↑∑Firms
Homogenous
Products
↓Entry/Exit
Cost Parity
Monopolistic
Competition ↑∑Firms
Heterogenious
Products
↓Entry/Exit
Cost CA
Oligopoly ↓∑Fims
Homogenous
Products
↑Entry/Exit
Cost CA
Monopoly One Firm
↑Entry/Exit
Cost CA
© Lucas Wenger 2018
Ethics & Strategy
• Which of these types of competition is most
beneficial to society (social welfare)?
• What do we want? (low cost, high quality)
• What about innovation
• SCP
– ID whether competitiveness and intervene
– Flipped to learn how to gain competitive advantage
– Is that good for society
– How do firms create CA/EV (address consumer needs)
© Lucas Wenger 2018
General Environment
© Lucas Wenger 2018
Demographics & Culture
• What do each of these mean?
• How predictable are they?
• How can they be measured?
• How are they relevant to strategic
management?
© Lucas Wenger 2018
Legal/Political & Economic Climate
• What do each of these mean?
• How predictable are they?
• How can they be measured?
• How are they relevant to strategic
management?
© Lucas Wenger 2018
Technological Change
• How predictable is this?
• How can it be measured?
• How is it relevant to strategic management?
© Lucas Wenger 2018
Major International Events
• How predictable is this?
• How can it be measured?
• How is it relevant to strategic management?
© Lucas Wenger 2018
There are two parts of the Environment:
General (PEST/PESTLE/DPest) & Competitive
Source: Ireland, Hitt & Hoskisson 2006 – Copyright Thompson
Business & Professional Publishing
Q
© Lucas Wenger 2018
BUYERS
Threat of
new entrants
MARKET
COMPETITORS
Bargaining power
of customers
SUPPLIERS
SUBSTITUTES
Rivalry among
existing firms
Bargaining power
of suppliers
Threat of substitute
products or services
Source: Porter (1980)
POTENTIAL
ENTRANTS
The Competitive Environment of the
Firm and the 5-Forces Framework
P, Q
© Lucas Wenger 2018
What do we look for to determine
whether rivalry is high?
© Lucas Wenger 2018
Rivalry is high when:
• Industry concentration is low
• Competitors are very homogeneous
• Little product differentiation exists
• Excess capacity and exit barriers are present
• Scale economies are high and the ratio of fixed
to variable costs is high
© Lucas Wenger 2018
What do we look for to determine how high
the threat of substitutability is?
© Lucas Wenger 2018
The threat of substitutes is high when:
• Buyers have a high propensity to substitute
• The relative price and performance of
substitutes is high
© Lucas Wenger 2018
What do we look for to determine whether
buyers have a high or low power?
© Lucas Wenger 2018
When is buyer power high? I
• When price sensitivity of focal industry is
high:
– Cost of supplier product relative to total costs of
focal industry products high
– Product differentiation of supplies low
– Competition between focal industry players is high
© Lucas Wenger 2018
When is buyer power high? II
• Relative bargaining power of focal firms is high:
– Size and concentration of focal industry firms relatives to
suppliers is high
– Focal industry firms face little if no switching costs
– Focal industry firms know and understand well the cost
structure of suppliers
– Focal industry firms can easily integrate backward
© Lucas Wenger 2018
What do we look for to determine whether
suppliers have a high or low power?
© Lucas Wenger 2018
When is supplier power low? I
• When price sensitivity of focal industry is
high:
– Cost of supplier product relative to total costs of
focal industry products high
– Product differentiation of supplies low
– Competition between focal industry players is high
© Lucas Wenger 2018
When is supplier power low? II
• Relative bargaining power of focal firms is high:
– Size and concentration of focal industry firms relatives to
suppliers is high
– Focal industry firms face little if no switching costs
– Focal industry firms know and understand well the cost
structure of suppliers
– Focal industry firms can easily integrate backward
© Lucas Wenger 2018
What do we look for to determine how
low the threat of entry is?
© Lucas Wenger 2018
The threat of entry is low when:
• Economies of scale are present
• Incumbents have an absolute cost advantage
• High capital is needed to start
• Existing products are highly differentiated
• Channels of distribution are preempted or difficult to
access
• Government and legal barriers exist
• Retaliation by established competitors is likely
© Lucas Wenger 2018
THREAT OF ENTRY
• economies of scale
• absolute cost
advantages
• capital requirements
• product differentiation
• access to distribution
channels
• governmental and legal
barriers
• retaliation by
established producers
THREAT OF
SUBSTITUTES
• buyer propensity to substitute
• relative price performance of
substitutes
INDUSTRY
COMPETITIVENESS
• concentration
• product differentiation
• excess capacity
• ratio of fixed to
variable costs
• demand growth
• cyclical fluctuations of
demand
• exit barriers
BUYER POWER
Price sensitivity
• cost of purchases
• profitability of buyers
• importance of the product
to quality of buyers’
product
Bargaining power
• size and concentration of buyers
relative to suppliers
• buyers’ switching costs
• buyers’ information
• buyers’ ability to backward
integrate
SUPPLIER POWER
Factors determining power of
suppliers relative to producers
same as those determining
power of producers relative to
buyers--see “Buyer Power” box.
Generic
Drivers of
Industry
Forces
© Lucas Wenger 2018
THREAT OF ENTRY
• Erect barriers to entry
by building:
– economies of scale
– absolute cost
advantages
• Influence govt. policy
requirements . . .
• Overcome barriers to
entry through:
– product
differentiation
– . . .
THREAT OF
SUBSTITUTES
Improve product’s
attractiveness relative to
substitutes:
• Lower Prices
• Product differentiation
• Move into new businesses
INDUSTRY
COMPETITIVENESS
• Compete on
dimensions besides
price
• Consolidate ownership
• Build a first-mover
advantage . . .
BUYER POWER
Reduce Buyers’ Uniqueness
• Forward Vertical Integration
• Product Differentiation
• Target New Market Segments
SUPPLIER POWER
Reduce Suppliers’ Uniqueness
• Backward Vertical Integration
• Use Multiple Suppliers
Source: Barney (1997)
Generic
Responses to
Industry
Forces
© Lucas Wenger 2018
Industry Structure
• Fragmented
– No dominant firm
– Opportunity for consolidation
• Emerging
– New created (or re-created industries)
– Opportunity to seize 1st mover advtg?
© Lucas Wenger 2018
Industry Structure (Cont’d)
• Emerging
– New created industries
– Re-created industries
• Tech innovation
• ∆ in customer needs
• Mature
– Opportunities for:
• 1st mover advtg?
• Tech leadership
• Control strategic assets
• Avoid customer-switching
costs
– Threat of:
• 1st mover disadvtg?
• Loss of flexibility
• 2nd mover advtg
© Lucas Wenger 2018
Seizing 1st Mover Advantage
-Suarez & Lanzolla, 2005 (HBR)
© Lucas Wenger 2018
Seizing 1st Mover Advantage
-Suarez & Lanzolla, 2005 (HBR)
© Lucas Wenger 2018
Industry Structure (Cont’d)
• Mature
– Slowing ↑Qd
– Slowing ↑Qs (via
stagnant production
capacity)
– ↑Customer Expertise
– ↓New products/services
– ↑Int’l competition
– ↓∑Profitability
• Mature
– Opportunities for:
• Product refinement
• Investment in service
quality
• Process innovation
© Lucas Wenger 2018
Industry Structure (Cont’d)
• Declining
– ↓∑Sales
– ↑Rivalry
• ↑Buys
• ↑Suppliers
• ↑Substitutes
• Declining
• Leadership
• Niche
• Harvest
• Divestment
© Lucas Wenger 2018
Step 1 – Define the industry the firm is in
Step 2 - Identify the players:
Competitors, substitutes, suppliers, buyers,
and potential entrants
Industry Analysis
© Lucas Wenger 2018
Step 3 - Evaluate the 5-forces:
Their intensity, the underlying conditions
that drive this intensity, and the
implication for the performance of
companies in this industry
Industry Analysis
© Lucas Wenger 2018
Step 4 - What would it take for any
company to be successful in this industry;
or how can we change the industry
forces in our favor; aka industry key
success factors
Industry Analysis
© Lucas Wenger 2018
What is this External Environment
Analysis?
• Part 1: Describe the External Environment of
the Firm
• Part 2: Evaluate this Environment
• Part 3: Draw Clear Conclusions: What are the
opportunities and threats in this environment?
What are the drivers of these? What are
potential strategies to capitalize on the
opportunities and neutralize the threats?
© Lucas Wenger 2018
External Analysis
– External Analysis
• What is the current industry structure/level of competition
(perfect
competitionàmonopoly) and what are the consequences (See
Table 2.7)
• Describe the General and Competitive Environment - Use at
least one of tools described in our textbook (6 category
description of the general environment in Figure 2.1, Porter’s 5
Forces, PEST, GDPest, etc.)
• What are the opportunities and threats related to the external
environment?
• How does the external environment influence the company’s
strategy?
MNG000273
Assignment 2 –
1500 word report 35%
Student: Mark: Grade:
Poor Fair Good V. Good Excellent
Content
- purpose, goals
and objectives, program, location and
duration
stakeholders for the event
vernance
(organisational structure for the event)
Research and scholarship
of research. (at least 2 academic
references)
Presentation
structure
written expression.
Other comments:
Grading for the assignment
Poor: below standard and unacceptable
Fair: borderline as it shows signs of effort but can improve
dramatically
Good: satisfactory work that addresses the criteria
V.Good: high standard of coherence and clarity
Excellent: free from error and vaguaries – very appropriate for
criteria

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© Lucas Wenger 2018Welcome to Strategic ManagementWeek 3.docx

  • 1. © Lucas Wenger 2018 Welcome to Strategic Management Week 3 Chapter 2 Review Evaluating a Firm’s External Environment © Lucas Wenger 2018 What is External Environment Analysis? © Lucas Wenger 2018 The Structure-Conduct-Performance Model © Lucas Wenger 2018 Types of Competition Type Q(Firms) Product Type Barriers Perfect Competition ↑∑Firms
  • 2. Homogenous Products ↓Entry/Exit Cost Parity Monopolistic Competition ↑∑Firms Heterogenious Products ↓Entry/Exit Cost CA Oligopoly ↓∑Fims Homogenous Products ↑Entry/Exit Cost CA Monopoly One Firm ↑Entry/Exit Cost CA © Lucas Wenger 2018 Ethics & Strategy • Which of these types of competition is most beneficial to society (social welfare)? • What do we want? (low cost, high quality) • What about innovation
  • 3. • SCP – ID whether competitiveness and intervene – Flipped to learn how to gain competitive advantage – Is that good for society – How do firms create CA/EV (address consumer needs) © Lucas Wenger 2018 General Environment © Lucas Wenger 2018 Demographics & Culture • What do each of these mean? • How predictable are they? • How can they be measured? • How are they relevant to strategic management? © Lucas Wenger 2018 Legal/Political & Economic Climate • What do each of these mean? • How predictable are they? • How can they be measured? • How are they relevant to strategic
  • 4. management? © Lucas Wenger 2018 Technological Change • How predictable is this? • How can it be measured? • How is it relevant to strategic management? © Lucas Wenger 2018 Major International Events • How predictable is this? • How can it be measured? • How is it relevant to strategic management? © Lucas Wenger 2018 There are two parts of the Environment: General (PEST/PESTLE/DPest) & Competitive Source: Ireland, Hitt & Hoskisson 2006 – Copyright Thompson Business & Professional Publishing Q
  • 5. © Lucas Wenger 2018 BUYERS Threat of new entrants MARKET COMPETITORS Bargaining power of customers SUPPLIERS SUBSTITUTES Rivalry among existing firms Bargaining power of suppliers Threat of substitute products or services Source: Porter (1980) POTENTIAL ENTRANTS The Competitive Environment of the Firm and the 5-Forces Framework P, Q
  • 6. © Lucas Wenger 2018 What do we look for to determine whether rivalry is high? © Lucas Wenger 2018 Rivalry is high when: • Industry concentration is low • Competitors are very homogeneous • Little product differentiation exists • Excess capacity and exit barriers are present • Scale economies are high and the ratio of fixed to variable costs is high © Lucas Wenger 2018 What do we look for to determine how high the threat of substitutability is? © Lucas Wenger 2018 The threat of substitutes is high when: • Buyers have a high propensity to substitute • The relative price and performance of
  • 7. substitutes is high © Lucas Wenger 2018 What do we look for to determine whether buyers have a high or low power? © Lucas Wenger 2018 When is buyer power high? I • When price sensitivity of focal industry is high: – Cost of supplier product relative to total costs of focal industry products high – Product differentiation of supplies low – Competition between focal industry players is high © Lucas Wenger 2018 When is buyer power high? II • Relative bargaining power of focal firms is high: – Size and concentration of focal industry firms relatives to suppliers is high – Focal industry firms face little if no switching costs – Focal industry firms know and understand well the cost
  • 8. structure of suppliers – Focal industry firms can easily integrate backward © Lucas Wenger 2018 What do we look for to determine whether suppliers have a high or low power? © Lucas Wenger 2018 When is supplier power low? I • When price sensitivity of focal industry is high: – Cost of supplier product relative to total costs of focal industry products high – Product differentiation of supplies low – Competition between focal industry players is high © Lucas Wenger 2018 When is supplier power low? II • Relative bargaining power of focal firms is high: – Size and concentration of focal industry firms relatives to suppliers is high – Focal industry firms face little if no switching costs
  • 9. – Focal industry firms know and understand well the cost structure of suppliers – Focal industry firms can easily integrate backward © Lucas Wenger 2018 What do we look for to determine how low the threat of entry is? © Lucas Wenger 2018 The threat of entry is low when: • Economies of scale are present • Incumbents have an absolute cost advantage • High capital is needed to start • Existing products are highly differentiated • Channels of distribution are preempted or difficult to access • Government and legal barriers exist • Retaliation by established competitors is likely © Lucas Wenger 2018 THREAT OF ENTRY • economies of scale • absolute cost
  • 10. advantages • capital requirements • product differentiation • access to distribution channels • governmental and legal barriers • retaliation by established producers THREAT OF SUBSTITUTES • buyer propensity to substitute • relative price performance of substitutes INDUSTRY COMPETITIVENESS • concentration • product differentiation • excess capacity • ratio of fixed to variable costs • demand growth • cyclical fluctuations of demand • exit barriers
  • 11. BUYER POWER Price sensitivity • cost of purchases • profitability of buyers • importance of the product to quality of buyers’ product Bargaining power • size and concentration of buyers relative to suppliers • buyers’ switching costs • buyers’ information • buyers’ ability to backward integrate SUPPLIER POWER Factors determining power of suppliers relative to producers same as those determining power of producers relative to buyers--see “Buyer Power” box. Generic Drivers of Industry Forces © Lucas Wenger 2018 THREAT OF ENTRY
  • 12. • Erect barriers to entry by building: – economies of scale – absolute cost advantages • Influence govt. policy requirements . . . • Overcome barriers to entry through: – product differentiation – . . . THREAT OF SUBSTITUTES Improve product’s attractiveness relative to substitutes: • Lower Prices • Product differentiation • Move into new businesses INDUSTRY COMPETITIVENESS • Compete on dimensions besides price • Consolidate ownership
  • 13. • Build a first-mover advantage . . . BUYER POWER Reduce Buyers’ Uniqueness • Forward Vertical Integration • Product Differentiation • Target New Market Segments SUPPLIER POWER Reduce Suppliers’ Uniqueness • Backward Vertical Integration • Use Multiple Suppliers Source: Barney (1997) Generic Responses to Industry Forces © Lucas Wenger 2018 Industry Structure • Fragmented – No dominant firm – Opportunity for consolidation • Emerging
  • 14. – New created (or re-created industries) – Opportunity to seize 1st mover advtg? © Lucas Wenger 2018 Industry Structure (Cont’d) • Emerging – New created industries – Re-created industries • Tech innovation • ∆ in customer needs • Mature – Opportunities for: • 1st mover advtg? • Tech leadership • Control strategic assets • Avoid customer-switching costs – Threat of: • 1st mover disadvtg? • Loss of flexibility • 2nd mover advtg © Lucas Wenger 2018 Seizing 1st Mover Advantage
  • 15. -Suarez & Lanzolla, 2005 (HBR) © Lucas Wenger 2018 Seizing 1st Mover Advantage -Suarez & Lanzolla, 2005 (HBR) © Lucas Wenger 2018 Industry Structure (Cont’d) • Mature – Slowing ↑Qd – Slowing ↑Qs (via stagnant production capacity) – ↑Customer Expertise – ↓New products/services – ↑Int’l competition – ↓∑Profitability • Mature – Opportunities for: • Product refinement • Investment in service quality
  • 16. • Process innovation © Lucas Wenger 2018 Industry Structure (Cont’d) • Declining – ↓∑Sales – ↑Rivalry • ↑Buys • ↑Suppliers • ↑Substitutes • Declining • Leadership • Niche • Harvest • Divestment © Lucas Wenger 2018 Step 1 – Define the industry the firm is in Step 2 - Identify the players: Competitors, substitutes, suppliers, buyers, and potential entrants Industry Analysis
  • 17. © Lucas Wenger 2018 Step 3 - Evaluate the 5-forces: Their intensity, the underlying conditions that drive this intensity, and the implication for the performance of companies in this industry Industry Analysis © Lucas Wenger 2018 Step 4 - What would it take for any company to be successful in this industry; or how can we change the industry forces in our favor; aka industry key success factors Industry Analysis © Lucas Wenger 2018 What is this External Environment Analysis? • Part 1: Describe the External Environment of the Firm
  • 18. • Part 2: Evaluate this Environment • Part 3: Draw Clear Conclusions: What are the opportunities and threats in this environment? What are the drivers of these? What are potential strategies to capitalize on the opportunities and neutralize the threats? © Lucas Wenger 2018 External Analysis – External Analysis • What is the current industry structure/level of competition (perfect competitionàmonopoly) and what are the consequences (See Table 2.7) • Describe the General and Competitive Environment - Use at least one of tools described in our textbook (6 category description of the general environment in Figure 2.1, Porter’s 5 Forces, PEST, GDPest, etc.) • What are the opportunities and threats related to the external environment? • How does the external environment influence the company’s strategy? MNG000273
  • 19. Assignment 2 – 1500 word report 35% Student: Mark: Grade: Poor Fair Good V. Good Excellent Content - purpose, goals and objectives, program, location and duration stakeholders for the event vernance (organisational structure for the event)
  • 20. Research and scholarship of research. (at least 2 academic references) Presentation structure written expression. Other comments: Grading for the assignment Poor: below standard and unacceptable Fair: borderline as it shows signs of effort but can improve dramatically Good: satisfactory work that addresses the criteria
  • 21. V.Good: high standard of coherence and clarity Excellent: free from error and vaguaries – very appropriate for criteria