This document discusses analyzing a firm's external environment. It describes Porter's five forces model for understanding industry competition and outlines the general environment segments of demographic, economic, sociocultural, technological, political/legal, and global factors. The industry environment is analyzed using the five competitive forces of threat of new entrants, power of suppliers/buyers, threat of substitutes, and rivalry among existing competitors. Competitor analysis involves understanding competitors' objectives, strategies, assumptions, and capabilities.

1. The External Environment: Opportunities, Threats, Industry Competition & Competitor Analysis Chapter Three 0 © 2006 by Nelson, a division of Thomson Canada Limited.

2. The Strategic Management Process Strategic  Actions  Chapter 3: The External Environment Chapter 4: The Internal Environment Strategic Competitiveness Strategic Mission & Strategic Intent Strategic Objectives & Inputs Chapter 1: Strategic Management Ch. 2: Strat. Mgmt . & Performance Chapter 3: The External Environment Chapter 5: Bus.-Level Strategy Chapter 6: Competitive Dynamics Chapter 7: Corp.-Level Strategy Chapter 8: Acquisition & Restructuring Chapter 9: International Strategy Chapter 10: Cooperative Strategy Strategy Formulation Chapter 11: Corporate Governance Ch. 12: Org. Structure & Controls Chapter 13: Strategic Leadership Chapter 14: Org. Renewal & Innovation Strategy Implementation Strategic Competitiveness

4. The External Environment General Environment General Environment General Environment Sociocultural Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Environment Economic Political/Legal Technological Global Demographic

13. 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. I O I O

14. The I/O Model of Superior Returns an * Action required: Study the external environment, especially the industry environment . External Environment Competitive Environment General Environment Industry Environment

15. The I/O Model of Superior Returns an * 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

16. The I/O Model of Superior Returns Industry Environment an * External Environment General Environment Competitive Environment An Attractive Industry An industry whose structural characteristics suggest above-average returns are possible 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 Strategy Formulation

17. The I/O Model of Superior Returns Industry Environment an * External Environment General Environment Competitive Environment 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 Strategy Formulation Assets and Skills Assets and skills required to implement a chosen strategy

18. The I/O Model of Superior Returns External Environment General Environment Competitive Environment Industry Environment an * 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 Strategy Formulation Assets and Skills Assets and skills required to implement a chosen strategy 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

19. The I/O Model of Superior Returns External Environment General Environment Competitive Environment Industry Environment an * 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 Strategy Formulation Assets 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: Maintain selected strategy in order to out-perform industry rivals. Superior Returns Earning of above-average returns

20. External Environmental Analysis 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 

21. Porter’s 5 Forces Model of Competition The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved. The threat of new entrants depends on barriers to entry Threat of New Entrants Threat of New Entrants Bargaining Power of Buyers Threat of Substitute Products Bargaining Power of Suppliers Rivalry Among Competing Firms Five Forces of Competition

22. Threat of New Entrants Barriers to Entry * Product Differentiation * Capital Requirements * Switching Costs * Access to Distribution Channels * Cost Disadvantages Independent of Scale * Government Policy * Expected Retaliation * Economies of Scale *

23. Porter’s 5 Forces Model of Competition * Bargaining Power of suppliers depends on a number of factors Bargaining Power of Suppliers Bargaining Power of Suppliers Bargaining Power of Buyers Threat of New Entrants Threat of Substitute Products Rivalry Among Competing Firms Five Forces of Competition Threat of New Entrants

24. Bargaining Power of Suppliers Suppliers are likely to be powerful if: Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases * 0 * 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’ 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 Suppliers’ products have few substitutes. *

25. Porter’s 5 Forces Model of Competition * Bargaining Power of buyers depends on a number of factors Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Bargaining Power of Buyers Threat of New Entrants Threat of Substitute Products Bargaining Power of Suppliers Rivalry Among Competing Firms Five Forces of Competition

26. Bargaining Power of Buyers * Forcing higher quality Buyer groups are likely to be powerful if: * Playing firms off of each other Buyers compete with supplying industry by: * Bargaining down prices * 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

27. Porter’s 5 Forces Model of Competition * Substitutes are not direct competitors Threat of Substitute Products Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Bargaining Power of Buyers Threat of New Entrants Bargaining Power of Suppliers Rivalry Among Competing Firms Five Forces of Competition

28. Threat of Substitute Products Fax machines or e-mailed attachments in place of overnight mail delivery 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: Electronic security systems in place of security guards

29. Porter’s 5 Forces Model of Competition * Reduced rivalry means greater profitability Rivalry Among Competing Firms Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products Rivalry Among Competing Firms Bargaining Power of Buyers Threat of New Entrants Threat of Substitute Products Bargaining Power of Suppliers Five Forces of Competition

30. Rivalry Among Existing Competitors 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 *

31. Rivalry Among Existing Competitors 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

32. Rivalry Among Existing Competitors * 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 *

40. The Strategic Management Process Strategic  Actions  Chapter 3: The External Environment Chapter 4: The Internal Environment Strategic Competitiveness Strategic Mission & Strategic Intent Strategic Objectives & Inputs Chapter 1: Strategic Management Ch. 2: Strat. Mgmt . & Performance Chapter 3: The External Environment Chapter 3: The External Environment Chapter 5: Bus.-Level Strategy Chapter 6: Competitive Dynamics Chapter 7: Corp.-Level Strategy Chapter 8: Acquisition & Restructuring Chapter 9: International Strategy Chapter 10: Cooperative Strategy Strategy Formulation Chapter 11: Corporate Governance Ch. 12: Org. Structure & Controls Chapter 13: Strategic Leadership Chapter 14: Org. Renewal & Innovation Strategy Implementation Strategic Competitiveness