© Lucas Wenger 2018Welcome to Strategic ManagementWeek 3.docx

© Lucas Wenger 2018
Welcome to Strategic Management
Week 3
Chapter 2 Review
Evaluating a Firm’s External Environment
What is External Environment Analysis?
The Structure-Conduct-Performance Model
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
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)
General Environment
Demographics & Culture
• What do each of these mean?
• How predictable are they?
• How can they be measured?
• How are they relevant to strategic
management?
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?
Technological Change
• How predictable is this?
• How can it be measured?
• How is it relevant to strategic management?
Major International Events
• How predictable is this?
• How can it be measured?
• How is it relevant to strategic management?
There are two parts of the Environment:
General (PEST/PESTLE/DPest) & Competitive
Source: Ireland, Hitt & Hoskisson 2006 – Copyright Thompson
Business & Professional Publishing
Q

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

What do we look for to determine
whether rivalry is high?
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
What do we look for to determine how high
the threat of substitutability is?
The threat of substitutes is high when:
• Buyers have a high propensity to substitute
• The relative price and performance of

substitutes is high
What do we look for to determine whether
buyers have a high or low power?
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
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
What do we look for to determine whether
suppliers have a high or low power?
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
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
What do we look for to determine how
low the threat of entry is?
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
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
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
Industry Structure
• Fragmented
– No dominant firm
– Opportunity for consolidation
• Emerging

– New created (or re-created industries)
– Opportunity to seize 1st mover advtg?
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
Seizing 1st Mover Advantage

-Suarez & Lanzolla, 2005 (HBR)
Seizing 1st Mover Advantage
-Suarez & Lanzolla, 2005 (HBR)
• 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
• Declining
– ↓∑Sales
– ↑Rivalry
• ↑Buys
• ↑Suppliers
• ↑Substitutes
• Declining
• Leadership
• Niche
• Harvest
• Divestment
Step 1 – Define the industry the firm is in
Step 2 - Identify the players:
Competitors, substitutes, suppliers, buyers,
and potential entrants
Industry Analysis

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
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
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?
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

© Lucas Wenger 2018Welcome to Strategic ManagementWeek 3.docx

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© Lucas Wenger 2018Welcome to Strategic ManagementWeek 3.docx