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- 2. External Environment of the Firm: Creating Competitive Advantages MGT 401-C University of Miami P. Derayati – Department of Management 1 Introduction Learning from mistakes. • Cell Zone • “...So next time your phone rings, step in to a Cell Zone and indulge in a peaceful conversation with your loved ones. If you thought someone from the detective squad could eavesdrop while you’re in the
- 3. booth, let me tell you that this novelty is completely sound- resistant, thereby delivering privacy to users. I wonder why such an opportunity was not explored by mobile phone makers in the past. Well, applaud the brain behind this concept…”1 2 https://cellphonebeat.com/the-cell-zone-will-deliver-crisp- phone-conversations.html Introduction Learning from mistakes. • Cell Zone • Detected emerging trend: • Rise of cell phone usage in public places • Potential discomfort to others present nearby • Undetected emerging trends:
- 4. • Rise of non-voice communication: ▪ Social Media ▪ Text Messaging (including apps) • Other Factors: • Willingness to pay? (3500) • Loss of 650,000$ to date 3 Creating the Environmentally Aware Organization • Perceptual Acuity helps managers adapt with external shifts. • Defined as “the ability to sense what is coming before the fog clears.” ▪ Ted turner realized the potential for 24-hour news tv ▪ Steve Jobs saw the shifting trend of consumer taste in buying music • It is about shaping, as well as adapting • The way of addressing the issue is equally important: ▪ Napster vs. Apple
- 5. ▪ IoT (Google vs. Amazon) 4 Creating the Environmentally Aware Organization 5 Scanning Monitoring Forecasts Competitive Intelligence Creating the Environmentally Aware Organization • Environmental scanning: involves surveillance of a firm’s external environment ▪ Predicts environmental changes to come ▪ Detects changes already under way ▪ If detected before (most of) competitors notice, allows firm to be proactive • Environmental monitoring: tracks evolution of environmental
- 6. trends • Sequences of measurable facts/events • Streams of activities or trends from outside the organization • Trends can be revealed through indicators: ▪ A Motel 6 executive. ➢ The number of rooms in the budget segment of the industry in the US ➢ The difference between the average daily room rate and the consumer price index (CPI) (what does it reveal?) 6 Creating the Environmentally Aware Organization ▪ A Pier 1 Imports executive ➢ Net disposable income (NDI) ➢ Consumer confidence index ➢ Housing starts ▪ A Johnson & Johnson medical products executive ➢ Percentage of gross domestic product (GDP) spent on health
- 7. care ➢ Number of active hospital beds ➢ The size and power of purchasing agents (indicates the concentration of buyers) 7 Creating the Environmentally Aware Organization • Competitive Intelligence: Associated with collecting data on competitors and interpreting such data • Involves shaping actions with respect to competitors moves and responding to them • Internet and social media (LinkedIn, Facebook, YouTube, etc.…) have become important source for readily available information 8 Creating the Environmentally Aware Organization Environmental forecasting: Predicts change
- 8. • Plausible projections about • Direction, Scope, Speed, and Intensity of environmental change? • Questions such as: • How long will it take a new technology to reach the marketplace? • Will the present social concern about an issue result in new legislation? • Are current lifestyle trends likely to continue? Scenario analysis: Involves detailed assessments of the ways trends may affect an issue & development of alternative futures based on these assessments. 9 Creating the Environmentally Aware Organization SWOT analysis: A basic technique for analyzing firm and industry
- 9. conditions • Firm or internal conditions = Strengths & Weaknesses • Where the firm excels or where it may be lacking • Environmental or external conditions = Opportunities & Threats • Developments that exist in the general environment • Activities among firms competing for the same customers 10 Picture Source: https://articles.bplans.com/how-to-perform- swot-analysis/ Creating the Environmentally Aware Organization • Acute sense of environment is important (and cannot be taken for granted!): • Freddie Mac and Fannie Mae are fundamentally sound … I think they are in good shape going forward.” —Barney Frank (D-Mass.), House Financial Services Committee Chairman, July 14, 2008. (Two months later, the government forced the mortgage giants into conservatorships.)
- 10. • “I think you guys are just a bunch of hippies selling food to other hippies.” —a venture capitalist's response to an invitation to invest in Whole Foods, 1980. • In a January 2014 survey by The Wall Street Journal, 49 economists expected oil to end 2014 at about $95 a barrel, up from about $92 at the time of the survey. (Oil ended the year at about $54 a barrel.) 11 Picture Source: https://articles.bplans.com/how-to-perform- swot-analysis/ The General Environment 12 The General Environment The General Environment: Encompasses forces that have the potential of a meaningful impact on the organization. • These factors can be hard to predict and are difficult to control
- 11. • Can be divided into six categories: • Demographic • Sociocultural • Political/Legal • Technological • Economic • Global 13 The General Environment Demographic: are easily understandable & quantifiable: • The distribution of population age and its trend (Elderly care services, health care, baby products) • Rising (or declining) affluence (Recreational services, affordable grocery) • Changes in ethnic composition • Geographic distribution of population • Greater (smaller) disparities in income levels
- 12. • Not a homogeneous effect: 14 The General Environment • Compared to younger workers, older workers are less motivated, less healthy, resist change, are less trusting, have more trouble balancing work & family. • Does it sound reasonable? • What does the research say, and what implications might this have for a firm’s human resource strategy? 15 The General Environment • ACTUALLY, compared to younger workers, older workers can be MORE motivated, more willing to implement change, are as healthy,
- 13. as trusting, and do not have issues with work-family imbalance. • However, older workers ARE less willing to participate in training & career development. • Implications? • Should we question your assumption biases? 16 Sociocultural • Sociocultural: Are forces that influence the values, beliefs, and lifestyles of a society: ▪ More women in the workforce ▪ Dual-income families ➢ Industries dealing with cooking from the scratch ➢ Child Care industries ➢ Readily available foods ▪ Increase in temporary workers ▪ Greater concern for healthy diets & physical fitness (increasing
- 14. levels of obesity) ➢ Gyms and fitness facilities ➢ Healthy foods industry (grocery stores, pre-made foods) ▪ Greater concern for the environment ▪ Postponement of marriage & family formation, having children 17 Political/Legal • Political/Legal: Processes & legislation influence environmental regulations with which industries must comply: • Tort reform • Americans with Disabilities Act (ADA) • Deregulation of utilities & other industries • Increases in minimum wages • Legislation on corporate governance reforms • Immigration & visa reform • Affordable Health Care Act, Medicare reimbursements
- 15. 18 Technological • Technological: developments lead to new products developments that lead to new products & services; can create new industries & alter existing ones: ▪ Genetic engineering Uber & Lyft ▪ Airbnb ▪ Napster & iTunes ▪ Netflix (Hulu, etc…) • Disruptive innovation (Clayton M. Christensen): technologies that ruin an old industry (CAD/CAM sometimes completely) and establish new ones by introducing ground-breaking products • PCs: affected typewriters, communication, audio and video processing devices • Emails: why post offices did not go out of business? What is a
- 16. likely avenue to invest in for post offices? • Smartphones: affected EVERY industry. Business apps. Segments from portable audio players, cameras, even flash lights! • Most of the time, industries are partly disrupted, but not affected in other areas (movie producers, professional DJs, miner). 19 Technological (continued) • Big corporations usually exploit the current state of the art technology very efficiently and place mechanisms to continue to do so, but are not strong when it comes to employing an emerging disruptive innovation (Christensen) • Common among them to dismiss the value and the potential of the emerging technological trends: • “There is no chance that the iPhone is going to get any
- 17. significant market share.” —Steve Ballmer, former CEO of Microsoft, in 2007 • Why? 20 Technological (continued) • Other emerging trends: • Genetic engineering • Computer-aided design/computer-aided manufacturing systems (CAD/CAM)Research in synthetic & exotic materials • Pollution/global warming • Nanotechnology & physiolectics • Digital technology can affect multiple segments of the General Environment 21 Economic • Economic forces affect all industries (more or less):
- 18. • Interest rates: • Higher pays for debts • Lesser discretionary income on average • Cut in non-essential purchases • Medical expenses? Luxury fashion? • Unemployment • Low-cost providers: rise of demand, decrease in requested wage • How did Walmart do in 2008 financial crisis? • Consumer Price Index • Trends in GDP & net disposable income • Changes in stock market valuations 22 Global • Global: forces offer both opportunities & risks: • Currency exchange rates: ➢ Effects on procurement
- 19. ➢ Effects on loans • Increasing global trade • Emergence of the Chinese economy: ➢ More discretionary income for low-income segment ➢ A threat for employment rates • Trade agreements among regional blocs (NAFTA, EU, ASEAN) ➢ Effects on working class (outsourcing, lower wages) ➢ Lower grocery prices ➢ Lower oil prices • General Agreement of Tariffs & Trade (GATT) – leading to decreasing tariffs/free trade in services • Rapid rise of the middle class in emerging countries 23 General Environment: Relationships among Elements • Elements of the general environment interact with each other: • Demographic trends have implications for economics
- 20. • Greater access to information technology affects both economics and global relationships • Political/legal trends can have very different effects on different industries • The Internet & digital technology has altered the way business is conducted in nearly every business domain 24 The Competitive Environment 25 The Competitive Environment • The competitive environment: Consists of factors in the task or industry environment that are particularly relevant to a firm’s strategy: • Competitors
- 21. • Existing competitors • Potential Competitors: Those considering entry into the industry • Potential Competitors: Those satisfying the same need in another industry • Customers (or buyers) • Suppliers • Including those considering forward integration 26 The Competitive Environment 27 Rivalry among Existing Firms New Entrants Substitutes BuyersSuppliers Bargaining power of buyers
- 22. Bargaining power of suppliers Threat of new entrants Threat of substitute products or services The Threat of New Entrants • The Threat of New Entrants: The threat of new entrants – possibility that the profits of established firms in the industry may be eroded by new competitors. • Depends on existing barriers to entry: • Economies of scale: Reduction in cost per unit produced as volume increases. (Why?) – Automobile manufacturers
- 23. • Economies of scope: Reduction in cost per unit produced as scope of products increases. (Why?) – P&G • Product differentiation • Capital requirements • Switching costs • Access to distribution channels (retail shelf spaces) • Cost disadvantages independent of scale: • Proprietary products • Favorable access to raw materials • Government subsidies • Favorable government policies 28 The Bargaining Power of Buyers • The Bargaining Power of Buyers: • Can force prices down, or demand higher qualities or service levels • Buyers are not necessarily the final customers
- 24. • Buyers have bargaining power when: • Purchasing standard products in large volumes • Profits are low & switching costs are few • Backward integration is possible • Buyer’s product quality is not affected by industry product (Input from supplier is not critical) • Only a few buyers available in the market 29 The Bargaining Power of Suppliers • The Bargaining Power of Suppliers: • Suppliers can exert threat by: • Raise prices • Reduce the quality of purchased goods and services • Limit the availability • Supplier groups are powerful when: • Only a few firms dominate the industry • No competition from substitute products
- 25. • Suppliers sell to several industries • Buyer quality is affected by industry product (Input is considered important by buyers) • Products are differentiated & have switching costs • Forward integration is possible 30 The Threat of Substitute Products & Services • Substitute products & services limit the potential returns of an industry by moving revenues to another industry • Substitutes come from another industry • Respond to the same need • Raise the competition with possibility of price damages • The more attractive the price/performance ratio, the more the substitute erodes industry profits. • Examples: • Internet vs. airlines? • Casinos vs theaters
- 26. • Pre-made foods vs. resturaunts 31 The Intensity of Rivalry Among Competitors in an Industry • Rivalry tactics include price competition, advertising battles, new product introductions, increased customer service or warranties • Factors lead to intense rivalry: • Numerous or equally balanced competitors • Slow industry growth • High fixed or shortage costs • Lack of differentiation or switching costs • Capacity augmented in large increments • High exit barriers: • Barriers that keep from existing an industry even though they lose money • Specialized fixed assets • Long term contracts
- 27. • Strategic relationship with other SBUs (Inputs, Technology, Image) 32 How the Internet and Digital Technologies Affect Competitive Forces 33 Using Industry Analysis: A Few Caveats • Industry structure does not determine everything • Five forces analysis implicitly assumes a zero-sum game – yet mutually beneficial relationships can still be established with buyers & suppliers (common in car manufacturing) • Five forces analysis is essentially a static analysis – yet external forces can still change the structure of all industries • Take time horizon into consideration. For most industries 3 to 5 years is appropriate. It means average profitability over that period,
- 28. not in any particular year. • Do not to declare the industry universally attractive or unattractive! The goal is rather to understand specific competitive factors and assess them in the light of the firm’s strengths and capabilities 34 Strategic Groups Within Industries • Two unassailable assumptions in industry analysis: • No two firms are totally different • No two firms are exactly the same • Strategic groups – clusters of firms that share similar strategies: • Breadth of product & geographic scope • Price/quality • Degree of vertical integration • Type of distribution 35
- 29. Strategic Groups Within Industries • Strategic groups as an analytical tool • Helps identify barriers to mobility that protect a group from attacks by other groups • Helps identify groups whose competitive position may be marginal or tenuous • Helps chart the future direction of firms’ strategies • Helps to think through the implications of each industry trend for the strategic group as a whole 36 Strategic Groups Within Industries 37