Because learning changes everything CHAPTER 2 Analyzing the
Because learning changes everything. ® CHAPTER 2 Analyzing the External Environment of the Firm: Creating Competitive Advantages © 2021 Mc. Graw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of Mc. Graw Hill.
The Important of External Environment Consider … Successful managers are always aware of what’s going on outside their company. Their perceptual acuity allows them to sense what’s coming. Detecting early warning signals, keeping pace with changes in the external environment can sustain a competitive advantage. © Mc. Graw Hill
Enhancing Awareness of the External Environment Exhibit 2. 1 Inputs to Forecasting © Mc. Graw Hill
Scanning the Environment. . . • What does it look like? © Mc. Graw Hill • How do I interpret it?
Environmental Scanning and Monitoring Environmental scanning involves surveillance of a firm’s external environment. • Predicts environmental changes to come. • Detects changes already under way. • Allows firm to be proactive. Environmental monitoring tracks evolution of environmental trends. • Sequences of measurable facts/events. • Streams of activities or trends from outside the organization. © Mc. Graw Hill
Competitive Intelligence Competitive intelligence • Helps firms define and understand their industry. • Identifies rivals’ strengths & weaknesses. • Collect data on competitors. • Interpret intelligence data. • Helps firms avoid surprises. • Anticipate competitors’ moves. • Decrease response time. • Potential for unethical behavior while gathering intelligence. © Mc. Graw Hill
Environmental Forecasting Environmental forecasting predicts change. • Plausible projections about • Direction of environmental change? • Scope of environmental change? • Speed of environmental change? • Intensity of environmental change? Scenario analysis is an in-depth approach. • What are some of the ways trends may affect an issue? • Can we project alternative futures based on these assessments? © Mc. Graw Hill
SWOT Analysis SWOT analysis is a basic technique for analyzing firm and industry conditions. • A firm’s internal conditions = Strengths and Weaknesses. • Where the firm excels or where it may be lacking. • Any environmental or external conditions = Opportunities and Threats. • Developments that exist in the general environment. • Activities among firms competing for the same customers in an industry. • Must consider both internal and external factors simultaneously. © Mc. Graw Hill
Situation Analysis Strengths Weaknesses Opportunities • What does the company do well? • What worries other firms about your firm? • Where does the organization compete well? • What can you improve? • What is being done badly? • What is working less than optimally? • What are your competitors doing better? • What is possible? • In what businesses will you be in five years? • Who could you partner with? • What else can be done with your existing technology? © Mc. Graw Hill Threats • What keeps you up at night? • What are barriers to your development? • Can you fund your growth? • What new technology can unseat you?
SWOT Analysis 2 -10 ▪ SWOT analysis ▪ Forces managers to consider both internal & external factors simultaneously ▪ Makes firms act proactively ▪ Raises awareness about role of strategy ▪ A firm’s strategy must build on its strengths ▪ Remedy the weaknesses or work around them ▪ Take advantage of the opportunities presented by the environment ▪ Protect the firm from the threats © Mc. Graw Hill
The General Environment The general environment is composed of factors that are both hard to predict and difficult to control. • Demographic. • Sociocultural. • Political/Legal. • Technological. • Economic. • Global. © Mc. Graw Hill
The Demographic Segment Demographics are easily understandable & quantifiable. • Aging population. • Rising affluence. • Changes in ethnic composition. • Geographic distribution of population. • Greater disparities in income levels. © Mc. Graw Hill
The Social Segment Sociocultural forces influence the values, beliefs, and lifestyles of a society. • More women in the workforce. • Increase in temporary workers. • Greater concern for fitness. • Greater concern for the environment. • Postponement of family formation. © Mc. Graw Hill
The Political/Legal Segment Political/Legal processes & legislation influence environmental regulations with which industries must comply. • Tort reform. • Americans with Disabilities Act (ADA) of 1990. • Deregulation of utilities & other industries. • Increases in federally mandated minimum wages. • Taxation at local, state, federal levels. • Legislation on corporate governance reforms in bookkeeping, sock options, and so forth (Sarbanes. Oxley act of 2002). • Affordable Care Act (Obamacare) © Mc. Graw Hill
The Technological Segment Technological developments lead to new products and services. They can create new industries and alter existing ones. • Genetic engineering. • Three-dimensional (3 D) printing. • Research in synthetic & exotic materials. • Miniaturization of computing technologies. • Wireless communications. • Nanotechnology. • Big Data Analytics © Mc. Graw Hill
The Economic Segment Economic forces affect all industries. • Interest rates. • Unemployment. • Consumer Price Index. • Trends in GDP. • Changes in stock market valuations. • National debt. © Mc. Graw Hill
The Global Segment Global forces offer both opportunities & risks. • Changes in global trade. • Currency exchange rates. • Emergence of the Indian and Chinese economies. • Trade agreements among regional blocs (NAFTA, EU, ASEAN). • Creation of the WTO (leading to decreasing tariffs/free trade in services). • Increased risks associated with terrorism. © Mc. Graw Hill
General Environment: Relationships among Elements of the general environment interact with each other. • Demographic trends have implications for economics. • Political/legal trends can have very different effects on different industries. • Greater access to information technology affects both economics and global relationships. • The digital economy and the use of data analytics has altered the way business is conducted in nearly every business domain. © Mc. Graw Hill
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 (existing or potential). • Including those considering entry into an entirely new industry. • Customers (or buyers). • Suppliers. • Including those considering forward integration. © Mc. Graw Hill
Porter’s Five Forces Model of Industry Competition Exhibit 2. 4 Porter’s Five Forces Model of Industry Competition Source: From Michael E. Porter, “The Five Competitive Forces That Shape Strategy, ” Special Issue on HBS Centennial. . Harvard Business Review 86, No. 1 (January 2008), 78 -93. Reprinted with permission of Michael E. Porter. Access the text alternative for slide images. © Mc. Graw Hill
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. • Product differentiation. • Capital requirements. • Switching costs. • Access to distribution channels. • Cost disadvantages independent of scale. © Mc. Graw Hill
The Bargaining Power of Buyers have bargaining power. Buyers can force down prices, bargain for higher quality or more services, or play competitors against each other. Buyer groups are powerful. • Purchasing standard products are in large volumes. • Profits are low & switching costs are few. • Backward integration is possible. • Buyer’s product quality is not affected by industry product. © Mc. Graw Hill
The Bargaining Power of Suppliers can exert bargaining power by threatening to raise prices or reduce the quality of purchased goods and services. Supplier groups are powerful. • Only a few firms dominate the industry. • There is no competition from substitute products. • Suppliers sell to several industries. • Buyer quality is affected by industry product. • Products are differentiated & have switching costs. • Forward integration is possible. © Mc. Graw Hill
The Threat of Substitute Products and Services Substitute products & services limit the potential returns of an industry. Substitutes come from another industry. Substitutes can perform the same function as the industry’s offerings. Substitutes place a ceiling on prices that firms in an industry can profitably charge. • The more attractive the price/performance ratio, the more the substitute erodes industry profits. © Mc. Graw Hill
The Intensity of Rivalry among Competitors in an Industry Rivalry tactics include price competition, advertising battles, new product introductions, increased customer service or warranties. Interacting 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. © Mc. Graw Hill
How the Internet and Digital Technologies Affect Competitive Forces Benefits to Industry Disadvantages to Industry Threat of New Entrants • Can offer premium services. • Gain access to previously closed distribution channels or manufacturers. • Lower barriers to entry increased number of entrants. • Many Internet-based capabilities can be easily imitated. Bargaining Power of Buyers • Reduces the power of buyer intermediaries in many distribution channels. • Switching costs decrease. • Information availability online empowers and users. Bargaining Power of Suppliers • Online procurement methods can increase bargaining power over suppliers. • Reintermediation creates opportunities for new suppliers. • The Internet gives suppliers access to more customers and makes it easier to reach end users. • Online procurement practices deter competition and reduce differentiating features. Threat of Substitutes • Internet-based increases in overall efficiency can expand industry sales. • Internet-based storage capabilities create more opportunities for substitution. Intensity of Rivalry • If capable, can use digital technologies to create a distinct image, unique offerings, smarter service delivery options to differentiate themselves. • Since location is less important, the number of competitors increases. • Differences among competitors are harder to perceive online. • Rivalry tends to focus on price and differentiating features are minimized via infomediaries. © Mc. Graw Hill
Using Industry Analysis: A Few Caveats Managers must not always avoid low profit industries; these can still yield high returns for players who pursue sound strategies. Five forces analysis implicitly assumes a zerosum game. Yet mutually beneficial relationships can still be established with buyers & suppliers. Five forces analysis is essentially a static analysis, yet external forces can still change the structure of all industries. • See the value net extension of five forces analysis. • Vertical dimension = suppliers & customers. • Horizontal dimension = substitutes & complements. © Mc. Graw Hill
The Value Net Exhibit 2. 6 The Value Net Source: Adapted from “The Right Game: Use Game Theory Shape Strategy, ” by A. Brandenburger and B. J. Nalebuff, July-August 1995 Harvard Business Review. Access the text alternative for slide images © Mc. Graw Hill
Example: Strategic Groups within Industries Exhibit 2. 7 The World Automobile Industry: Strategic Groups Note: Members of each strategic group are not exhaustive, only illustrative. Access the text alternative for slide images. © Mc. Graw Hill
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