Download External Environment

External and Internal Analyses
Environment
Sociocultural
Industry
Environment
Competitor
Environment
Technological
General
By studying the
external
environment, firms
identify what they
might choose to do
Opportunities and
threats
External and Internal
Analyses
General Environment Components
Demographic
Segment
 Population size
 Age structure
 Ethnic Mix
 Geographical Distribution
 Income distribution
 Immigration
Sociocultural
Segment
 Women in the workforce
 Workforce diversity
 Environmental Concerns
 Work life quality attitudes
 Concerns about the environment
 Shifts in 2 career preferences
 Shifts in preferences regarding product
/ service characteristics
Political/Legal
Segment
 Competition Laws
 Labour Laws
 Taxation laws
 Education philosophies & policy
 Government econ. involvement /
ownership Philosophies
 De-/ Regulation philosophy
General Environment Components
Economic
Segment
 Inflation & interest rates
 Personal savings rate
 Business savings rates
Technological  Product innovations
Segment
 Process Innovations
 Applications of knowledge
Global
Segment
 Important political events
 Critical global markets
 Trade deficits or surpluses
Budget deficits or surpluses
 Gross domestic product
 Focus of private & governmentsupported R&D expenditures
 New communication
technologies
 Newly industrialized countries
 Different cultural and institutional
attributes
The Industry Environment
The set of factors that directly influences a firm,
it’s competitive actions & competitive
responses:
1. The threat of new entrants
2. The power of suppliers
3. The power of buyers
4. The threat of product substitutes
5. The intensity of rivalry among competitors
Competitor Analysis
Predicting the dynamics of competitor actions,
responses and intentions.
Macro-environmental Forces
External Environmental
Analysis
The external environmental analysis process should be
conducted on a continuous basis.
This process includes four activities:
 Scanning

Monitoring
Identifying early signals of
environmental changes and trends
Detect meaning by ongoing observations of environmental
changes and trends
Forecasting
Assessing
Developing projections of anticipated
outcomes based on monitored changes and
trends
Determining the timing & importance
of
environmental changes and trends for
firms' strategies & their management
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 trend
 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
Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Rivalry Among Competing
Firms in Industry
Threat of
Substitute
Products
Bargaining
Power of
Buyers
Threat of New Entrants
*
Barriers
Barriers
Entry
to to
Entry
*
*
*
*
Economies of Scale
* Product Differentiation
* Capital Requirements
* Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Government Policy
Expected Retaliation
Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Suppliers exert power
in the industry by:
Supplier industry is dominated by a few
firms.
* Suppliers’ products have few substitutes.
*
* Threatening to raise
* Buyer is not an important customer to
prices or to reduce quality
Powerful suppliers can
squeeze industry
profitability if firms are
unable to recover cost
increases
*
*
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.
*
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
 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
Buyers compete with
supplying industry
by:
Bargaining down prices
Forcing higher quality
Playing firms off each
other
Threat of Substitute Products
Keys to evaluating substitute products:
*
Products
with similar
function
limit the
prices firms
can charge
Products with improving price /
performance tradeoffs relative to
present industry products
For Example:
Electronic security systems in
place of security guards
Fax machines or e-mailed
attachments in place of
overnight mail delivery
Rivalry Among Existing Competitors
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
Occurs when a firm is pressured or sees an opportunity
 Price competition often leaves entire industry worse off
 Advertising battles may increase total industry demand,
but may be costly to smaller competitors
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when

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





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Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
Rivalry Among Existing Competitors
High Exit Barriers are economic, strategic
and emotional factors which cause companies
to remain in an industry even when future
profitability is questionable.

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Specialized assets
Fixed cost of exit (e.g., labour agreements)
Strategic interrelationships
Emotional barriers
Government and social restrictions
Competitor Environment
Competitor intelligence is the ethical gathering of
needed information and data about competitors’
objectives, strategies, assumptions, and
capabilities.
• What drives the competitor as shown by its future
objectives,
• What the competitor is doing and can do as revealed
by its current strategy,
• What the competitor believes about itself and the
industry, as shown by its assumptions,
• What the the competitor may be able to do, as shown
by its capabilities.
Competitor Analysis
Future Objectives:
Future objectives
• How do our goals compare with
our competitors’ goals?
• Where will the emphasis be
placed in the future?
• What is the attitude toward risk?
Competitor Analysis
Current Strategy:
Future objectives
Current strategy
• How are we currently
competing?
• Does this strategy support
changes in the competitive
structure?
Competitor Analysis
Assumptions:
Future objectives
Current strategy
Assumptions
• Do we assume the future will
be volatile?
• Are we operating under a status
quo?
• What assumptions do our
competitors hold about the
industry and themselves?
Competitor Analysis
Future objectives
Current strategy
Assumptions
Capabilities
Capabilities:
• What are our strengths and
weaknesses?
• How do we rate compared to
our competitors?
Competitor Analysis
Future objectives
Response
Response:
Current strategy
• What will our competitors do in
the future?
Assumptions
• Where do we hold an
advantage over our
competitors?
Capabilities
• How will this change our
relationship with our
competitors?