Presentation design by Charlie Cook

Presentation design by Charlie Cook

Chapter 2

The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

PART 1 STRATEGIC MANAGEMENT INPUTS

Student Version

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2–2

General Environment

Dimensions in the broader society that influence an industry and the firms within it:

Demographic

Economic

Political/legal

Sociocultural

Technological

Global

Physical

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2–3

Industry Environment

The set of factors directly influencing a firm and its competitive actions and competitive responses

Threat of new entrants

Power of suppliers

Power of buyers

Threat of product substitutes

Intensity of rivalry among competitors

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2–4

External Environmental Analysis

General environment

Focused on the future

Industry environment

Focused on factors and conditions influencing a firm’s profitability within an industry

Competitor environment

Focused on predicting the dynamics of competitors’ actions, responses and intentions

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Segments of the General Environment

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2–5

The Demographic Segment

Population size

Age structure

Geographic distribution

Ethnic mix

Income distribution

Segments of the General Environment (cont’d)

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Global Focusing

Important geopolitical trends

Critical global niche markets

Growth of the informal economy

Different cultural and institutional attributes

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2–7

Industry Environment Analysis

Industry Defined

A group of firms producing products that are close substitutes.

Firms use a rich mix of different

competitive strategies to pursue above-average returns when competing in a particular industry.

An industry’s structural characteristics influence a firm’s choice of strategies

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Threat of New Entrants: Barriers to Entry

Economies of scale

Product differentiation

Capital requirements

Switching costs

Access to distribution channels

Cost disadvantages independent of scale

Government policy

Expected retaliation

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2–9

Bargaining Power of Suppliers

Supplier power increases when:

Suppliers are large and few in number.

Suitable substitute products are not available.

Individual buyers are not large customers of suppliers and there are many of them.

Suppliers’ goods are critical to the buyers’ marketplace success.

Suppliers’ products create high switching costs.

Suppliers pose a threat to integrate forward into buyers’ industry.

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2–10

Bargaining Power of Buyers

Buyer power increases when:

Buyers are large and few in number.

Buyers purchase a large portion of an industry’s total output.

Buyers’ purchases are a significant portion of a supplier’s annual revenues.

Buyers’ switching costs are low.

Buyers can pose threat to integrate backward into the sellers’ industry.

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2–11

Threat of Substitute Products

The threat of substitute products increases when:

Buyers face few switching costs.

The substitute product’s price is lower.

Substitute product’s quality and performance are equal to or greater than the existing product.

Differentiated industry products that are valued by customers reduce this threat.

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2–12

Intensity of Rivalry Among Competitors

Industry rivalry increases when:

There are numerous or equally balanced competitors.

Industry growth slows or declines.

There are high fixed costs or high storage costs.

There is a lack of differentiation opportunities or low switching costs.

When the strategic stakes are high.

When high exit barriers prevent competitors from leaving the industry.

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2–13

Low entry barriers

Interpreting Industry Analyses

Unattractive Industry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

(Low profit potential)

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2–14

Interpreting Industry Analyses (cont’d)

Attractive Industry

High entry barriers

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

(High profit potential)

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Strategic Groups

Strategic Group Defined

A set of firms emphasizing similar strategic dimensions and using similar strategies.

Intra-strategic group competition is more intense than is inter-strategic group competition due to:

Similar market positions

Similar products

Similar strategic actions

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2–15

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2–16

Competitor Analysis

Competitor Intelligence

The ethical gathering of needed information and data that provides understanding of:

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 the industry, as shown by its assumptions.

What the competitor’s capabilities are, as shown by its strengths and weaknesses.

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Complementors

Complementors

The network of companies that sell complementary products or services or are compatible with the focal firm’s own product or service.

If a complementor’s product or service adds value to the sale of the focal firm’s product or service, it is likely to create value for the focal firm.

However, if a complementor’s product or service is in a market into which the focal firm intends to expand, the complementor can represent a formidable competitor.

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Ethical Considerations

Practices considered both legal and ethical:

Obtaining publicly available information

Attending trade fairs and shows to obtain competitors’ brochures, viewing their exhibits, and listening to discussions about their products

Practices considered both unethical and illegal:

Blackmail

Trespassing

Eavesdropping

Stealing drawings, samples, or documents

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