Lecture 3- Exploring External Enironment : Competiting and Opportunities

Strategic Management:

Module 1:

Lecuture 3-4: The External Environment:

Opportunities, Threats, Industry Competition and Competitor Analysis

 

Overview: Six content areas

1. The firm’s External environment
2. General and industry environment
3. External environment analysis process activities
4. Porter’s 5 Competitive Forces
5. Strategic groups: Definition and influence
6. Competitors and intelligence collection methods

 

 

CASE-Wal-Mart
Environmental Pressures:
Emerged from a small-town in Arkansas, USA. Slogan: EVERYDAY LOW PRICES.Based on cost leadership strategy. Since 2005 growth formula not as effective.In 2006, U.S. division saw 1.9% gain in same-store sales – worst performance ever
WHY? COMPETITION (Target, Costco, Kroger, Safeway): growing 2 – 5 times faster than WM
WM plagued by many problems including (but not limited to) employee-related, environmentalists
and external gov’t/political entities

 

1.   External Environment: General /, Industry and Competitor

 

 

 

The General Environment / The Macro Environment…

 

The broader society dimensions that influence an industry and the firms within it Grouped into 6 dimensions OR ‘environmental segments’ Each segment composed of elements

 

 

2.The General Environment :-

It categorizes environmental influences into six main types Segments & Elements

1. Demographic Segment
2. Economic segment
3. Political / Legal Segment
4. Socio Culture Segment
5. Technological Segment
6. Global Segment

1 Demographic Segment

• Population Size
• Age Structure
• Geographic Distribution
• Ethnic Mix
• Income Distribution

2. Economic Segment

• Inflation rates
• Interest rates
• Trade deficits or surpluses
• Budget deficits or Surpluses
• Personal savings rate
• Business savings rates
• Gross domestic products

 

3. Political / Legal Segment

• Antitrust laws
• Taxation laws
• Deregulation philosophies
• Labour training laws
• Educational philosophies and policies

 

4. Socioculture Segment

• Women in the workforce
• Workforce diversity
• Attitudes about the quality of work life
• Concerns about the environment
• Shift in work and career preferences
• Shifts in preferences regarding products and services characteristics.

5. Technological Segment

• Product innovations
• Applications of knowledge
• Focus of private and govt supported R&D Expenditure
• New communication technology

6. Global Segment

• Important political events
• Critical global markets
• Newly industrialized countries
• Different cultural and institutional attributes.

 Industry Environment
Set of factors directly influencing
A firm’s competitive actions/responses
Relates to Porter’s 5 Forces – see upcoming slides
Competitor analysis: gather and interpret competitor information
Competitor Environment
Gives details about
A firm’s direct and indirect competitors
The competitive dynamics expected to impact a firm's efforts to generate above-average returns

 

3.External Environment Analysis

 

Opportunity
General environment condition that, if exploited, helps a company achieve strategic competitiveness

Threat
General environment condition that may hinder a company's efforts to achieve strategic competitiveness

 

 

4 components of External Environment

• Scanning :      Identifying early signals of enviromental changes and trends
• Monitoring :   Detecting meaning through ongoing observations of enviromental changes and trends
• Forecasting:   Developing projections of anticipated outcome based on monitered changes and trends
• 
  
  Assessing:      Determing the timing and importance of environmental changes and trends for firms        strategies and their management

Industry Environment Analysis

 

Industry
Definition: Group of firms producing products that are close substitutes
Industry environment, in comparison to the general environment, has more direct effect of firm’s
Strategic competitiveness and Above-average returns.

 

Intensity of industry competition and industry’s profit potential are a function of 5 forces

4.The Five Forces of Competition Model : Porter’s 5 Forces

 

 

 

• (1/5)New entrants
• Can threaten market share of existing competitors
• May bring additional production capacity
• Function of two factors

                  Barriers to entry

• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of scale
• Gov’t policy

2: Expected retaliation

 

• 2/5: Bargaining power of suppliers

They are powerful when …
1. Few large companies and more concentrated than the industry to which they sell
2. No substitutes
3. Industry firms not significant customer to supplier gp
4. Supplier’s goods are critical to buyer’s success
5. High switching costs due to effectiveness of supplier’s products
6. Threat of forward integration

 

 

• 3/5: Bargaining power of buyers

They are powerful when …
1. Purchase large portion of industry’s total output
2. Product sales accounts for significant seller annual revenue
3. Low switching costs (to other industry product)
4. Industry products are undifferentiated or standardized and threat of backward integration

 

 

4/5: Threat of substitute products
Goods or services outside of given industry perform same or similar functions (I.e., sugar vs. sugar substitute such as NutraSweet)

 

 

5/5: Intensity of Rivalry Among Competitors

1. Numerous or equally balanced competitors
• Firms are generally aware about their competitor and no firm can act without eliciting responces and conteraction would be there..
2. Slow industry growth
• Growing Mkt: Less Pressure to take the customer from compititors but ...
• In No Growth market: Intense battle to increase mkt share by attacking Compititors Mkt share
3. High fixed costs or high storage costs:
• When fixed cost account for a large part of total cost companies tries of MAXIMISE their productive capacity to spread cost across a large volume of output.
• When many firms maximise their capacity, excess capacity is created on an industry wide basis.
• To reduce the inventory, firms typically cut prices of their products and offer rebate and special discounts to intencify the compitition e.g. Automobile Industry
• Perisbable good lose their value rapidly with the time and as the inventory grow, productrs of perishabe good
4.  Lack of differentiation or low switching costs
• Firms with product differentiation have less rivalry and low competition
• However when buyer view it as a Commodities, rivalry intensifies
• Eg.Personal computers Dell, HP and other manufacturers 
5. High strategic stakes
6. High exit barriers
• 1. Specialized assets
• 2. Fixed costs of exit (i.e., labor agreements)
• 3. Strategic interrelationships (i.e., one business depends on another)
• 4. Emotional barriers (i.e., loyalty to employees, etc.)
• 5. Government and social restrictions

 

5.Strategic Groups

Def:-Strategic Groups
Set of firms emphasizing similar strategic dimensions to use a similar strategy
Implications:
Because firms within a group compete (offer similar products) rivalry can be intense – the greater the rivalry the greater the threat to each firm’s profitability
Strengths of the 5 forces differs across strategic groups
The closer the strategic groups, in terms of strategy, the greater the likelihood of rivalry

Competitor analysis and organization response:

1. What drives competitors: Shown by organization's future objectives
2. What the competitor is doing and can do : Revealed in organization's current strategy
3. What the competitor believes about the industry:Shown in organization's assumptions
4. What the competitor’s capabilities are :Shown by organization's strengths and weaknesses

Competitor Analysis Components

Competitor intelligence
Set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities

Follow ethical practices when gathering competitor intelligence

• Obtain public information
• Attend trade fairs and shows and collect brochures, view exhibits, listen to their discussions

Some practices may be legal, but unethical
Unethical tactics can include

• Blackmail
• Trespassing
• Eavesdropping
• Stealing drawings, samples or documents