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Dr.

Satirenjit Kaur Johl

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Studying this chapter should provide you with the strategic
management knowledge needed to:
Explain the importance of analyzing and understanding the
firms external environment.
Define and describe the general environment and the industry
environment.
Discuss the four activities of the external environmental analysis
process.
Name and describe the general environments six segments.
Identify the five competitive forces and explain how they
determine an industrys profit potential.
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Studying this chapter should provide
you with the strategic management
knowledge needed to:
* Define strategic groups and describe
their influence on the firm.
* Describe what firms need to know
about their competitors and different
methods used to collect intelligence
about them.

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Figure 1.1
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Figure 2.1
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Dimensions in the broader society that
influence industry and the firms within it
Economic
Sociocultural
Global
Technological
Political/legal
Demographic

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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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All of the companies that the firm competes
against.

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General environment
Focused on the future
Industry environment
Focused on factors and conditions
influencing a firms profitability within an
industry
Competitor environment
Focused on predicting the dynamics of
competitors actions, responses and
intentions
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Opportunity
A condition in the general environment that if
exploited, helps a company achieve strategic
competitiveness
Exp increasing no of men interested in fragrances &
skin products Procter & Gamble takes advantage of it
Threat
A condition in the general environment that may hinder
a companys efforts to achieve strategic
competitiveness
Exp: Digital tech affected Polaroid as it was prepared
& did not respond effectively
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A continuous process which includes
Scanning for early signals of potential
changes and trends in the general environment
Monitoring changes to see if a trend emerges
from among those spotted by scanning
Forecasting projections of outcomes based on
monitored changes and trends
Assessing the timing and significance of changes
and trends on the strategic management of the firm

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Table 2.2
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The Economic Segment
Inflation rates
Interest rates
Trade deficits or
surpluses
Budget deficits or
surpluses
Personal savings rate
Business savings rates
Gross domestic product

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The Sociocultural
Segment
Women in the workplace
Workforce diversity
Attitudes about quality
of worklife
Concerns about
environment
Shifts in work and career
preferences
Shifts in product and
service preferences

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The Global Segment
Include relevant new global
markets, existing markets
that are changing,
important political events.
Globalization of business
markets creates
opportunities & challenges
for firms.
Increasing amount of
global out sourcing
Extends a firms reach &
potential
Risk is involved in global
markets

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The Technological
Segment
Product innovations
Applications of
knowledge
Focus of private and
government-supported
R&D expenditures
New communication
technologies

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The Political/Legal
Segment
Taxation laws
Deregulation
philosophies
Labor training laws
Educational
philosophies and
policies

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The Demographic Segment
Population size world population from
3(1956) to 6 (1999) to 9 billion (2040)
Age structure aging population in Japan,
North America & Europe
Geographic distribution
Ethnic mix good & services adapt with
the unique needs
Income distribution dual career couples
in accepting international assignment.
2005 (55%) of the world population define
as middle class
(1/3 of the income left for
discretionary spending)

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Industry Defined
A group of firms producing products that
are close substitutes
Firms that influence one another
Includes a rich mix of competitive
strategies that companies use in
pursuing strategic competitiveness and
above-average returns

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Figure 2.2
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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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Economies of Scale
Marginal improvements in efficiency
that a firm experiences as it
incrementally increases its size
Advantages and disadvantages of
large-scale and small-scale entry

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Product Capital
differentiation Requirements
Unique products Physical facilities
Customer loyalty Inventories
Products at Marketing activities
competitive prices Availability of capital

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Switching Costs
One-time costs customers incur
when they buy from a different
supplier
New equipment
Retraining employees
Psychic costs of ending a relationship

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Access to Distribution Channels can be strong barrier for
new entry
Particularly act as a strong barrier in consumer nondurable
goods
Stocking or shelf space in grocery stores where shelf space is
limited
Price breaks barrier for new entrants
Cost Disadvantages Independent of Scale
Established competitors have cost advantages that new entrants
cannot duplicate such as:
Proprietary product technology
Favorable access to raw materials
Desirable locations

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Government policy
Gov often restrict entry into some
industries
Licensing and permit
requirements
Deregulation of industries

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Expected retaliation
Responses by existing
competitors may depend on a
firms present stake in the
industry (available business
options)

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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 buyers marketplace
success
Suppliers products create high switching costs.
Suppliers pose a threat to integrate forward into buyers
industry. Credibility enhanced when suppliers have
substantial resources & provide highly differentiated
product

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Buyer power increase when:
Buyers are large and few in number
Buyers purchase a large portion of
an industrys total output
Buyers purchases are a significant portion
of a suppliers annual revenues
Buyers can switch to another product without
incurring high switching costs
Industrys product are undifferentiated & Buyers
pose threat to integrate backward into the sellers
industry

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The threat of substitute products
increases when:
Buyers face few switching costs
The substitute products price is
lower
Substitute products 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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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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Low entry barriers

Suppliers and buyers


have strong positions
Unattractive
Strong threats from Industry
substitute products

Intense rivalry
Low profit potential
among competitors

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High entry barriers

Suppliers and buyers


have weak positions
Attractive
Few threats from Industry
substitute products

Moderate rivalry
High profit potential
among competitors

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

Internal competition between strategic


group firms is greater than between firms
outside that strategic group

There is more heterogeneity in the


performance of firms within strategic
groups

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Strategic Dimensions that firms may
treat similarly
Extent of technological leadership
Product quality
Pricing Policies
Distribution channels
Customer service
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Competitor Intelligence
The ethical gathering of needed information and
data that provides insight into:
A competitors direction (future objectives)
A competitors capabilities and intentions
(current strategy)
A competitors beliefs about the industry (its
assumptions)
A competitors capabilities
Exp : Philip Morris International vs Japan
Tobacco ; Coco cola vs Pepsi
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Figure 2.3
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