External Environmental

Analysis

1
 Lecture Topics
• Purpose of External Environmental Analysis
• Gathering Information for External
Environmental Analysis
• General Environment
• Competitive Environment
• Key Success Factors
• Competitive Changes During Industry
Evolution
• Strategic Groups
• National Competitive Advantage
•
2
 Purpose of External
Environmental Analysis
• Organizations are affected by
conditions in the environment
• Managers need to be aware of these
conditions in order to
– Take advantage of opportunities that
can lead to higher profits
– Reduce the impact of threats that can
harm the organization’s future

3
Gathering Information for External
Environmental Analysis
• Managers need information in order to know
and develop an understanding about what
is happening in the external environment
• Three approaches to information gathering:
– Scanning: general surveillance of
environmental changes; looking for early
signals of changes
– Monitoring: close attention to specific
developments that could affect the
organization
– Competitive Intelligence: following actions of
competitors 4
 Two Areas for Analysis
• General Environment
• Competitive Environment

5
The General and Competitive Environment
 General
Environment
Demographics

Competitive
Global Environment Political/Legal

Threat on new entrants

Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products

Sociocultural Competitive rivalry

Technological

Macoreconomic
6
 General Environment
Demographics
• Characteristics of a country’s population
– Size of population and growth rate
– Age distribution of population
– Education levels
– Income distribution
– Ethnic diversity
– Geographic distribution

7
 General Environment
Political/Legal
• Political and legal conditions affecting
business
– Government policies toward business
– Investment incentives
– Business regulation: labor, environment
– Education priorities
– Budget conditions and plans

8
 General Environment
Technological
• Technological developments relevant to
a business
– Telecommunications
– Internet
– On-line training
– Product and process innovations

9
 General Environment
Macroeconomic
• Impact of the economy on business
– Size and change in gross domestic
product
– Per capita income levels
– Inflation rate
– Interest rates
– Foreign trade deficit or surplus
– Unemployment
– Rates of saving and investment
– 10
 General Environment
Sociocultural
• Influence of values, beliefs, and
lifestyles of a country on business
– Family relationships
– Attitudes about work
– Living arrangements
– Styles of entertainment
– Attitudes toward health

11
 General Environment
Global
• International developments that can
impact a business
– Rise of China as economic power
– Rising global trade and WTO
– Intellectual property protection
– Important political events: Iraq war
– Search for low cost suppliers

12
 Competitive Environment
• The essence of strategy formulation is coping
with competition.
• The corporate strategists’ goal is to find a
position in the industry where his or her
company can best defend itself against
these forces or can influence them in its
favor.
• Managers must understand the conditions of
competition within their industry
– Porter Five-Forces Model of Competition
(determining the attractiveness of an
industry)
– Key Success Factors
– Competitive Changes During industry Evolution
– Strategic Groups 13
– National Competitive Advantage
 Defining an Industry
• Industry
– A group of companies offering products
or services that are close substitutes
for each other
• Competitors
– Rival companies that serve the same
basic customer needs

14
 Defining an Industry (cont’d)
• Sector
– A group of closely related industries
• Market segments
– Distinct groups of customers within a
market that can be differentiated from
each other based on their distinct
attributes and demands
• Changing industry boundaries

15
 The Computer Sector:
Industries and Segments

16
Five Forces Driving Industry Competition

17
 Threat of New Entrants
• Fundamental question: how easy is it for
another company to enter the industry?
• Factors making easy entry to industry
– Low economies of scale
– Low product differentiation
– Low capital requirements
– No switching costs for buyer
– Easy access to distribution channels
– Little government regulation

18
 Supplier Power
• Fundamental question: how badly does a
supplier need your business?
• Factors giving power to supplier:
– Supplier industry dominated by few firms
– Buyer is not important to customer
– Supplier’s product is important input to buyer’s
product
– Supplier’s products have high switching costs
– Supplier can “integrate forward” and become
competitor of buyer
–
19
 Threat of Substitutes
• Fundamental question: what other products
or services could perform the same
function as your products or services?
• Factors indicating high threat of substitutes:
– Few switching costs for buyer
– Price of substitute lower or quality higher than
for your products
– Firms offering substitutes have high profitability
–

20
 Buyer Power
• Fundamental questions: How badly does a
buyer need your products or services?
• Factors contributing to high buyer power:
– Few buyers compared to the number of sellers
– Buyers purchases high relative to seller’s sales
– Products are undifferentiated
– Buyer has low switching costs
– Buyer has low profits
– Buyer can “integrate backward” and supply the
product to itself

21
 Competitive Rivalry
• Fundamental question: how intense is
competition in the industry?
• Factors leading to high competitive rivalry:
– Numerous or equally balanced competitors
– High fixed costs
– Slow industry growth
– Lack of differentiation or switching costs
– High strategic stakes
– High exit barriers
–

22
 A Sixth Force:
Complementors
• Not a supplier
• Offers service or product that affects
industry’s performance
• When complementors are important and their
number is increasing
– Demand and profits in the industry are boosted
• When complementors are weak
– Industry growth can slow and profits can be
limited
• Example: Internet Service Providers
“complementors” to eBusiness firms
23
 Strategic Implications of the
Five Competitive Forces
•Competitive environment is unattractive
from the standpoint of earning good
profits when:
–Rivalry is strong
–Entry barriers are low and entry is likely
–Competition from substitutes is strong
–Suppliers and customers have
considerable bargaining power

24
Strategic Implications of the
Five Competitive Forces
•Competitive environment is ideal from
a profit-making standpoint when:
–Rivalry is moderate
–Entry barriers are high and no firm is
likely to enter
–Good substitutes do not exist
–Suppliers and customers are in a weak
bargaining position

25
 Key Success Factors
• In many industries, there are certain actions
or practices that a business must follow in
order to compete in the industry.
• May need effort to distinguish company from
competitors
• AN INDIVIDUAL COMPANY DOES NOT
HAVE KEY SUCCESS FACTORS!!!!
• KEY SUCCESS FACTORS ARE NOT THE
SOURCE OF A COMPANY’S
COMPETITIVE ADVANTAGE – THEY
ARE REQUIREMENTS FOR COMPETING
IN AN INDUSTRY AND DO NOT GIVE
ANY FIRM A COMPETITIVE
ADVANTAGE 26
 Examples of Key Success
Factors in Selected Industries
• Pharmaceuticals: research and
personal selling
• Beer: advertising and distribution
• Restaurant: quality food, service,
location, notoriety
• Retailer: location and priced-for-quality

27
 Changes in Competition
During Industry’s Evolution
• Over time as an industry evolves, the nature
and basis of competition changes
• Managers must anticipate how the forces will
change as the industry evolves and
formulate appropriate strategies
• Five Stages ( similar to product-life cycle)
– Embryonic—introduction of product
– Growth
– Shakeout
– Mature
– Declining
28
Stages in the Industry Life
Cycle

29
Shakeout: Growth in Demand
and Capacity

30
 Requirements in Each Stage
of Industry’s Evolution
• Embryonic: Know-how, educating customers,
opening distribution channels
• Growth: Know-how for continued innovation,
financing, build demand
• Shakeout: Dominant market position, low
cost producer, high capacity
• Maturity: low cost production, brand loyalty
• Declining: lowest cost production, reduce
capacity

31
 Limitations of Models for
Industry Analysis
• Life cycle issues
– The embryonic stage can sometimes be
skipped
– Industry growth can be revitalized
– The time span of the stages can vary
• Innovation and change
– Innovation can unfreeze and reshape industry
structure
– An industry may be hypercompetitive, with
permanent and ongoing change
32
 Limitations of Models for
Industry Analysis (cont’d)
• Company differences
– The importance of company differences
within an industry or strategic group
can be underemphasized
– The individual resources and
capabilities of a company may be
more important in determining
profitability than the industry or
strategic group
33
 Strategic Groups
• Companies do not compete against all
companies in an industry
• Companies compete against several other
companies that follow similar strategies
• A strategic group consists of those rivals
with similar competitive approaches in an
industry
• Examples ways of competing:
– Price -- Range of products
– Innovation -- Customers served
– Research
– Quality

34
 Procedure for Constructing a
Strategic Group Map
STEP 1: Identify competitive characteristics that
differentiate firms in an industry from one
another
STEP 2: Plot firms on a two-variable map using pairs

of these differentiating characteristics

STEP 3: Assign firms that fall in about the same

strategy space to same strategic group

STEP 4: Draw circles around each group, making

circles proportional to size of group’s

respective share of total industry sales

35
 Example: Strategic Group Map of
the Video Game Industry
Arcades
Suppliers/Distribution Channels

Arcade
operators
Types of Video Game

Publishers
Home PCs of games on
CD-ROMs
Sony, Sega,
Nintendo, several
Video game others
consoles

MSN Gaming Zone,

Online/Internet Pogo.com,
America Online,
HEAT, Engage,
Oceanline, TEN

Low Medium High

(Coin-operated (Console players cost (Use PC)
equipment) $100-$300)
Overall Cost to Players of Video Games 36
Nation-State and Competitive
Advantage
• A country may provide a competitive
advantage for a company
• Need to identify national factors in order to
determine
– Where most significant competitors will come
from
– Where to locate production activities
• Porter’s Diamond of Determinants of National
Competitive Advantage

37
 The Global and National
Environments
• Globalization of production and markets
– Lower barriers to cross-border trade and
investment
– National differences in the cost and quality of
factors of production
– “Home” and “foreign” markets and competitors
are blurring
– Intensified rivalry
– Intensified rate of innovation
– Many new markets are open

38
 Determinants of National Competitive
Advantage
Strategy,
Structure,
Rivalry

Factor National Demand

Competitive
Endowments Conditions
Advantage

Related and
Supporting
Industries 39
 Factor Endowments
• Availability of traditional factors of production
—land, labor, capital, entrepreneurship—
provide cost advantages to companies
located in countries possessing those
factors
• More significant, countries and their
companies can create new factors such as
a knowledgeable workforce and
infrastructure that is rare and difficult to
imitate
• Factor endowments less important than the
speed and efficiency of deploying those
resources.
40
 Demand Conditions
• Large growing markets provide
foundation for global competition
• More significant, sophisticated and
demanding consumers force
companies to innovate and improve
their products
• Advances in products, services, and
standards improve companies’
knowledge and capabilities for selling
in other world markets
41
 Related and Supporting
Industries
• Provide inputs and capabilities that help
a company to improve its own
products and capabilities
• Helps reduce manufacturing costs
through cost-effective, timely methods
• Ongoing exchange of knowledge
through research and development
and joint projects improves both
suppliers and companies
•
42
 Strategy, Structures, and
Rivalry
• Different management ideologies lead to
different emphases within a company
• Japan and Germany both have engineers in
top management and those country’s
companies concentrate on process and
product improvement
• Intense domestic rivalry leads to product
improvements and cost reduction in order
to compete for domestic customers

43
 Conclusions About
Determinants of National
Competitive Advantage
• Firms succeeding in global markets first
succeeded in intense competition in
home countries
• Competitive advantage for global firms
comes from continuous improvement,
innovation, and change.

44