Post on 21-Dec-2015
description
External Environmental Analysis
yunan@muraelpiji.com
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Lecture TopicsPurpose of External Environmental
AnalysisGathering Information for External
Environmental AnalysisGeneral EnvironmentCompetitive EnvironmentKey Success FactorsCompetitive Changes During Industry
EvolutionStrategic GroupsNational Competitive Advantage
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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
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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
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Two Areas for Analysis General Environment Competitive Environment
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The General and Competitive Environment
General Environment
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Competitive
Environment
Threat on new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Competitive rivalry
Demographics
Political/Legal
Technological
Global
Sociocultural
Macoreconomic
General EnvironmentDemographics Characteristics of a country’s population
Size of population and growth rate Age distribution of population Education levels Income distribution Ethnic diversity Geographic distribution
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General EnvironmentPolitical/Legal Political and legal conditions affecting
business Government policies toward business Investment incentives Business regulation: labor, environment Education priorities Budget conditions and plans
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General EnvironmentTechnological Technological developments relevant to
a business Telecommunications Internet On-line training Product and process innovations
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General EnvironmentMacroeconomic 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
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General EnvironmentSociocultural Influence of values, beliefs, and
lifestyles of a country on business Family relationships Attitudes about work Living arrangements Styles of entertainment Attitudes toward health
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General EnvironmentGlobal 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
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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 National Competitive Advantage
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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
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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
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The Computer Sector: Industries and Segments
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Five Forces Driving Industry Competition
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Threat of New EntrantsFundamental 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
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Supplier PowerFundamental 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
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Threat of SubstitutesFundamental 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
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Buyer PowerFundamental 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
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Competitive RivalryFundamental 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
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A Sixth Force: ComplementorsNot a supplierOffers service or product that affects
industry’s performanceWhen complementors are important
and their number is increasing Demand and profits in the industry are
boostedWhen complementors are weak
Industry growth can slow and profits can be limited
Example: Internet Service Providers “complementors” to eBusiness firms
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Strategic Implications of theFive 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
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• 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
Strategic Implications of theFive Competitive Forces
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
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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
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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
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Stages in the Industry Life Cycle
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Shakeout: Growth in Demand and Capacity
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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
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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
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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
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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
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Procedure for Constructing aStrategic Group MapSTEP 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
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36Example: Strategic Group Map of the Video Game Industry
Typ
es o
f V
ideo
Gam
e S
up
pli
ers/
Dis
trib
uti
on
Ch
ann
els
Overall Cost to Players of Video Games
Low(Coin-operated
equipment)
Medium (Console players cost
$100-$300)
High (Use PC)
Arcades
Home PCs
Video game consoles
Online/Internet
Sony, Sega, Nintendo, several
others
Arcade operators Publishers
of games on CD-ROMs
MSN Gaming Zone, Pogo.com,
America Online, HEAT, Engage, Oceanline, TEN
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
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The Global and National EnvironmentsGlobalization 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
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Determinants of National Competitive Advantage
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Strategy,
Structure,
Rivalry
Factor
Endowments
Demand
Conditions
Related and
Supporting
Industries
National Competitive Advantage
Factor EndowmentsAvailability 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.
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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
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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
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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
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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.
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