11

MGNT428 – Business PolicyMGNT428 – Business Policy& Strategy& Strategy

Dr. Tom Lachowicz, InstructorDr. Tom Lachowicz, Instructor

The External EnvironmentHitt - Chapter 2

22

Knowledge ObjectivesKnowledge Objectives

• Studying this chapter should provide you with the strategic management knowledge needed to:

– Explain the importance of analyzing and understanding the firm’s 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 environment’s six segments.

– Identify the five competitive forces and explain how they determine an industry’s profit potential.

33

Knowledge Objectives (cont’d)Knowledge Objectives (cont’d)

• 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.

44

Figure 1.1Figure 1.1

Copyright © 2004 South-Western. All rights reserved.

The Hitt Chapters The Hitt Chapters LayoutLayout

55

The External The External EnvironmentEnvironment

Figure 2.1Figure 2.1

66

General EnvironmentGeneral Environment

• Dimensions in the broader society that influence and industry and the firms within it . . .

– Economic

– Sociocultural

– Global

– Technological

– Political/legal

– Demographic

77

Industry EnvironmentIndustry Environment

99

Analysis of the External EnvironmentsAnalysis of the External Environments

• 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

1010

Opportunities and ThreatsOpportunities and Threats

• Opportunity– A condition in the general environment that if

exploited, helps a company achieve strategic competitiveness

• Threat– A condition in the general environment that

may hinder a company’s efforts to achieve strategic competitiveness

1111

External Environmental AnalysisExternal Environmental Analysis• 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

1212

Components of the External Components of the External Environmental AnalysisEnvironmental Analysis

Table 2.2Table 2.2

1313

General Environment (cont’d)General Environment (cont’d)

• The Economic Segment

– Inflation rates

– Interest rates

– Trade deficits or surpluses

– Budget deficits or surpluses

– Personal savings rate

– Business savings rates

– Gross domestic product

1414

General Environment (cont’d)General Environment (cont’d)

• 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

1515

General Environment (cont’d)General Environment (cont’d)

• The Global Segment

– Product innovations

– Applications of knowledge

– Focus of private and government-supported R&D expenditures

– New communication technologies

1616

General Environment (cont’d)General Environment (cont’d)• The Technological

Segment

– Product innovations

– Applications of knowledge

– Focus of private and government-supported R&D expenditures

– New communication technologies

1717

General Environment (cont’d)General Environment (cont’d)

• The Political/Legal Segment

– Antitrust laws

– Taxation laws

– Deregulation philosophies

– Labor training laws

– Educational philosophies and policies

1818

General EnvironmentGeneral Environment

• The Demographic Segment

– Population size

– Age structure

– Geographic distribution

– Ethnic mix

– Income distribution

1919

The Industry EnvironmentThe Industry Environment

• 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

2020

Porter’s Five Forces of Porter’s Five Forces of Competition ModelCompetition Model

Figure 2.2Figure 2.2

2121

Threat of New Entrants:Threat of New Entrants: Barriers Barriers to Entryto Entry

• Economies of scale• Product differentiation• Capital requirements• Switching costs• Access to distribution channels• Cost disadvantages independent of scale• Government policy• Expected retaliation

2222

Barriers to EntryBarriers to Entry

• 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

2323

Barriers to Entry (cont’d)Barriers to Entry (cont’d)

• Product differentiation

– Unique products

– Customer loyalty

– Products at competitive prices

• Capital Requirements

– Physical facilities

– Inventories

– Marketing activities

– Availability of capital

2424

Barriers to Entry (cont’d)Barriers to Entry (cont’d)

• Switching Costs

– One-time costs customers incur when they buy from a different supplier

– New equipment

– Retraining employees

– Psychic costs of ending a relationship

2525

Barriers to Entry (cont’d)Barriers to Entry (cont’d)

• Access to Distribution Channels

– Stocking or shelf space

– Price breaks

– Cooperative advertising allowances

• Cost Disadvantages Independent of Scale

– Proprietary product technology

– Favorable access to raw materials

– Desirable locations

2626

Barriers to Entry (cont’d)Barriers to Entry (cont’d)

• Cost disadvantages independent of scale

– Proprietary product technology

– Favorable access to raw materials

– Desirable locations

• Government policy

– Licensing and permit requirements

– Deregulation of industries

2727

Barriers to Entry (cont’d)Barriers to Entry (cont’d)

• Expected retaliation– Responses by existing competitors may

depend on a firm’s present stake in the industry (available business options)

2828

Bargaining Power of SuppliersBargaining 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 buyers’ marketplace success

– Suppliers’ products create high switching costs.

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

2929

Threat of Substitute ProductsThreat 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

3030

Intensity of Rivalry Among CompetitorsIntensity 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

3131

Low entry barriers

Interpreting Industry AnalysesInterpreting Industry Analyses

All suggest an:Unattractive

Industry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential

3232

All suggest an:AttractiveIndustry

High entry barriers

Interpreting Industry AnalysesInterpreting Industry Analyses

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

With high profit potential

3333

Strategic Groups DefinedStrategic Groups Defined

• 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

3434

Strategic GroupsStrategic Groups

• Strategic Dimensions– Extent of technological leadership

– Product quality

– Pricing Policies

– Distribution channels

– Customer service

3535

Competitor AnalysisCompetitor Analysis

• Competitor (a.k.a. CI) Intelligence– The ethical gathering of needed information and

data that provides insight into:

• A competitor’s direction (future objectives)

• A competitor’s capabilities and intentions (current strategy)

• A competitor’s beliefs about the industry (its assumptions)

• A competitor’s capabilities

3636

Components of Components of Competitor AnalysisCompetitor Analysis

Figure 2.3Figure 2.3