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The External EnvironmentChapter 2
Built by Stambaugh/2009 Only the Paranoid Survive … Andy Grove
Jeff StambaughDillard College of Business/Rm 257A
[email protected]://faculty.mwsu.edu/business/jeff.stambaugh
Today’s Objectives
Built by Stambaugh/2009
■ Understand why and how we do an external analysis■ Understand the components of the general
environment and how they affect businesses■ Understand the components of the specific
(industry) environment and how they affect businesses
Only the Paranoid Survive … Andy Grove
External Environment
Built by Stambaugh/2009
■ Motivator—Andy Grove■ External environment: what’s■ outside your firm that affects your■ performance
■ General vs industry / competitive■ a common separation
■ Changes in the environment can create threats and opportunities
■ Threats and opportunities can be viewed as things you
“must do” versus resources that tell you what you “can do”
Only the Paranoid Survive … Andy Grove
External Environment
Organization
Specific EnvironmentIndustry-Competitors
SubstituteProducts
BargainingPower of Suppliers
BargainingPower of Buyers
PotentialEntrants
Current Rivalry
General Environment
Technological
Political-Legal
Sociocultural
Demographic
Economic
Global
General Environment
Built by Stambaugh/2009
Hard to predict … even harder to control Trends affect industries differently
Demographic Socio-cultural link
Political – Legal Link
Technological Oil
Economic Global
Which play a role in our SIPs
Only the Paranoid Survive … Andy Grove
Which of these industries will benefit most from stricter
immigration laws?
25%
25%
25%
25%1. Organic food industry
2. Firms that build/operate data systems to verify status of workers
3. Defense firms that work border security issues
4. Lawyers that cater to the Hispanic populace
0 of 5
What to Do … Forecasting
Built by Stambaugh/2009
• Spot these changes before they’re obvious– Back to that “threats
and opportunities” concept
– Paralysis from analysis
– Where to look (sources of info)
Only the Paranoid Survive … Andy Grove
Threat of New Entrants
Built by Stambaugh/2009
Threat of new entrants greatest when Low economies of scale (or no cost
disadvantages independent of scale) Low capital requirements Low switching costs Little Differentiation Easy access to distribution channels Government policy does not inhibit new entries
Only the Paranoid Survive … Andy Grove
Bargaining Power of Buyer
Built by Stambaugh/2009
Greater when:
Buyer is a major customer for supplier
Low switching costs
Undifferentiated products
Able to backward integrate
Buyer earns low profits
Buyer doesn’t rely on product for key attributes (e.g. quality)
Only the Paranoid Survive … Andy Grove
Bargaining Power of Suppliers
Built by Stambaugh/2009
Greater when: Few large suppliers and buying firms’ industry
not concentrated. No substitute products Supplier not reliant on buyer’s business Suppliers’ goods are essential to buyer High switching costs for buyers or differentiated
product Suppliers could forward integrate into buyer’s
business
Only the Paranoid Survive … Andy Grove
Substitute Products
Built by Stambaugh/2009
The Home-town NFL versus Direct TV This is where Andy Grove’s paranoia comes in:
The car vs Southwest Airlines Email fax vs FedExing documents overnight Downloading music off the web vs CDs Print newspapers vs “the Web” TV versus videogames?
Only the Paranoid Survive … Andy Grove
Rivalry Among Competitors
Built by Stambaugh/2009
Rivalry among existing firms increases when: Little degree of differentiation Low switching costs Numerous / equally balanced competitors Slow industry growth High strategic stakes High fixed costs or high storage costs High exit barriers
Only the Paranoid Survive … Andy Grove
Which of the following should improve industry profitability?
25%
25%
25%
25% 1. Only a few firms in an industry
2. Many suppliers selling undifferentiated products
3. Large number of buyers
4. Low capital requirements to enter an industry
0 of 5
What hath the internet wrought?
Built by Stambaugh/2009
■ Made new entrants more likely■ Cut out many intermediaries (in supplier and buyer
chains)■ Increased (in general) buyer power due to more
information■ Made buyers more aware of substitute products■ Increased competitive rivalries in general
Only the Paranoid Survive … Andy Grove
Summary of 5 Forces
Built by Stambaugh/2009
Profit potential greatest within an industry when:
Low rivalry
Low threat of new entrants
Lack of substitute products
Weak buyers
Weak suppliers
Don’t forget complementors: videogame consoles and videogames; GPS navigators and auto manufacturers
Only the Paranoid Survive … Andy Grove
IO View of Competitive Advantage
Built by Stambaugh/2009
Pick a strong industry
Pick a strong position
Fortify / defend it (manipulate the 5 forces)
How much does industry matter … really?
Only the Paranoid Survive … Andy Grove
Who is My Competitor?
Built by Stambaugh/2009
Strategic Groups: Breadth of product
line
Location
Price/Quality
Distribution channels
Uses … ID Barriers to moves
Endangered groups
Direction of strategies
Implications of trends
Only the Paranoid Survive … Andy Grove
Competitor Intelligence
Built by Stambaugh/2009
Fair or Not?
Talking to their customers / supplies
Shopping at their “stores” (getting prices)
Routinely surfing their web site
Sifting their trash
Hiring their superstars (or even their Red Dwarfs)
Going on a fake job interview
Making copies of their proprietary documents
Only the Paranoid Survive … Andy Grove
Competitor Analysis: Airbus vs Boeing
■ Airbus—Founded in 1970 as European consortium
■ Strategic Intent: Gain more market share than Boeing (achieved in 2002)
■ Both firms have high market dependence■ Competitive Strategy
■ Build great products w/full line■ Gain market share through pricing (Boeing
alleges!)■ Airbus Strengths / Weaknesses
■ Political ties in Europe (S)■ Strong Products (S)■ Launch Aid / Govt Subsidy (S)■ Alliance politics (W) Link Delayliner
Built by Stambaugh/2009 Only the Paranoid Survive … Andy Grove
Summary
Built by Stambaugh/2009
■ Your business is not in this alone!!■ Changes in external environment can have big
impact on your business—both good and bad■ It’s a matter of strategic choice how you deal with
your competitors / customers / suppliers■ Innovator?■ Reactor?■ Defender?
■ The most risky of all strategies is to ignore your competitors!
Only the Paranoid Survive … Andy Grove