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External Environment Analysis
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External Forces
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General Environment
Dimensions in the broader society that influence and
industry and the firms within it
Economic
Sociocultural
Global
Technological
Political/legal
Demographic
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Economic Environment
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
Budget deficits or surpluses
Personal & Business Savings rate
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Socio Cultural Environment
Influence of values, beliefs, and lifestyles of a country onbusiness
Family relationships
Attitudes about work
Living arrangements Attitudes toward health
Women in the workplace
Workforce diversity
Attitudes about quality of worklife Concerns about environment
Changes in work and career preferences
Changes in product and service preferences
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Political & Legal Environment
Government policies toward business
Investment incentives
Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws Educational philosophies and policies
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Demographic Environment
Size of population and growth rate
Age distribution of population
Education levels
Income distribution
Ethnic diversity
Geographic distribution
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Technological Environment
Product innovations
Applications of knowledge
Focus of private and government-supportedR&D expenditures
New communication technologies
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Global Environment
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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Industry Environment
What is Industry?
Group of firms offering products or serviceswhich are close substitute to each other, i.e. the
products and services that satisfy the same basic
customer needs
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Industry and Sector
A Sector is a group of closely related industries
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Porters Five Forces
Model of Competition
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Rivalry among competing sellers
The intensity and nature of rivalry among
current industry participants
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Potential New Entrants
The perceived likelihood that new players will
enter an industry (successfully or not).
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Substitute Products
A substitute product is a different product
categorywhich can deliver the same end
benefit to the user as the industrys product
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Bargaining Power of Suppliers
The ability (and propensity) of Suppliers to
capture value from the sale of the end product
through their own pricing.
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Bargaining Power of Buyers
Ability (and propensity) of Buyers to bargain
away industry profits by demanding low
prices
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Interpreting Industry Analyses
Suppliers and buyers have strong positions
Low entry barriers
Strong threats from substitute products
Intense rivalry among competitors
Low profit potential Ex-Personal Computers
Unattractive
Industry
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Interpreting Industry Analyses
High entry barriers
Suppliers and buyers have weak positions
Few threats from substitute products
Moderate rivalry among competitors
High profit potential
AttractiveIndustry
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Strategic Groups Within Industries
Companies do not compete against all companies in anindustry
Companies compete against selective other companies thatfollow similar strategies
A strategic group consists of those rivals with similarcompetitive approaches in an industry- Set of firmsemphasizing similar strategic dimensions and using a similarstrategy
Can be useful for analyzing an industrys competitivestructure
Can also be helpful in diagnosing competition, positioning,and the profitability of firms within an industry
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Firms in same strategic grouphave two or morecompetitive characteristicsin common
Have comparable product line breadth
Sell in same price/quality rangeEmphasize same distribution channels
Use same product attributes to appealto similar types of buyers
Use identical technological approaches
Offer buyers similar services
Cover same geographic areas
Strategic Group Mapping
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Constructing Strategic Group Map
1. Identify competitive characteristics that differentiate
firms in an industry from one another
2. Plot firms on a two-variable map using pairs of these
differentiating characteristics3. Assign firms that fall in about the same strategy
space to same strategic group
4. Draw circles around each group, making circlesproportional to size of groups respective share of
total industry sales
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Strategic Groups in the Pharmaceutical
Industry
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Implications of strategic groups
The closest industry competitors are those in thegroup.
The various industry groups are differentially andcompetitively advantaged and positioned.
Mobility barriers may inhibit the movement ofcompetitors from one strategic group to another.
Strengths of the 5 forces can differ across strategic
groups The closer the strategic groups, in terms of strategy,
the greater the likelihood of rivalry
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The Competitor Environment
and Competitor Analysis
Competitor EnvironmentGives details about
A firms direct and indirect competitors
The competitive dynamics expected to impact a firm's efforts togenerate above-average returns
Competitor analysisFocused on predicting the dynamics of competitor's actions,
responses, and intentions
Focuses on each company which a firm directly competes
Seeks to understand each competitors future objectives,current strategy, assumptions, and capabilities
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Competitor Analysis
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
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Competitor AnalysisComponents
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Limitations of the Five Forces and
Strategic Group Models
Both models are static and ignore innovation.
Their focus is on industry and group structuresrather than individual companies. Innovation creates change in industry structures,
altering the competitive environment.
Industry structure cannot fully explain theperformance differences between industrycompetitors.
Source: Based on Figure 2 4 in Hill and
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Industry Life Cycle ModelSource: Based on Figure 2.4 in Hill and
Source: Based on Figure 2.4 in Hill and Jones (2008).Source: Based on Figure 2.4 in Hill and Jones (2008).