McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

After reading this chapter, you should have a good understanding of:
 The impact of the general environment on a firm’s strategies and performance.
 How forces in the competitive environment can affect profitability and how a firm can improve its competitive position by increasing its power visà-vis these forces.
 How trends and events in the general environment and forces in the competitive environment are interrelated and affect performance.
 How the internet and digitally based compatibilities are affecting the five competitive forces and industry profitability.
 The concept of strategic groups and their strategy and performance implications.
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All of the following are segments of the general environment except: a) Legal/Political b) Technological c) Ethical d) Sociocultural
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 Segments of the general environment include:
 Demographic
 Sociocultural
 Legal/Political
 Technological
 Economic
General
Environmen t
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 General environmental trends and events:
 Little ability to predict them
 Even less ability to control them
 Can vary across industries
General
Environmen t
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 Aging population
 Rising affluence
 Changes in ethnic composition
 Geographic distribution of population
 Greater disparities in income levels
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 More women in the workforce
 Increase in temporary workers
 Greater concern for fitness
 Greater concern for environment
 Postponement of family formation
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 Tort reform
 Americans with Disabilities Act (ADA)
 Repeal of Glass-Steagall Act in 1999
 Deregulation of utility and other industries
 Increases in federally mandated minimum wages
 Taxation at local, state, federal levels
 Legislation on corporate governance reforms
(Sarbanes-Oxley Act)
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 Sarbanes-Oxley Act is five years young and seems to be having the desired effect
 Intended to protect from corporate corruption
 In 1981 about 36% of households invested in the stock market; now 54%
 Initially the law was "far too bureaucratic"
 Since been ironed out by the SEC and the Public
Company Oversight Accounting Board
4-10 www.forbes.com/leadership/2007/08/27/sarbox-regulation-rules-lead-govern-cx_mk_0827oxley.html

 Genetic engineering
 Emergence of Internet technology
 Computer-aided design/computer-aided manufacturing systems (CAD/CAM)
 Research in synthetic and exotic materials
 Pollution/global warming
 Miniaturization of computing technologies
 Wireless communication
 Nanotechnology
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Technological Segment -
Nanotechnology
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 Carbon nanotubes become first application to transform nanotechnology
 Rolled sheets of graphite, with the ends capped with a soccer ball-shaped carbon structure
 Several times stronger and lighter than steel
 Electronically, they can be metallic or semiconducting
 Nanotubes can be made as ballistic conductors or insulators
4-13 www.forbes.com/personalfinance/2007/05/15/nanotech-arrowhead-intel-pf-guru-in_jw_0515soapbox_inl.html

Technological Segment – Internet
Growth
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 Interest rates
 Unemployment
 Consumer Price index
 Trends in GDP
 Changes in stock market valuations
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 Segments of the competitive environment include:
 Competitors
 Customers
 Suppliers
Competitive
Environment
 Sometimes called the task or industry environment
 Porter’s five forces model
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Porter’s Five Forces Model of Industry Competition
 Most common analytical tool for examining competitive environment
 Five basic competitive forces:
 Threat of new entrants
 Bargaining power of buyers
 Bargaining power of suppliers
 Threat of substitute products and services
 Intensity of rivalry among competitors in an industry
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Porter’s Five Forces Model of Industry Competition
 Five forces model important because:
 Helps decide if firm should remain in or exit an industry
 Provides rationale for increasing or decreasing resource commitments
 Helps assess how to improve firm’s competitive position with regard to each of forces
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Porter’s Five Forces Model of Industry Competition
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 Porter’s Five Forces Model: BMW
 Threat of new entrants
 Very low
 Threat of substitutes
 Medium, but growing
 Power of suppliers
 Medium
 Power of buyers
 Medium, but growing rapidly
 Rivalry among existing firms
 Very High
Source: Developed from www.bmw.com
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 Profits of established firms in the industry may be eroded by new competitors
 High entry barriers lead to low threat of new entries
 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of scale
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If you are considering opening a new pizza restaurant in your community, what would be the threat of new entrants? How would you evaluate
Porter’s other forces for this industry? Explain.
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 Buyers threaten an industry
 Force down prices
 Bargain for higher quality or more services
 Play competitors against each other
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 A buyer group is powerful when
 It is concentrated or purchases large volumes relative to seller sales
 The products it purchases from the industry are standard or undifferentiated
 The buyer faces few switching costs
 It earns low profits
 The buyers pose a credible threat of backward integration
 The industry’s product is unimportant to the quality of the buyer’s products or services
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How can suppliers exert power?
a) Increase the amount of materials supplied b) Reduce the quality of purchased goods and services c) Threatening to raise prices d) Both B and C
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 Suppliers exert power by threatening to raise prices or reduce the quality goods and services
 A supplier group will be powerful when
 It is dominated by a few companies and is more concentrated than the industry it sells to
 It is not obliged to contend with substitute products for sale to the industry
 The industry is not an important customer of the supplier group
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 A supplier group will be powerful when
(cont.)
 The supplier’s product is an important input to the buyer’s business
 The supplier group’s products are differentiated or it has built up switching costs for the buyer
 The supplier group poses a credible threat of forward integration
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Substitutes of products and services pose a threat to an industry because they: a) Limit the potential returns b) Places a ceiling on the prices that firms can profitably charge c) Affects the price/performance ratio d) All of the above
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The
 Substitutes limit the potential returns of an industry
 Ceiling on the prices that firms in that industry can profitably charge
 Price/performance ratio
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The Intensity of Rivalry among
Competitors in an Industry
 Jockeying for position
 Price competition
 Rivals easily match price cuts
 Advertising battles
 Expand overall demand or enhance level of product differentiation
 Product introductions
 Increased customer service or warranties
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The Intensity of Rivalry among
Competitors in an Industry
 Interacting factors lead to intense rivalry
 Numerous or equally balanced competitors
 Slow industry growth
 High fixed or shortage costs
 Lack of differentiation or switching costs
 Capacity augmented in large increments
 High exit barriers
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Using Industry Analysis: A Few Caveats
 Company must collect and evaluate a wide variety of information from many sources
 Globalization trend, information on foreign markets and a wider variety of competitors, suppliers, customers, substitutes, and potential entrants become critical
 Helps a firm to evaluate profit potential and consider various ways to strengthen position
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Using Industry Analysis: A Few Caveats
 Five Forces:
 Assumes zero-sum game
 Determines how a firm can enhance its position
 External forces and strategies of individual firms are continually changing
 Criticized for being a static analysis
 Key role is played by complements
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How the Internet and Digital
Technologies Influences Industry
 Threat of New Entrants –Disadvantages the industry
 Lower barriers to entry increases number of new entrants
 Many internet-based capabilities can be easily imitated
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How the Internet and Digital
Technologies Influences Industry
 Bargaining Power of Buyers
 Benefits Industry
 Reduces the power of buyer intermediaries in many distribution channels
 Disadvantages Industry
 Switching costs decrease
 Information availability online empowers ends users
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How the Internet and Digital
Technologies Influences Industry
 Bargaining Power of Suppliers
 Benefits Industry
 Online procurement methods can increase bargaining power over suppliers
 Disadvantages Industry
 The Internet gives suppliers access to more customers and makes it easer to reach end users
 Online procurement practices deter competition and reduce differentiating features
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How the Internet and Digital
Technologies Influences Industry
 Threats of Substitutes
 Benefits Industry
 Internet-Based increases in overall efficiency can expand industry sales
 Disadvantages Industry
 Internet-Based capabilities create more opportunities for substitution
 Intensity of Rivalry
 Disadvantages Industry
 Because location is less important, the number of competitors increases
 Differences among competitors are harder to perceive online
 Rivalry tends to focus on price and differentiating features are minimized
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 Two unassailable assumptions in industry analysis
 No two firms are totally different
 No two firms are exactly the same
 Strategic groups
 Cluster of firms that share similar strategies
 Breadth of product and geographic scope
 Price/quality
 Degree of vertical integration
 Type of distribution system
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 Value of strategic groups as an analytical tool
 Identify barriers to mobility that protect a group from attacks by other groups
 Identify groups whose competitive position may be marginal or tenuous
 Chart the future direction of firms’ strategies
 Thinking through the implications of each industry trend for the strategic group as a whole
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