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Ch02 PPT

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CHAPTER 2
Analyzing the
External Environment
of the Firm:
Creating Competitive
Advantages
Copyright Anatoli Styf/Shutterstock
Learning Objectives
After reading this chapter, you should have a good understanding of:
2-1 The importance of developing forecasts of the business
environment.
2-2 Why environmental scanning, environmental monitoring, and
collecting competitive intelligence are critical inputs to
forecasting.
2-3 Why scenario planning is a useful technique for firms competing
in industries characterized by unpredictability and change.
2-4 The impact of the general environment on a firm’s strategies
and performance.
2-5 How forces in the competitive environment can affect
profitability, and how a firm can improve its competitive
position by increasing its power vis-à-vis these forces.
2-6 The concept of strategic groups and their strategy and
performance implications.
©McGraw-Hill Education.
The Importance of External Environment
Consider. . .
The best CEOs are always aware of what’s going
on outside their company. Their perceptual
acuity allows them to sense what’s coming.
Detecting early warning signals, keeping pace with
changes in the external environment can sustain a
competitive advantage.
©McGraw-Hill Education.
Enhancing Awareness of the External
Environment
Exhibit 2.1 Inputs to Forecasting
©McGraw-Hill Education.
Environmental Scanning & Monitoring
Environmental scanning involves surveillance of
a firm’s external environment.
• Predicts environmental changes to come
• Detects changes already under way
• Allows firm to be proactive
Environmental monitoring tracks evolution of
environmental trends.
• Sequences of measurable facts/events
• Streams of activities or trends from outside the
organization
©McGraw-Hill Education.
Competitive Intelligence
Competitive intelligence
• Helps firms define & understand their industry
• Identifies rivals’ strengths & weaknesses
• Collect data on competitors
• Interpret intelligence data
• Helps firms avoid surprises
• Anticipate competitors’ moves
• Decrease response time
• Potential for unethical behavior while gathering
intelligence
©McGraw-Hill Education.
Environmental Forecasting
Environmental forecasting predicts change.
• Plausible projections about
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•
•
•
Direction of environmental change?
Scope of environmental change?
Speed of environmental change?
Intensity of environmental change?
Scenario analysis involves detailed assessments
of the ways trends may affect an issue &
development of alternative futures based on these
assessments.
©McGraw-Hill Education.
Question
(1 of 2)
A danger of forecasting discussed in the text is
that
A. in most cases, the expense of collecting the
necessary data exceeds the benefit.
B. forecasting’s retrospective nature provides little
information about the future.
C. managers may view uncertainty as “black and
white” while ignoring important “gray areas.”
D. it can create legal problems for the firm if
regulators discover the company is making
forecasts.
©McGraw-Hill Education.
SWOT Analysis
SWOT analysis is a basic technique for analyzing
firm and industry conditions.
• Firm or internal conditions = Strengths &
Weaknesses
• Where the firm excels or where it may be lacking
• Environmental or external conditions =
Opportunities & Threats
• Developments that exist in the general environment
• Activities among firms competing for the same
customers
• Must consider both internal & external factors
simultaneously
©McGraw-Hill Education.
The General Environment
The general environment is composed of factors
that are both hard to predict and difficult to
control.
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•
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•
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•
©McGraw-Hill Education.
Demographic
Sociocultural
Political/Legal
Technological
Economic
Global
The Demographic Segment
Demographics are easily understandable &
quantifiable.
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•
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•
©McGraw-Hill Education.
Aging population
Rising affluence
Changes in ethnic composition
Geographic distribution of population
Greater disparities in income levels
The Sociocultural Segment
Sociocultural forces influence the values, beliefs,
and lifestyles of a society.
• More women in the workforce
• Increase in temporary workers
• Greater concern for healthy diets & physical fitness
(increasing levels of obesity)
• Greater concern for the environment
• Postponement of marriage & family formation,
having children
©McGraw-Hill Education.
The Political/Legal Segment
Political/Legal processes & legislation influence
environmental regulations with which industries
must comply.
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•
•
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•
©McGraw-Hill Education.
Tort reform
Americans with Disabilities Act (ADA)
Deregulation of utilities & other industries
Increases in minimum wages
Taxation
Legislation on corporate governance reforms
Affordable Health Care Act, Medicare
reimbursements
The Technological Segment
Technological developments lead to new products &
services. They can create new industries & alter
existing ones.
• Genetic engineering
• Three-dimensional (3D) printing
• Computer-aided design/computer-aided manufacturing
systems (CAD/CAM)
• Research in synthetic & exotic materials
• Pollution/global warming
• Miniaturization of computing technologies
• Wireless communications
• Nanotechnology
• Big data/data analysis
©McGraw-Hill Education.
The Economic Segment
Economic forces affect all industries.
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•
•
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©McGraw-Hill Education.
Interest rates
Unemployment
Consumer Price Index
Trends in GDP & net disposable income
Changes in stock market valuations
The Global Segment
Global forces offer both opportunities & risks.
Increasing global trade
Currency exchange rates
Emergence of the Indian & Chinese economies
Trade agreements among regional blocs (NAFTA,
EU, ASEAN)
• Creation of the WTO (leading to decreasing
tariffs/free trade in services)
• Increased risks associated with terrorism
•
•
•
•
©McGraw-Hill Education.
General Environment:
Relationships among Elements
Elements of the general environment interact with
each other.
• Demographic trends have implications for
economics.
• Greater access to information technology affects
both economics and global relationships.
• Political/legal trends can have very different effects
on different industries.
• Digital technology has altered the way business is
conducted in nearly every business domain.
• Data analytics
©McGraw-Hill Education.
The Competitive Environment
The competitive environment consists of
factors in the task or industry environment that
are particularly relevant to a firm’s strategy.
• Competitors (existing or potential)
• Including those considering entry into an entirely
new industry
• Customers (or buyers)
• Suppliers
• Including those considering forward integration
©McGraw-Hill Education.
Porter’s Five Forces Model of Industry
Competition
Exhibit 2.4 Porter’s Five Forces Model of Industry Competition
Source: From Michael E. Porter, “The Five Competitive Forces That Shape Strategy,” Special Issue on HBS Centennial.. Harvard Business
Review 86, No. 1 (January 2008), 78-93. Reprinted with permission of Michael E. Porter.
©McGraw-Hill Education.
Jump to Appendix 1 for long description.
The Threat of New Entrants
The threat of new entrants – possibility that the
profits of established firms in the industry may be
eroded by new competitors.
Depends on existing barriers to entry:
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•
©McGraw-Hill Education.
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Question
(2 of 2)
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.
©McGraw-Hill Education.
The Bargaining Power of Buyers
Buyers have bargaining power.
Buyers can force down prices, bargain for higher
quality or more services, or play competitors
against each other.
Buyer groups are powerful.
• Purchasing standard products are in large
volumes.
• Profits are low & switching costs are few.
• Backward integration is possible.
• Buyer’s product quality is not affected by industry
product.
©McGraw-Hill Education.
The Bargaining Power of Suppliers
Suppliers can exert bargaining power by
threatening to raise prices or reduce the quality of
purchased goods and services.
Supplier groups are powerful.
•
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•
•
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•
©McGraw-Hill Education.
Only a few firms dominate the industry.
There is no competition from substitute products.
Suppliers sell to several industries.
Buyer quality is affected by industry product.
Products are differentiated & have switching costs.
Forward integration is possible.
The Threat of Substitute Products &
Services
Substitute products & services limit the
potential returns of an industry.
Substitutes come from another industry.
Substitutes can perform the same function as the
industry’s offerings.
Substitutes place a ceiling on prices that firms in
an industry can profitably charge.
• The more attractive the price/performance ratio,
the more the substitute erodes industry profits.
©McGraw-Hill Education.
The Intensity of Rivalry among
Competitors in an Industry
Rivalry tactics include price competition,
advertising battles, new product introductions,
increased customer service or warranties.
Interacting factors lead to intense rivalry.
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•
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©McGraw-Hill Education.
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
How the Internet and Digital Technologies
Affect Competitive Forces
Competitive Forces
Benefits to Industry
Threat of New Entrants
Disadvantages to Industry
• Lower barriers to entry increases
number of new entrants.
• Many Internet-based capabilities can
be easily imitated.
Bargaining Power of Buyers
Reduces the power of buyer
intermediaries in many distribution
channels.
• Switching costs decrease.
• Information availability online
empowers and users.
Bargaining Power of Suppliers
Online procurement methods can
increase bargaining power over
suppliers.
• The Internet gives suppliers access
to more customers and makes it
easier to reach end users.
• Online procurement practices deter
competition and reduce
differentiating features.
Threat of Substitutes
Internet-based increases in overall
efficiency can expand industry sales.
• Internet-based capabilities create
more opportunities for substitution.
Intensity of Rivalry
• Since 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.
Sources: Bodily, S., & Venkataraman, S. 2004. Not walls, windows: Capturing value in the digital age. Journal of Business Strategy. 25(3): 15-25; Lumpkin, G.T.
Droege, S.B., & Dess, G.G. 2002. E-commerce strategies: Achieving sustainable competitive advantage and avoiding pitfalls. Organizational Dynamics, 30 (Spring):
1-17.
©McGraw-Hill Education.
Using Industry Analysis:
A Few Caveats
Managers must not always avoid low profit
industries; these can still yield high returns for
players who pursue sound strategies.
Five forces analysis implicitly assumes a zerosum game. Yet mutually beneficial relationships
can still be established with buyers & suppliers.
Five forces analysis is essentially a static analysis,
yet external forces can still change the structure
of all industries.
• See the value net extension of five forces analysis.
• Vertical dimension = suppliers & customers
• Horizontal dimension = substitutes & complements
©McGraw-Hill Education.
The Value Net
Exhibit 2.6 The Value Net
Source: Adapted from “The Right Game: Use Game Theory Shape Strategy,” by A. Brandenburger and B.J. Nalebuff,
July-August 1995 Harvard Business Review.
©McGraw-Hill Education.
Jump to Appendix 2 for long description.
Doing a Good Industry Analysis
Good industry analysis looks rigorously at the
structural underpinnings & root causes of
profitability.
• Must choose the appropriate time frame
• Consider the industry business life cycle
• Average profitability over 3-5 years or longer
• Must consider quantitative factors as well as
qualitative
• Get numbers to quantify five forces factors
• Percentages of total cost or sales accounted for by the
industry, actual switching costs
©McGraw-Hill Education.
Strategic Groups within Industries
Two unassailable assumptions in industry
analysis:
• No two firms are totally different.
• No two firms are exactly the same.
Strategic groups – clusters of firms that share
similar strategies:
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•
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©McGraw-Hill Education.
Breadth of product & geographic scope
Price/quality
Degree of vertical integration
Type of distribution
Strategic Groups as an Analytic Tool
Strategic groups can be analytical tools.
• Helps identify barriers to mobility that protect a
group from attacks by other groups
• Helps identify groups whose competitive position
may be marginal or tenuous
• Helps chart the future direction of firms’ strategies
• Helps to think through the implications of each
industry trend for the strategic group as a whole
©McGraw-Hill Education.
Example: Strategic Groups within
Industries
Exhibit 2.7 The
World
Automobile
Industry:
Strategic
Groups
Note: Members of each
strategic group are not
exhaustive, only
illustrative.
©McGraw-Hill Education.
Jump to Appendix 3 for long description.
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