• General environment
– Focused on the future
• Industry environment
– Focused on industry-specific factors influencing firm profitability
• Competitor environment
– Focused on competitive dynamics
– competitors’ capabilities, intentions, actions, responses
1

Is a continuous process
Scan : Identify signals of changes and trends
Monitor : interpret changes & trends
Forecast : future scenarios from monitoring
Assess : timing and importance of forecast to current or prospective firm strategies
Which PEOPLE in the firm should do this?
What limits the effectiveness of this process?
2

Analysis of Environment
• Your firm is interdependent with BROAD institutional dynamics:
– Demographic
– Economic
– Political/legal
– Sociocultural
– Technological
– Global
3

Analysis of Environment
Demographic trends in …
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Population size
Age structure
Skills/education
Geographic distribution
Ethnic mix
Income distribution
4

Analysis of Environment
(examples)
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Inflation/interest rates (hurdle costs)
Trade deficits or surpluses
Budget deficits or surpluses
Consumption, savings, tax rates
GDP, business cycles
5

Analysis of Environment
Political/Legal Segment (examples)
 Antitrust laws (Whole Foods)
 Tax laws (incentives)
 Regulatory philosophies (SOX)
 Labor/training laws (EEOC)
 Educational policies (gov backed student loans)
6

Analysis of Environment
Sociocultural segment
(examples)
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Opportunity cost of work
(leisure)
Social concerns (greening, alcohol, meat)
Shifts in social preferences (on-line networking)
Shifts in product/service preferences
(track my child; Care Trak Int’l)
7

Analysis of Environment
Technological Segment (examples)
 Process architectures (McD, FedEx)
 New General Purpose Technologies (IT)
 Private / Public R&D
(Human Genome Project)
 Converging technologies (VOIP, bioinformatics)
 Standard setting (cell phone interoperability)
8

Environmental Analysis
 Trade regions as boundaries
 Critical global markets
 Locating product & factor markets
 cultural and institutional attributes
 IP & property rights
9

Environmental Analysis
Segment dynamics
– Demographic
– Economic
– Political/legal
– Sociocultural
– Technological
– Global
• Generate economic effects on industries/firms (S/D, & factor costs)
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• Interdependence among firms competing for similar customers
• Competitive actions and responses.
• Interactions among factors determine industry profit potential.
1. Threat of new entrants
2. Power of suppliers
3. Power of buyers
4. Product substitutes
5. Intensity of rivalry
11

Industry Environment
• Define the industry - current and potential customers and the firms that serve them.
• Analyze industry and competitors.
• Note:
– Suppliers and buyers can become competitors through integration.
– Producers of potential substitutes may become competitors.
12

13

Barriers to entry
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
(e.g., sites, subsidies, learning)
Government policy
Expected retaliation
14

• World War 2 - same plants, same rate of output - lower costs over time
• Important for complex products and processes where humans can learn
• A possible source of ‘first-mover’ advantage
• Boston Consulting Group focused on the experience curve and learning effects
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Cost
($ per unit of output)
Economies of
Scale Versus Learning
Learning
C
A
Economies of Scale – reversible.
B
AC
1
AC
2
Output
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• A supplier group is powerful when: it is dominated by a few large companies; satisfactory substitute products are not available to industry firms; industry firms are not a significant customer for the supplier group; suppliers’ goods are critical to buyers’ marketplace success; effectiveness of suppliers’ products has created high switching costs; suppliers are a credible threat to integrate forward into the buyers’ industry.
17

• Buyers (customers) are powerful when:
• they purchase a large portion of an industry’s total output
• the sales of the product being purchased account for a significant portion of the seller’s annual revenues
• they could easily switch to another product
• the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry
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• Product substitutes are strong threat when:
• customers face few switching costs
• substitute product’s price is lower
• substitute product’s quality and performance capabilities are equal to or greater than those of the competing product
19

• Intensity of rivalry is stronger when competitors:
• are numerous or equally balanced
• experience slow industry growth
• have high fixed costs or high storage costs
• lack differentiation or have low switching costs
• experience high strategic stakes
• have high exit barriers
20

• Common exit barriers include:
• specialized assets (assets with values linked to a particular business or location)
• fixed costs of exit such as labor agreements
• strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets)
• emotional barriers (career concerns, loyalty to employees, etc.)
• government and social restrictions
21

• What is an industry?
• Useful to consider chain of related products (complements) when assessing industry attractiveness
22

Orit Gadiesh and James L. Gilbert
Harvard Business Review
May-June 1998
40%
30
The value chain for the PC industry includes six key activities; the profitability of the activities varies widely. Manufacturers compete in the largest but least-profitable segment of the chain.
20
10
0
0 other components personal computers microprocessors share of industry revenue
Value chain focus
Axes
Vertical—operating margin
Horizontal—share of industry software peripherals services
100%
23

The Profit Pool Lens
The profit pool is the total profit earned in an industry at all points along the industry’s value chain
Segment profitability may vary by customer group, product category, geographic market, or distribution channel
Profit concentration may be very different than revenue concentration
Shape of the profit pool reflects the competitive dynamics of a business
Interactions of companies and customers
Competitive strategies of competitors
Product pools are not stagnant
24

25

THE U.S. AUTO INDUSTRY’S PROFIT
POOL
25%
20
The automotive industry encompasses many value-chain activities. The way that profits and revenues are distributed among these activities varies greatly. The most profitable areas of the car business are not the ones that generate the biggest revenues.
15
10
5
0
0 new car dealers auto manufacturing source: Harvard Business Review, May-June 1998 used car dealers auto loans gasoline leasing warranty auto insurance share of industry revenue service repair
100% aftermarket parts auto rental
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Firms
Automakers
U-Haul
Elevators
(OTIS)
Harley
Davidson
Polaroid
Core Business
Auto manufacturing
Sources of
Highest ROI
Auto leasing, insurance
Truck Rental
Elevator
Manufacturing
Packing materials, storage
Service
Motorcycles
Accessories (consumer products), leasing, service, restaurants
Instant Photography
Cameras
Film
27

Implications
Focusing on growth and market share can lead a company to choose unprofitable segments of an industry
Today’s deep revenue pool may be tomorrow’s dry hole .
The goal should be to focus on profitable opportunities
Industry should be considered more broadly than traditional definition
Automobile industry includes
Component manufacture and supply
New car assembly and delivery
New car warrantee and service
New car financing, leasing, and insurance
Used car sales and service
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Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions.
The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry.
29

Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities what drives the competitor as shown by its future objectives what the competitor is doing and can do as revealed by its current strategy
What the competitor believes about itself and the industry, as shown by its assumptions
What the the competitor may be able to do, as shown by its capabilities
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Future objectives
Current strategy
Assumptions
Capabilities
Response
Response:
What will our competitors do in the future?
Where do we hold an advantage over our competitors?
How will this change our relationship with our competitors?
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1. List industry key success factors and other relevant measures of competitive strength
2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong)
3. Decide whether to use a weighted or unweighted rating system
4. Sum individual ratings to get overall measure of competitive strength for each rival
5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage
32

KSF/Strength Measure ABC Co.
Rival 1 Rival 2 Rival 3 Rival 4
Quality/product performance
Reputation/image
Manufacturing capability
Technological skills
Dealer network/distribution
New product innovation
Financial resources
Relative cost position
Customer service capability
Overall strength rating
8
8
2
10
9
9
5
5
5
61
5
7
10
1
4
4
10
10
7
58
Rating Scale: 1 = Very weak; 10 = Very strong
10
10
7
3
10
10
4
7
10
71
5
5
3
1
1
25
1
1
5
3
1
1
1
4
4
32
6
6
1
8
33

KSF/Strength Measure
Quality/product performance
Weight
0.10
ABC
Co.
8 / 0.80
Rival 1 Rival 2
5/0.50
10/1.00
Rival 3
1/0.10
Reputation/image
Manufacturing capability
Technological skills
Dealer network/distribution
New product innovation
Financial resources
Relative cost position
Customer service capability
Sum of weights
0.10
0.10
0.05
0.05
0.05
0.10
0.35
0.15
1.00
8/0.80
2/0.20
10/0.50
9/0.45
9/0.45
5/0.50
5/1.75
5/0.75
7/0.70
10/1.00
10/1.00
4/0.40
1/0.05
7/0.35
4/0.20
10/0.50
4/0.20
10/0.50
10/1.00
7/0.70
10/3.50
3/1.05
7/1.05
10/1.50
1/0.10
5/0.50
3/0.15
5/0.25
5/0.25
3/0.30
1/0.35
1/0.15
Overall strength rating 6.20
8.20
7.00
2.10
Rating Scale: 1 = Very weak; 10 = Very strong
Rival 4
6/0.60
6/0.60
1/0.10
8/0.40
1/0.05
1/0.05
1/0.10
4/1.40
4/1.60
2.90
34

Reveals firm’s competitive position
Pinpoints the company’s competitive strengths and weaknesses
Identifies competitive advantage, parity, or disadvantage
Identifies possible offensive attacks
Identifies possible defensive actions
35