Transcript The External Environment

Objectives - Analysis of
Environment
• 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
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Analysis of Environment
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?
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Analysis of Environment
• Your firm is interdependent with BROAD
institutional dynamics:
– Demographic
– Economic
– Political/legal
– Sociocultural
– Technological
– Global
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Analysis of Environment
Demographic trends in …
Population size
 Age structure
 Skills/education
 Geographic distribution
 Ethnic mix
 Income distribution

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Analysis of Environment
Economic segment
(examples)
 Inflation/interest
rates (hurdle costs)
 Trade deficits or surpluses
 Budget deficits or surpluses
 Consumption, savings, tax rates
 GDP, business cycles
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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)
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Analysis of Environment
Sociocultural segment (examples)
 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)
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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)
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Environmental Analysis
Global
 Trade
regions as boundaries
 Critical global markets
 Locating product & factor markets
 cultural and institutional attributes
 IP & property rights
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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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Industry Environment
• Interdependence among firms
competing for similar customers
• Competitive actions and responses.
• Interactions among factors
determine industry profit potential.
1.
2.
3.
4.
5.
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
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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.
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5 Forces Industry Analysis
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Threat of New Entrants
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
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Learning effects
• 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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Economies of
Scale Versus Learning
Cost
($ per unit
of output)
Economies of Scale –
reversible.
A
B
AC1
Learning
C
AC2
Output
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Bargaining Power of
Suppliers
• 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.
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Bargaining Power of
Buyers
• 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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Threat of Substitute
Products
• 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
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Intensity of Rivalry
• 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
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High Exit Barriers
• 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
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Industry Scope
• What is an industry?
• Useful to consider chain of related
products (complements) when
assessing industry attractiveness
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Orit Gadiesh and James L. Gilbert
Harvard Business Review
May-June 1998
THE PC INDUSTRY’S PROFIT POOL
40%
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.
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20
10
0
0
other components
microprocessors
peripherals
personal computers
software
share of industry revenue
100%
services
Value chain focus
Axes
Vertical—operating margin
Horizontal—share of industry
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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
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THE U.S. AUTO INDUSTRY’S PROFIT
POOL
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.
operating margin
25%
20
15
10
5
0
0
new car dealers
auto manufacturing
source: Harvard Business Review, May-June 1998
used car dealers
auto loans
gasoline
auto insurance
leasing
warranty
share of industry revenue
service repair
100%
aftermarket parts
auto rental
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Profit Pools: Company
Examples
Sources of
Highest ROI
Firms
Core Business
Automakers
Auto manufacturing Auto leasing, insurance
U-Haul
Truck Rental
Elevators
(OTIS)
Elevator
Manufacturing
Packing materials,
storage
Service
Harley
Davidson
Motorcycles
Polaroid
Instant Photography Film
Cameras
Accessories (consumer
products), leasing,
service, restaurants
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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 Groups
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.
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Competitor behavior
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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Competitor Analysis
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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Assessing competitive
Strength vis a vis Rivals
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
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An Unweighted Competitive
Strength Assessment
KSF/Strength Measure
ABC Co.
Rival 1
Rival 2
Rival 3
Rival 4
Quality/product performance
8
5
10
1
6
Reputation/image
8
7
10
1
6
Manufacturing capability
2
10
4
5
1
Technological skills
10
1
7
3
8
Dealer network/distribution
9
4
10
5
1
New product innovation
9
4
10
5
1
Financial resources
5
10
7
3
1
Relative cost position
5
10
3
1
4
Customer service capability
5
7
10
1
4
61
58
71
25
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Overall strength rating
Rating Scale: 1 = Very weak; 10 = Very strong
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A Weighted Competitive
Strength Assessment
KSF/Strength Measure
Weight
ABC
Co.
Rival 1
Rival 2
Rival 3
Rival 4
Quality/product performance
0.10
8/0.80
5/0.50
10/1.00
1/0.10
6/0.60
Reputation/image
0.10
8/0.80
7/0.70
10/1.00
1/0.10
6/0.60
Manufacturing capability
0.10
2/0.20
10/1.00
4/0.40
5/0.50
1/0.10
Technological skills
0.05
10/0.50
1/0.05
7/0.35
3/0.15
8/0.40
Dealer network/distribution
0.05
9/0.45
4/0.20
10/0.50
5/0.25
1/0.05
New product innovation
0.05
9/0.45
4/0.20
10/0.50
5/0.25
1/0.05
Financial resources
0.10
5/0.50
10/1.00
7/0.70
3/0.30
1/0.10
Relative cost position
0.35
5/1.75
10/3.50
3/1.05
1/0.35
4/1.40
Customer service capability
0.15
5/0.75
7/1.05
10/1.50
1/0.15
4/1.60
Sum of weights
1.00
6.20
8.20
7.00
2.10
2.90
Overall strength rating
Rating Scale: 1 = Very weak; 10 = Very strong
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Why Do a Competitive
Strength Assessment ?
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
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