Transcript Slide 1

McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 4
Analyzing the External
Environment
Learning Objectives
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 vis-à-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.
4-3
Question
All of the following are segments of the general
environment except:
a)
b)
c)
d)
Legal/Political
Technological
Ethical
Sociocultural
4-4
The General Environment
 Segments of the general environment include:
Demographic
Sociocultural
Legal/Political
Technological
Economic
General
Environmen
t
4-5
The General Environment
 General environmental trends and events:
Little ability to predict them
Even less ability to control them
Can vary across industries
General
Environmen
t
4-6
Demographic Segment
 Aging population
 Rising affluence
 Changes in ethnic composition
 Geographic distribution of population
 Greater disparities in income levels
4-7
Sociocultural Segment
 More women in the workforce
 Increase in temporary workers
 Greater concern for fitness
 Greater concern for environment
 Postponement of family formation
4-8
Political/Legal Segment
 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)
4-9
Example: Sarbanes-Oxley
 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
www.forbes.com/leadership/2007/08/27/sarbox-regulation-rules-lead-govern-cx_mk_0827oxley.html
4-10
Technological Segment
 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
4-11
Technological Segment Nanotechnology
4-12
Example: Nanotech’s Material
 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
www.forbes.com/personalfinance/2007/05/15/nanotech-arrowhead-intel-pf-guru-in_jw_0515soapbox_inl.html
4-13
Technological Segment – Internet
Growth
4-14
Economic Segment
 Interest rates
 Unemployment
 Consumer Price index
 Trends in GDP
 Changes in stock market valuations
4-15
The Competitive Environment
 Segments of the competitive
environment include:
Competitors
Customers
Suppliers
Competitive
Environment
 Sometimes called the task or industry
environment
 Porter’s five forces model
4-16
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
4-17
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
4-19
Example
 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
4-20
The Threat of New Entrants
 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
4-21
Question
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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The Bargaining Power of Buyers
 Buyers threaten an industry
Force down prices
Bargain for higher quality or more services
Play competitors against each other
4-23
The Bargaining Power of Buyers
 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
4-24
Question
How can suppliers exert power?
a)
b)
c)
d)
Increase the amount of materials supplied
Reduce the quality of purchased goods and services
Threatening to raise prices
Both B and C
4-25
The Bargaining Power of Suppliers
 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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The Bargaining Power of Suppliers
 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
4-27
Question
Substitutes of products and services pose a
threat to an industry because they:
a)
b)
c)
d)
Limit the potential returns
Places a ceiling on the prices that firms can
profitably charge
Affects the price/performance ratio
All of the above
4-28
The Threat of Substitute
Products and Services
 Substitutes limit the potential returns
of an industry
Ceiling on the prices that firms in that
industry can profitably charge
Price/performance ratio
4-29
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
4-30
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
4-31
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
4-32
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
4-33
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
4-34
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
4-35
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
4-36
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
4-37
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
 Cluster of firms that share similar strategies
Breadth of product and geographic scope
Price/quality
Degree of vertical integration
Type of distribution system
4-38
Strategic Groups within Industries
 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
4-39
Strategic Groups within Industries
4-40