Download Session 6 Presentation

Session 6
Chapter 4
External Environmental Analysis
Remote/General
Industry/Competitive
Direct /Operating/Task
McGraw-Hill/Irwin
Strategic Management, 10/e
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
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Session Objectives
• To stress the importance of the sectors of the firm’s
external environment to strategy formulation.
• To develop a broader sense of competition and
competitive pressures.
• To understand the purpose of competitive strategy
The Firm’s External Environment
Remote Environment (Global and Domestic)
• Economic
• Social
• Political
• Technological
• Ecological
Industry Environment (Global and Domestic)
• Entry barriers
• Buyer power
• Supplier power • Substitute availability
• Competitive rivalry
Operating Environment (Global and Domestic)
• Competitors
• Customers
• Creditors
• Labor
• Suppliers
THE FIRM
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Economic Factors
• Concern nature and direction of economy in
which a firm operates
• Types of factors
– General availability of credit
– Level of disposable income
– Propensity of people to spend
– Prime interest rates
– Inflation rates
– Trends in growth of gross national product
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Social Factors
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• Include beliefs, values, opinions, and lifestyles
of people
• Recent social trends
– Entry of large numbers of women into labor market
– Accelerating interest of consumers and employees
in quality-of-life issues
– Shift in age distribution of population
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Political Factors
• Define legal and regulatory parameters within
which firms must operate
• Types of factors
– Fair-trade decisions
– Antitrust laws
– Tax programs
– Minimum wage legislation
– Pollution and pricing policies
– Administrative jawboning
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Technological Factors
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• Focus on technological changes affecting industry
• Types of changes
– New products
– Improvements in existing products
– Manufacturing and marketing techniques
• Role of technological forecasting
– Foresees advancements and estimating their impact
– Alerts managers to impending challenges and
promising opportunities
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Ecological Factors
• Involve relationships among human beings
and other living things and air, soil, and water
• Current concerns
– Global warming
– Loss of habitat and biodiversity
– Air, water, and land pollution
• Responsibilities of firms
– Eliminating toxic by-products of current
manufacturing processes
– Cleaning up prior environmental damage
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Firm’s External Environment
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Industry/Competitive Environment
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Michael E. Porter’s Five Forces Model the
concept of industry environment as integral to
strategic thought and business planning.
The five forces shape competition in an industry.
The framework helps strategic managers link
remote factors to their effects on a firm’s operating
environment.
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Competitive Forces Shape Strategy
•
The essence of strategy formulation is to better
cope with competition.
•
Competition in an industry is rooted in its
underlying economics, and competitive forces
exist that go well beyond the established
combatants in a particular industry.
•
The corporate strategists’ goal is to find a position
in the industry where his or her company can best
defend itself against these forces or can influence
them in its favor.
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The Goal of Competitive Strategy
To Achieve a Defensible Position Against the
Competitive (Five) Forces that Are Constantly
Working to Erode Industrywide Profitability
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Competitive Forces
Any Entity (Group or Class of
Firms) that has the Potential to
Erode Profitability Among Firms
within an Industry
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Government Influence on the Model
We Consider the Influence of
Government as Felt through its
Role(s) as one of the Five Forces:
Government can be a Potential
Entrant, Supplier, Buyer, Substitute,
or Rival Firm
Industry Analysis
& Competitive Analysis
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•
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An industry is a collection of firms that offer
similar products or services.
Structural attributes are the enduring
characteristics that give an industry its distinctive
character.
Concentration refers to the extent to which
industry sales are dominated by only a few firms.
Barriers to entry are the obstacles that a firm
must overcome to enter an industry.
Five Forces Driving Industry Competition
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Let’s Hear from Dr. Porter
• http://www.youtube.com/watch?v=mYF2_FBCvXw
&feature=results_video&playnext=1&list=PL72A65
662D7647704
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Breakout Groups by Case
• 1. Define your Industry
• 2. Most Significant General Environmental Factor
• 3. Top Two More Significant of the Five Forces
You have 15 minutes!
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The Five Forces
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Threat of Entry
Bargaining Power of Suppliers
Bargaining Power of Buyers
Pressure from Substitute Products
Rivalry Among Existing Firms
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Forces Affecting Entry Decision
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Economies of Scale
Product Differentiation
Capital Requirements
Cost Disadvantages
Independent of Size
Access to Distribution
Channels
Government Policy
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Powerful Suppliers
A supplier group is powerful if:
• It is dominated by a few companies and
is more concentrated than the industry
it sells to
• Its product is unique or at least
differentiated, or if it has built-up
switching costs
• It is not obliged to contend with other
products for sale to the industry
• It poses a credible threat of integrating forward into the
industry’s business
• The industry is not an important customer of the supplier
group
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Powerful Buyers
A buyer group is powerful if:
• It is concentrated or purchases in
large volumes
• The products it purchases from the industry are standard
• The products it purchases from the industry form a
component of its product and represent a significant
fraction of its cost
• It earns low profits
• The industry’s product is unimportant to the quality of the
buyers’ products or services
• The industry’s product does not save the buyer money
• The buyers pose a credible threat of integrating backward
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Substitute Products
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By placing a ceiling on the prices it can charge,
substitute products or services limit the potential of
an industry
Substitutes not only limit profits in normal times
but also reduce the bonanza an industry can reap in
boom times
Substitute products that deserve the most attention
strategically are those that are
–
–
subject to trends improving their price-performance
trade-off with the industry’s product or
produced by industries earning high profits
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Jockeying for Position
Intense rivalry occurs when:
• Competitors are numerous or are roughly equal
• Industry growth is slow, precipitating fights for market
share that involve expansion
• The product or service lacks differentiation or switching
costs
• Fixed costs are high or the product is perishable, creating
strong temptation to cut prices
• Capacity normally is augmented in large increments
• Exit barriers are high
• Rivals are diverse in strategy, origin, and personality
Direct/Operating/Task
Environment
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Also called task environment
Includes competitor positions relative to the five
forces and profiling based on the following factors:
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Geographic
Demographic
Psychographic
Buyer Behavior
Also includes suppliers & creditors and HRM
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HR: Nature of the Labor Market
Access to personnel is affected by 4 factors:
• Firm’s reputation as an employer
• Local employment rates
• Availability of people with the needed skills
• Its relationship with labor unions.
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Emphasis on Environmental Factors
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Differing external elements affect different strategies at
different times and with varying strengths
Only certainty is that the effect of the remote and
operating environments will be uncertain until a strategy
is implemented
Many managers, particularly in less powerful firms,
minimize long-term planning
Instead, they allow managers to adapt to new pressures
from the environment
Absence of strong resources and psychological
commitment to a proactive strategy effectively bars a firm
from assuming a leadership role in its environment