ANALYSIS OF THE

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CHAPTER 2

• ANALYSIS OF THE
• EXTERNAL
• ENVIRONMENT

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Vision and Mission ? ? 1.External
analysis 2.Internal analysis ?
? Opportunities threats Strengths
weaknesses Key success factors
Distinctive competence ?
? Strategy 4.Social ? ?
?3.Managerial responsibility values Implementa
tion ? Sustainable competitive advantage Above
average returns
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? Mission ? External analysis
Internal analysis What MIGHT we do? What
CAN we do? ? ? Opportunities
and Strengths and threats weaknesses ? Stra
tegy ? ? ? Social responsibility Manageri
al values What SHOULD we do? What do we
WANT to do?
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External analysis - WHY?

• Analysis is the critical starting point for
  strategic thinking. Kenichi Ohmae, prominent
  business consultant and author
• Things are always different the art is
  figuring out which differences matter. Laszio
  Birinyi, Investments manager.
• Is the industry attractive? What strategic
  positions are attractive/unattractive? What are
  the forces of change in the industry? KF

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External analysis - HOW?

• Important tools of external analysis
• for strategic management
• general environment analysis
• basic industry facts
• Porters five-forces of competition
• (strategic group maps)
• competitive intelligence

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External Environment
Figure 2.1
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External Environmental Analysis

• A continuous process which includes
• Scanning for early signals of potential changes
  and trends in the environment
• Monitoring changes to see if a trend emerges from
  among those spotted by scanning
• Forecasting projections of outcomes based on
  monitored changes and trends
• Assessing the timing and significance of changes
  and trends on the strategic management of the firm

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General Environment
Dimensions in the broader society that influence
and industry and the firms within
it Economic Sociocultural Global Technological Pol
itical/legal Demographic
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General Environment
The Demographic Segment Population
size Age structure Geographic distribution Ethnic
mix Income distribution
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General Environment (contd)
The Sociocultural Segment Workforce
diversity Attitudes about worklife Environmental
concerns Shifts in product and service
preferences Shifts in leisure pursuits Shifts in
daily habits
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General Environment (contd)

• The Economic Segment
• Inflation rates
• Interest rates
• Unemployment rate
• Trade balance
• National budget deficits or surpluses
• Personal savings rate
• Business savings rates
• Gross domestic product

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General Environment (contd)

• The Technological Segment
• Product innovations
• Focus of private and government-supported RD
  expenditures
• New communication technologies
• Process innovations
• Revolutionary technologies

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General environment (cont)

• The Political/Legal Segment
• Antitrust laws
• Taxation laws
• Labor laws
• Environmental laws
• Regulation issues
• Education policies
• Relevant federal, state, local issues

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General Environment (contd)
The Global Segment Important political
events Critical global markets Newly
industrialized countries Different cultural and
institutional attributes
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General Environment Analysis

• Identify trends in the various general
  environment categories that are potentially
  relevant to your industry.
• Look for specific opportunities and threats.
• Prepare to adapt -- these trends are typically
  beyond the control of an organization.
• Anticipate! Prepare to place your bets!

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Team/Term Project

• Goals
• Major content areas
• Required analysis tools
• Scoring
• Information sources -
• industry (gt2) company (gt 5)

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TEAMS
Meet and greet Exchange contact
information S/W of each person?
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TEAM PROJECT EXERCISE Examine each category of
the general environment for trends that are
relevant to your industry. Keep in mind that
this perspective is very future oriented. Try to
identify specific opportunities and threats.
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Industry Analysis

• Industry IS NOT THE SAME as company!
• Industry external environment
• Company internal environment
• These are different levels of analysis!

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Examples Industries/Companies

• Industries
• 1.
• 2.
• 3. Software
• 4. Restaurant
• 5.

• Companies
• 1. Wal-Mart
• 2. NW Airlines
• 3.
• 4.
• 5.

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Useful basic facts about an industry

• market size primary market segments
• total industry volume industry growth rate
• stage of industry life cycle
• average industry profit margins
• primary competitive arena (local?
  regional? national? global?)
• relative consolidation vs. fragmentation
  4-firm concentration ratio market share data

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TEAM PROJECT HOMEWORK for use in class
tomorrow

• Read about the firm find at least five
  different relevant information inputs.
• Locate mission statement.
• Find some basic industry facts, and general
  industry information at least two different
  relevant industry sources.

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Good sources of information . . .

• ABOUT INDUSTRY
• Standard and Poors Industry Surveys
• HC 106.6 S74
• SEC filings
• Industry trade groups
• Business periodicals

ABOUT COMPANY

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Porters Five Forces of Competition Model
Figure 2.2
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Porters Five-Forces of Competition

• A set of factors that directly influences a
  company and its competitive actions and
  responses.
• Interaction among these factors determine an
  industrys profit potential and location of
  profit pools.
• Need to understand which competitive factors have
  power, why they have power, and what you might be
  able to do about it to improve your own position.

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1. Threat of New Entrants - analyze Barriers to
Entry, such as . .

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Analysis of barriers to entry

• High entry barriers create
• (more?) (less?) competition?
• Existing firms in an industry prefer
• (high?)(low?) entry barriers?
• What should existing firms do about entry
  barriers in their industry?

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2. Bargaining Power of Suppliers
Suppliers are the organizations providing inputs
to the type of firm being analyzed. Examples
What should firms do about potential power
of suppliers?
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Bargaining Power of Suppliers

• Supplier power increases when
• Suppliers are few and/or large
• Suitable substitutes are
• not available
• Individual buyers are not large
  customers of suppliers and are plentiful
• Suppliers goods are critical for buyers
  marketplace success
• Suppliers products create high switching costs
• Suppliers pose a threat to integrate forward into
  buyers industry

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3. Bargaining Power of Buyers

• Buyer power increases when
• Buyers are large and few in number
• A buyers purchases are a significant
• portion of a firms annual revenues
• The product involved is
• undifferentiated
• Buyers can switch to another product without
  incurring high switching costs
• Buyers are price sensitive
• Buyers are well informed
• Buyers pose threat to integrate backward into the
  sellers industry

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How can businesses reduce buyer power?

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4. Threat of Substitutes

• Substitutes offer an alternative way to
• satisfy a consumer need, often satisfied by
• firms in a different industry.
• Substitutes ARE NOT THE SAME as rivals!
• Burger King IS NOT considered a
• substitute for McDonalds.
• A substitute for McDonalds . . . .

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Threat of Substitute Products

• The threat of substitute products
• increases when
• Buyers face few switching costs
• The substitutes price is lower
• Substitutes quality and performance are equal to
  or greater than the existing product
• Firms need to consider the price/performance
  tradeoffs offered by substitute products
• Substitutes can put a lid on prices, and even
  make an existing product obsolete.
• Examples of powerful substitute products . .
  .

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5. Intensity of Rivalry

• Industry rivalry increases when
• There are numerous or equally balanced or
  aggressive competitors
• Industry growth slows or declines
  (overcapacity exists)
• There are high fixed costs or high storage
  costs
• There is a lack of differentiation opportunities
  or low switching costs
• Price cutting strategies are employed
• The strategic stakes are high
• High exit barriers exist

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Five-Forces Analysis -- SO WHAT?

• Consider how opportunities and threats may result
  from the five competitive forces.
• Understand the strength of each competitive
  force, and underlying reasons for strength.
• Select niches where forces are weaker, and profit
  pools are higher.
• Build strategies that defend yourself against
  strong competitive forces, and that influence the
  forces in your favor.

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Overall Evaluation of Industry Attractiveness

• Attractive industry
• favorable general environment trends
• favorable industry facts industry growth and
  generous industry profits
• few strong threats from the 5 competitive forces
• no powerful direct rivals

• Unattractive industry
• unfavorable general environment trends
• unfavorable industry facts overcapacity and
  low industry profits
• many strong threats in the 5 competitive forces
• many powerful direct rivals

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Porters Five-Forces Analysis-Take 1
brainstorming session

• Identify types of players comprising each of the
  five competitive forces.
• Evaluate the relative threat of each of the five
  forces of competition.
• Consider the overall strength of the five forces
  and resulting industry attractiveness.
• Identify specific opportunities and threats.

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Team Project Information Assessment

• General environment trends?
• Basic industry facts?
• Five-forces of competition?
• Specific close competitors?
• Detailed company information?

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Case 1 Analysis of MP3 Player Industry

• Examine questions CAREFULLY read case.
• Prepare your thoughts (take notes!) relative to
  each question/issue.
• Friday class will begin with 20-point individual
  accountability quiz
  (closed book, closed notes).
• Team/Class discussion 5 points.