Lecture Outline

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Lecture Outline
MAN 6721 Strategic Management
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Class 2
Evaluating a Firms External Environment Thursda
y, January 25, 2007
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Strategic Management Process
External Analysis
Strategic Choice
Strategy Implementation
Competitive Advantage
Mission
Objectives
Internal Analysis
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SWOT Analysis
Internal External

Strengths
Opportunities
-
Weaknesses
Threats
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Value of SWOT Analysis
Internal External

Strengths
Opportunities
Helps organization prioritize opportunities and
develop realistic, well-informed goals and
strategies
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Weaknesses
Threats
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SWOT Analysis

• Conducting an Internal Analysis
• Purpose is to identify assets, resources, skills,
  and processes that represent either strengths or
  weaknesses for the organization.
• Evaluating the External Environment
• Purpose is to identify those aspects of the
  environment that represent either an opportunity
  or a threat for the organization.

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Tools for Conducting an External Analysis

• Attendance at industry trade shows and
  participation in trade associations
• General awareness of industry-related news
• Professional research firms such as Forrester
  Research and Gartner
• Utilization of simple keyword alert services
  like Google Alerts
• Specialty services such as TVEyes
• Information from free search services like
  FindArticles.com and Bizstats.com
• Information from subscription or fee based
  services like Hoovers,
• Bizminer.com, Marketresearch.com, and U.S.
  Industry Profiles

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Example of Why Internal and External Analysis is
Important
Dream Dinners Recipe For Success Passion,
Market Opportunity, and The Skills to Make It
Happen
Passion
Both founders were passionate about helping
families share evening meals together
Market Opportunity
Skill
Feedback from customers willing to pay for the
service indicated that a market opportunity
existed
Founder Stephanie Firchaus professional
background in catering and the business side of
cooking
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Areas That Should Be EvaluatedBy An External
Analysis(1 of 2)

• General Environment
• Includes environmental forces that are beyond the
  influence of the organization and over which it
  has no (or little) control.
• Task Environment
• Includes environmental forces that are within the
  organizations operating environment and may be
  influenced to some degree.

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Areas That Should Be EvaluatedBy An External
Analysis(2 of 2)
General Environment
Economic Factors
Technological Factors
Sociocultural Factors
Political-Legal Factors
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Areas That Should Be EvaluatedBy An External
Analysis(3 of 3)
Task Environment
Competition
Customers
Communities In Which the Firm Operates
Suppliers
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What External Analysis Leads To

• Economic Factors
• State of the economy
• Level of disposable income
• Consumer spending patterns

• Social Factors
• Social cultural trends
• Demographic changes
• What people think is in

• Business and/or Product Opportunity Gap
• Difference between whats available and whats
  possible

New Business and Product Ideas

• Technology Advances
• New technologies
• Emerging technologies
• New uses of old technologies

• Political Regulatory Changes
• Changes in political arena
• New laws and regulations

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Integral to Environmental Analysis(And the
decision whether to pursue on opportunity)
Industry Analysis
Competitor Analysis
Business research that focuses on the potential
of an industry
A detailed analysis of a firms competitors
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The Five Forces Model of Environmental Threats
Higher Threat
Lower Average Profits
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Threat 1Threat of New Entrants(1 of 5)

• Threat of New Entrants
• If firms can easily enter the industry, any above
  normal profits will be bid away quickly.
• Barriers to entry lower the threat of entry.
• The existence of barriers to entry make an
  industry more attractive
• This is true whether the focal firm is already in
  the industry or is thinking about entering it.
• Qualification There is a difference between
  entering vertical and horizontal markets.
  (Stubhub case)

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Threat 1Threat of New Entrants(2 of 5)

• Traditional Barriers to Entry
• Economies of Scale
• Firm that cant produce the minimum efficient
  scale will be at a disadvantage.
• Product Differentiation
• Entrants are forced to overcome customer
  loyalties to existing products.
• Cost Advantages Independent of Scale
• Incumbents may have learning advantages, location
  advantages, etc.
• Government Policies
• Governments may impose trade restrictions and/or
  grant monopolies.

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Threat 1Threat of New Entrants(3 of 5)

• Non Traditional Barriers to Entry
• It is difficult for start-ups to execute barriers
  to entry that are expensive, such as economies of
  scale, because money is usually tight.
• Start-ups have to rely on nontraditional barriers
  to entry to discourage new entrants, such as
  assembling a world-class management team that
  would be difficult for another company to
  replicate.

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Threat 1Threat of New Entrants(4 of 5)
Nontraditional Barriers to Entry
Barrier to Entry
Explanation
If a start-up puts together a world-class
management team, it may give potential rivals
pause in taking on the start-up in its chosen
industry.
Strength of management team
If a start-up pioneers an industry or a new
concept within an existing industry, the name
recognition the start-up establishes may create a
formable barrier to entry.
First-mover advantage
If the employees of a start-up are highly
motivated by the unique culture of a start-up,
and anticipate large financial rewards through
stock options, this is a combination that cannot
be replicated by larger firms. Think of the
employees of a biotech firms trying to find a
cure for a disease.
Passion of the management team and employees
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Threat 1Threat of New Entrants(5 of 5)
Nontraditional Barriers to Entry (continued)
Barrier to Entry
Explanation
If a start-up is able to construct a unique
business model and establish a network of
relationships that makes the business model work,
this set of advantages create a barrier to entry.
Unique Business Model
Inventing a new approach to an industry and
executing the idea in an exemplary fashion
If a start-up invents a new approach to an
industry and executes it in an exemplary fashion,
these factors create a barrier to entry for
potential imitators.
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Threat 2 Threat of Rivalry

• Rivalry Among Existing Firms
• High rivalry means firms compete vigorouslyand
  compete away above average profits.
• Industry conditions that favor rivalry
• Large number of competitors
• Slow or declining growth
• High fixed costs/and or high storage costs
• Low product differentiation
• Industry capacity can only be added in large
  increments

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Threat 3 Threat of Substitutes

• Substitutes
• Substitutes fill the same need but in different
  ways.
• Coke and Pepsi are rivals, milk is a substitute
  for both
• Substitutes creates a price ceiling because
  consumers switch to the substitute if price the
  price gets too high.
• Substitutes will likely come from outside the
  industrybe sure to look.

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Threat 4 Threat of Suppliers

• Threat of Suppliers
• Powerful suppliers can squeeze (lower profits)
  of the focal firm.
• Industry conditions that facilitate supplier
  power
• Small number of firms in suppliers industry
• Highly differentiated product
• Lack of close substitutes for suppliers product
• Supplier could integrate forward
• Focal firm is an insignificant customer of
  supplier

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Threat 5 Threat of Buyers(1 of 2)

• Threat of Buyers
• Powerful buyers can squeeze (lower profits) the
  focal firm by demanding lower prices and/or
  higher levels of quality and service.
• Industry conditions that facilitate buyer power
• Small number of buyers for focal firms output
• Lack of a differentiated product
• The product is significant to the buyer

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Threat 5 Threat of Buyers(2 of 2)

• Threat of Buyers
• Industry conditions that facilitate buyer power
  (continued)
• Buyers operate in a competitive marketthey are
  not earning above normal profits
• Buyers can vertically integrate backward
• Many small buyers can be united around an issue
  to act as a block

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Porters Five Forces Model
If all threats are high
Expect normal profits
If all threats are low
Expect above normal profits
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In-Class Exercise
Determining the attractiveness of an industry
using the five-forces model
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Application of Model for Startups
Using the Five Forces Model to Pose Questions to
Determine the Potential Success of a New Venture
in a Particular Industry
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Complementors As Another Force

• Complementors As Another Force
• Complementors Increase the Value of the Focal
  Firms Product
• Customers perceive more value in the focal firms
  product when it is combined with the
  complementors product
• Complementors may be found outside the focal
  firms industry

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Exploiting Industry Structure Opportunities
Most Common Industry Structures
Fragmented Industry
Mature Industry
Emerging Industry
Declining Industry
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Fragmented Industry Structure
Industries in which a large number of small or
medium-sized firms operate and no small set of
firms has dominant market share or creates
dominant technologies
Industry Characteristics
Opportunity

• Large number of small firms
• No dominant firms
• No dominant industries
• Commodity type products
• Low barriers to entry
• Few, if any, economies of scale

• Consolidation
• Buy competitors
• Build market power
• Exploit economies of scale

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Emerging Industry Structure
Emerging industries are newly created industries
formed by technological innovations, changes in
demand, the emergence of new customer needs, and
so forth
Industry Characteristics
Opportunity

• New industry based on break through
• technology or product
• No product standard has been
• reached
• No dominant firm has emerged
• New customers come from non-
• consumption not from competitors

• First mover advantages
• Technology
• Locking-up assets
• Creating switching costs

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Mature Industry Structure
Mature industries are characterized by declining
growth in total industry demand
Industry Characteristics
Opportunity

• Slowing growth in industry demand
• Technology standard exists
• Increasing international competition
• Industry-wide profits declining
• Industry exit is beginning

• - Refine current products
• Improve service
• Process innovation

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Declining Industry Structure
A declining industry is an industry that has
experienced an absolute decline in unit sales
over a sustained period of time
Industry Characteristics
Opportunity

• Industry sales have sustained pattern
• of decline
• Some well-established firms have
• exited
• Firms have stopped investing in
• maintenance

• - Market leadership
• Niche
• Harvest
• Divest

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Competitor Analysis

• What is a Competitor Analysis?
• A competitor analysis is a detailed analysis of a
  firms competition.
• It helps a firm understand the positions of its
  major competitors and the opportunities that are
  available.
• A competitive analysis grid is a tool for
  organizing the information a firm collects about
  its competitors.

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Identifying Competitors
Types of Competitors Firms Face
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Sources of Competitive Intelligence(1 of 2)

• Collecting Competitive Intelligence
• To complete a competitive analysis grid, a firm
  must first understand the strategies and
  behaviors of its competitors.
• The information that is gathered by a firm to
  learn about its competitors is referred to as
  competitive intelligence.
• A new venture should take care that it collects
  competitive intelligence in a professional and
  ethical manner.

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Sources of Competitive Intelligence(2 of 2)
Ways that a firm can ethically obtain information
about its competitors

• Attend conference and trade shows
• Read industry related book, magazines, and Web
  sites
• Talk to customers about what motivated them to
  buy your product
• as opposed to your competitors
• Purchase competitors products to understand
  their features,
• benefits, and shortcomings
• Study competitors Web sites
• Study Web sites that provide information about
  companies

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Completing a Competitive Analysis Grid(1 of 2)

• Competitive Analysis Grid
• A tool for organizing the information a firm
  collects about its competitors
• It can help a firm see how it stakes up against
  its competitors, provide ideas for markets to
  pursue, and identify its primary sources of
  competitive advantage.

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Completing a Competitive Analysis Grid(2 of 2)
Competitive Analysis Grid for Activision
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Class 2
Introduction to Feasibility Analysis Thursday,
January 25, 2007
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Feasibility Analysis

• Feasibility Analysis
• Feasibility analysis is the process of
  determining if a business or product idea is
  viable.
• As a preliminary evaluation of a business or
  product idea, a feasibility analysis is completed
  to determine if an idea is worth pursuing and to
  screen ideas before spending resources on them.

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Stage-Gate Model of New Product Development
Stage 1
Stage 2
Stage 5
Stage 4
Stage 3
Concept
Full Production and Market Launch
Preliminary Investigation
Detailed Investigation
Testing and Validation
Development
Initial screen
Second screen
Decision on business case
Post development review
Pre-commercial analysis
Gates
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Model of the Front-End of the Entrepreneurial
Process
Favorable results/proceed
Favorable results/proceed
Step 1
Step 2
Step 5
Step 4
Step 3
Screen (or test) the idea to determine its
preliminary feasibility
Identify a business idea
Conduct a full feasibility analysis
Prepare a written business plan
Launch the Business
Unfavorable results//stop or reevaluate idea
Unfavorable results//stop or reevaluate idea
Brainstorming and investigative function
Planning and launching function
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Preliminary Assessment of Business Idea
Favorable results/proceed
Favorable results/proceed
Step 1
Step 2
Step 5
Step 4
Step 3
Screen (or test) the idea to determine its
preliminary feasibility
Identify a business idea
Conduct a full feasibility analysis
Prepare a written business plan
Launch the Business
Unfavorable results//stop or reevaluate idea
Unfavorable results//stop or reevaluate idea
Preliminary Feasibility Analysis (Quick Screen)
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Preliminary Assessment of Business Idea

• Preliminary Assessment
• Provides a broad overview of an ideas potential
  
• Allows the entrepreneur to conduct a quick
  evaluation of an idea in a short period of time
• If too much rigor is applied at this early stage,
  it will discourage brainstorming and the
  articulation of multiple ideas.
• There are a number of templates or checklists
  available to facilitate a preliminary assessment.
• Timmons QuickScreen is an example
• The templates or checklists, like the
  QuickScreen, should be able to be completed
  within an hour
• If an idea doesnt cut muster at this level it
  should be dropped or reevaluated

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Full Feasibility Analysis

• A Full Feasibility Analysis Contains the
  Following Components
• Product/service feasibility
• Industry/market feasibility
• Competitive feasibility
• Organizational feasibility
• Financial feasibility

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Review of Place of Feasibility Analysis in the
Front-End of the Entrepreneurial Process
Favorable results/proceed
Favorable results/proceed
Step 1
Step 2
Step 5
Step 4
Step 3
Screen (or test) the idea to determine its
preliminary feasibility
Identify a business idea
Conduct a full feasibility analysis
Prepare a written business plan
Launch the Business
Unfavorable results//stop or reevaluate idea
Unfavorable results//stop or reevaluate idea

• Product/service feasibility
• Industry/market feasibility
• Competitive feasibility
• Organizational feasibility
• Financial feasibility