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Competing for Advantage
PART II STRATEGIC ANALYSIS

• Chapter 3
• The External Environment
• Opportunities, Threats, Industry Competition, and
  Competitor Analysis

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The Strategic Management Process
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External Environments

• Key Terms
• General environment
• Composed of dimensions in the broader society
  that influence an industry and the firms within
  it
• Industry environment
• Set of factors that directly influence a firm and
  its competitive actions and competitive responses
• Competitor environment
• Details about direct and indirect competitors and
  the competitive dynamics expected impact a firm's
  efforts to generate above-average returns

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The External Environment
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External Environmental Analysis

• Key Terms
• Opportunity
• Condition in the external environment that, if
  exploited, helps a company achieve value creation
• Threat
• Condition in the general environment that may
  hinder a company's efforts to achieve value
  creation

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External Environment Analysis

• Key Terms
• Scanning
• Studying all segments in the general environment
• Monitoring
• Observing scanned environmental changes to
  identify important emerging trends
• Forecasting
• Developing feasible projections of potential
  events
• Assessing
• Determining the timing and significance of the
  effects of environmental changes and trends on
  the strategic management of the firm

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Components of External Environmental Analysis
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The General Environment
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The Demographic Segment

• Key Terms
• Demographic segment
• Segment of the environment concerned with a
  population's size, age structure, geographic
  distribution, ethnic mix, and income distribution

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Demographic Characteristics

• Population size
• Age structure
• Geographic distribution
• Ethnic mix
• Income distribution

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The Economic Segment

• Key Terms
• Economic segment
• Nature and direction of the economy in which a
  firm competes or may compete

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Economic Factors

• Gross National Product (GNP)
• Interest rates
• Inflation/Deflation
• Foreign exchange rates
• Trade balances

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The Political Segment

• Key Terms
• Political/legal segment
• Arena in which organizations and interest groups
  compete for attention, resources, and a voice in
  overseeing the body of laws and regulations
  guiding the interactions among nations

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The Sociocultural Segment

• Key Terms
• Sociocultural segment
• Segment of the environment concerned with a
  society's attitudes and cultural values

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Sociocultural Considerations

• Healthcare
• Workforce diversity
• Changing attitudes toward work
• Saving and retirement planning
• Concern for the environment
• Concern for quality of work life
• Residential decisions
• Shifts in product/service preferences

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The Technological Segment

• Key Terms
• Technological segment
• Segment of the environment that includes the
  institutions and activities involved with
  creating new knowledge and translating that
  knowledge into new outputs, products, processes,
  and materials

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Technological Issues

• Rapid pace of technological change
• Impact of the Internet on business practices
• Impact of wireless communications on business
  practices.
• Internal development versus external sources of
  new technology

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The Global Segment

• Key Terms
• Global segment
• Segment of the environment that includes relevant
  new global markets, existing markets that are
  changing, important international political
  events, and critical cultural and institutional
  characteristics of global markets

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Global Interdependence

• Increase and ease in the flow of goods, services,
  financial capital, and knowledge across borders
• Opening of economically maturing markets
• Extended reach and potential for firms

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Global Challenges

• The low cost of goods developed in countries with
  extremely low wage rates threatens industries in
  higher wage nations.
• There are risks are associated with investing in
  less economically mature markets.
• Different sociocultural and institutional
  attributes need to be recognized when expanding
  into global markets.

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The Physical Environment Segment

• Key Terms
• Physical environment segment
• Segment of the environment that involves changes
  to the physical environment and business
  practices to respond to or prevent those changes

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Industry Environment Analysis

• Key Terms
• Industry
• Group of firms producing products that are close
  substitutes
• Market microstructure
• Term referring to competition for the a group of
  customers who value location and firm
  capabilities when making buying decisions

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Five Forces Model of Competition
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Five Competitive Forces

• Threat of new entrants
• Bargaining power of suppliers
• Bargaining power of buyers
• Threat of substitute products
• Intensity of rivalry among competitors

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New Entrants

• Threat to current competitors
• Market share
• Production capacity
• Earnings
• Likelihood of entry
• Barriers
• Expected retaliation

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Market Entry Barriers

• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost advantages independent of scale
• Government policy
• Expected retaliation

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Bargaining Power of Suppliers

• Supplier concentration
• No substitutes
• Small customers
• Critical product
• High switching cost
• Threat of forward integration

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Bargaining Power of Buyers

• Large buyers in industry
• Large portion of firms sales
• Low switching costs
• Standardized product
• Threat of backward integration

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Threat of Substitute Products

• Few switching costs
• Lower price
• Equal or higher quality and performance
  capabilities

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Competitive Rivalry

• Intensifies when a firm is challenged or
  recognizes an opportunity to improve its market
  position
• Visible dimensions
• - Price
• - Quality
• - Innovation

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Intensity of Rivalry

• Numerous or equally-balanced competitors
• Slow industry growth
• High fixed costs or high storage costs
• Lack of differentiation or low switching costs
• High strategic stakes
• High exit barriers

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Complementors

• Key Terms
• Complementors
• Companies that sell complementary goods or
  services that are compatible with the focal
  firm's own product or services

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Interpreting Industry Analysis
Unattractive Industry Attractive Industry
Low entry barriers High entry barriers
Powerful buyers Limited buyer power
Powerful suppliers Limited supplier power
Good product substitutes Poor product substitutes
Intense rivalry Moderate rivalry
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Interpreting Industry Analysis

• The five forces competitive analysis suggests
  the attractiveness of an industry and determines
  the potential for above-average returns over the
  long-term based on the level of competition
  observed.

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Analysis of Direct Competitors

• Key Terms
• Strategic group
• Set of firms emphasizing similar strategic
  dimensions which result in the use of similar
  strategies
• Strategic dimensions
• Areas that firms in a strategic group treat
  similarly

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Strategic Groups

• The strengths of the five industry forces differ
  across strategic groups.
• Strategic groups differ in performance.
• Strategic group membership remains relatively
  stable over time, enhancing analysis.
• Patterns of competition are evident within
  strategic groups.

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Strategic Group Dynamics

• Intra-strategic group rivalry is more intense
  than inter-strategic group rivalry.
• Organizations in a strategic group
• Occupy similar positions in the market
• Offer similar goods to a similar set of customers
• Often use similar production technology and
  organizational processes
• The more similar strategies are across strategic
  groups, the greater the level of expected rivalry.

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Understanding Competitors and Their Intentions

• Key Terms
• Competitor intelligence
• Set of data and information the firm gathers to
  better understand and better anticipate
  competitors' objectives, strategies, assumptions,
  and capabilities

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Components ofCompetitor Analysis
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Ethical Question

• How can a firm use its code of ethics as it
  analyzes the external environment?

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Ethical Question

• What ethical issues, if any, may be relevant to
  a firms monitoring of its external environment?
  Does use of the Internet to monitor the
  environment lead to additional ethical issues?
  If so, what are they?

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Ethical Question

• What is an ethical issue associated with each
  segment of a firms general environment? Are
  firms across the globe doing enough to deal with
  this issue?

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Ethical Question

• Why are ethical practices critical in the
  relationships between a firm and its suppliers?

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Ethical Question

• In an intense rivalry, especially one that
  involves competition in the global marketplace,
  how can the firm gather competitor intelligence
  ethically while maintaining its competitiveness?

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Ethical Question

• What do you believe determines whether an
  intelligence-gathering practice is or is not
  ethical? Do you see this changing as the worlds
  economies become more interdependent? If so,
  why? Do you see this changing because of the
  Internet? If so, how?