Strategic Management- Chapter Two

PART 1: STRATEGIC MANAGEMEN T INPUTS CHAPTER 2 THE EXTERNAL ENVIRONMENT: OPPORTUNITIES, THREATS, INDUSTRY COMPETITION, & COMPETITOR ANALYSIS Authored by: Marta Szabo White. Ph.D Georgia State University THE STRATEGIC MANAGEMENT PROCESS 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

KNOWLEDGE OBJECTIVES Explain the importance of analyzing and understanding the firms external environment. Define and describe the general environment and the industry environment. Discuss the four activities of the external environmental analysis process. Name and describe the general environments seven segments. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. KNOWLEDGE OBJECTIVES Identify the five competitive forces and explain how they determine an industrys profit potential.

Define strategic groups and describe their influence on the firm. Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. IMPORTANT DEFINITIONS A firms EXTERNAL ENVIRONMENT is broken down into three parts: General Industry Competitor A firms strategic actions are

influenced by the conditions in all three parts. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. IMPORTANT DEFINITIONS General Environment MACRO Dimensions in the broader society that influence an industry and the firms within it Industry Environment MICRO Set of factors that directly influences a firm and its competitive actions and

response Competitor Environment Focuses on each company against which a firm directly competes 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT FIGURE 2.1 The External Environment 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. OPENING CASE BRITISH PETROLEUM (BP) External environment affects a

firms strategic actions BP seeks to expand its oil reserves after the Deepwater Horizon oil and gas drilling platform disaster in the Gulf of Mexico by forming joint ventures in Russia with Rosneft Corporation and in India with Reliance Industries. BPs strategic actions are also affected by conditions in other segments of its general environment: e.g., the political/legal, social/cultural, and physical environment segments. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT A firms external environment creates: OPPORTUNITIES

e.g., the opportunity for BP to enter other global markets, and THREATS e.g., the possibility that additional regulations in its markets will reduce opportunities for BP to extract oil and gas Collectively, opportunities and threats affect a firms strategic actions. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. MA TC HI N G THE EXTERNAL

ENVIRONMENT 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT The GeneralGENERAL Environment is grouped into seven environmental segments: [1] Demographic [2] Economic [3] Political/Legal [4] Sociocultural [5] Technological [6] Global [7] Physical To successfully deal with uncertainty in the external environment and achieve strategic competitiveness, firms must be aware of and understand these segments.

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT GENERAL Firms cannot directly CONTROL the general environments segments. However, these segments influence the actions that firms take. Successful firms learn how to gather the information needed to understand all segments and their implications for selecting and implementing the firms strategies. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT

GENERAL SEGMENTS AND THE DEMOGRAPHIC ELEMENTS SEGMENT Demographic segments are commonly analyzed on a global basis because of their potential effects across countries borders and because many firms compete in global markets. Demographic Segment Population size Age structure Geographic distribution

Ethnic mix Income distribution 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE ECONOMIC SEGMENT ELEMENTS This segment refers to the nature and direction of the economy in which a firm competes or may compete. Firms generally seek to compete in relatively stable economies with strong growth potential. With globalization and the interconnectedness of nations, firms must scan, monitor, forecast, and assess the health of their host nation and the health of the economies outside their host nation.

Budget deficits or Economic Segment surpluses Inflation rates Personal savings rate Interest rates Business savings rates Trade deficits or Gross domestic product surpluses 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT

GENERAL SEGMENTS AND THE POLITICAL/LEGAL ELEMENTS SEGMENT This segment represents how organizations and governments mutually try to influence each other, and how firms try to understand these influences (current and projected) on their strategic actions. Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies

Labor training laws Educational philosophies and policies 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE SOCIOCULTURAL ELEMENTS SEGMENT The sociocultural segment is concerned with a societys attitudes and cultural values. Because attitudes and values form the cornerstone of a society, they often drive demographic, economic, political/legal, and technological conditions and changes. Sociocultural Segment

Women in the workforce Workforce Diversity attitudes about the quality of work life Shifts in work and career preferences 2013 Learning. in All Rights Reserved. May and not be copied, scanned, or duplicated, in whole or in part, except for use as Cengage Shifts product service preference permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE TECHNOLOGICAL ELEMENTS SEGMENT Technological changes occur through new products, processes, and materials. The technological segment includes the activities involved in creating new knowledge and translating that knowledge into new outputs, products, processes, and materials. Given the rapid pace of technological change and risk Technological of disruption, it is vital for firms to study this segment. Applications of Segment

knowledge Product innovations Focus of private and New communication government-supported technologies R&D expenditures 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE GLOBAL SEGMENT ELEMENTS Markets and consumers are more global. This segment includes relevant new global markets,

existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets. Global Segment Important political events Critical global markets Newly industrialized countries Different cultural and institutional attributes 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND

THE PHYSICAL ENVIRONMENT ELEMENTS SEGMENT Concerned with trends oriented to sustaining the worlds physical environment, firms recognize that ecological, social, and economic systems interactively influence what happens in this particular segment. This segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes. Physical Environment Segment

Energy consumption Practices used to develop energy sources Renewable energy efforts Minimizing a firms environmental footprint Availability of water as a resource Producing environmentally friendly products Reacting to natural or man-made disasters 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE PHYSICAL ENVIRONMENT ELEMENTS EXAMP LE

SEGMENT Strategic Focus: Firms Efforts to Take Care of the Physical Environment in Which They Compete The examples noted in this Strategic Focus: Siemens AG, McDonalds, Procter & Gamble, and GE signify a growing commitment by firms around the globe in response to emerging trends in the physical environment segment. In addition to positively responding to the observed trends in this segment of the general environment, there is some evidence that firms engaging in these types of behaviors outperform those failing to do so. This emerging evidence suggests that these behaviors benefit companies, their stakeholders, and the physical environment in which they operate. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXTERNAL ENVIRONMENTAL ANALYSIS External environments are: Turbulent

Complex Global Uncertain Ambiguous Incomplete Firms engage in external environmental analysis to better understand and cope with their environments. This analysis has four parts: scanning, monitoring, forecasting, and assessing. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXTERNAL ENVIRONMENTAL ANALYSIS

ng i z ly h e a n t A al n r e ext onm ir v n e is a t en ult,

c ffi i d y et an c fi ni t, g i s y. t i v i act 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS Identifying opportunities and threats is an important objective of studying the general environment. OPPORTUNITY is a condition in the general environment that if exploited effectively, helps a company achieve strategic competitiveness. EXAMPLE: Procter & Gamble (P&G) is reorienting beauty products to better serve both men and women. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXTERNAL ENVIRONMENTAL ANALYSIS THREAT is a condition in the general environment that may hinder a companys efforts to achieve

strategic competitiveness. EXAMPLE: Microsoft is experiencing a severe external threat as smartphones are expected to surpass personal computer (PC) sales in the near future. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXTERNAL ENVIRONMENTAL ANALYSIS Firms use several sources to analyze the general environment:

trade publications newspapers business publications academic research public polls trade shows suppliers customers employees People in boundary-spanning positions can obtain a great deal of this type of information. Examples: salespersons, purchasing managers, public relations directors, and customer service representatives, each of whom interacts with external constituents 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXTERNAL ENVIRONMENTAL

ANALYSIS: SCANNING 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXTERNAL ENVIRONMENTAL ANALYSIS: MONITORING 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXTERNAL ENVIRONMENTAL ANALYSIS: FORECASTING 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. EXTERNAL ENVIRONMENTAL ANALYSIS: ASSESSING 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS An INDUSTRY is a group of firms that produce similar products or offer similar services that are close substitutes. Compared with the general environment, the industry environment has a more direct effect on the firms: Strategic competitiveness Ability to earn above-average returns 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS An industrys profit potential is a function of the five forces of competition:

The threats posed by new entrants The power of suppliers The power of buyers Product substitutes The intensity of rivalry among competitors Strategies are chosen, in part, because of the influence of an industrys characteristics. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS FIGURE 2.2 The Five Forces of Competition Model

2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL The five forces model of competition expands the arena for competitive analysis. Historically, firms concentrated only on direct competitors. Today, firms must study many industries, as competitors are defined more broadly. For example, the communications industry now encompasses media companies, telecoms, entertainment companies, 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY Can threaten market share of existing competitors May stimulate additional production capacity New competitors may force existing firms to be more efficient and to learn how to compete on new dimensions Entry barriers make it difficult for new firms to enter an industry and often place

them at a competitive disadvantage even 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY High entry barriers tend to increase the returns for existing firms in the industry and may allow some firms to dominate the industry Industry incumbents want to

maintain high entry barriers in order to discourage potential competitors from entering the 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY FUNCTION OF TWO FACTORS 1

BARRIERS TO ENTRY Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy 2 EXPECTED RETALIATION 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS

THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY ECONOMIES OF SCALE Marginal improvements in efficiency that a firm experiences as it incrementally increases its size Economies of scale can be developed in most business functions, such as marketing, manufacturing, research and development, and purchasing 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY ECONOMIES OF SCALE (contd) FACTORS (advantages/disadvantages) related to large- and small-scale entry Flexibility in pricing and market share Costs related to scale economies Competitor retaliation Flexible manufacturing systems 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY PRODUCT DIFFERENTIATION Unique products Customer loyalty New entrants frequently offer products at lower prices 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY CAPITAL REQUIREMENTS Differ according to industry Availability of capital Physical facilities/Inventories/Marketing activities Knowledge requirements 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT

ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY SWITCHING COSTS One-time costs customers incur when they buy from a different supplier New equipment Retraining employees Psychological costs of ending a supplier relationship 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS

THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY ACCESS TO DISTRIBUTION CHANNELS Stocking or shelf space Price breaks/Cooperative advertising allowances Less of a barrier for products that can be sold on the Internet 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS

THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY COST DISADVANTAGES INDEPENDENT OF SCALE Proprietary product technology Favorable access to raw materials Desirable locations 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5

THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY GOVERNMENT POLICY Licensing and permit requirements Regulation/Deregulation of industries Antitrust violations resulting from industry dominance 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS:

COMPETITION MODELBARRIERS TO ENTRY EXPECTED RETALIATION Vigorous retaliation can be expected when the existing firm has a major stake in the industry. It has fixed assets with few, if any, alternative uses It has substantial resources When industry growth is slow or constrained Locating market niches not being served by incumbents allows the new entrant to avoid entry barriers Small entrepreneurial firms are generally best 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS

THE FIVE FORCES OF COMPETITION MODEL 2/5 BARGAINING POWER OF SUPPLIERS SUPPLIER POWER INCREASES WHEN: Suppliers are large and few in number Suitable substitute products are not available Industry firms are not a significant customer for the suppliers Suppliers goods are critical to 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT

ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 2/5 BARGAINING POWER OF SUPPLIERS SUPPLIER POWER INCREASES WHEN (contd): Suppliers products create high switching costs Suppliers have substantial resources and provide a highly differentiated product Suppliers pose a credible threat to integrate forward into the buyers 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 3/5 BARGAINING POWER OF BUYERS BUYER POWER INCREASES WHEN: Buyers purchase a large portion of an industrys total output Buyers purchases are a significant portion of a sellers annual revenues Switching costs are low (to other industry product) 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT

ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 3/5 BARGAINING POWER OF BUYERS BUYER POWER INCREASES WHEN (contd): The industrys products are undifferentiated or standardized Buyers pose a credible threat to integrate backward into the sellers industry 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS

THE FIVE FORCES OF COMPETITION MODEL 4/5 THREAT OF SUBSTITUTE PRODUCTS THREAT OF SUBSTITUTE PRODUCTS INCREASES WHEN: Buyers face few switching costs The substitute products price is lower Substitute products quality and performance are equal to or greater than the existing product Differentiated industry products that are valued by customers reduce 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 4/5 THREAT OF SUBSTITUTE PRODUCTS FUNCTION OF A SUBSTITUTE Places a ceiling on prices firms can charge Goods or services outside a given industry perform the same or similar functions at a competitive price (e.g., plastic has replaced steel in many applications) 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS INDUSTRY RESTRUCTURED THROUGH COMPETITORS STRATEGIC FOCUS: The Multi-Industry Battle for Mobile and Home Digital Computing and Entertainment The process of new technology creation, utilization, and commercialization ultimately leads to changes in organizational patterns, and in particular, strategic alliances and mergers and acquisitions as firms restructure

themselves around the opportunities being 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS INDUSTRY RESTRUCTURED THROUGH COMPETITORS (contd) Competitor analysis must examine how such technological changes will lead to convergence

of competitors or other firms and associated organizational changes and the possible re-creation of a new set of industry competitors, buyers, and suppliers. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS INDUSTRY RIVALRY Competitors are rarely homogeneous; they differ

in resources and capabilities and seek to differentiate themselves from competitors Firms seek to differentiate their products in ways that customers value and in which the firms have a competitive advantage Common rivalry dimensions: Price Service after the sale Innovation 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL

COMPETITORS INDUSTRY RIVALRY INTENSIFIES WITH: Numerous or equally balanced competitors Slow industry growth High fixed costs or high storage costs Lack of differentiation opportunities or low switching costs 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY

AMONG COMPETITION MODEL COMPETITORS EXIT BARRIERS High exit barriers prevent competitors from leaving the industry EXAMPLES Specialized assets: assets with values linked to a particular business Fixed costs of exit: such as labor agreements 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF

5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS EXIT BARRIERS (examples contd): Strategic interrelationships: relationships of mutual dependence, such as those between one business and other parts of a companys operations, including shared facilities and access to financial markets 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF

5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS EXIT BARRIERS (examples contd): Emotional barriers: aversion to economically justified business decisions because of fear for ones own career, loyalty to employees, etc. Government and social restrictions: often based on government concerns for job losses and regional economic effects; more : 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL INTERPRETING INDUSTRY ANALYSES Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors Unattractive

Industry LOW PROFIT POTENTIAL 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL INTERPRETING INDUSTRY ANALYSES High entry barriers Suppliers and buyers have weak positions

Few threats from substitute products Moderate rivalry among competitors Attractive Industry HIGH PROFIT POTENTIAL 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS: STRATEGIC GROUPS STRATEGIC GROUP DEFINED A set of firms emphasizing similar strategic dimensions and using similar strategies

The competition within a strategic group is greater than the competition between strategic groups There is more heterogeneity in the performance of firms within strategic groups Similar market positions Similar products Similar strategic actions 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS: STRATEGIC GROUPS STRATEGIC DIMENSIONS Extent of technological leadership Product quality

Pricing policies Distribution channels Customer service 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INDUSTRY ENVIRONMENT ANALYSIS: STRATEGIC GROUPS IMPLICATIONS Firms within a strategic group are direct competitors (offer similar products), thus rivalry can be intense; the greater the rivalry the greater the threat to each firms profitability The strengths of the five forces differ across strategic groups The closer the strategic groups in terms of strategy, the greater the likelihood of rivalry 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COMPETITOR ANALYSIS COMPETITOR INTELLIGENCE Set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities The ethical and legal gathering of needed information and data that provides insight into: What drives competitors Shown by organization's future objectives What the competitor is doing and can do Revealed in organization's current strategy What the competitor believes about the industry Shown in organization's assumptions What the competitors capabilities are Shown by organization's strengths and weaknesses 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITOR ANALYSIS COMPONENTS FIGURE 2.3 Competitor Analysis Components 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COMPETITOR ANALYSIS: COMPLEMENTORS Complementors: The network of companies that sell complementary products or services or are compatible with the focal firms own product or service. Complementors expand the set of competitors that firms must evaluate when completing a competitor analysis 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Un e ta thi c c t inc ics al lu d c a e: n COMPETITOR ANALYSIS: ETHICAL CONSIDERATIONS 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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