External Environmental Analysis

yunan@muraelpiji.com

Lecture Topics
Purpose

of External Environmental

Analysis
Gathering Information for External
Environmental Analysis
General Environment
Competitive Environment
Key Success Factors
Competitive Changes During Industry
Evolution
Strategic Groups
National Competitive Advantage

Purpose of External
Environmental Analysis
Organizations

are affected by conditions

in the environment
Managers need to be aware of these
conditions in order to

Take advantage of opportunities that can

lead to higher profits
Reduce the impact of threats that can
harm the organizations future

Gathering Information for

External Environmental Analysis
Managers

need information in order to know

and develop an understanding about what is
happening in the external environment
Three approaches to information gathering:

Scanning: general surveillance of environmental

changes; looking for early signals of changes
Monitoring: close attention to specific
developments that could affect the organization
Competitive Intelligence: following actions of
competitors

Two Areas for Analysis

General

Environment
Competitive Environment

The General and Competitive

Environment
General Environment
Demographics

Competitive
Global

Environment

Political/Legal

Threat on new entrants

Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Sociocultural

Competitive rivalry

Macoreconomic

Technological

General Environment
Demographics
Characteristics

of a countrys population

Size of population and growth rate

Age distribution of population
Education levels
Income distribution
Ethnic diversity
Geographic distribution

General Environment
Political/Legal
Political

and legal conditions affecting

business

Government policies toward business

Investment incentives
Business regulation: labor, environment
Education priorities
Budget conditions and plans

General Environment
Technological
Technological

developments relevant to

a business

Telecommunications
Internet
On-line training
Product and process innovations

10

General Environment
Macroeconomic
Impact

of the economy on business

Size and change in gross domestic

product
Per capita income levels
Inflation rate
Interest rates
Foreign trade deficit or surplus
Unemployment
Rates of saving and investment

11

General Environment
Sociocultural
Influence

of values, beliefs, and

lifestyles of a country on business

Family relationships
Attitudes about work
Living arrangements
Styles of entertainment
Attitudes toward health

12

General Environment
Global
International

developments that can

impact a business

Rise of China as economic power

Rising global trade and WTO
Intellectual property protection
Important political events: Iraq war
Search for low cost suppliers

Competitive Environment
13

The

essence of strategy formulation is

coping with competition.
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.
Managers must understand the conditions
of competition within their industry

Porter Five-Forces Model of Competition

(determining the attractiveness of an industry)
Key Success Factors
Competitive Changes During industry Evolution
Strategic Groups
National Competitive Advantage

14

Defining an Industry

Industry

A group of companies offering products or

services that are close substitutes for each other

Competitors

Rival companies that serve the same basic

customer needs

15

Defining an Industry (contd)

Sector

A group of closely related industries

Market

segments

Distinct groups of customers within a market that

can be differentiated from each other based on
their distinct attributes and demands

Changing

industry boundaries

16

The Computer Sector: Industries

and Segments

17

Five Forces Driving Industry

Competition

18

Threat of New Entrants

Fundamental

question: how easy is it

for another company to enter the
industry?
Factors making easy entry to industry
Low

economies of scale
Low product differentiation
Low capital requirements
No switching costs for buyer
Easy access to distribution channels
Little government regulation

19

Supplier Power
Fundamental

question: how badly does

a supplier need your business?
Factors giving power to supplier:
Supplier

industry dominated by few firms

Buyer is not important to customer
Suppliers product is important input to
buyers product
Suppliers products have high switching costs
Supplier can integrate forward and become
competitor of buyer

20

Threat of Substitutes
Fundamental

question: what other

products or services could perform the
same function as your products or
services?
Factors indicating high threat of
substitutes:
Few

switching costs for buyer

Price of substitute lower or quality higher
than for your products
Firms offering substitutes have high
profitability

21

Buyer Power
Fundamental

questions: How badly does a

buyer need your products or services?
Factors contributing to high buyer power:
Few

buyers compared to the number of sellers

Buyers purchases high relative to sellers sales
Products are undifferentiated
Buyer has low switching costs
Buyer has low profits
Buyer can integrate backward and supply the
product to itself

22

Competitive Rivalry
Fundamental

question: how intense is

competition in the industry?
Factors leading to high competitive
rivalry:
Numerous

or equally balanced competitors

High fixed costs
Slow industry growth
Lack of differentiation or switching costs
High strategic stakes
High exit barriers

A Sixth Force:
Complementors

23

Not

a supplier
Offers service or product that affects
industrys performance
When complementors are important and
their number is increasing
Demand

and profits in the industry are

boosted

When

complementors are weak

Industry

limited

growth can slow and profits can be

Example:

Internet Service Providers

complementors to eBusiness firms

24

Strategic Implications of the

Five Competitive Forces
Competitive environment is unattractive
from the standpoint of earning good
profits when:
Rivalry is strong
Entry barriers are low and entry is likely
Competition from substitutes is strong
Suppliers and customers have considerable
bargaining power

Strategic Implications of the

Five Competitive Forces
25

Competitive environment is ideal

from a profit-making standpoint when:
Rivalry is moderate
Entry barriers are high and no firm is
likely to enter
Good substitutes do not exist
Suppliers and customers are in a weak
bargaining position

26

Key Success Factors

In

many industries, there are certain

actions or practices that a business must
follow in order to compete in the industry.
May need effort to distinguish company
from competitors
AN INDIVIDUAL COMPANY DOES NOT
HAVE KEY SUCCESS FACTORS!!!!
KEY SUCCESS FACTORS ARE NOT THE
SOURCE OF A COMPANYS
COMPETITIVE ADVANTAGE THEY ARE
REQUIREMENTS FOR COMPETING IN
AN INDUSTRY AND DO NOT GIVE ANY
FIRM A COMPETITIVE ADVANTAGE

27

Examples of Key Success

Factors in Selected Industries
Pharmaceuticals:

research and personal

selling
Beer: advertising and distribution
Restaurant: quality food, service,
location, notoriety
Retailer: location and priced-for-quality

28

Changes in Competition During

Industrys Evolution
Over

time as an industry evolves, the

nature and basis of competition changes
Managers must anticipate how the forces
will change as the industry evolves and
formulate appropriate strategies
Five Stages ( similar to product-life cycle)
Embryonicintroduction of product
Growth
Shakeout
Mature
Declining

29

Stages in the Industry Life Cycle

30

Shakeout: Growth in Demand

and Capacity

31

Requirements in Each Stage

of Industrys Evolution
Embryonic:

Know-how, educating
customers, opening distribution channels
Growth: Know-how for continued
innovation, financing, build demand
Shakeout: Dominant market position,
low cost producer, high capacity
Maturity: low cost production, brand
loyalty
Declining: lowest cost production,
reduce capacity

32

Limitations of Models for

Industry Analysis
Life

cycle issues

The embryonic stage can sometimes be

skipped
Industry growth can be revitalized
The time span of the stages can vary

Innovation

and change

Innovation can unfreeze and reshape

industry structure
An industry may be hypercompetitive,
with permanent and ongoing change

33

Limitations of Models for

Industry Analysis (contd)
Company

differences

The importance of company differences

within an industry or strategic group can
be underemphasized
The individual resources and capabilities
of a company may be more important in
determining profitability than the industry
or strategic group

34

Strategic Groups
Companies

do not compete against all

companies in an industry
Companies compete against several other
companies that follow similar strategies
A strategic group consists of those rivals
with similar competitive approaches in an
industry
Examples ways of competing:

Price
Innovation
Research
Quality

-- Range of products
-- Customers served

35

Procedure for Constructing a

Strategic Group Map
STEP 1: Identify competitive characteristics that
differentiate firms in an industry from
one another
STEP 2: Plot firms on a two-variable map using
pairs of these differentiating
characteristics
STEP 3: Assign firms that fall in about the same
strategy space to same strategic group
STEP 4: Draw circles around each group, making
circles proportional to size of groups
respective share of total industry sales

Example: Strategic Group Map of

the Video Game Industry
Types of Video Game
Suppliers/Distribution Channels

36

Arcades
Arcade
operators

Home PCs
Sony, Sega,
Nintendo, several
others

Video game
consoles

Publishers
of games on
CD-ROMs

MSN Gaming Zone,

Pogo.com,
America Online,
HEAT, Engage,
Oceanline, TEN

Online/Internet

Low
(Coin-operated
equipment)

Medium
(Console players cost
$100-$300)

High
(Use PC)

Overall Cost to Players of Video Games

37

Nation-State and
Competitive Advantage
A

country may provide a competitive

advantage for a company
Need to identify national factors in
order to determine

Where most significant competitors will

come from
Where to locate production activities

Porters

Diamond of Determinants of
National Competitive Advantage

38

39

The Global and National

Environments
Globalization

markets
Lower

of production and

barriers to cross-border trade

and investment
National differences in the cost and
quality of factors of production
Home and foreign markets and
competitors are blurring
Intensified rivalry
Intensified rate of innovation
Many new markets are open

40

Determinants of National Competitive

Advantage
Strategy,
Structure,
Rivalry

Factor
Endowments

National
Competitive
Advantage

Related and
Supporting
Industries

Demand
Conditions

41

Factor Endowments
Availability

of traditional factors of
productionland, labor, capital,
entrepreneurshipprovide cost
advantages to companies located in
countries possessing those factors
More significant, countries and their
companies can create new factors such
as a knowledgeable workforce and
infrastructure that is rare and difficult to
imitate
Factor endowments less important than
the speed and efficiency of deploying
those resources.

42

Demand Conditions
Large

growing markets provide foundation for

global competition
More significant, sophisticated and demanding
consumers force companies to innovate and
improve their products
Advances in products, services, and standards
improve companies knowledge and
capabilities for selling in other world markets

43

Related and Supporting

Industries
Provide

inputs and capabilities that help a

company to improve its own products and
capabilities
Helps reduce manufacturing costs through
cost-effective, timely methods
Ongoing exchange of knowledge through
research and development and joint projects
improves both suppliers and companies

44

Strategy, Structures, and Rivalry

Different

management ideologies lead to

different emphases within a company
Japan and Germany both have engineers
in top management and those countrys
companies concentrate on process and
product improvement
Intense domestic rivalry leads to product
improvements and cost reduction in
order to compete for domestic customers

45

Conclusions About Determinants

of National Competitive
Advantage
Firms

succeeding in global markets first

succeeded in intense competition in home
countries
Competitive advantage for global firms comes
from continuous improvement, innovation, and
change.