1 Competing for AdvantageSTRATEGIC ANALYSIS The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

2 Analysis of the External EnvironmentsGeneral environment Focused on the future Industry environment Focused on factors and conditions influencing a firm’s profitability within an industry Competitor environment Focused on predicting the dynamics of competitors’ actions, responses and intentions

3 The External EnvironmentFigure 3.1: The External Environment – In combination, the results of analyzing the various environments outside of the firm will influence its strategic intent and actions. An integrated analysis of the environmental areas strengthens the quality of the firm’s strategic efforts. Discussion points: General environment Dimensions in the broader society are grouped into seven segments. Elements in the general environment cannot be controlled by the firm, but can have profound implications to the company’s performance. Analysis of the general environment is focused on the future. Industry environment Five major factors determine an industry’s profit potential. The challenge is to locate a position within an industry where the firm can favorably influence those factors or successfully defend against their influence to maximize firm performance and returns. Analysis of the industry environment is focused on the factors and conditions influencing the firm’s profitability within its industry. Competitor environment Firms conduct competitor analysis to gather and interpret information about their rivals. Analysis of the competitor environment is focused on predicting the dynamics of competitors’ actions, responses, and intentions.

4 External Environmental AnalysisKey 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 External Environmental Analysis – External environmental analysis is a continuous process used by companies to interpret and understand turbulent, complex, and global environments. Although difficult, companies search for sources of information to reduce the ambiguity and incompleteness of their environmental data. An important objective of studying the external environment is to identify the opportunities and threats which have strategic significance to the firm. Discussion points: Opportunities – competitive possibilities Example: Walmart in China Threats – potential constraints Example: Polaroid, RIM, Laptop PCs What are some of the sources which can be used by firms to analyze the general environment? Printed materials Trade publications Newspapers Business publications Results of academic research and public polls Publications produced by trade shows, suppliers, custoemrs, and employees of public-sector organizations External network contacts People in the firm’s “boundary-spanning” positions who interact with external constituents Salespeople Purchasing managers Public relations directors Customer service representatives The external environmental analysis process includes four activities, which are outlined on Slide 6 and on Table 3.2.

5 External Environmental AnalysisA continuous process which includes Scanning for early signals of potential changes and trends in the general 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

6 The General EnvironmentTable 3.1: The General Environment – comprehensive outline of segments and elements Again, these segments and elements are external to the firm. Although the degree to which each will impact a particular firm varies, they do affect all industries and companies. The challenge for the firm is to thoroughly and effectively analyze the general environment to highlight the most relevant and impactful events and conditions. The result of this analysis should be recognition and understanding of environmental changes, trends, opportunities, and threats which can be aligned with the company’s core competencies (a matching process which is discussed more fully in Chapter 4). Key objective of analyzing the general environment is identifying anticipated changes and trends among external elements with a focus on the future.

7 The Demographic SegmentKey Terms Demographic segment Segment of the environment concerned with a population's size, age structure, geographic distribution, ethnic mix, and income distribution The Demographic Segment – characteristics of populations in the marketplace that organizations consider when analyzing their environments Demographic segments are now analyzed on a global basis because of the potential effects across country borders and because many firms now compete in global markets.

8 Demographic CharacteristicsPopulation size Age structure Geographic distribution Ethnic mix Income distribution Demographic Characteristics – characteristics of populations in the marketplace with implications for organizational performance Discussion points: Population size Developed versus undeveloped countries Most heavily populated countries Imbalanced growth rates across countries Negative population growth - birthrates Immigration Age structure Growth rates for different age and gender groups in different countries Aging (increasing life expectancy) trends suggest opportunities to meet needs of older population Example: Walmart’s prescription drug program Effects on labor forces Example: Japanese workforce Effects on pension plans Example: Opportunities for financial institutions Geographic distribution Regional shifts Migration to nonmetropolitan areas Changing tax bases Varies by country Effect on location of business operations Ethnic mix Varies significantly across regions Significant opportunities emerging U.S. Hispanic and Asian markets Effects on workforce composition Implications of cultural diversity Income distribution Discretionary income varies across groups and nations Effects on purchasing power Decline of real income Dual income trends Effect of rapid economic growth in China

9 The Economic Segment Key Terms Economic segmentNature and direction of the economy in which a firm competes or may compete The Economic Segment – measurements of economic health – changes and trends with strategic implications – that affect a nation’s firms and industries

10 Economic Factors Gross National Product (GNP) Interest ratesInflation/Deflation Foreign exchange rates Trade balances Economic Factors – aspects of the economy that deserve ongoing attention Discussion points: Gross National Product (GNP) A general indication of the economy’s strength Often reported per capita or adjusted for inflation Interacts with other factors Interest rates and inflation are interconnected Low interest rates encourage investment, which increases GNP Increased production and demand for supplies can fuel inflation Interest rates at which banks can borrow from the U.S. government is set by the U.S. Federal Reserve and influences other interest rates Government attempts to manage inflation and minimize downward economic cycles Global economy has increased interconnectedness amongst national economies Trade balance and foreign investment effects of U.S. consumerism Extended reach of Chinese and Indian firms Effect of inflation and trade surpluses on foreign exchange rates, investments, and earnings

11 The Political Segment Key Terms Political/legal segmentArena 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 The Political/Legal Segment – Organizations try to influence government bodies, whose constantly changing influences affect the nature of competition through laws, regulations, and policies. Government actions can affect business operations and industry profitability. It is often necessary to develop a political strategy to influence government policies and actions which impact the firm. Discussion points: Penalties can be harsh New administrations and political trends bring new business-related policies and philosophies Antitrust laws Taxation laws Industry regulation Labor training and educational policies Global trade policies Risks in developing countries Examples: Uncertainty in the Middle East and economic crises in the EU

12 The Sociocultural SegmentKey Terms Sociocultural segment Segment of the environment concerned with a society's attitudes and cultural values The Sociocultural Segment – Values and attitudes form the cornerstone of societies in which businesses operate. They vary across countries.

13 Sociocultural ConsiderationsHealthcare 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

14 The Technological SegmentKey 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 The Technological Segment – Pervasive and diversified in scope, technological changes are producing new products, processes, and materials which affect many sectors of society.

15 Technological Issues Rapid pace of technological changeImpact of the Internet on business practices Impact of wireless communications on business practices. Internal development versus external sources of new technology The Technological Segment – technological trends impacting businesses today Discussion points: Firms that adopt new technology early often achieve higher market shares and earn higher returns. The Internet is at the heart of the increasing rate of technological change and diffusion, changes in IT, and increasing knowledge intensity. Among its many valuable uses, the Internet provides access to excellent sources of data and information to decipher the external environment. A competitive advantage may accrue to companies which derive full value from the Internet in terms of e-commerce activities, transactions, and work flow processes. Wireless communication facilitates the diffusion of other technologies and knowledge critical to achieving and maintaining competitive advantages.

16 The Global Segment Key Terms Global segmentSegment 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 The Global Segment – Recall from Chapter 1 that globalization is the increasing economic interdependence among countries.

17 Global InterdependenceIncrease 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 Global Interdependence – Globalization of business markets creates opportunities for businesses today.

18 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. Global Challenges – Highlights the necessity of a top management team with experience, knowledge, and sensitivity to effectively understand this environmental segment and to build relationships with key stakeholders in other countries.

19 The Physical Environment SegmentKey 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 The Physical Environment Segment – Concern is with sustaining the physical environment, with a particular focus on ecological, social, and economic systems (or sustainability). Many firms are now developing sustainability strategies and integrating them with their corporate strategies. Discussion points: Global warming Greening strategies to minimize negative effects on the natural environment Government incentives Green or economically-friendly products Conservation efforts Financial implications for firms

20 Industry Environment AnalysisKey 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 Industry Environment Analysis – Compared with the general environment, the industry environment more directly affects the firm’s value creation and return on investment level. In the pursuit of value creation and above-average returns, firms compete. In the course of competition, they influence one another and the industry itself. Norms of behavior (practices), unique sets of resources, specific skill requirements, and success requirements evolve within individual industries. The Five Forces of Competition model provides a method for understanding the mix of acting strategies that influence an industry and offers a suggestion for appropriate strategies to employ while operating within a particular industry. This model best describes the competitive situation in an industry and yields an understanding of the intensity of industry competition and the long-term profit potential of the industry. A focus on customers and geographic boundaries, rather just specific industry boundaries, enhances the analysis of the industry environment.

21 The Five Forces of Competition Model

22 New Entrants Threat to current competitors Likelihood of entryMarket share Production capacity Earnings Likelihood of entry Barriers New Entrants – threaten the market share of existing competitors by bringing additional production capacity into the industry Discussion points: Additional production capacity Holds consumer costs down unless demand is increasing Results in less revenue and lower returns for competing firms New entrants motivated to gain a large market share Force existing competitors to be more efficient and to compete in new ways The likelihood that firms will enter an industry is a function of several factors. Barriers to entry – place new competitors at a disadvantage and provide existing firms with higher returns (discussed more fully in the following slides) Expected retaliation from current industry participants

23 Market Entry Barriers Economies of scale Product differentiationCapital requirements Switching costs Access to distribution channels Cost advantages independent of scale Government policy Market Entry Barriers – Firms work to increase entry barriers in their industry, and potential entrants seek markets with limited barriers and attractive potential for profits. Discussion points: Economies of scale Marginal improvements in efficiency with incremental increases in size As the production quantity goes up, unit costs of manufacturing decline Yield high volume, low cost production advantages for existing firms Can be developed in most business functions Increase flexibility for the firm New entrant dilemma: enter small and face cost disadvantages or enter big and invite retaliation Mass customization Reduces the potential of economies of scale as an entry barrier Customized products not manufactured in volumes necessary to achieve economies of scale Flexible manufacturing systems enable customization on a grand scale Even quick responsive individualization is available to meet very specific customer demands Product differentiation Can generate a strong customer following that is difficult to overcome Product distinctiveness can generate loyalty to both the product and the company which produces it Substantial resources are often required to overcome existing customer loyalties Even lower prices might be necessary to attract customers to a new brand Either of these might reduce the potential return and desirability of entering a market Capital requirements Competing in a new industry can demand substantial resources to invest in physical facilities, inventory, marketing, and other critical business functions Switching costs One-time costs incurred by customers to change to a new product supplier Customer loyalty programs are designed to increase switching costs – real or perceived The more established the relationship, the higher the cost of switching to an alternative product offering because of the trust and cooperation which develop between parties over time Access to distribution channels May be restricted by existing relationships between manufacturers and their established distribution networks Can be a strong barrier to entry, particularly in consumer nondurable goods industries and in international markets Practices to entice retailers or distributors to carry a new product (such as price breaks or cooperative advertising programs) can reduce potential returns Scale-independent cost advantages Valuable when competitors cannot duplicate Successful competition requires new entrants to reduce the strategic relevance of such advantages Example: Overcoming location advantages through delivery or superior service Government policies When entry is controlled by licensing and permit requirements When regulation and oversight influence industry behavior Some efforts are meant to ensure a mandatory level of quality or to protect jobs Antitrust regulation can draw sharp criticism for firms believed to use excessive measures to restrict market entry Example: Microsoft Expectation retaliation Anticipated reactions from existing firms with a major stake in the industry Swift and vigorous competitive response can interfere with decisions to enter a market Unserved market niches or neglected segments are an exception Small entrepreneurial firms are well-suited to identify and serve neglected market segments Example: Honda’s entry into a neglected small engine market niche What are some methods of achieving product differentiation? Providing exceptional service to the customer Effective advertising campaigns Being the first to market a good or service Provide some examples of high and low switching costs. Changing to a new type of soft drink carries no switching costs with it. Buying new production equipment may involve additional employee training. The switching costs associated with changing schools increases the longer a student is engaged in a program. Some psychological costs are involved with ending or beginning new supplier relationships. What are some examples of cost advantages which are unrelated to economies of scale? Proprietary product technology Favorable access to raw materials Desirable locations Government subsidies Describe some industries where entry is affected by governments. Liquor retailing Banking Trucking and transportation Airline Utilities What type of conditions increase the likelihood of swift and vigorous retaliation by existing industry participants? Fixed assets with few or no alternative uses Availability of substantial resources to make a strong response Slow or constrained industry growth

24 Barriers to Entry Economies of ScaleMarginal improvements in efficiency that a firm experiences as it incrementally increases its size Capital Requirements Physical facilities Inventories Marketing activities Availability of capital Access to Distribution Channels Stocking or shelf space Price breaks Cooperative advertising allowances Product differentiation Unique products Customer loyalty Products at competitive prices Switching Costs One-time costs customers incur when they buy from a different supplier New equipment Retraining employees Psychic costs of ending a relationship

25 Bargaining Power of SuppliersSupplier power increases when: Suppliers are large and few in number Suitable substitute products are not available Individual buyers are not large customers of suppliers and there are many of them Suppliers’ goods are critical to buyers’ marketplace success Suppliers’ products create high switching costs. Suppliers pose a threat to integrate forward into buyers’ industry

26 Bargaining Power of Buyers/CustomersBuyer power increase when: Buyers are large and few in number Buyers purchase a large portion of an industry’s total output Buyers’ purchases are a significant portion of a supplier’s annual revenues Buyers can switch to another product without incurring high switching costs Buyers pose threat to integrate backward into the sellers’ industry

27 Threat of Substitute ProductsSubstitutes are defined by product function, not by product form The threat of substitute products increases when: Buyers face few switching costs The substitute product’s price is lower Substitute product’s quality and performance are equal to or greater than the existing product Consumer tastes and preferences Differentiated industry products that are valued by customers reduce this threat

28 Intensity of Rivalry/Threat of RivalryRivalry is the threat of established firms competing away their economic profits Price competition Frequent introduction of new products Intense advertising campaigns Rapid competitive response

29 Intensity of Rivalry Among CompetitorsIndustry rivalry increases when: There are numerous or equally balanced competitors Industry growth slows or declines There are high fixed costs or high storage costs There is a lack of differentiation opportunities or low switching costs When the strategic stakes are high When high exit barriers prevent competitors from leaving the industry

30 Interpreting Industry AnalysesSuppliers and buyers have strong positions Low entry barriers Strong threats from substitute products Intense rivalry among competitors Low profit potential Unattractive Industry

31 Interpreting Industry AnalysesHigh entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors High profit potential Attractive Industry

32 Interpreting Industry AnalysisUnattractive 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 Interpreting Industry Analysis – Industry characteristics determine the potential for competing firms to create value and earn above-average returns.

33 Competitor Analysis Competitor IntelligenceThe ethical gathering of needed information and data that provides insight into: A competitor’s direction (future objectives) A competitor’s capabilities and intentions (current strategy) A competitor’s beliefs about the industry (its assumptions) A competitor’s capabilities

34 Competitor Analysis Components

35 Interpreting Industry AnalysisUnattractive 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 Interpreting Industry Analysis – Industry characteristics determine the potential for competing firms to create value and earn above-average returns.

36 Strategic Management:Implementing Strategies: Marketing, Finance/Accounting, R&D, and MIS Issues Strategic Management:

37 Implementing Strategies:Low strategy implementation success: Failing to segment markets appropriately Paying too much for a new acquisition Falling behind competition in R&D Not recognizing benefit of computers in managing information For Successful Strategy Implementation: Firms must market goods and services well Firms must raise needed working capital Firms produce technologically-sound goods Firms must have sound information systems

38 Implementing Strategies:For Successful Strategy Implementation -- Firms must market goods and services well Firms must raise needed working capital Firms produce technologically-sound goods Firms must have sound information systems

39 Marketing Issues Marketing variables affect success or failure of strategy implementation Market Segmentation Production Positioning

40 Strategy Analysis & ChoiceImplementing Strategies: Marketing Issues Strategy Analysis & Choice Marketing Decisions requiring polices – Be a price leader or price follower Offer a complete or limited warranty Reward salespeople based on straight commission or combination salary/commission

41 Market Segmentation Market Segmentation Important Variable:Market and product development, market penetration, and diversification require increased sales through new markets or products

42 Market Segmentation Market Segmentation Important Variable:Firm can operate with limited resources. Enables a small firm by maximizing per-unit profits and per-segment sales.

43 Market Segmentation Market Segmentation Important Variable:Segmentation decisions directly affect marketing mix variables: Product, place, promotion, and price

44 Marketing Mix – Component FactorsService level Warranty Transportation carriers Product line Inventory levels/locations Packaging Publicity Sales territories Brand name Payment terms Sales promotion Outlet location Style Discounts & allowances Personal selling Distribution coverage Features Level Advertising Distribution channels Quality Price Promotion Place Product

45 Market Segmentation Bases for Segmenting Markets -- GeographicGeographic Basis: Region County Size City size Density Climate Bases for Segmenting Markets -- Geographic Demographic Psychographic Behavioral Demographic Basis: Age Family Size Family Life Cycle Income Occupation Education Religion Race Nationality Behavioral Basis: Use occasion Benefits sought User status Usage rate Loyalty status Readiness Stage Attitude toward product Psychographic Basis: Social Class Lifestyle Personality

46 Market Segmentation Geographic Basis: Region County SizeCity or SMSA size Density Climate

47 Market Segmentation Demographic Basis: Age Family SizeFamily Life Cycle Income Occupation Education Religion Race Nationality

48 Market Segmentation Psychographic Basis: Social Class LifestylePersonality

49 Market Segmentation Behavioral Basis: Use occasion Benefits soughtUser status Usage rate Loyalty status Readiness Stage Attitude toward product

50 Product Positioning Product Positioning based on: Customers wantsCustomers needs

51 Product Positioning Product Positioning Map as Strategy-Implementation Tool— Look for vacant niche Don’t serve 2 segments with same strategy Don’t position in the middle of the map