1 the external environment: opportunities, threats, industry competition, and competitor analysis...
DESCRIPTION
3 Industry Environment A set of factors that directly influences a company and its competitive actions and responses A set of factors that directly influences a company and its competitive actions and responses Interaction among these factors determine an industry’s profit potential Interaction among these factors determine an industry’s profit potential Threat of new entrants Threat of new entrants Power of suppliers Power of suppliers Power of buyers Power of buyers Product substitutes Product substitutes Intensity of rivalry Intensity of rivalryTRANSCRIPT
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The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis
Chapter 3Chapter 3
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General
Envi
ronm
ent
General
Environment
Gen
eral
Environment
EconomicEconomic
Political/Legal
Political/LegalTechnologicalTechnological
Glo
bal
Glo
bal
Dem
ogra
phic
Dem
ogra
phic Sociocultural
Sociocultural
The External Environment
IndustryEnvironment
Threat of new entrantsPower of suppliersPower of buyers
Product substitutesIntensity of rivalry
CompetitorEnvironment
3
Industry Environment A set of factors that A set of factors that
directly influences a directly influences a company and its company and its competitive actions and competitive actions and responsesresponses
Interaction among Interaction among these factors determine these factors determine an industry’s profit an industry’s profit potentialpotential
Threat of new entrantsThreat of new entrants Power of suppliersPower of suppliers Power of buyersPower of buyers Product substitutesProduct substitutes Intensity of rivalryIntensity of rivalry
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Analyzing Industry Environment
Opportunities and threats are competitive challenges arising for changes in industry conditions.
Analytic tools such as the five forces model help
managers formulate appropriate strategic
responses.
5
Five Forces Model of Competition
Identify current and potential competitors and determine Identify current and potential competitors and determine which firms serve themwhich firms serve them
Conduct competitive analysisConduct competitive analysis Recognize that suppliers and buyers can become Recognize that suppliers and buyers can become
competitorscompetitors Recognize that producers of potential substitutes may Recognize that producers of potential substitutes may
become competitorsbecome competitors
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Threat of New Entrants
Threat of New Entrants
Barg
aini
ng P
ower
of
Barg
aini
ng P
ower
of
Supp
liers
Supp
liers
Bargaining Power of Bargaining Power of BuyersBuyers
Threat of Substitute
Threat of Substitute
ProductsProducts
Rivalry Among
Rivalry Among
Competing Firm
s
Competing Firm
s
Five Forces Model of Competition
Five Forces ofFive Forces ofCompetitionCompetition
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Potential Competitors
New entrants into an industry threaten incumbent companies.Entry barriers reduce the threat of new and additional competition.
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Threat of New Entrants
Barriers to entryBarriers to entry
Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Switching costsSwitching costs Access to distribution channelsAccess to distribution channels Cost disadvantages independent of scaleCost disadvantages independent of scale Government policyGovernment policy Expected retaliationExpected retaliation
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Rivalry Among Established Companies The intensity of competitive rivalry in an
industry arises from: Industry’s competitive structure. Demand (growth or decline) conditions in industry. Height of industry exit barriers.
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Rivalry Among Established Companies Industry Competitive
Structure
Consolidated
One firm or onedominant firm.
(monopoly)
Fragmented
Many firms.No dominant
firmFew firms,
Shared dominance(Oligopoly)
The Continuum of Industry StructuresThe Continuum of Industry Structures
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Rivalry Among Established Companies (Continued) Demand Conditions
vs.
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Rivalry Among Established Companies (Continued)
Height of Exit Barriers in the Industry
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High Exit Barriers
Common exit barriers include:Common exit barriers include: specialized assets (assets with values linked to a particular specialized assets (assets with values linked to a particular
business or location)business or location) fixed costs of exit such as labor agreementsfixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual strategic interrelationships (relationships of mutual
dependence between one business and other parts of a dependence between one business and other parts of a company’s operation, such as shared facilities and access company’s operation, such as shared facilities and access to financial markets)to financial markets)
emotional barriers (career concerns, loyalty to employees, emotional barriers (career concerns, loyalty to employees, etc.)etc.)
government and social restrictionsgovernment and social restrictions
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Bargaining Power of Suppliers
A supplier group is powerful when:A supplier group is powerful when:
it is dominated by a few large companiesit is dominated by a few large companies satisfactory substitute products are not available to industry satisfactory substitute products are not available to industry
firmsfirms industry firms are not a significant customer for the supplier industry firms are not a significant customer for the supplier
groupgroup suppliers’ goods are critical to buyers’ marketplace successsuppliers’ goods are critical to buyers’ marketplace success effectiveness of suppliers’ products has created high effectiveness of suppliers’ products has created high
switching costsswitching costs suppliers are a credible threat to integrate forward into the suppliers are a credible threat to integrate forward into the
buyers’ industrybuyers’ industry
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Bargaining Power of Buyers
Buyers (customers) are powerful when:Buyers (customers) are powerful when:
they purchase a large portion of an industry’s total outputthey purchase a large portion of an industry’s total output the sales of the product being purchased account for a the sales of the product being purchased account for a
significant portion of the seller’s annual revenuessignificant portion of the seller’s annual revenues they could easily switch to another productthey could easily switch to another product the industry’s products are undifferentiated or the industry’s products are undifferentiated or
standardized, and buyers pose a credible threat if they standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industrywere to integrate backward into the seller’s industry
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Threat of Substitute Products
Product substitutes are strong threat when:Product substitutes are strong threat when:
customers face few switching costscustomers face few switching costs substitute product’s price is lowersubstitute product’s price is lower substitute product’s quality and performance capabilities are substitute product’s quality and performance capabilities are
equal to or greater than those of the competing productequal to or greater than those of the competing product
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Substitute Products
The competitive threat of substitute products increases as they come closer to serving similar customer needs.
CloseCloseFarFar
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A Sixth Force: Complementors
Complementors: Companies whose products are sold in tandem with
another company’s products. Increased supply of a complementary product
collaterally increases demand for the primary product. Example:
Faster CPU chips fuel salesof personal computers.
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Strategic Groups
Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensionsThe strategy followed by a strategic group differs from strategies being implemented by other companies in the industry
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Strategic Groups Within IndustriesThe concept of strategic groups
Within an industry, a competitor grouping using similar strategies that differ from other industry groups.
Implications of strategic groups The closest industry competitors are those in the group. The various industry groups are differentially and
competitively advantaged and positioned. Mobility barriers inhibit the movement of competitors from one
strategic group to another.
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Strategic Groups in the Pharmaceutical Industry
High
HighLow
Low
Pric
es C
harg
edPr
ices
Cha
rged
R&D SpendingR&D Spending
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Strategic Groups in the Pharmaceutical Industry
High
HighLow
Low
Pric
es C
harg
edPr
ices
Cha
rged
R&D SpendingR&D Spending
Generic Generic GroupGroup
• Marion Labs• Carter Wallace
• INC Pharmaceut’l
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Strategic Groups in the Pharmaceutical Industry
• Merck• Pfizer
• Eli Lilly
High
HighLow
Low
Pric
es C
harg
edPr
ices
Cha
rged
R&D SpendingR&D Spending
Proprietary Proprietary GroupGroup
Generic Generic GroupGroup
• Marion Labs• Carter Wallace
• INC Pharmaceut’l
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Limitations of the Five Forces and Strategic Group ModelsBoth models are static and ignore innovation.Their focus is on industry and group structures rather than individual companies.
Innovation creates change in industry structures, altering thecompetitive environment.
Industry structure cannot fully explain the performance differences between industry competitors.
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Competitor Environment
Competitor intelligenceCompetitor intelligence is the ethical gathering of is the ethical gathering of needed information and data about competitors’ needed information and data about competitors’ objectives, strategies, assumptions, and capabilitiesobjectives, strategies, assumptions, and capabilities
what drives the competitor as shown by its what drives the competitor as shown by its future objectivesfuture objectives what the competitor is doing and can do as revealed by its what the competitor is doing and can do as revealed by its
current strategycurrent strategy What the competitor believes about itself and the industry, as What the competitor believes about itself and the industry, as
shown by its shown by its assumptionsassumptions What the the competitor may be able to do, as shown by its What the the competitor may be able to do, as shown by its
capabilitiescapabilities
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Competitor Analysis
Future Objectives:Future objectivesFuture objectives How do our goals compare with
our competitors’ goals? Where will the emphasis be
placed in the future? What is the attitude toward
risk?
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Competitor Analysis
Current strategyCurrent strategy
Current Strategy: How are we currently
competing? Does this strategy support
changes in the competitive structure?
Future objectivesFuture objectives
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Competitor Analysis
AssumptionsAssumptions
Assumptions: Do we assume the future will
be volatile? Are we operating under a
status quo? What assumptions do our
competitors hold about the industry and themselves?
Current strategyCurrent strategy
Future objectivesFuture objectives
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Competitor Analysis
CapabilitiesCapabilities
Capabilities: What are our strengths and
weaknesses? How do we rate compared to
our competitors?
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectives
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Competitor Analysis
ResponseResponse
Response: What will our competitors do in
the future? Where do we hold an
advantage over our competitors?
How will this change our relationship with our competitors?CapabilitiesCapabilities
AssumptionsAssumptions
Current strategyCurrent strategy
Future objectivesFuture objectives
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The Role of the General Environment
Potential competitors
Rivalry
Substitutes
Supplier power
Buyer power
EconomicEnvironment
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Economic segmentEconomic segment
General Environment
Inflation ratesInflation rates Interest ratesInterest rates Trade deficits or surplusesTrade deficits or surpluses Budget deficits or surplusesBudget deficits or surpluses Personal savings ratePersonal savings rate Business savings ratesBusiness savings rates Gross domestic productGross domestic product
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The Role of the General Environment
Potential competitors
Rivalry
Substitutes
Supplier power
TechnologicalEnvironment
Buyer power
EconomicEnvironment
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General Environment
Technological SegmentTechnological Segment Product innovationsProduct innovations Applications of knowledgeApplications of knowledge Focus of private and government-supported Focus of private and government-supported
R&D expendituresR&D expenditures New communication technologiesNew communication technologies
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The Role of the General Environment
Potential competitors
Rivalry
Substitutes
Supplier power
TechnologicalEnvironment
Social Environment
Buyer power
EconomicEnvironment
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General Environment
Sociocultural segmentSociocultural segment
Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences
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The Role of the General Environment
Potential competitors
Rivalry
Substitutes
Supplier power
TechnologicalEnvironment
DemographicEnvironment
Social Environment
Buyer power
EconomicEnvironment
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General Environment
Demographic Segment Population size Age structure Geographic distribution Ethnic mix Income distribution
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The Role of the General Environment
Potential competitors
Rivalry
Substitutes
Supplier power
Political and LegalEnvironment
TechnologicalEnvironment
DemographicEnvironment
Social Environment
Buyer power
EconomicEnvironment
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General Environment
Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies
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The Role of the General Environment
Potential competitors
Rivalry
Substitutes
Supplier power
Political and LegalEnvironment
TechnologicalEnvironment
DemographicEnvironment
Social Environment
Buyer power
EconomicEnvironment
GlobalEnvironment
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General Environment
Global Segment Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes
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Globalization and Industry Structure Globalization
of Markets
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Globalization and Industry Structure Globalization
Globally dispersed production lowers costs and increases quality.
Global markets are replacing national markets.
Trend implications No isolated national markets More competitors, more intense
competition More rapid innovation and shorter product
life cycles
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Stages of the Industry Life Cycle
Time
Dem
and
Embryonic
Competitive Changes During Industry Evolution
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Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution (Continued)
Time
Embryonic
Growth
Dem
and
47
Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution (Continued)
Time
Embryonic
Growth Shakeout
Dem
and
48
Growth in Demand and Capacity
Competitive Changes During Industry Evolution (Continued)
Uni
ts
Timet1 t2
CapacityCapacity
DemandDemand
ExcessCapacity
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Stages of the Industry Life Cycle
Time
Embryonic
Growth Shakeout Maturity
Competitive Changes During Industry Evolution (Continued)
Dem
and
50
Stages of the Industry Life Cycle
Competitive Changes During Industry Evolution (Continued)
Time
Embryonic
Growth Shakeout Maturity Decline
Dem
and