external environmental opportunities and threats “things are always different--the art is figuring...
TRANSCRIPT
External Environmental External Environmental Opportunities and ThreatsOpportunities and Threats
““Things are always different--the Things are always different--the
art is figuring out which differences art is figuring out which differences
matter.”matter.”
Laszlo Birinyi
Three Levels of Analysis
MACROENVIRONMENT
Legislation and
Regulation
Societal Values
and LifestylesPopulatio
n
Demographics
Technology
The Economy at Large
COMPANY
Suppliers Substitutes
Buyers
NewEntrants
Rival Firms
IMMEDIATE INDUSTRY
AND COMPETITIVE ENVIRONMENT
Question 1: What are theIndustry’s Dominant Economic Traits?
Market size andMarket size and growth rategrowth rate Scope of competitive rivalryScope of competitive rivalry Number of competitorsNumber of competitors and their relative sizesand their relative sizes Prevalence of backward/forward integrationPrevalence of backward/forward integration Entry/exit barriersEntry/exit barriers Nature and pace of technological changeNature and pace of technological change Product and customer characteristicsProduct and customer characteristics Scale economies and experience curve effectsScale economies and experience curve effects Capacity utilization and resource requirementsCapacity utilization and resource requirements Industry profitabilityIndustry profitability
Table 3.2: Relevance ofKey Economic Features
Economic Feature
Market Size
Market growth rate
Capacity surpluses/shortages
Industry profitability
Entry/exit barriers
Product is big-ticket item for buyers
Standard products
Rapid technological change
Capital requirements
Vertical integration
Economies of scale
Rapid product innovation
Strategic Importance
Small markets don’t tend to attract new firms; large markets attract firms looking to acquire rivals with established positions in attractive industries Fast growth breeds new entry; slow growth spawns increased rivalry & shake-out of weak rivals
Surpluses push prices & profit margins down; shortages pull them up
High-profit industries attract new entrants; depressed conditions lead to exit
High barriers protect positions and profits of existing firms; low barriers make existing firms vulnerable to entry
More buyers will shop for lowest price
Buyers have more power because it’s easier to switch from seller to seller
Raises risk; investments in technology facilities/equipment may become obsolete before they wear outBig requirements make investment decisions critical; timing becomes important; creates a barrier to entry and exitRaises capital requirements; often creates competitive & cost differences among fully vs. partially vs. non-integrated firms
Increases volume & market share needed to be cost competitive
Shortens product life cycle; increases risk because of opportunities for leapfrogging
Macroenvironmental Forces
Political-Legal ForcesPolitical-Legal Forces Include the outcomes of elections, legislation, and court Include the outcomes of elections, legislation, and court
judgments, as well as decisions rendered by various judgments, as well as decisions rendered by various commissions and agencies at every level of commissions and agencies at every level of government.government.
Economic ForcesEconomic Forces Forces that have a significant impact on business Forces that have a significant impact on business
operations, such as the GDP, interest rates, inflation operations, such as the GDP, interest rates, inflation rates, and the value of the dollar.rates, and the value of the dollar.
Macroenvironmental Forces
Technological ForcesTechnological Forces Include scientific improvements and innovations that Include scientific improvements and innovations that
provide opportunities or threats for business.provide opportunities or threats for business.
Social ForcesSocial Forces Include traditions, values, societal trends, demographic Include traditions, values, societal trends, demographic
trends, and a society’s expectations of business.trends, and a society’s expectations of business.
Assessing Industry Attractiveness Four primary analysesFour primary analyses
Porter’s Five ForcesPorter’s Five Forces Driving ForcesDriving Forces Key Success FactorsKey Success Factors Competitive AnalysisCompetitive Analysis
Assess Assess strengthstrength of each of Porter’s five forces (of each of Porter’s five forces (Strong? Moderate? Weak?Strong? Moderate? Weak? ) ) Rivalry among competitorsRivalry among competitors Substitute productsSubstitute products Potential entryPotential entry Bargaining power of suppliersBargaining power of suppliers Bargaining power of buyersBargaining power of buyers
Explain how Explain how eacheach force acts to create competitive pressure force acts to create competitive pressure Decide whether Decide whether overall competitionoverall competition is brutal, fierce, strong, normal/moderate, is brutal, fierce, strong, normal/moderate,
or weakor weak
Rivalry Among Competing Sellers
Usually the Usually the most powerfulmost powerful of the five forcesof the five forces Check which weapons of competitive rivalry are most Check which weapons of competitive rivalry are most
actively used by rivals in jockeying for positionactively used by rivals in jockeying for position PricePrice QualityQuality Performance features offeredPerformance features offered Customer serviceCustomer service Warranties/guaranteesWarranties/guarantees Advertising/promotionsAdvertising/promotions Dealer networksDealer networks Product innovationProduct innovation
Competitors number and strengthCompetitors number and strength
Threat of New Entrants
How hard is it to get into the industry?How hard is it to get into the industry? Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Learning curve effectsLearning curve effects Access to distribution channelsAccess to distribution channels Government policiesGovernment policies Control of key raw materialsControl of key raw materials Inability to gain access to specialized technologyInability to gain access to specialized technology
Threat of Substitutes
SubstitutesSubstitutes matter when customers are attracted to matter when customers are attracted to the products of firms in other industries the products of firms in other industries
Eyeglasses vs. Contact Lens Sugar vs. Artificial Sweeteners Plastic vs. Glass vs. Metal Newspapers vs. TV vs. Internet
Examples
Threat of Suppliers
Suppliers are a Suppliers are a strongstrong competitive force competitive force when:when: Item makes up large portion of product costs, is Item makes up large portion of product costs, is
crucial to production process, and/or significantly crucial to production process, and/or significantly affects product qualityaffects product quality
It is costly for buyers to switch suppliersIt is costly for buyers to switch suppliers They have good reputations and growing demandThey have good reputations and growing demand They can supply a component cheaper than industry They can supply a component cheaper than industry
members can make it themselvesmembers can make it themselves They do not have to contend with substitutesThey do not have to contend with substitutes Buying firms are not important customersBuying firms are not important customers
Threat of Buyers
Buyers are a Buyers are a strongstrong competitive force competitive force when:when: They are large and purchase a sizable percentage of They are large and purchase a sizable percentage of
industry’s productindustry’s product They buy in volume quantitiesThey buy in volume quantities They can integrate backwardThey can integrate backward Industry’s product is standardizedIndustry’s product is standardized Their costs in switching to substitutes or other brands are Their costs in switching to substitutes or other brands are
lowlow They can purchase from several sellersThey can purchase from several sellers Product purchased does not save buyer money Product purchased does not save buyer money
Strategic Implications of theFive Competitive Forces
Competitive environment is Competitive environment is unattractiveunattractive from the standpoint of earning from the standpoint of earning good profits when:good profits when: Rivalry is strongRivalry is strong
Entry barriers are lowEntry barriers are lowand entry is likelyand entry is likely
Competition from Competition from substitutes is strongsubstitutes is strong
Suppliers and customers have considerable Suppliers and customers have considerable bargaining powerbargaining power
Competitive environment is Competitive environment is idealideal from a profit-making standpointfrom a profit-making standpoint when:when:
Rivalry is moderateRivalry is moderate
Entry barriers are highEntry barriers are highand no firm is likely toand no firm is likely toenter enter
Good substitutes do Good substitutes do not existnot exist
Suppliers and customers are in a weak Suppliers and customers are in a weak bargaining positionbargaining position
Strategic Implications of theFive Competitive Forces
Driving ForcesIndustries change because Industries change because forcesforces are are drivingdriving industry industry
participants to alter their actionsparticipants to alter their actions
Driving forces Driving forces are theare the major underlying causes major underlying causes of of changing industry and competitive conditionschanging industry and competitive conditions
•Changes in long-term industry growth rate
•Changes in who buys the product and how they use it
•Product innovation
•Technological change/process innovation
•Marketing innovation
•Entry or exit of major firms
•Diffusion of technical knowledge
Examples
Key Success Factors
KSFsKSFs are competitive elements that most affect are competitive elements that most affect every every industry member’sindustry member’s ability to prosper in the ability to prosper in the marketplacemarketplace Specific strategy elementsSpecific strategy elements Product attributesProduct attributes ResourcesResources CompetenciesCompetencies Competitive capabilitiesCompetitive capabilities
KSFsKSFs spell difference betweenspell difference between Profit and lossProfit and loss Competitive success or failureCompetitive success or failure
Table 3.3: Common Types ofKey Success Factors
Distribution-related
Marketing-related
Skills-related
Organizational capability
Other types
Technology-related
Manufacturing-related
Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activities
Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of products
Strong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast delivery
Fast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertising
Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quickly
Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-how
Favorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection
Identifying IndustryKey Success Factors
Answers to three questions pinpoint Answers to three questions pinpoint KSFsKSFs On what basis do customers choose between On what basis do customers choose between
competing brands of sellers?competing brands of sellers? What resources and competitive capabilities does a What resources and competitive capabilities does a
seller need to have to be competitively successful?seller need to have to be competitively successful? What does it take for sellers to achieve a sustainable What does it take for sellers to achieve a sustainable
competitive advantage?competitive advantage? KSFsKSFs consist of the consist of the 3 - 5 3 - 5 really really majormajor
determinants of financial and determinants of financial and competitive success in an industrycompetitive success in an industry
Things to Consider inAssessing Industry Attractiveness
Industry’s market size and growth potentialIndustry’s market size and growth potential Whether competitive conditions are conducive to Whether competitive conditions are conducive to
rising/falling industry profitabilityrising/falling industry profitability Will competitive forces become stronger or Will competitive forces become stronger or
weaker weaker Whether industry will be favorably or Whether industry will be favorably or
unfavorably impacted by driving forcesunfavorably impacted by driving forces Potential for entry/exit of major firmsPotential for entry/exit of major firms Stability/dependability of demandStability/dependability of demand Severity of problems facing industrySeverity of problems facing industry Degree of risk and uncertainty in industry’s Degree of risk and uncertainty in industry’s
futurefuture
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