Session 3

The External Environment:

Opportunities, Threats, Industry Competition, and Competitor Analysis

Defining an Industry
Identify an industry that your company competes in. Hence the managers should take customer oriented view of the company instead of product oriented view Defining industry boundary is very important for managers E.g. Coca-Cola long saw itself as being in soda industry however t hat was in soft drink industry which is also in non carbonated drink. As a result, it caught by surprise by the rise of consumer demand in bottled water and fruit drinks which began to cut into demand for Sodas. Coca Cola moved quickly to respond to these threats by introducing Dasani and acquiring Minute maid. By defining the industry boundaries too narrowly, Coca Cola almost missed the rise of non carbonated drink segment.

Industry Vs Sector

Computer Sector

Component Industries

HW industries

SW Industries

Disk Drive Industries

Semiconductor industries

Modem Industry

Mainfarame Industry

PC industry

Handheld industry

Industry and Market Segment

Market Segments are distinct group of customers within a market that can be differentiated from each other on the basis of attributes and specific demands In the Beer industry e.g. there are 3 main segments
Consumers who drink long established mass market brands(budweiser) Weight conscious consumers who drink less filling, low calorie, mass market brands( coors light) Consumers who prefer premium priced craft beer offered by microbreweries

Same in the PC industry

Components of the General Environment

Economic
Demographic Industry Environment Competitive Environment Political/ Legal Technological Global

Sociocultural

Components of the General Environment

Demographic Segment Population size Age structure Geographic distribution Economic Segment Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Sociocultural Segment Women in the workforce Workforce diversity Attitudes about work life quality Labor training laws Educational philosophies and policies Concerns about the environment Shifts in work and career preferences Shifts in preferences regarding product and service characteristics Technological Segment Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies Global Segment Important political events Critical global markets Newly industrialized countries Different cultural and institutional attributes Personal savings rate Business savings rates Gross domestic product Ethnic mix Income distribution

External Environmental Analysis

The external environmental analysis process should be conducted on a continuous basis. This process includes four activities: Scanning
Identifying early signals of environmental changes and trends

Monitoring Detecting meaning through ongoing observations

of environmental changes and trends

Forecasting Developing projections of anticipated outcomes

based on monitored changes and trends

Assessing

Determining the timing and importance of environmental changes and trends for firms' strategies and their management

Disruptive Tech: Winners and Losers

Dominant firm GM and ford Product Small cars Disruptive technology Japanese quality and manufacturing expertise Stainless steel technology Winning challangers Toyota and Honda

Gillette

Razor blades

Wilkensen

Gillette Parker
Swiss watchmakers Timex

Cheap Razors Fountain Pens

Time pieces Watches

Plastic technology Bic Ball point pen tech

Lever action watch technology Electronic technology

Bic
Timex Casio

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Threat of New Entrants

Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements

Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale

Government Policy Expected Retaliation

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Suppliers are likely to be powerful if:
Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality

Supplier industry is dominated by a few firms Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product Suppliers products are differentiated Suppliers products have high switching costs Supplier poses credible threat of forward integration

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Bargaining Power of Buyers

Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality Buyer has full information

Buyers compete with the supplying industry by:

* Bargaining down prices * Forcing higher quality * Playing firms off of each other

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Threat of Substitute Products

Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:
Jockeying for strategic position Using price competition

Staging advertising battles Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors

Rivalry Among Existing Competitors

Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs

Capacity added in large increments

Diverse competitors High strategic stakes

High exit barriers

Rivalry Among Existing Competitors

High exit barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable. Specialized assets Fixed cost of exit (e.g., labor agreements)

Strategic interrelationships
Emotional barriers Government and social restrictions

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers

Low

High

Low Entry Barriers

High

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers

Low

High

Low Entry Barriers

Low, Stable Returns

High

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers

Low

High

Low Entry Barriers

Low, Stable Returns

High

High, Stable Returns

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers

Low

High

Low Entry Barriers

Low, Stable Returns

Low, Risky Returns

High

High, Stable Returns

Effects of Entry Barriers and Exit Barriers on Industry Profits

Exit Barriers

Low

High

Low Entry Barriers

Low, Stable Returns

Low, Risky Returns

High

High, Stable Returns

High, Risky Returns

Competitor Analysis
The follow-up to Industry Analysis is effective analysis of a firms Competitors

Industry Environment Competitive Environment

Competitive Landscape

Strategic leadership: How effectively manage a strategy making process Strategy making process: Select and implement strategies that achieve competitive advantage Strategy implementation: Putting the selected strategies into action Success is 10% formulation 90% implementation

Superior Performance
Profitability(ROI C) Effectiveness of strategies Shareholder value

Profit Growth

Strategic Leadership
Superior Performance

Maximizing shareholder value

Risk capital Legal Owners Ex: JPMorgan shares went from $23 to $34 in 2003 Profitability(ROIC=Netprofit/Capital) How efficiently and effectively managers use its capital to produce goods and services) Profit growth(Incr in net profit over time) ex:Walmart (from $2.68 to $10.1bn in 10yrs and EPS incr from $0.59 to $2.35)

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where will emphasis be placed in the future? What is the attitude toward risk?

What Drives the competitor?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? currently How are we What is the attitude competing? toward risk? Does this strategy support changes in the competitive structure?

What is the competitor doing? What can the competitor do?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this strategy Do we assume the future support changes in the will be volatile? competition structure? What assumptions do our competitors hold about the industry and themselves? Are we assuming stable competitive conditions?

What does the competitor believe about itself and the industry?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this strategy Do we assume the future supportwill be volatile? changes in the competition structure? What assumptions do our competitors hold about the Capabilities industry and themselves? What are my competitors Are we operating under strengths and weaknesses? a status quo? How do our capabilities compare to our competitors?

What are the competitors capabilities?

Competitor Analysis
Future Objectives
How do our goals compare to our competitors goals? Where Current Strategy will emphasis be placed in the future? How are we currently What is the attitude competing? Assumptions toward risk? Does this strategy Do we assume the future supportwill be volatile? changes in the competition structure? What assumptions do our Capabilities competitors hold about the industry and themselves? What are my competitors Are we operating under strengths and weaknesses? a status quo? How do our capabilities compare to our competitors?

Response
What will our competitors do in the future? Where do we have a competitive advantage? How will this change our relationship with our competition?

I/O Model of Superior Returns

The Industrial Organization model suggests that above-average returns for any firm are largely determined by characteristics outside the firm. This model largely focuses on industry structure or attractiveness of the external environment rather than internal characteristics of the firm.

I/O Model of Superior Returns

External Environment
General Environment Industry Environment Competitive Environment

Action required: Study the external environment, especially the industry environment.

I/O Model of Superior Returns

External Environment An Attractive GeneralIndustry Environment
Industry Environment An industry whose Competitive structural characteristics Environment above-average suggest returns are possible

Action required: Locate an industry with high potential for aboveaverage returns.

I/O Model of Superior Returns

External Environment Attractive GeneralIndustry Environment Industry Environment Strategy An industry whose Formulation Competitive structural characteristics
Action required: Identify strategy called for by the industry to earn above-average returns.

Environment above-average a strategy Selection of suggest returns are linked with abovepossible average returns in a particular industry

I/O Model of Superior Returns

Action required: External Develop or acquire assets Environment Attractive and skills needed to GeneralIndustry Environment implement the strategy. Strategy Industry Environment An industry whose Formulation Competitive structural characteristics Environment above-averageAssets and Skills Selection of a strategy suggest
returns are linked with abovepossible Assets and average returns in a skills required particular industry to implement a chosen strategy

I/O Model of Superior Returns

Action required: External Use the firms strengths Environment Attractive (its assets or skills) to GeneralIndustry Environment implement the strategy. Strategy Industry Environment An industry whose Formulation Competitive structural characteristics Environment above-averageAssets and Skills Selection of a strategy suggest
returns are linked with abovepossible Assets and skills average returns in a Strategy required Implementation particular industry to implement a chosen strategy Selection of strategic actions linked with effective implementation of the chosen strategy

I/O Model of Superior Returns

Action required: External Maintain selected strategy Environment Attractive in order to outperform GeneralIndustry Environment industry rivals. Strategy Industry Environment An industry whose Formulation Competitive structural characteristics Environment above-averageAssets and Skills Selection of a strategy suggest
returns are linked with abovepossible Assets and skills average returns in a Strategy required Implementation particular industry to implement Superior Returns a chosen strategy Selection of strategic actions linked with Earning of aboveeffective implementation average returns of the chosen strategy

Resource-Based Model of Superior Returns

The Resource-Based model suggests that above-average returns for any firm are largely determined by characteristics inside the firm. This model focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.

Resource-Based Model of Superior Returns

Resources
Inputs to a firms production process.

Action required: Identify firm resources. Study strengths and weaknesses relative to rivals.

Resource-Based Model of Superior Returns

Resources Capability Action required: Determine what firm capabilities allow it to do better than rivals.

Inputs to a firms production process. an integrated Capacity for set of resources to perform a task or activity.

Resource-Based Model of Superior Returns

Resources Capability Action required: Determine how firms resources and capabilities may create competitive advantage.

Inputs to a firms Competitive production process. an integrated Capacity for set of resources to Advantage integratively perform a Ability task or activity. of a firm to outperform its rivals

Resource-Based Model of Superior Returns

Resources Capability Action required: Locate an attractive industry.

Inputs to a firms Competitive production process. an integrated Capacity for set of resources to Advantage An integratively perform a Attractive Ability firm to task or activity. of aIndustry outperform its rivals Location of an industry with opportunities that can be exploited by the firms resources and capabilities

Resource-Based Model of Superior Returns

Resources Capability Action required: Select strategy that best exploits resources and capabilities relative to opportunities in environs.

Inputs to a firms Competitive production process. an integrated Capacity for set of resources to Advantage An integratively perform a Attractive Ability firm to task or activity. of aIndustry outperform its rivalsStrategy Location of an industry Formulation with opportunities that and can be exploited by the Implementation firms resources and Strategic actions taken to capabilities earn above-average returns

Resource-Based Model of Superior Returns

Resources Capability Action required: Maintain selected strategy in order to outperform industry rivals.

Inputs to a firms Competitive production process. an integrated Capacity for set of resources to Advantage An integratively perform a Attractive Ability firm to task or activity. of aIndustry outperform its rivalsStrategy Location of an industry Formulation with opportunities that and Superior can be exploited by the Implementation Returns firms resources and Strategic actions takenaboveEarning of to capabilities earn above-averagereturns average returns

Resources and capabilities lead to Competitive Advantage when they are:

Valuable
allow the firm to exploit opportunities or neutralize threats in its external environment possessed by few, if any, current and potential competitors

Rare

Costly to Imitate when other firms either cannot obtain them

or must obtain them at a much higher cost

Nonsubstitutable the firm must be organized appropriately to

obtain the full benefits of the resources in order to realize a competitive advantage