Environmental Analysis

Topics
Purpose

of General Environmental Analysis

Gathering
General

Information

Environment

Competitive

Environment

Key Success Factors

Competitive Changes During Industry Evolution
Strategic Groups
National Competitive Advantage
Internal

Environment
2

Purpose of General 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:

1. Scanning: general surveillance of environmental

changes; looking for early signals of changes
2. Monitoring: close attention to specific
developments that could affect the organization
3. Competitive Intelligence: following actions of
competitors
4

Sources of Environmental Data

Internal sources may also be a good source of data on customer needs,

attitudes, and behavior. The organization's own records are the best
source of data on current objectives, performance, and available
resources.

The sheer volume of available information on the economy, our population,

and business activities is the major strength of most government data
sources.

The articles and research reports that are available in periodicals and
books provide a gamut of information about many organizations,
industries, and nations.

Commercial sources are almost always relevant to a specific issue because

they deal with the actual behaviors of customers in the marketplace.

The best approach to secondary data collection is one that blends data and
information from a variety of sources.

If needed secondary data is not available, out of date, inaccurate or

unreliable, or irrelevant to the specific problem at hand, the manager may
have little choice but to collect primary data through marketing research.

Overcoming Problems with Data

Collection
One

of the most common problems is an incomplete or

inaccurate assessment of the situation for which data
is being gathered to address.

Another

common difficulty is the expense of collecting

environmental data.

third issue is the time it takes to collect

environmental data.

final challenge is finding a way to organize the vast

amount of data and information that are collected
during the environmental analysis.

3-24

Three Areas for Analysis

General Environment
2. Competitive Environment
3. Internal Environment
1.

General & Competitive Environments

General Environment

Demographics

Competitive
Global

Political/Legal

Environment
Threat on new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products

Sociocultural

Competitive rivalry

Technological

Macoreconomic

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8

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

10

General Environment
TECHNOLOGICAL
Technological

business

developments relevant to a

Telecommunications
Internet
On-line training
Product and process innovations

11

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

12

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

13

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

14

COMPETITIVE Environment
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

15

Porters Five Forces Model of

Competition
Substitute Products
(of firms in
other industries)

Suppliers
of Key
Inputs

Rivalry
Among
Competing
Sellers

Potential
New
Entrants

Buyers

16

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
17

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
18

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
19

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

20

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
21

Four Basic Types of Competition

1. Brand Competitors: market products that are
similar in features and benefits to the same
customers at similar prices
2. Product Competitors: compete in the same
product class, but with products that are
different in features, benefits, and price
3. Generic Competitors: market very different
products that solve the same problem or satisfy
the same basic need
4. Total Budget Competitors: compete for the
limited financial resources of the same customers
22

The 6-W Model

1. Who are our current and potential customers?
2. What do our customers do with our products?
3. Where do our customers purchase our
products?
4. When do our customers purchase our
products?
5. Why (and how) do our customers select our
products?
6. Why do potential customers not purchase our
products?
23

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

24

Examples of Key Success Factors

in Selected Industries
Pharmaceuticals

research and personal selling

Beer

advertising and distribution

Restaurant

quality food and service

Retailer

location and priced-for-quality

25

Changes in Competition During

Industrys Evolution
Over

time as an industry evolves, the

nature and basis of competition
changes
Five Stages

Embryonicintroduction of product
Growth
Shakeout
Mature
Declining

26

Demand

Stages of Industry Life Cycle

Embryonic
Shakeout

Mature

Declining

Growth

Time
27

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:
Declining:

capacity

low cost production, brand loyalty

lowest cost production, reduce

28

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
29

Strategic Implications of the

Five Competitive Forces
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
30

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

31

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
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Types of Video Game

Suppliers/Distribution Channels

Example: Strategic Group Map of

the Video Game Industry
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

33

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
34

Determinants of National Competitive

Advantage
Strategy,
Structure &
Rivalry

Factor
Endowments

National
Competitive
Advantage

Demand
Conditions

Related and
Supporting
Industries
35

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
36

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

37

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
38

Factor Endowments
Availability

of traditional factors of production

land, labor, capital, entrepreneurship
provide 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.
39

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.

40

INTERNAL ANALYSIS
How

can we assess the resource capabilities?

Resource Based View

Each firm has three

Tangible assets

basic kinds of Resources

Fords Cash Reserves

3Ms Patents
Georgia Pacific Land holdings
Coca Colas formula

Intangible assets

Nike - Brand Name

Dell Reputation
GE- Welchs Leadership

Organizational capabilities
Dells Customer Service
Sonys Product Development
3Ms Innovation

How resources become valuable

Competitively

Superior

Walmarts Logistics Allowed better pricing

Resource

Scarcity

OPECs Oil Reserves Finite oil reserves

Appropriability

Who profits from a resource?

Mickey Mouse does not have an agent

Inimitability

Pricelines pricing for air tickets

Wendys Drive Through
Path dependency - Steinway with Pianos
Causal ambiguity South West Airlines
Economic Deterrence

Durability

How long will the competitive advantage last?

Patentable products longer durability

Value Chain Analysis

Disaggregates

a business into sets of activities

Primary Activities Inbound logistics --- Operations

----Outbound logistics ---- marketing and Sales and
service
Support activities General Administration, HRM, R&D,
Systems Development
How

to do a VCA

Identify key activities

Allocate costs to each activity
Identify the activities that differentiate the firm
Examine the Value Chain
Different activities may be important industry and strategy
Importance of activities can vary based on a company position
in a larger scheme of activities

Making meaningful comparisons

Comparison

with past performance

Trend analysis Where are you relative to the

past.
Stages of Industry Evolution
Emergence, Growth, Maturity and Decline
Strengths or competencies needed at each stage are
different

Benchmarking with the competitors

Key competitors
Best practices irrespective of industry