Chapter2: External environment: Opportunities, Threats, Industry competition, and Competitor Analysis
Terms in this set (22)
Composed of dimension in the broader society that influence an industry and the firms within it
set of factors that directly influences a firm and its competitive actions and responses:
Threat of new entrants,
The power of suppliers,
The power of buyers,
The threat of product substitutes,
And the Intensity of rivalry among competing firms
How companies gather and interprets information about their competitor
External environmental analysis
Opportunity - condition in the general environment that, if exploited EFFECTIVELY, helps a company reach strategic competitiveness
Threat - condition in the general environment that may hinder a company's efforts to achieve strategic competitiveness
Multiple Sources to analyze general environments
Identifying EARLY SIGNALS of environmental changes and TRENDS
ex: amazon recording information about individuals visiting website , especially those who make purchases.
amazon then welcomes those customers by name and suggesting similar products they purchased last time.
Detecting meaning through ONGOING OBSERVATION of environmental changes and trends
Observe if any significant trend has EMERGED from those spotted from SCANNING
Developing PROJECTIONS of anticipated outcomes based on monitored changes and trends
What might happen? How quickly?
ex: time required for new technology to reach marketplace, length of time before different corporate training procedures are required to deal with anticipated changes in workforce,
how much time will elapse before changes in governmental taxation policies affect Consumer's buying patterns.
Determining the TIMING and IMPORTANCE of environmental changes and trends for firm's strategies and their management
specify implications of those understanding from scanning, monitoring, and forecasting.
appropriately interpreting intelligence collected - to determine if trend in the general environment is an Opportunity ? or Threat !
Segments of General Environment
Demographic segment : concerned with population's size, age structure, geographic distribution, ethnic mix and income distribution
Economic Segment : nature and direction of the economy in which a firm competes or may compete.
( firms generally want stable economy with Strong growth potential)
Firms must scan, observe, forecast, assess. health of host nation as well as economies outside it.
Political/Legal Segment : arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between firms and various local governmental agencies.
(how firms try to influence governments - lobbying)
ex: state of Nevada legalized online poker/gambling. MGM tried to decide if this was good opportunity, because nevada was too small of a state to provide online market.
Socio-cultural segment - Society's attitudes and cultural values.
Technological Segment : institutions and activities involved in creating new knowledge and translating that knowledge into new outputs, products, processes, and materials
Global Segment : includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets
Sustainable Physical Environment Segment: potential and actual changes in the physical environment and business practices that are intended to positively respond to those changes with the intent of creating a sustainable environment.
( renewable energy - walmart planned for their entire operation)
group of firms producing products that are close substitutes
To study an Industry - firms use the FIVE Forces of Competition Model
Five Forces of Competition Model
Threat of new entrant
Bargaining power of suppliers
Bargaining power of Buyers
Threat of substitute products
Rivalry among competing firms
Threat of new entrant
they can threaten the market share of existing competitor.
1- Barriers to entry
2- retaliation expected from current industry participant.
Successful firms want to maintain high entry barriers to DISCOURAGE new Entrants to the Industry
Several entry barriers
-Economies of scale - cost of producing each unit declines as QUANTITY of product increases
new entrant is unlikely to develop economies of scale in short amount of time.
-Product Differentiation - unique product.
-Switching cost ( coke to pepsi, at&t to verizon)
-Access to Distribution Channels
-Cost Disadvantages independent of scale (proprietary product technology, good location, access to raw materials, government subsidies)
2- Expected retaliation:
* from existing firm due to overcapacity.
ex: honda - harley davidson
honda first targeted small motorcycles, then on to bigger ones.
Bargaining Power of suppliers
supplier groups are powerful
- it is dominated by few large companies
- satisfactory substitute products are not available
- industry firm is not a significant customer for supplier group
- supplier's goods are critical to buyers' marketplace success
- effectiveness of supplier's product has created high switching cost for industry firms
- poses credible threat to integrate forward into buyer's industry. Credibility is enhanced when suppliers have substantial resources and provide a HIGHLY DIFFERENTIATED PRODUCT
solution : long term relationship, trust,
Bargaining Power of Buyers
bargaining power of buyers are powerful when:
- they purchase large portion of industry's output
- sales of product purchased account for significant portion of seller's annual REVENUE.
- they can switch to another product at little cost
- the industry's products are undifferentiated or standardized and buyer pose a credible threat if they were to integrate backwards into seller's industry.
Threat of Substitute Product
Sugar - and Stevia ( nutra sweet)
Intensity of Rivalry among competitors
intensifies when one firm is challenged by another. or one firm recognizes opportunity to improve market.
- numerous / or equally balanced competitors
- slow industry growth
- high fixed costs or high storage costs
- lack of differentiation or low switching costs
- high strategic stakes ( samsung and apple - mutual relationship reliant on one another, but still intense rivalry )
-high exit barriers ( airline companies, hard to get out, because of specialized assets( planes) , and Fixed costs of exit ( labor agreements )
Stronger the competitive forces, -> Lower the potential for firms to generate profits by implementing strategies.
set of firms Emphasizing similar strategic dimensions and using similar Strategy
- technological leadership,
- product quality
- pricing policy
- distribution channels
- customer service
Strategic GRoups can be used to determine industry's competitive structure.
set of data and information the firm gathers to better understand and anticipate competitor's objectives, strategies, assumptions and capabilities.
( Coca cola vs. Pepsi co, Home Depot vs Lowe's. )
- what drives the competitor - future objectives
- what competitor is doing and can do - current strategy
- what competitor believes about the industry - assumption
-what competitor capabilities are - strength and weaknesses
Companies / networks of companies that sell complementary goods or services that are compatible with the focal firm's good or services.
milk -cereal / microsoft - intel /
practices considered both legal and ethical :
obtaining publicly available information
attending trade fairs to obtain competitor's brochures
unethical and illegal :
blackmail, trespassing, eavesdropping, stealing drawing/ samples / documents.