PART 1: STRATEGIC MANAGEMEN T INPUTS CHAPTER 2 THE

PART 1: STRATEGIC MANAGEMEN T INPUTS CHAPTER 2 THE EXTERNAL ENVIRONMENT: OPPORTUNITIES, THREATS, INDUSTRY COMPETITION, & COMPETITOR ANALYSIS Authored by: Marta Szabo White. Ph.D Georgia State University

THE STRATEGIC MANAGEMENT PROCESS 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

KNOWLEDGE OBJECTIVES Explain the importance of analyzing and understanding the firm’s external environment. Define and describe the general environment and the industry environment. Discuss the four activities of the external environmental analysis process. Name and describe the general environment’s seven segments. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

KNOWLEDGE OBJECTIVES Identify the five competitive forces and explain how they determine an industry’s profit potential. Define strategic groups and describe their influence on the firm. Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPORTANT DEFINITIONS A firm’s EXTERNAL ENVIRONMENT is broken down into three parts: General Industry Competitor A firm’s strategic actions are influenced by the conditions in all three parts. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPORTANT DEFINITIONS General Environment MACRO Dimensions in the broader society that influence an industry and the firms within it Industry Environment MICRO Set of factors that directly influences a firm and its competitive actions and response Competitor Environment Focuses on each company against which a firm directly competes 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT FIGURE 2.1 The External Environment 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

OPENING CASE BRITISH PETROLEUM (BP) External environment affects a firm’s strategic actions BP seeks to expand its oil reserves after the Deepwater Horizon oil and gas drilling platform disaster in the Gulf of Mexico by forming joint ventures in Russia with Rosneft Corporation and in India with Reliance Industries. BP’s strategic actions are also affected by conditions in other segments of its general environment: e.g., the political/legal, social/cultural, and physical environment segments. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT A firm’s external environment creates: OPPORTUNITIES e.g., the opportunity for BP to enter other global markets, and THREATS e.g., the possibility that additional regulations in its markets will reduce opportunities for BP to extract oil and gas Collectively, opportunities and threats affect a firm’s strategic actions. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MA TC HI N G THE EXTERNAL ENVIRONMENT EXTERNAL ENVIRONMENT UNDERSTANDING INTERNAL ENVIRONMENT KNOWLEDGE VISION, MISSION, AND STRATEGY 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT The GeneralGENERAL Environment is grouped into seven environmental segments: [1] Demographic [2] Economic [3] Political/Legal [4] Sociocultural [5] Technological [6] Global [7] Physical To successfully deal with uncertainty in the external environment and achieve strategic competitiveness, firms must be aware of and understand these segments. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL Firms cannot directly CONTROL the general environment’s segments. However, these segments influence the actions that firms take. Successful firms learn how to gather the information needed to understand all segments and their implications for selecting and implementing the firm’s strategies. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE DEMOGRAPHIC ELEMENTS SEGMENT Demographic segments are commonly analyzed on a global basis because of their potential effects across countries’ borders and because many firms compete in global markets. Demographic Segment Population size Age structure Geographic distribution Ethnic mix Income distribution 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE ECONOMIC SEGMENT ELEMENTS This segment refers to the nature and direction of the economy in which a firm competes or may compete. Firms generally seek to compete in relatively stable economies with strong growth potential. With globalization and the interconnectedness of nations, firms must scan, monitor, forecast, and assess the health of their host nation and the health of the economies outside their host nation. Budget deficits or Economic Segment surpluses Inflation rates Personal savings rate Interest rates Business savings rates Trade deficits or Gross domestic product surpluses 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE POLITICAL/LEGAL ELEMENTS SEGMENT This segment represents how organizations and governments mutually try to influence each other, and how firms try to understand these influences (current and projected) on their strategic actions. Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE SOCIOCULTURAL ELEMENTS SEGMENT The sociocultural segment is concerned with a society’s attitudes and cultural values. Because attitudes and values form the cornerstone of a society, they often drive demographic, economic, political/legal, and technological conditions and changes. Sociocultural Segment Women in the workforce Workforce Diversity attitudes about the quality of work life Shifts in work and career preferences 2013 Learning. in All Rights Reserved. Mayand not be copied, scanned, or duplicated, in whole or in part, except for use as Cengage Shifts product service preference permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE TECHNOLOGICAL ELEMENTS SEGMENT Technological changes occur through new products, processes, and materials. The technological segment includes the activities involved in creating new knowledge and translating that knowledge into new outputs, products, processes, and materials. Given the rapid pace of technological change and risk Technological of disruption, it is vital for firms to study this segment. Applications of Segment knowledge Product innovations Focus of private and New communication government-supported technologies R&D expenditures 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE GLOBAL SEGMENT ELEMENTS Markets and consumers are more global. This segment includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets. Global Segment Important political events Critical global markets Newly industrialized countries Different cultural and institutional attributes 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE PHYSICAL ENVIRONMENT ELEMENTS SEGMENT Concerned with trends oriented to sustaining the world’s physical environment, firms recognize that ecological, social, and economic systems interactively influence what happens in this particular segment. This segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes. Physical Environment Segment Energy consumption Practices used to develop energy sources Renewable energy efforts Minimizing a firm’s environmental footprint Availability of water as a resource Producing environmentally friendly products Reacting to natural or man-made disasters 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE EXTERNAL ENVIRONMENT GENERAL SEGMENTS AND THE PHYSICAL ENVIRONMENT ELEMENTS EXAMP LE SEGMENT Strategic Focus: Firms’ Efforts to Take Care of the Physical Environment in Which They Compete The examples noted in this Strategic Focus: Siemens AG, McDonald’s, Procter & Gamble, and GE signify a growing commitment by firms around the globe in response to emerging trends in the physical environment segment. In addition to positively responding to the observed trends in this segment of the general environment, there is some evidence that firms engaging in these types of behaviors outperform those failing to do so. This emerging evidence suggests that these behaviors benefit companies, their stakeholders, and the physical environment in which they operate. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS External environments are: Turbulent Complex Global Uncertain Ambiguous Incomplete Firms engage in external environmental analysis to better understand and cope with their environments. This analysis has four parts: scanning, monitoring, forecasting, and assessing. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS ASSESSI MONITO FORECA SCANNIN G STING RING NG SCANNIN ASSESSI MONITO FORECA G STING RING NG Determining timing and Detectingthe Developing meaning importance Identifying of early through ongoing projections of environmental signals of changes observations anticipated outcomes of and trends for firms’ environmental strategies Determining environmental based on monitored the timing and Detecting Developing and meaning importance changes and trends. Identifying of early management. changes and through ongoing projections oftrends. environmental signals of changes observations anticipated outcomes of and trends for firms’ environmental environmental based on monitored strategies changesand and trends. management. changes and trends. ng i z ly he a n t A al n r e ext onm ir v n e is a t en ult, c ffi i d yet an c fi ni t, g i s y. t i v i act 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS Identifying opportunities and threats is an important objective of studying the general environment. OPPORTUNITY is a condition in the general environment that if exploited effectively, helps a company achieve strategic competitiveness. EXAMPLE: Procter & Gamble (P&G) is reorienting beauty products to better serve both men and women. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS THREAT is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness. EXAMPLE: Microsoft is experiencing a severe external threat as smartphones are expected to surpass personal computer (PC) sales in the near future. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS Firms use several sources to analyze the general environment: trade publications newspapers business publications academic research public polls trade shows suppliers customers employees People in boundary-spanning positions can obtain a great deal of this type of information. Examples: salespersons, purchasing managers, public relations directors, and customer service representatives, each of whom interacts with external constituents 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS: SCANNING Scanning: the study of all segments in the general environment; through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already underway Scanning often reveals ambiguous, incomplete, or unconnected data and information. Environmental scanning is challenging but critically important for firms, especially those competing in highly volatile environment. Many firms use special software to reduce the trade-off between an important missed event and false alarm rates. Also, the Internet provides significant opportunities for scanning. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS: MONITORING Monitoring: analysts observe MEANINGFUL environmental changes to see if an important trend is emerging from among those spotted through scanning Effective monitoring requires the firm to identify important stakeholders and understand its reputation among these stakeholders as the foundation for serving their unique needs. Scanning and monitoring are particularly important when a firm competes in an industry with high technological uncertainty. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS: FORECASTING Forecasting: feasibility projections developed for what might happen, and how quickly, as a result of the changes and trends detected through scanning and monitoring, both of which focus on events at a point in time Technology trends are continually driving product life cycles shorter, which makes forecasting demand for new technological products that much more challenging. During an economic downturn, forecasting becomes more difficult and more important. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

EXTERNAL ENVIRONMENTAL ANALYSIS: ASSESSING Assessing: determining the timing and significance of the effects of environmental trends that have been identified; specifying the implications of the understanding gathered in the previous stages INTERPRETATION IS KEY. Even if formal assessment is inadequate, the appropriate interpretation of that information is important. Gathering and organizing information is important, BUT appropriately interpreting that intelligence to determine if an identified trend in the external environment is an opportunity or threat is PARAMOUNT. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS An INDUSTRY is a group of firms that produce similar products or offer similar services that are close substitutes. Compared with the general environment, the industry environment has a more direct effect on the firm’s: Strategic competitiveness Ability to earn above-average returns 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS An industry’s profit potential is a function of the five forces of competition: The threats posed by new entrants The power of suppliers The power of buyers Product substitutes The intensity of rivalry among competitors Strategies are chosen, in part, because of the influence of an industry’s characteristics. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS FIGURE 2.2 The Five Forces of Competition Model 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL The five forces model of competition expands the arena for competitive analysis. Historically, firms concentrated only on direct competitors. Today, firms must study many industries, as competitors are defined more broadly. For example, the communications industry now encompasses media companies, telecoms, entertainment companies, 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY Can threaten market share of existing competitors May stimulate additional production capacity New competitors may force existing firms to be more efficient and to learn how to compete on new dimensions Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY High entry barriers tend to increase the returns for existing firms in the industry and may allow some firms to dominate the industry Industry incumbents want to maintain high entry barriers in order to discourage potential competitors from entering the 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY FUNCTION OF TWO FACTORS 1 BARRIERS TO ENTRY Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy 2 EXPECTED RETALIATION 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY ECONOMIES OF SCALE Marginal improvements in efficiency that a firm experiences as it incrementally increases its size Economies of scale can be developed in most business functions, such as marketing, manufacturing, research and development, and purchasing 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY ECONOMIES OF SCALE (cont’d) FACTORS (advantages/disadvantages) related to large- and small-scale entry Flexibility in pricing and market share Costs related to scale economies Competitor retaliation Flexible manufacturing systems 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY PRODUCT DIFFERENTIATION Unique products Customer loyalty New entrants frequently offer products at lower prices 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY CAPITAL REQUIREMENTS Differ according to industry Availability of capital Physical facilities/Inventories/Marketing activities Knowledge requirements 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY SWITCHING COSTS One-time costs customers incur when they buy from a different supplier New equipment Retraining employees Psychological costs of ending a supplier relationship 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY ACCESS TO DISTRIBUTION CHANNELS Stocking or shelf space Price breaks/Cooperative advertising allowances Less of a barrier for products that can be sold on the Internet 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY COST DISADVANTAGES INDEPENDENT OF SCALE Proprietary product technology Favorable access to raw materials Desirable locations 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY GOVERNMENT POLICY Licensing and permit requirements Regulation/Deregulation of industries Antitrust violations resulting from industry dominance 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 1/5 THREAT OF NEW ENTRANTS: COMPETITION MODELBARRIERS TO ENTRY EXPECTED RETALIATION Vigorous retaliation can be expected when the existing firm has a major stake in the industry. It has fixed assets with few, if any, alternative uses It has substantial resources When industry growth is slow or constrained Locating market niches not being served by incumbents allows the new entrant to avoid entry barriers Small entrepreneurial firms are generally best 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 2/5 BARGAINING POWER OF SUPPLIERS SUPPLIER POWER INCREASES WHEN: Suppliers are large and few in number Suitable substitute products are not available Industry firms are not a significant customer for the suppliers Suppliers’ goods are critical to 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 2/5 BARGAINING POWER OF SUPPLIERS SUPPLIER POWER INCREASES WHEN (cont’d): Suppliers’ products create high switching costs Suppliers have substantial resources and provide a highly differentiated product Suppliers pose a credible threat to integrate forward into the buyers’ 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 3/5 BARGAINING POWER OF BUYERS BUYER POWER INCREASES WHEN: Buyers purchase a large portion of an industry’s total output Buyers’ purchases are a significant portion of a seller’s annual revenues Switching costs are low (to other industry product) 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 3/5 BARGAINING POWER OF BUYERS BUYER POWER INCREASES WHEN (cont’d): The industry’s products are undifferentiated or standardized Buyers pose a credible threat to integrate backward into the sellers’ industry 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 4/5 THREAT OF SUBSTITUTE PRODUCTS THREAT OF SUBSTITUTE PRODUCTS INCREASES WHEN: Buyers face few switching costs The substitute product’s price is lower Substitute product’s quality and performance are equal to or greater than the existing product Differentiated industry products that are valued by customers reduce 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 4/5 THREAT OF SUBSTITUTE PRODUCTS FUNCTION OF A SUBSTITUTE Places a ceiling on prices firms can charge Goods or services outside a given industry perform the same or similar functions at a competitive price (e.g., plastic has replaced steel in many applications) 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS INDUSTRY RESTRUCTURED THROUGH COMPETITORS STRATEGIC FOCUS: The Multi-Industry Battle for Mobile and Home Digital Computing and Entertainment The process of new technology creation, utilization, and commercialization ultimately leads to changes in organizational patterns, and in particular, strategic alliances and mergers and acquisitions as firms restructure themselves around the opportunities being 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS INDUSTRY RESTRUCTURED THROUGH COMPETITORS (cont’d) Competitor analysis must examine how such technological changes will lead to convergence of competitors or other firms and associated organizational changes and the possible re-creation of a new set of industry competitors, buyers, and suppliers. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS INDUSTRY RIVALRY Competitors are rarely homogeneous; they differ in resources and capabilities and seek to differentiate themselves from competitors Firms seek to differentiate their products in ways that customers value and in which the firms have a competitive advantage Common rivalry dimensions: Price Service after the sale Innovation 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS INDUSTRY RIVALRY INTENSIFIES WITH: Numerous or equally balanced competitors Slow industry growth High fixed costs or high storage costs Lack of differentiation opportunities or low switching costs 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS EXIT BARRIERS High exit barriers prevent competitors from leaving the industry EXAMPLES Specialized assets: assets with values linked to a particular business Fixed costs of exit: such as labor agreements 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS EXIT BARRIERS (examples cont’d): Strategic interrelationships: relationships of mutual dependence, such as those between one business and other parts of a company’s operations, including shared facilities and access to financial markets 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF 5/5 INTENSITY OF RIVALRY AMONG COMPETITION MODEL COMPETITORS EXIT BARRIERS (examples cont’d): Emotional barriers: aversion to economically justified business decisions because of fear for one’s own career, loyalty to employees, etc. Government and social restrictions: often based on government concerns for job losses and regional economic effects; more : 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL INTERPRETING INDUSTRY ANALYSES Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors Unattractive Industry LOW PROFIT POTENTIAL 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL INTERPRETING INDUSTRY ANALYSES High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors Attractive Industry HIGH PROFIT POTENTIAL 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS: STRATEGIC GROUPS INTRAS TRATEGI C GROUP COMPE TITION MORE INTE NSE THAN INTERS TRATEGI C GROUP COMPE TITION STRATEGIC GROUP DEFINED A set of firms emphasizing similar strategic dimensions and using similar strategies The competition within a strategic group is greater than the competition between strategic groups There is more heterogeneity in the performance of firms within strategic groups Similar market positions Similar products Similar strategic actions 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS: STRATEGIC GROUPS STRATEGIC DIMENSIONS Extent of technological leadership Product quality Pricing policies Distribution channels Customer service 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

INDUSTRY ENVIRONMENT ANALYSIS: STRATEGIC GROUPS IMPLICATIONS Firms within a strategic group are direct competitors (offer similar products), thus rivalry can be intense; the greater the rivalry the greater the threat to each firm’s profitability The strengths of the five forces differ across strategic groups The closer the strategic groups in terms of strategy, the greater the likelihood of rivalry 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITOR ANALYSIS COMPETITOR INTELLIGENCE Set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities The ethical and legal gathering of needed information and data that provides insight into: What drives competitors Shown by organization's future objectives What the competitor is doing and can do Revealed in organization's current strategy What the competitor believes about the industry Shown in organization's assumptions What the competitor’s capabilities are Shown by organization's strengths and weaknesses 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITOR ANALYSIS COMPONENTS FIGURE 2.3 Competitor Analysis Components 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

COMPETITOR ANALYSIS: COMPLEMENTORS Complementors: The network of companies that sell complementary products or services or are compatible with the focal firm’s own product or service. Complementors expand the set of competitors that firms must evaluate when completing a competitor analysis COMPLEME NTOR COMPETIT OR If a complementor’s product or service adds value to the sale of the focal firm’s product or service, it is likely to create value for the focal firm If a complementor’s product or service is in a market into which the focal firm intends to expand, the complementor can represent a formidable competitor. 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Un e ta thi c c t inc ics al lud c a e: n COMPETITOR ANALYSIS: ETHICAL CONSIDERATIONS BLACKMAIL TRESPASSING EAVESDROPPIN G STEALING STEALING DRAWINGS, DRAWINGS, SAMPLES, SAMPLES, OR OR DOCUMENTS DOCUMENTS 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.