PART 1: STRATEGIC MANAGEMENT INPUTS CHAPTER 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 passwordprotected 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 passwordprotected 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 passwordprotected 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 passwordprotected website for classroom use IMPORTANT DEFINITIONS ● General Environment MACRO MACRO Dimensions in the broader society that influence an industry and the firms within it ● Industry Environment Set of factors that directly influences a firm and its competitive actions and response MICRO MICRO ● 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 passwordprotected 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 passwordprotected 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 passwordprotected 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 C ollectively, 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 passwordprotected website for classroom use MA TC HI NG 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 passwordprotected website for classroom use INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG 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 passwordprotected website for classroom use INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG 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 passwordprotected website for classroom use INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG 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 ● High strategic stakes ● High exit barriers ©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 passwordprotected website for classroom use INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG 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 passwordprotected website for classroom use INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG 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 passwordprotected website for classroom use INDUSTRY ENVIRONMENT ANALYSIS THE FIVE FORCES OF COMPETITION MODEL 5/5 INTENSITY OF RIVALRY AMONG 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 common outside the United States ©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 passwordprotected 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 Unattractive Industry products Intense rivalry among competitors 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 passwordprotected 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 Attractive Industry products Moderate rivalry among competitors 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 passwordprotected website for classroom use INDUSTRY ENVIRONMENT ANALYSIS: STRATEGIC GROUPS INTRASTRATEGIC GROUP COMPETITION MORE INTENSE THAN INTERSTRATEGIC GROUP COMPETITION STRATEGIC GROUP DEFINED ● A set of frms 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 frms 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 passwordprotected 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 passwordprotected 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 passwordprotected 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 ■ 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 passwordprotected 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 passwordprotected 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 • COMPLEMENTOR the sale of the focal firm’s product or service, it is likely to create value for the focal firm • COMPETITOR If a complementor’s product or service adds value to 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 passwordprotected website for classroom use BLACKMAIL BLACKMAIL TRESPASSING TRESPASSING Un eth i ca l tac t ic sc an i nc lud e: COMPETITOR ANALYSIS: ETHICAL CONSIDERATIONS EAVESDROPPING EAVESDROPPING 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 passwordprotected website for classroom use