External Environmental Analysis Session 6 Chapter 4 External Environmental Analysis Remote/General Industry/Competitive Direct /Operating/Task

Session Objectives To stress the importance of the sectors of the firm’s external environment to strategy formulation. To develop a broader sense of competition and competitive pressures. To understand the purpose of competitive strategy

The Firm’s External Environment Remote Environment (Global and Domestic) Industry Environment (Global and Domestic) Operating Environment (Global and Domestic) Economic Social Political Technological Ecological Entry barriers Supplier power Buyer power Substitute availability Competitive rivalry Competitors Creditors Customers Labor Suppliers THE FIRM

Firm’s External Environment

Industry/Competitive Environment Michael E. Porter’s Five Forces Model the concept of industry environment as integral to strategic thought and business planning. The five forces shape competition in an industry. The framework helps strategic managers link remote factors to their effects on a firm’s operating environment.

Competitive Forces Shape Strategy The essence of strategy formulation is to better cope with competition. Competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. The corporate strategists’ goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor.

The Goal of Competitive Strategy To Achieve a Defensible Position Against the Competitive (Five) Forces that Are Constantly Working to Erode Industrywide Profitability

Competitive Forces Any Entity (Group or Class of Firms) that has the Potential to Erode Profitability Among Firms within an Industry

Government Influence on the Model We Consider the Influence of Government as Felt through its Role(s) as one of the Five Forces: Government can be a Potential Entrant, Supplier, Buyer, Substitute, or Rival Firm

Industry Analysis & Competitive Analysis An industry is a collection of firms that offer similar products or services. Structural attributes are the enduring characteristics that give an industry its distinctive character. Concentration refers to the extent to which industry sales are dominated by only a few firms. Barriers to entry are the obstacles that a firm must overcome to enter an industry.

Five Forces Driving Industry Competition

Breakout Groups by Case 1. Define your Industry 2. Most Significant General Environmental Factor 3. Top Two More Significant of the Five Forces You have 15 minutes!

The Five Forces Threat of Entry Bargaining Power of Suppliers Bargaining Power of Buyers Pressure from Substitute Products Rivalry Among Existing Firms

Forces Affecting Entry Decision Economies of Scale Product Differentiation Capital Requirements Cost Disadvantages Independent of Size Access to Distribution Channels Government Policy

Powerful Suppliers A supplier group is powerful if: It is dominated by a few companies and is more concentrated than the industry it sells to Its product is unique or at least differentiated, or if it has built-up switching costs It is not obliged to contend with other products for sale to the industry It poses a credible threat of integrating forward into the industry’s business The industry is not an important customer of the supplier group

Powerful Buyers A buyer group is powerful if: It is concentrated or purchases in large volumes The products it purchases from the industry are standard The products it purchases from the industry form a component of its product and represent a significant fraction of its cost It earns low profits The industry’s product is unimportant to the quality of the buyers’ products or services The industry’s product does not save the buyer money The buyers pose a credible threat of integrating backward

Substitute Products By placing a ceiling on the prices it can charge, substitute products or services limit the potential of an industry Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times Substitute products that deserve the most attention strategically are those that are subject to trends improving their price-performance trade-off with the industry’s product or produced by industries earning high profits

Jockeying for Position Intense rivalry occurs when: Competitors are numerous or are roughly equal Industry growth is slow, precipitating fights for market share that involve expansion The product or service lacks differentiation or switching costs Fixed costs are high or the product is perishable, creating strong temptation to cut prices Capacity normally is augmented in large increments Exit barriers are high Rivals are diverse in strategy, origin, and personality

Direct/Operating/Task Environment Also called task environment Includes competitor positions relative to the five forces and profiling based on the following factors: Geographic Demographic Psychographic Buyer Behavior Also includes suppliers & creditors and HRM

HR: Nature of the Labor Market Access to personnel is affected by 4 factors: Firm’s reputation as an employer Local employment rates Availability of people with the needed skills Its relationship with labor unions.

Emphasis on Environmental Factors Differing external elements affect different strategies at different times and with varying strengths Only certainty is that the effect of the remote and operating environments will be uncertain until a strategy is implemented Many managers, particularly in less powerful firms, minimize long-term planning Instead, they allow managers to adapt to new pressures from the environment Absence of strong resources and psychological commitment to a proactive strategy effectively bars a firm from assuming a leadership role in its environment