Chapter 2 The External Environment

External Analysis: How Will These Affect Our Firm? YouTube: PEST Analysis (Video)

External Environmental Analysis General environment Can’t control but can understand and try to predict effect on firm/industry At firm/industry level Industry environment Factors and conditions influencing industry profitability At industry level By extension, firm profitability Competitor environment Predicting what competitors will do (actions, responses and intentions)

This Includes Scanning Identifying early signals of environmental changes and trends Monitoring Detecting meaning through ongoing observations of environmental changes and trends Forecasting Developing projections of anticipated outcomes based on monitored changes and trends Assessing Determining the timing and importance of environmental changes and trends for firms’ strategies and their management

What We are After: Opportunities and Threats Opportunity A condition in the (general) environment that, if exploited effectively, helps a firm achieve strategic competitiveness. Threat A condition in the (general) environment that may hinder a firm’s efforts to achieve strategic competitiveness.

Car Industry: General Motors Four segments: GM North America, Europe, South America and International Also GM Financial Sales: 152Bn (about 10M cars) Growth markets: Generally emerging markets (China 7.3%, 10%, 16%, 21M), U.S (5.7%,17.5M) and Europe Profit margin: 3.4 % Diversified car manufacturer (wide range of products) Competitors: Toyota (10), VW (10), Ford (6-7), Chrysler, Nissan

General Environment: Demographic Segment Geographic distribution Age structure Ethnic mix The Demographic Segment Population size Income distribution Any of these have a large impact on GM and/or their competitors?

General Environment: Economic Segment Market growth rates depends on: Consumer demand GDP growth Employment level and wage gains Inflation and interest rates Personal and business savings rates Effect on GM North American operations (and their competitors)?

General Environment: Political and Legal The Political/Legal Segment Regulations Consumer privacy laws Lobbying Antitrust, deregulation laws Taxation Effect on GM North American operations (and their competitors)?

General Environment: Sociocultural The Sociocultural Segment Changing attitudes and cultural values Attitudes about quality of work-life balance Diverse and aging workforce Women in the workplace Concerns about environment Shifts in work and career preferences Shifts in product and service preferences Effect on GM North American operations (and their competitors)?

General Environment: Technological Segment The Technological Segment Rapid technological change and the risk of disruption Product innovations, shorter product cycles What are some changes in technology that will affect GM and its competitors in the future?

General Environment: Physical Environment The Physical Environment Segment Sustaining the world’s physical environment Sustainable use of resources, pollution etc. How could implications here affect GM?

Summary: General Environment Demographic Segment -Neutral to + Economic Segment - + (US) Political and Legal Segment -Neutral perhaps Technological Segment - (-) Physical Environment Segment -(-)

Next Level of Analysis: Industry Environment Industry Defined Group of firms producing products that are close substitutes Dell, HP, Lenovo Other industries? Fry’s , Albertsons, Safeway External (industry) perspective: Industry structure constrains what firms can do (their choice of strategies) Strategies become more similar over time Industry-level analysis (Porters 5 Forces) Internal perspective: Firm try to differentiate themselves by pursuing different strategies

Car Industry: General Motors Four segments: GM North America, Europe, South America and International Also GM Financial Sales: 152Bn (about 10M cars) Growth markets: Generally emerging markets (China 7.3%, 10, 16, 21M), U.S 5.7%,17.5M) and Europe Profit margin: 3.4 % Diversified car manufacturer (wide range of products) Competitors: Toyota (10M), VW (10M), Ford (6-7M), Chrysler, Nissan

The Five Forces of Model (Industry Level) Impacts industry profitability (and by extension firm profitability)

1st Force: Threat of New Entrants Barriers to Entry New entrants increased competition lower prices lower industry profits Economies of Scale Improvements in efficiency as volume increases Product Differentiation Unique products Customer loyalty Products at competitive prices Capital Requirements Physical facilities Inventories Capex and R&D Switching Costs One-time costs customers incur buying from a different supplier Distribution Channel Access Outlets, shelf space Cooperative advertising allowances

Barriers to Entry Cost Advantages Independent of Scale Proprietary product technology Favorable access to raw materials Desirable locations Government policy Licensing and permit requirements Deregulation of industries Expected retaliation Responses by existing competitors may depend on a firm’s present stake in the industry (available business options)

2nd Force: Bargaining Power of Suppliers Powerful suppliers eat into industry profits with high prices (e.g., Microsoft/Intel and PC-makers) Supplier power increases when: Suppliers are large and few in number. Suppliers’ goods are critical to the buyers’ marketplace success. - Suitable substitute products are not available. Suppliers’ products create high switching costs. Suppliers pose a threat to integrate forward into buyers’ industry. High / low supplier power?

3rd Force: Bargaining Power of Buyers More powerful buyers demand lower prices and better quality Buyer power increases when: Buyers are large and few in number. Buyers purchase a large portion of an industry’s total output. Buyers’ purchases are a significant portion of a firm’s annual revenues. Buyers’ switching costs are low. Buyers can pose threat to integrate backward into the sellers’ industry.

4th Force: Threat of Substitute Products More substitutes: lower prices and lower growth potential The threat of substitute products increases when: Buyers face few switching costs. Substitute product’s quality and performance are equal to or greater than the existing product. The substitute product’s price is lower. Differentiated industry products that are valued by customers reduce this threat.

5th Force: Intensity of Rivalry Among Competitors Industry rivalry increases when: There are numerous or equally balanced competitors. Industry growth slows or declines. There are high fixed costs or high storage costs. There is a lack of differentiation opportunities High exit barriers prevent competitors from leaving the industry

Interpreting Industry Analyses Entry barriers Supplier and buyer bargaining power Industry Attractiveness Threats from substitute products Rivalry among competitors

Strategic Groups Strategic Group Defined Set of firms offering similar products using similar strategies More so than within an industry Competition is more intense inside compared to outside the strategic group Strengths of the five forces differ across strategic groups. The closer the groups (within an industry) are in their strategies, the greater the rivalry between groups.

Strategic Groups: Car Industry Diversified manufacturers: GM, VW, Toyota , Ford, Chrysler Diversified luxury manufacturers: Audi, BMW, Mercedes, Lexus, infinity, Cadillac Ultra luxury:

Next Level of Analysis: Competitor Analysis Competitor Intelligence Gathering of information to understand: What the firm’s competitors will do in the future? Based on how they view the industry Do they think their industry will substantially change in the future? General Motors invested$500M in Lyft What does this action tell their competitors? Toyota(Uber),VW(Gett), and BMW(Scoop) What the firm’s competitors are currently doing (current strategy) and what they can do Capabilities (strengths and weaknesses)

External Analysis: How Will These Affect Spotify?