THE EXTERNAL ENVIRONMENT Chapter 2

The Organization Owners & Directors Managers Employees The Task Environment Gov’t agencies Competitors Unions Suppliers Financial Intermediaries Local Communities Customers Activist Groups The Broad (or General) Environment Sociocultural Forces Political/Legal Forces Technological Forces Economic Forces

THE EXTERNAL ENVIRONMENT  Competitive Forces (CF) – those parts of the task environment that drive competition in the industry; they either make the intensity of competition strong or weak  Driving Forces (DF) – trends that are so significant that they are creating fundamental industry change (from Appendix p. 180)  Key Success Factors (KSF) – resources and capabilities that firms in the industry must possess if they desire to be successful in the industry (from Appendix p. 180)  Stakeholders such as special interest groups, unions, communities and government agencies can either be considered as part of the task environment or as creating the forces in the broad (or general environment).  Analysis of the external environment lead to identification of opportunities and threats in a firm’s industry.

The Five-Forces Model of Competition: A Key Analytical Tool 3–4

CF: INTENSITY OF RIVALRY AMONG COMPETITORS (COMPETING SELLERS) Slow industry growth High fixed costs Lack of product differentiation Large number of competitors High exit barriers Rapid industry growth Low fixed costs Several ways to differentiate product Few competitors Low exit barriers Strong CF (Threats) Weak CF (Opportunities)

CF: POTENTIAL ENTRY OF NEW COMPETITORS Economies of scale is not a factor Low capital requirements Low levels of product differentiation Low switching costs Easy access to distribution channels Government policies that encourage competition Easy access to key resources Retaliation by existing rivals toward new entrants is unlikely Rapid industry growth Large economies of scale High capital requirements High levels of product differentiation High switching costs Limited access to distribution channels Government policies that limit entry into industry Limited access to key resources Aggressive retaliation by existing rivals toward new entrants Slow industry growth Strong CF (Threats) Weak CF (Opportunities)

CF: ATTRACTIVENESS OF SUBSTITUTE PRODUCTS Substitute products are reasonably priced Substitute products can satisfy the same needs as the industry’s products Substitute products are readily available. Substitute products are not priced competitively. Substitute products cannot satisfy the same needs as the industry’s products Substitute products are not readily available. Strong CF (Threats) Weak CF (Opportunities)

CF: BARGAINING POWER OF SUPPLIERS Only a few suppliers are available Few substitutes for suppliers exist Suppliers are not highly dependent on the sellers’ industry Sellers are dependent on suppliers’ products Suppliers’ products are highly differentiated High switching costs between suppliers Suppliers can easily integrate forward into sellers’ industry Many suppliers are available Many substitutes for suppliers exist Suppliers are highly dependent on the sellers’ industry Sellers are not highly dependent on suppliers’ products Suppliers’ products are not highly differentiated Low switching costs between suppliers Sellers can easily integrate backward into suppliers’ industry Strong CF (Threats) Weak CF (Opportunities)

CF: BARGAINING POWER OF CUSTOMERS (BUYERS) Small number of customers Customers make high volume purchases Sellers’ products are major cost purchases for customers Sellers’ products are not highly differentiated Customers earn low profits Information about sellers’ products are readily available Suppliers can easily integrate backward into sellers’ industry Low switching costs for customers Slow industry growth Large number of customers Customers make small purchases Sellers’ products are minor cost purchases for customers Sellers’ products are highly differentiated Customers earn substantial profits Information about sellers’ products are not readily available Sellers can easily integrate forward into customers’ industry High switching costs for customers Rapid industry growth Strong CF (Threats) Weak CF (Opportunities)

Industry Fact Strong CF Potential Threat

Industry Fact Weak CF Potential Opportunity

A SINGLE FACT ABOUT THE INDUSTRY CAN CREATE SEVERAL POTENTIAL OPPORTUNITIES AND THREATS EXAMPLE: RAPID INDUSTRY GROWTH Strong potential entry of new competitors Weak rivalry among competitors Weak bargaining power of customers Strong CF (Threats) Weak CF (Opportunities)

The Diamond of National Advantage 7–13

THE EXTERNAL ENVIRONMENT  Competitive Forces (CF) – those parts of the task environment that drive competition in the industry; they either make the intensity of competition strong or weak  Driving Forces (DF) – trends that are so significant that they are creating fundamental industry change (from Appendix p. 180)

THE BROAD (GENERAL) ENVIRONMENT Sociocultural ForcesTechnological Forces Economic ForcesPolitical/Legal Forces Driving Forces (DF)

Driving Force (DF) Competitive Force (CF) Strategic Opportunity or Threat Industry Trend Current Industry Fact Future Industry Fact

DF Stronger CF Strategic Threat Industry Trend Changes Current Industry Fact Future Industry Fact

DF Weaker CF Strategic Opportunity Industry Trend Changes Current Industry Fact Future Industry Fact

THE EXTERNAL ENVIRONMENT  Competitive Forces (CF) – those parts of the task environment that drive competition in the industry; they either make the intensity of competition strong or weak  Driving Forces (DF) – trends that are so significant that they are creating fundamental industry change (from Appendix p. 180)  Key Success Factors (KSF) – resources and capabilities that firms in the industry must possess if they desire to be successful in the industry (from Appendix p. 180)

Does the DF… make the CF weaker in the future… and leads to a KSF in the industry? Key Strategic Opportunity Strategic Opportunity

Does the DF… make the CF stronger in the future… and makes it difficult to get a KSF in the industry? Key Strategic Threat Strategic Threat