McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 4 Analyzing the External Environment

The General Environment   Segments of the general environment include:   Demographic   Sociocultural   Legal/Political   Technological   Economic   Global General Environmen t 4-3

Demographic Segment   Aging population   Rising affluence   Changes in ethnic composition   Geographic distribution of population   Greater disparities in income levels 4-4

Sociocultural Segment   More women in the workforce   Increase in temporary workers   Greater concern for fitness   Greater concern for environment   Postponement of family formation 4-5

Political/Legal Segment   Tort reform   Americans with Disabilities Act (ADA)   Repeal of Glass-Steagall Act in 1999   Deregulation of utility and other industries   Increases in federally mandated minimum wages   Taxation at local, state, federal levels   Legislation on corporate governance reforms (Sarbanes-Oxley Act) 4-6

Technological Segment   Genetic engineering   Emergence of Internet technology   Computer-aided design/computer-aided manufacturing systems (CAD/CAM)   Research in synthetic and exotic materials   Pollution/global warming   Miniaturization of computing technologies   Wireless communication   Nanotechnology 4-7

Economic Segment   Interest rates   Unemployment   Consumer Price index   Trends in GDP   Changes in stock market valuations 4-8

The Competitive Environment   Segments of the competitive environment include:   Competitors   Customers   Suppliers   Sometimes called the task or industry environment   Porter’s five forces model Competitive Environment 4-9

Porter’s Five Forces Model of Industry Competition   Most common analytical tool for examining competitive environment   Five basic competitive forces:   Threat of new entrants   Bargaining power of buyers   Bargaining power of suppliers   Threat of substitute products and services   Intensity of rivalry among competitors in an industry 4-10

Porter’s Five Forces Model of Industry Competition   Five forces model important because:   Helps decide if firm should remain in or exit an industry   Provides rationale for increasing or decreasing resource commitments   Helps assess how to improve firm’s competitive position with regard to each of forces 4-11

The Threat of New Entrants   Profits of established firms in the industry may be eroded by new competitors   High entry barriers lead to low threat of new entries   Economies of scale   Product differentiation   Capital requirements   Switching costs   Access to distribution channels   Cost disadvantages independent of scale 4-12

The Bargaining Power of Buyers   Buyers threaten an industry   Force down prices   Bargain for higher quality or more services   Play competitors against each other 4-13

The Bargaining Power of Buyers   A buyer group is powerful when   It is concentrated or purchases large volumes relative to seller sales   The products it purchases from the industry are standard or undifferentiated   The buyer faces few switching costs   It earns low profits   The buyers pose a credible threat of backward integration   The industry’s product is unimportant to the quality of the buyer’s products or services 4-14

The Bargaining Power of Suppliers   Suppliers exert power by threatening to raise prices or reduce the quality goods and services   A supplier group will be powerful when   It is dominated by a few companies and is more concentrated than the industry it sells to   It is not obliged to contend with substitute products for sale to the industry   The industry is not an important customer of the supplier group 4-15

  A supplier group will be powerful when (cont.)   The supplier’s product is an important input to the buyer’s business   The supplier group’s products are differentiated or it has built up switching costs for the buyer   The supplier group poses a credible threat of forward integration The Bargaining Power of Suppliers 4-16

The Threat of Substitute Products and Services   Substitutes limit the potential returns of an industry   Ceiling on the prices that firms in that industry can profitably charge   Price/performance ratio 4-17

The Intensity of Rivalry among Competitors in an Industry   Interacting factors lead to intense rivalry   Numerous or equally balanced competitors   Slow industry growth   High fixed or shortage costs   Lack of differentiation or switching costs   Capacity augmented in large increments   High exit barriers 4-18

Using Industry Analysis: A Few Caveats   Five Forces:   Assumes zero-sum game   Determines how a firm can enhance its position   External forces and strategies of individual firms are continually changing Criticized for being a static analysis Key role is played by complements 4-19

How the Internet and Digital Technologies Influences Industry   Threat of New Entrants–Disadvantages the industry   Lower barriers to entry increases number of new entrants   Many internet-based capabilities can be easily imitated 4-20

How the Internet and Digital Technologies Influences Industry   Bargaining Power of Buyers   Benefits Industry Reduces the power of buyer intermediaries in many distribution channels   Disadvantages Industry Switching costs decrease Information availability online empowers ends users 4-21

How the Internet and Digital Technologies Influences Industry   Bargaining Power of Suppliers   Benefits Industry Online procurement methods can increase bargaining power over suppliers   Disadvantages Industry The Internet gives suppliers access to more customers and makes it easer to reach end users Online procurement practices deter competition and reduce differentiating features 4-22

How the Internet and Digital Technologies Influences Industry   Threats of Substitutes   Benefits Industry Internet-Based increases in overall efficiency can expand industry sales   Disadvantages Industry Internet-Based capabilities create more opportunities for substitution   Intensity of Rivalry   Disadvantages Industry Because location is less important, the number of competitors increases Differences among competitors are harder to perceive online Rivalry tends to focus on price and differentiating features are minimized 4-23

Strategic Groups within Industries   Two unassailable assumptions in industry analysis   No two firms are totally different   No two firms are exactly the same   Strategic groups   Cluster of firms that share similar strategies   Breadth of product and geographic scope   Price/quality   Degree of vertical integration   Type of distribution system 4-24

Strategic Groups within Industries   Value of strategic groups as an analytical tool   Identify barriers to mobility that protect a group from attacks by other groups   Identify groups whose competitive position may be marginal or tenuous   Chart the future direction of firms’ strategies   Thinking through the implications of each industry trend for the strategic group as a whole 4-25