1. Objectives - Analysis of Environment
General environment
Focused on the future
Industry environment
Focused on industry-specific factors influencing firm profitability
Competitor environment
Focused on competitive dynamics
competitors’ capabilities, intentions, actions, responses

2. Analysis of Environment
Is a continuous process
Scan: Identify signals of changes and trends
Monitor: interpret changes & trends
Forecast: future scenarios from monitoring
Assess: timing and importance of forecast to current or prospective firm strategies
Which PEOPLE in the firm should do this?
What limits the effectiveness of this process?

3. Your firm is interdependent with BROAD institutional dynamics:
Analysis of Environment
Your firm is interdependent with BROAD institutional dynamics:
Demographic
Economic
Political/legal
Sociocultural
Technological
Global

4. Demographic trends in …
Analysis of Environment
Demographic trends in …
Population size
Age structure
Skills/education
Geographic distribution
Ethnic mix
Income distribution

5. Economic segment (examples)
Analysis of Environment
Economic segment (examples)
Inflation/interest rates (hurdle costs)
Trade deficits or surpluses
Budget deficits or surpluses
Consumption, savings, tax rates
GDP, business cycles

6. Political/Legal Segment (examples)
Analysis of Environment
Political/Legal Segment (examples)
Antitrust laws (Whole Foods)
Tax laws (incentives)
Regulatory philosophies (SOX)
Labor/training laws (EEOC)
Educational policies (gov backed student loans)

7. Sociocultural segment (examples)
Analysis of Environment
Sociocultural segment (examples)
Opportunity cost of work (leisure)
Social concerns (greening, alcohol, meat)
Shifts in social preferences (on-line networking)
Shifts in product/service preferences (track my child; Care Trak Int’l)

8. Technological Segment (examples)
Analysis of Environment
Technological Segment (examples)
Process architectures (McD, FedEx)
New General Purpose Technologies (IT)
Private / Public R&D (Human Genome Project)
Converging technologies (VOIP, bioinformatics)
Standard setting (cell phone interoperability)

9. Global Trade regions as boundaries Critical global markets
Environmental Analysis
Global
Trade regions as boundaries
Critical global markets
Locating product & factor markets
cultural and institutional attributes
IP & property rights

10. Generate economic effects on industries/firms (S/D, & factor costs)
Environmental Analysis
Segment dynamics
Demographic
Economic
Political/legal
Sociocultural
Technological
Global
Generate economic effects on industries/firms (S/D, & factor costs)

11. Industry Environment
Interdependence among firms competing for similar customers
Competitive actions and responses.
Interactions among factors determine industry profit potential.
1. Threat of new entrants
2. Power of suppliers
3. Power of buyers
4. Product substitutes
5. Intensity of rivalry

12. Analyze industry and competitors. Note:
Industry Environment
Define the industry - current and potential customers and the firms that serve them.
Analyze industry and competitors.
Note:
Suppliers and buyers can become competitors through integration.
Producers of potential substitutes may become competitors.

13. 5 Forces Industry Analysis

14. Threat of New Entrants Barriers to entry Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale (e.g., sites, subsidies, learning)
Government policy
Expected retaliation

15. Learning effects
World War 2 - same plants, same rate of output - lower costs over time
Important for complex products and processes where humans can learn
A possible source of ‘first-mover’ advantage
Boston Consulting Group focused on the experience curve and learning effects

16. Economies of Scale Versus Learning
Cost
($ per unit
of output)
AC1 B
Economies of Scale –
reversible.
AC2
Learning C A
Output

17. Bargaining Power of Suppliers
A supplier group is powerful when:
it is dominated by a few large companies;
satisfactory substitute products are not available to industry firms;
industry firms are not a significant customer for the supplier group;
suppliers’ goods are critical to buyers’ marketplace success;
effectiveness of suppliers’ products has created high switching costs;
suppliers are a credible threat to integrate forward into the buyers’ industry.

18. Bargaining Power of Buyers
Buyers (customers) are powerful when:
they purchase a large portion of an industry’s total output
the sales of the product being purchased account for a significant portion of the seller’s annual revenues
they could easily switch to another product
the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry

19. Threat of Substitute Products
Product substitutes are strong threat when:
customers face few switching costs
substitute product’s price is lower
substitute product’s quality and performance capabilities are equal to or greater than those of the competing product

20. Intensity of Rivalry
Intensity of rivalry is stronger when competitors:
are numerous or equally balanced
experience slow industry growth
have high fixed costs or high storage costs
lack differentiation or have low switching costs
experience high strategic stakes
have high exit barriers

21. High Exit Barriers Common exit barriers include:
specialized assets (assets with values linked to a particular business or location)
fixed costs of exit such as labor agreements
strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets)
emotional barriers (career concerns, loyalty to employees, etc.)
government and social restrictions

22. Industry Scope What is an industry?
Useful to consider chain of related products (complements) when assessing industry attractiveness

23. share of industry revenue
Orit Gadiesh and James L. Gilbert
Harvard Business Review
May-June 1998
THE PC INDUSTRY’S PROFIT POOL
40% 30 20 10
100%
share of industry revenue
microprocessors
other components
personal computers
software
peripherals
services
The value chain for the PC industry includes six key activities; the profitability of the activities varies widely. Manufacturers compete in the largest but least-profitable segment of the chain.
Value chain focus
Axes
Vertical—operating margin
Horizontal—share of industry

24. The Profit Pool Lens
The profit pool is the total profit earned in an industry at all points along the industry’s value chain
Segment profitability may vary by customer group, product category, geographic market, or distribution channel
Profit concentration may be very different than revenue concentration
Shape of the profit pool reflects the competitive dynamics of a business
Interactions of companies and customers
Competitive strategies of competitors
Product pools are not stagnant

26. share of industry revenue
THE U.S. AUTO INDUSTRY’S PROFIT POOL
The automotive industry encompasses many value-chain activities. The way that profits and revenues are distributed among these activities varies greatly. The most profitable areas of the car business are not the ones that generate the biggest revenues.
25% 20
operating margin 15 10 5
auto loans
gasoline
new car dealers
100%
used car dealers
leasing
auto insurance
service repair
warranty
auto manufacturing
share of industry revenue
aftermarket parts
auto rental
source: Harvard Business Review, May-June 1998

27. Profit Pools: Company Examples
Sources of Highest ROI
Auto leasing, insurance
Packing materials, storage
Service
Accessories (consumer products), leasing, service, restaurants
Film
Firms
Automakers
U-Haul
Elevators (OTIS)
Harley Davidson
Polaroid
Core Business
Auto manufacturing
Truck Rental
Elevator Manufacturing
Motorcycles
Instant Photography Cameras

28. Implications
Focusing on growth and market share can lead a company to choose unprofitable segments of an industry
Today’s deep revenue pool may be tomorrow’s dry hole.
The goal should be to focus on profitable opportunities
Industry should be considered more broadly than traditional definition
Automobile industry includes
Component manufacture and supply
New car assembly and delivery
New car warrantee and service
New car financing, leasing, and insurance
Used car sales and service

29. Strategic Groups
Strategic group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions.
The strategy followed by a strategic group differs from strategies being implemented by other companies in the industry.

30. Competitor behavior
Competitor intelligence is the ethical gathering of needed information and data about competitors’ objectives, strategies, assumptions, and capabilities
what drives the competitor as shown by its future objectives
what the competitor is doing and can do as revealed by its current strategy
What the competitor believes about itself and the industry, as shown by its assumptions
What the the competitor may be able to do, as shown by its capabilities

31. Competitor Analysis Response: Future objectives Response
Current strategy
Response:
What will our competitors do in the future?
Where do we hold an advantage over our competitors?
How will this change our relationship with our competitors?
Assumptions
Capabilities

32. Assessing competitive Strength vis a vis Rivals
1. List industry key success factors and other relevant measures of competitive strength
2. Rate firm and key rivals on each factor using rating scale of (1 = weak; 10 = strong)
3. Decide whether to use a weighted or unweighted rating system
4. Sum individual ratings to get overall measure of competitive strength for each rival
5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage

33. Overall strength rating Rating Scale: 1 = Very weak; 10 = Very strong
An Unweighted Competitive Strength Assessment
KSF/Strength Measure
ABC Co.
Rival 1
Rival 2
Rival 3
Rival 4
Quality/product performance 8 5 10 1 6
Reputation/image 8 7 10 1 6
Manufacturing capability 2 10 4 5 1
Technological skills 10 1 7 3 8
Dealer network/distribution 9 4 10 5 1
New product innovation 9 4 10 5 1
Financial resources 5 10 7 3 1
Relative cost position 5 10 3 1 4
Customer service capability 5 7 10 1 4
Overall strength rating 61 58 71 25 32
Rating Scale: 1 = Very weak; 10 = Very strong

34. Overall strength rating
A Weighted Competitive Strength Assessment
KSF/Strength Measure
Weight
ABC Co.
Rival 1
Rival 2
Rival 3
Rival 4
Quality/product performance
0.10
8/0.80
5/0.50
10/1.00
1/0.10
6/0.60
Reputation/image
0.10
8/0.80
7/0.70
10/1.00
1/0.10
6/0.60
Manufacturing capability
0.10
2/0.20
10/1.00
4/0.40
5/0.50
1/0.10
Technological skills
0.05
10/0.50
1/0.05
7/0.35
3/0.15
8/0.40
Dealer network/distribution
0.05
9/0.45
4/0.20
10/0.50
5/0.25
1/0.05
New product innovation
0.05
9/0.45
4/0.20
10/0.50
5/0.25
1/0.05
Financial resources
0.10
5/0.50
10/1.00
7/0.70
3/0.30
1/0.10
Relative cost position
0.35
5/1.75
10/3.50
3/1.05
1/0.35
4/1.40
Customer service capability
0.15
5/0.75
7/1.05
10/1.50
1/0.15
4/1.60
Sum of weights
1.00
Overall strength rating
6.20
8.20
7.00
2.10
2.90
Rating Scale: 1 = Very weak; 10 = Very strong

35. Why Do a Competitive Strength Assessment ?
Reveals firm’s competitive position
Pinpoints the company’s competitive strengths and weaknesses
Identifies competitive advantage, parity, or disadvantage
Identifies possible offensive attacks
Identifies possible defensive actions