1. 1 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis Chapter 3

2. 2 General Environment General Environment General Environment Economic Political/Legal Technological Global Demographic Sociocultural The External Environment Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Competitor Environment

3. 3 Industry Environment A set of factors that directly influences a company and its competitive actions and responses A set of factors that directly influences a company and its competitive actions and responses Interaction among these factors determine an industry’s profit potential Interaction among these factors determine an industry’s profit potential Threat of new entrants Threat of new entrants Power of suppliers Power of suppliers Power of buyers Power of buyers Product substitutes Product substitutes Intensity of rivalry Intensity of rivalry

4. 4 Analyzing Industry Environment Opportunities and threats are competitive challenges arising for changes in industry conditions. Analytic tools such as the five forces model help managers formulate appropriate strategic responses.

5. 5 Five Forces Model of Competition Identify current and potential competitors and determine which firms serve them Identify current and potential competitors and determine which firms serve them Conduct competitive analysis Conduct competitive analysis Recognize that suppliers and buyers can become competitors Recognize that suppliers and buyers can become competitors Recognize that producers of potential substitutes may become competitors Recognize that producers of potential substitutes may become competitors

6. 6 Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Rivalry Among Competing Firms Five Forces Model of Competition Five Forces of Competition

7. 7 Potential Competitors New entrants into an industry threaten incumbent companies. Entry barriers reduce the threat of new and additional competition.

8. 8 Threat of New Entrants Barriers to entry Barriers to entry Economies of scale Economies of scale Product differentiation Product differentiation Capital requirements Capital requirements Switching costs Switching costs Access to distribution channels Access to distribution channels Cost disadvantages independent of scale Cost disadvantages independent of scale Government policy Government policy Expected retaliation Expected retaliation

9. 9 Rivalry Among Established Companies The intensity of competitive rivalry in an industry arises from:  Industry’s competitive structure.  Demand (growth or decline) conditions in industry.  Height of industry exit barriers.

10. 10 Rivalry Among Established Companies 4 Industry Competitive Structure Consolidated One firm or one dominant firm. (monopoly) Fragmented Many firms. No dominant firm Few firms, Shared dominance (Oligopoly) The Continuum of Industry Structures

11. 11 Rivalry Among Established Companies (Continued) 4 Demand Conditions vs.

12. 12 Rivalry Among Established Companies (Continued) 4 Height of Exit Barriers in the Industry

13. 13 High Exit Barriers Common exit barriers include: Common exit barriers include: specialized assets (assets with values linked to a particular business or location) specialized assets (assets with values linked to a particular business or location) fixed costs of exit such as labor agreements 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) 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.) emotional barriers (career concerns, loyalty to employees, etc.) government and social restrictions government and social restrictions

14. 14 Bargaining Power of Suppliers A supplier group is powerful when: A supplier group is powerful when: it is dominated by a few large companies it is dominated by a few large companies satisfactory substitute products are not available to industry firms satisfactory substitute products are not available to industry firms industry firms are not a significant customer for the supplier group industry firms are not a significant customer for the supplier group suppliers’ goods are critical to buyers’ marketplace success suppliers’ goods are critical to buyers’ marketplace success effectiveness of suppliers’ products has created high switching costs effectiveness of suppliers’ products has created high switching costs suppliers are a credible threat to integrate forward into the buyers’ industry suppliers are a credible threat to integrate forward into the buyers’ industry

15. 15 Bargaining Power of Buyers Buyers (customers) are powerful when: Buyers (customers) are powerful when: they purchase a large portion of an industry’s total output 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 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 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 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

16. 16 Threat of Substitute Products Product substitutes are strong threat when: Product substitutes are strong threat when: customers face few switching costs customers face few switching costs substitute product’s price is lower substitute product’s price is lower substitute product’s quality and performance capabilities are equal to or greater than those of the competing product substitute product’s quality and performance capabilities are equal to or greater than those of the competing product

17. 17 Substitute Products The competitive threat of substitute products increases as they come closer to serving similar customer needs. CloseFar

18. 18 A Sixth Force: Complementors Complementors:  Companies whose products are sold in tandem with another company’s products.  Increased supply of a complementary product collaterally increases demand for the primary product. Example:  Faster CPU chips fuel sales of personal computers.

19. 19 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

20. 20 Strategic Groups Within Industries The concept of strategic groups  Within an industry, a competitor grouping using similar strategies that differ from other industry groups. Implications of strategic groups  The closest industry competitors are those in the group.  The various industry groups are differentially and competitively advantaged and positioned.  Mobility barriers inhibit the movement of competitors from one strategic group to another.

21. 21 Strategic Groups in the Pharmaceutical Industry High Low Prices Charged R&D Spending

22. 22 Strategic Groups in the Pharmaceutical Industry High Low Prices Charged R&D Spending Generic Group Marion Labs Carter Wallace INC Pharmaceut’l

23. 23 Strategic Groups in the Pharmaceutical Industry Merck Pfizer Eli Lilly High Low Prices Charged R&D Spending Proprietary Group Generic Group Marion Labs Carter Wallace INC Pharmaceut’l

24. 24 Limitations of the Five Forces and Strategic Group Models Both models are static and ignore innovation. Their focus is on industry and group structures rather than individual companies.  Innovation creates change in industry structures, altering the competitive environment.  Industry structure cannot fully explain the performance differences between industry competitors.

25. 25 Competitor Environment 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 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 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 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 What the the competitor may be able to do, as shown by its capabilities

26. 26 Competitor Analysis Future Objectives: Future objectives How do our goals compare with our competitors’ goals? Where will the emphasis be placed in the future? What is the attitude toward risk?

27. 27 Competitor Analysis Current strategy Current Strategy: How are we currently competing? Does this strategy support changes in the competitive structure? Future objectives

28. 28 Competitor Analysis Assumptions Assumptions: Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves? Current strategy Future objectives

29. 29 Competitor Analysis Capabilities Capabilities: What are our strengths and weaknesses? How do we rate compared to our competitors? Assumptions Current strategy Future objectives

30. 30 Competitor Analysis Response 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? Capabilities Assumptions Current strategy Future objectives

31. 31 The Role of the General Environment Potential competitors Potential competitors Rivalry Substitutes Substitutes Supplier power Supplier power Buyer power Buyer power Economic Environment

32. 32 Economic segment Economic segment General Environment Inflation rates Inflation rates Interest rates Interest rates Trade deficits or surpluses Trade deficits or surpluses Budget deficits or surpluses Budget deficits or surpluses Personal savings rate Personal savings rate Business savings rates Business savings rates Gross domestic product Gross domestic product

33. 33 The Role of the General Environment Potential competitors Potential competitors Rivalry Substitutes Substitutes Supplier power Supplier power Technological Environment Buyer power Buyer power Economic Environment

34. 34 General Environment Technological Segment Technological Segment Product innovations Product innovations Applications of knowledge Applications of knowledge Focus of private and government-supported R&D expenditures Focus of private and government-supported R&D expenditures New communication technologies New communication technologies

35. 35 The Role of the General Environment Potential competitors Potential competitors Rivalry Substitutes Substitutes Supplier power Supplier power Technological Environment Social Environment Buyer power Buyer power Economic Environment

36. 36 General Environment Sociocultural segment Sociocultural segment Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences

37. 37 The Role of the General Environment Potential competitors Potential competitors Rivalry Substitutes Substitutes Supplier power Supplier power Technological Environment Demographic Environment Social Environment Buyer power Buyer power Economic Environment

38. 38 General Environment Demographic Segment Population size Age structure Geographic distribution Ethnic mix Income distribution

39. 39 The Role of the General Environment Potential competitors Potential competitors Rivalry Substitutes Substitutes Supplier power Supplier power Political and Legal Environment Technological Environment Demographic Environment Social Environment Buyer power Buyer power Economic Environment

40. 40 General Environment Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies

41. 41 The Role of the General Environment Potential competitors Potential competitors Rivalry Substitutes Substitutes Supplier power Supplier power Political and Legal Environment Technological Environment Demographic Environment Social Environment Buyer power Buyer power Economic Environment Global Environment

42. 42 General Environment Global Segment Important political events Critical global markets Newly industrialize countries Different cultural and institutional attributes

43. 43 Globalization and Industry Structure 4 Globalization of Markets

44. 44 Globalization and Industry Structure Globalization  Globally dispersed production lowers costs and increases quality.  Global markets are replacing national markets. Trend implications  No isolated national markets  More competitors, more intense competition  More rapid innovation and shorter product life cycles

45. 45 Stages of the Industry Life Cycle Time Demand Embryonic Competitive Changes During Industry Evolution

46. 46 Stages of the Industry Life Cycle Competitive Changes During Industry Evolution (Continued) Time Embryonic Growth Demand

47. 47 Stages of the Industry Life Cycle Competitive Changes During Industry Evolution (Continued) Time Embryonic Growth Shakeout Demand

48. 48 Growth in Demand and Capacity Competitive Changes During Industry Evolution (Continued) Units Time t1t1 t2t2 Capacity Demand Excess Capacity

49. 49 Stages of the Industry Life Cycle Time Embryonic Growth ShakeoutMaturity Competitive Changes During Industry Evolution (Continued) Demand

50. 50 Stages of the Industry Life Cycle Competitive Changes During Industry Evolution (Continued)