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Evaluating a Firms External EnvironmentEvaluating a Firms External Environment

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Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &Competitive AdvantageCompetitive Advantage -- Barney & HesterlyBarney & Hesterly

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Why External Analysis?

External analysis allows firms to:

discover threats and opportunities

see if above normal profits are likely in an industry

better understand the nature of competition in

an industry

make more informed strategic choices

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Focal

Firm

Buyers

Suppliers

Entry

Rivalry

Substitutes

Complementors

Demographic

Trends

TechnologicalChange

Cultural

Trends

Economic

Climate

Legal/Political

Conditions

Specific

International

Events

Industry

General External Environment

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Focal

Firm

Demographic

Trends

TechnologicalChange

Cultural

Trends

Economic

Climate

Legal/Political

Conditions

Specific

International

Events


PDAs &

Cell Phones

Hispanic Population Growth

Changing Image of SUVs

RisingInterest

Rates

Changing Policy toward Oil

Exploration on Public Lands

European Union Ban on

Hormone-Treated U.S. Beef

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Industry Analysis

The Structure Conduct Performance Model

originally developed to spot anti-competitive conditions

for anti-trust purposes

came to be used to assess the possibilities for

above normal profits for firms within an industry

Porters Five Forces Model was developed from

this economic tradition

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77

Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &Copyright 2006 Pearson Prentice Hall. All rights reserved. Strategic Management &Competitive AdvantageCompetitive Advantage -- Barney & HesterlyBarney & Hesterly 77


Types of Competition

Oligopoly

Small number of firms

Homogeneous products Costly entry and exit

Monopoly

One firm

Costly entry

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Porters Five Forces Model

Threat of Substitutes

substitutes fill the same need but in a different way

- Coke and Pepsi are rivals, milk is asubstitute for both

substitutes create a price ceiling because consumers

switch to the substitute if prices rise

substitutes will likely come from outside the

industrybe sure to look

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Threat of Suppliers

powerful suppliers can squeeze (lower profits)

the focal firm

Industry conditions that facilitate supplier power:

small number of firms in suppliers industry

highly differentiated product

lack of close substitutes for suppliers products

supplier could integrate forward

focal firm is an insignificant customer of supplier

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Threat of Buyers

powerful buyers can squeeze (lower profits)

the focal firm by demanding lower prices and/or

higher levels of quality and serviceIndustry conditions that facilitate buyer power:

small number of buyers for focal firms output

lack of a differentiated product

the product is significant to the buyer

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Threat of Buyers

Industry conditions that facilitate buyer power:

buyers operate in a competitive marketthey arenot earning above normal profits

buyers can vertically integrate backwards

many small buyers can be united around an issue

to act as a block

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Focal

Firm

Buyers

Suppliers

Entry

Rivalry

Substitutes

Industry

Threat

If all threats are high expect normal profits

If all threats are low expect above normal profits

Most industries are somewhere between the extremes

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Complementors As Another Force

Complementors Increase the Value of

the Focal Firms Product

customers perceive more value in the focal firms

product when it is combined with the complementorsproduct

complementors may be found outside the focal firms

industry

Example: Goodyear Tires on Corvette

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Responding to Environmental Threats

Neutralizing Threats

most firms cannot unilaterally change the

threats in an industry

by altering relationships in an industry, firms

may reduce threats and/or create opportunities,

thereby increasing profits

Examples: Regional Healthcare System, Building

Contractor, and the Bakery

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Exploiting Industry Structure Opportunities

Generic Industry Structures

at any point in time, the structure of most

industries fits into one of four generic categories each industry structure presents opportunities

that may be exploited

firms can choose to exploit an industry structure,

continue business as usual, or exit the industry

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Fragmented Industry Structure

Industry Characteristics Opportunity

large number of small firms

no dominant firms

no dominant technology

commodity type products

low barriers to entry

few, if any, economies of scale

Consolidation

buy competitors

build market power

exploit economies

of scale

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Emerging Industry Structure

Industry Characteristics Opportunity

new industry based on breakthrough technology or product

no product standard has

been reached

no dominant firm has emerged

new customers come from non-

consumption not from competitors

first mover advantages

technology

locking-up assets

creating switching

costs

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Mature Industry Structure

Industry Characteristics Opportunities

slowing growth in demand

technology standard exists

increasing international

competition

industry-wide profits declining

industry exit is beginning

refine current products

improve service

process innovation

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2020



International Opportunities

Approaches to International Markets

international markets present opportunities that

vary depending on market characteristics

firms can improve the probability of above

normal profits by exploiting the opportunities

presented by international market characteristics

external analysis should include an assessment

of international market characteristics

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Multinational Opportunity

Market Characteristics Structural Response

no global product standard

tastes and preferences vary

transportation of finishedproduct is cost prohibitive

governments impose

local content rules

replicate headquarters

functions in multiple

markets

give local managersautonomy to respond

modify product to local

tastes & preferences

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Global Opportunity


global product standard

governments allow importation

significant economies

of scale exist

product development costs

are significant

minimal replication ofheadquarters functions

centralized decision

making at headquarters

centralized manufacturing

little responsiveness

to local tastes &

preferences

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Transnational Opportunity


product standardization differsfrom region to region

government policy varies

from region to region

local tastes and preferences

vary from region to region

headquarters functionsare replicated in some

but not all regions

high degree of coordi-

nation between regionsand headquarters

this is a combination of a

multinational and global

approach

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Focal

Firm

Buyers

Suppliers

Entry

Rivalry

Substitutes

Complementors

Demographic

Trends

TechnologicalChange

Cultural

Trends

Economic

Climate

Legal/Political

Conditions

Specific

International

Events

Industry


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