EXTERNAL ENVIRONMENT

Mohammad Arief

External and Internal Analyses

Genera

l

Envi

ronm

ent

General

Environment

Genera

l

Enviro

nm

ent

Sociocultural

Glo

bal

Technological

Politi

cal/Le

gal

Dem

ogra

phic E

conom

ic

IndustryEnvironment

CompetitorEnvironment

By studying the external environment, firms identify what they might choose to do

Opportunities and threats

By studying the internal environment, firms identify what they can do

Unique resources, capabilities, and core competencies

(sustainable competitive advantage)

External and Internal Analyses

Demographic Segment

Population size Age structure Ethnic Mix

Geographical Distribution Income distribution Immigration

Sociocultural Segment

Women in the workforce Workforce diversity Environmental Concerns Work life quality attitudes

Concerns about the environment Shifts in 2 career preferences Shifts in preferences regarding product

/ service characteristics

Political/Legal Segment

Competition Laws Labour Laws Taxation laws

Education philosophies & policy Government econ. involvement /

ownership Philosophies De-/ Regulation philosophy

General Environment Components

Economic Segment

Inflation & interest rates Personal savings rate Business savings rates

Trade deficits or surpluses Budget deficits or surpluses

Gross domestic product

Technological Segment

Product innovations Process Innovations Applications of knowledge

Focus of private & government-supported R&D expenditures

New communication technologies

Global Segment

Important political events Critical global markets

Newly industrialized countries Different cultural and institutional

attributes

General Environment Components

The Industry Environment

The set of factors that directly influences a firm, it’s competitive actions & competitive responses:

1. The threat of new entrants

2. The power of suppliers

3. The power of buyers

4. The threat of product substitutes

5. The intensity of rivalry among competitors

Competitor Analysis

Predicting the dynamics of competitor actions, responses and intentions.

Macro-environmental Forces

The external environmental analysis process should be conducted on a continuous basis.

This process includes four activities:

Scanning Identifying early signals of environmental changes and trends

Monitoring Detect meaning by ongoing observations of environmental

changes and trends

Forecasting Developing projections of anticipated outcomes based on monitored changes and trends

Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management

External Environmental Analysis

External Environmental Analysis

The external environmental analysis process should be conducted on a continuous basis.

This process includes four activities:

Scanning Identifying early signals of environmental changes and trends

Monitoring Detect meaning by ongoing observations of environmental changes and trend

Forecasting Developing projections of anticipated outcomes based on monitored changes and trends

Assessing Determining the timing & importance of environmental changes and trends for firms' strategies & their management

Threat of New

Entrants

Threat of Substitute Products

Threat of New

Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Porter’s 5 Forces Model of Competition

Rivalry Among Competing Firms in Industry

Product Differentiation* Capital Requirements*

Switching Costs*Access to Distribution Channels*

Cost Disadvantages Independent of Scale* Government Policy*

Expected Retaliation*

Economies of Scale*Barriers to Entry

Barriers to Entry

Threat of New Entrants

* Supplier industry is dominated by a few firms.

* Buyer is not an important customer to supplier.

* Suppliers’ product is an important input to buyers’ product.

* Suppliers’ products are differentiated.

Suppliers are likely to be powerful if:

* Suppliers’ products have high switching costs.

* Supplier poses credible threat of forward integration.

Suppliers exert power in the industry by:

* Threatening to raise prices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers’ products have few substitutes.*

Bargaining Power of Suppliers

Bargaining Power of Buyers

Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large relative to seller’s sales

Purchase accounts for a significant fraction of supplier’s sales

Products are undifferentiated

Buyers face few switching costs

Buyers’ industry earns low profits

Buyer presents a credible threat of backward integration

Product unimportant to quality

Buyer has full information

Buyers compete with supplying industry

by:

Bargaining down prices

Forcing higher quality

Playing firms off each other

Products with similar function limit the prices firms can charge

* Products with improving price / performance tradeoffs relative to present industry products

Keys to evaluating substitute products:

For Example:

Electronic security systems in place of security guards

Fax machines or e-mailed attachments in place of overnight mail delivery

Threat of Substitute Products

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways

Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or

service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves entire industry worse off Advertising battles may increase total industry demand,

but may be costly to smaller competitors

Rivalry Among Existing Competitors

Cutthroat competition is more likely to occur when

Numerous or equally balanced competitors Slow growth industry High fixed costs High storage costs Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes High exit barriers

Rivalry Among Existing Competitors

High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.

Specialized assets Fixed cost of exit (e.g., labour agreements) Strategic interrelationships Emotional barriers Government and social restrictions

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 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.

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?

Competitor Analysis

Current strategy

Current Strategy:Future objectives • How are we currently

competing?

• Does this strategy support changes in the competitive structure?

Competitor Analysis

Assumptions

Current strategy

Future objectivesAssumptions:• 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?

Competitor Analysis

Capabilities

Assumptions

Current strategy

Future objectivesCapabilities:• What are our strengths and

weaknesses?

• How do we rate compared to our competitors?

Competitor Analysis

Capabilities

Assumptions

Current strategy

Future objectives 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?