The External Environment: Opportunities and Threats

Hierarchy of External Influences

Social Economic Technical Global Political/Legal
Firm

Five Forces Competitor Intelligence Industry Structure Strategic Groups Political/Legal

Stakeholders
Shareholders Government Financial Community Host Community Ecological Environment Society in General
Firm

Rivals Customers Suppliers Employees Managers Board Members

Industry Vital Statistics

How is the industry defined? Size Growth Key Players: Rivals, customers, suppliers, government agencies Structure Performance

Life Cycle Stage

Growth Rate

Time

Concentrated Structure

Fragmented Structure

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

(+) or (-) influence... Prices

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Costs

Threat of New Entrants * Economies of Scale -- Memory * Product Differentiation * Capital Requirements * Switching Costs -- Frequent flyer * Access to Distribution Channels * Cost Disadvantages Independent of Scale * Government Policy * Expected Retaliation

Barriers to Entry

Bargaining Power of Suppliers

Suppliers are likely to be powerful if: * Supplier industry is dominated by a few firms -- Microprocessors * Suppliers products have few substitutes -- Intel, PowerPC * Buyer is not an important customer to supplier * Suppliers product is an important input to buyers product * Suppliers products are differentiated * Suppliers products have high switching costs * Supplier poses credible threat of forward integration -- Nike

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

Bargaining Power of Buyers

Buyer groups are likely to be powerful if: * Buyers purchases are large relative to sellers sales -- Wal-Mart * Purchase accounts for a significant fraction of suppliers sales * Products are undifferentiated * Buyers face few switching costs -Gasoline * * Buyer presents a credible threat of backward integration * Product unimportant to quality * Buyer has full information Buyers compete with the supplying industry by:
* Bargaining down prices * Forcing higher quality * Playing firms off of each other

Threat of Substitute Products Keys to evaluate substitute products:

Products with similar function limit the prices firms can charge

* Products with improving price/performance tradeoffs relative to present industry products For Example: On-line trading in place of stock brokers Plastic vs. glass vs. aluminum containers for soft drinks

Intensity of Rivalry Among Existing Competitors Plays out in the following ways: * * * * * Jockeying for strategic position Using price competition -- AT&T vs. MCI Staging advertising battles -- Bud vs. Miller Increasing consumer warranties or service Making new product introductions

Intensity of Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: * Numerous or equally balanced competitors * Slow growth industry -- Heavy trucks * High fixed costs * High storage costs
* * * * *

Lack of differentiation -- Long distance phone svc. Capacity added in large increments Diverse competitors High strategic stakes High exit barriers

Environmental Scanning Grid

IMPACT Serious Threat General Economics Political-Legal Sociocultural Technological Global Competitive Potential Entry Environment Suppliers Customers Substitutes Rivalry
TOTAL IMPACT

Mild Threat

Benign

Potential Oppty.

Strong Oppty.

Environment Demographics

Strategic Group Map Department Stores

High Quality Wholesal e Clubs Low Quality Branded Chains Upscale

Closeout Low Price High Price

Strategic Group Map: Beer

(Pre-light / Pre-microbrew)
Dark/Full Guinness

Amber Regular Old Swill Light Low Price High Price Heineken Miller Bud

Strategic Group Map: Beer

Dark/Full
Killians Brown Lowenbrau Dark Guinness Blackened Voodoo Anchor Porter Sam Adams Bass Ale Pilsner Urquell Amstel Cardinal

Amber Regular Light

Killians Red Amber Bock Red Wolf Lowenbrau Old Swill Milwaukees Best Light Bud Miller Miller Lite Bud Ice

Low Price

High Price