Environmental Analysis 1

Environmental Analysis
1
Topics

Purpose of General Environmental Analysis

Gathering Information

General Environment

Competitive Environment
◦ Key Success Factors
◦ Competitive Changes During Industry Evolution
◦ Strategic Groups
◦ National Competitive Advantage

Internal Environment
2
Purpose of General Environmental
Analysis
Organizations are affected by conditions
in the environment
 Managers need to be aware of these
conditions in order to

◦ Take advantage of opportunities that can lead
to higher profits
◦ Reduce the impact of threats that can harm
the organization’s future
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Gathering Information for
External Environmental Analysis

Managers need information in order to know
and develop an understanding about what is
happening in the external environment

Three approaches to information gathering:
1. Scanning: general surveillance of environmental
changes; looking for early signals of changes
2. Monitoring: close attention to specific
developments that could affect the organization
3. Competitive Intelligence: following actions of
competitors
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Sources of Environmental Data

Internal sources may also be a good source of data on customer needs,
attitudes, and behavior. The organization's own records are the best
source of data on current objectives, performance, and available
resources.

The sheer volume of available information on the economy, our population,
and business activities is the major strength of most government data
sources.

The articles and research reports that are available in periodicals and
books provide a gamut of information about many organizations,
industries, and nations.

Commercial sources are almost always relevant to a specific issue because
they deal with the actual behaviors of customers in the marketplace.

The best approach to secondary data collection is one that blends data and
information from a variety of sources.

If needed secondary data is not available, out of date, inaccurate or
unreliable, or irrelevant to the specific problem at hand, the manager may
have little choice but to collect primary data through marketing research.
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Overcoming Problems with Data
Collection
3-24

One of the most common problems is an incomplete or
inaccurate assessment of the situation for which data
is being gathered to address.

Another common difficulty is the expense of collecting
environmental data.

A third issue is the time it takes to collect
environmental data.

A final challenge is finding a way to organize the vast
amount of data and information that are collected
during the environmental analysis.
Three Areas for Analysis
1.
2.
3.
General Environment
Competitive Environment
Internal Environment
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General & Competitive Environments
General Environment
Demographics
Competitive
Global
Political/Legal
Environment
Threat on new entrants
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products
Sociocultural
Competitive rivalry
Technological
Macoreconomic
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GENERAL Environment
DEMOGRAPHICS

Characteristics of a country’s population
◦
◦
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◦
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Size of population and growth rate
Age distribution of population
Education levels
Income distribution
Ethnic diversity
Geographic distribution
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General Environment
POLITICAL/LEGAL

Political and legal conditions affecting
business
◦
◦
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◦
Government policies toward business
Investment incentives
Business regulation: labor, environment
Education priorities
Budget conditions and plans
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General Environment
TECHNOLOGICAL

Technological developments relevant to a
business
◦
◦
◦
◦
Telecommunications
Internet
On-line training
Product and process innovations
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General Environment
MACROECONOMIC

Impact of the economy on business
◦
◦
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◦
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Size and change in gross domestic product
Per capita income levels
Inflation rate
Interest rates
Foreign trade deficit or surplus
Unemployment
Rates of saving and investment
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General Environment
SOCIOCULTURAL

Influence of values, beliefs, and lifestyles
of a country on business
◦
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Family relationships
Attitudes about work
Living arrangements
Styles of entertainment
Attitudes toward health
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General Environment
GLOBAL

International developments that can
impact a business
◦
◦
◦
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Rise of China as economic power
Rising global trade and WTO
Intellectual property protection
Important political events: Iraq war
Search for low cost suppliers
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COMPETITIVE Environment

Managers must understand the conditions
of competition within their industry
◦ Porter Five-Forces Model of Competition
(determining the attractiveness of an industry)
◦ Key Success Factors
◦ Competitive Changes During industry
Evolution
◦ Strategic Groups
◦ National Competitive Advantage
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Porter’s Five Forces Model of
Competition
Substitute Products
(of firms in
other industries)
Suppliers
of Key
Inputs
Rivalry
Among
Competing
Sellers
Potential
New
Entrants
Buyers
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Threat of New Entrants
Fundamental question: how easy is it
for another company to enter the
industry?
 Factors making easy entry to industry

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Low economies of scale
Low product differentiation
Low capital requirements
No switching costs for buyer
Easy access to distribution channels
Little government regulation
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Supplier Power
Fundamental question: how badly does
a supplier need your business?
 Factors giving power to supplier:

◦ Supplier industry dominated by few firms
◦ Buyer is not important to customer
◦ Supplier’s product is important input to
buyer’s product
◦ Supplier’s products have high switching
costs
◦ Supplier can “integrate forward” and become
competitor of buyer
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Threat of Substitutes
Fundamental question: what other
products or services could perform the
same function as your products or
services?
 Factors indicating high threat of
substitutes:

◦ Few switching costs for buyer
◦ Price of substitute lower or quality higher
than for your products
◦ Firms offering substitutes have high
profitability
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Buyer Power


Fundamental questions: How badly does a
buyer need your products or services?
Factors contributing to high buyer power:
◦
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Few buyers compared to the number of sellers
Buyers purchases high relative to seller’s sales
Products are undifferentiated
Buyer has low switching costs
Buyer has low profits
Buyer can “integrate backward” and supply the
product to itself
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Competitive Rivalry
Fundamental question: how intense is
competition in the industry?
 Factors leading to high competitive
rivalry:

◦
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Numerous or equally balanced competitors
High fixed costs
Slow industry growth
Lack of differentiation or switching costs
High strategic stakes
High exit barriers
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Four Basic Types of Competition
1. Brand Competitors: market products that are
similar in features and benefits to the same
customers at similar prices
2. Product Competitors: compete in the same
product class, but with products that are
different in features, benefits, and price
3. Generic Competitors: market very different
products that solve the same problem or satisfy
the same basic need
4. Total Budget Competitors: compete for the
limited financial resources of the same customers
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The 6-W Model
1. Who are our current and potential customers?
2. What do our customers do with our products?
3. Where do our customers purchase our
products?
4. When do our customers purchase our
products?
5. Why (and how) do our customers select our
products?
6. Why do potential customers not purchase our
products?
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Key Success Factors
In many industries, there are certain
actions or practices that a business
must follow in order to compete in the
industry.
 May need effort to distinguish company
from competitors

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Examples of Key Success Factors
in Selected Industries
 Pharmaceuticals
◦ research and personal selling
 Beer
◦ advertising and distribution
 Restaurant
◦ quality food and service
 Retailer
◦ location and priced-for-quality
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Changes in Competition During
Industry’s Evolution
Over time as an industry evolves, the
nature and basis of competition
changes
 Five Stages

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Embryonic—introduction of product
Growth
Shakeout
Mature
Declining
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Stages of Industry Life Cycle
Embryonic
Shakeout
Mature
Declining
Growth
Time
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Requirements in Each Stage of
Industry’s Evolution

Embryonic: Know-how, educating
customers, opening distribution channels

Growth: Know-how for continued innovation,
financing, build demand

Shakeout: Dominant market position, low
cost producer, high capacity

Maturity: low cost production, brand loyalty

Declining: lowest cost production, reduce
capacity
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Strategic Implications of the
Five Competitive Forces
• Competitive environment is unattractive
from the standpoint of earning good
profits when:
– Rivalry is strong
– Entry barriers are low and entry is likely
– Competition from substitutes is strong
– Suppliers and customers have considerable
bargaining power
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Strategic Implications of the
Five Competitive Forces
• Competitive environment is ideal
from a profit-making standpoint when:
– Rivalry is moderate
– Entry barriers are high and no firm is
likely to enter
– Good substitutes do not exist
– Suppliers and customers are in a weak
bargaining position
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Strategic Groups



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Companies do not compete against all
companies in an industry
Companies compete against several other
companies that follow similar strategies
A strategic group consists of those rivals
with similar competitive approaches in an
industry
Examples ways of competing:
◦
◦
◦
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Price
Innovation
Research
Quality
-- Range of products
-- Customers served
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Procedure for Constructing a
Strategic Group Map
STEP 1: Identify competitive characteristics that
differentiate firms in an industry from one
another
STEP 2: Plot firms on a two-variable map using
pairs of these differentiating
characteristics
STEP 3: Assign firms that fall in about the same
strategy space to same strategic group
STEP 4: Draw circles around each group, making
circles proportional to size of group’s
respective share of total industry sales
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Types of Video Game
Suppliers/Distribution Channels
Example: Strategic Group Map of
the Video Game Industry
Arcades
Arcade
operators
Publishers
of games on
CD-ROMs
Home PCs
Sony, Sega,
Nintendo, several
others
Video game
consoles
MSN Gaming Zone,
Pogo.com,
America Online,
HEAT, Engage,
Oceanline, TEN
Online/Internet
Low
(Coin-operated
equipment)
Medium
(Console players cost
$100-$300)
High
(Use PC)
Overall Cost to Players of Video Games
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Nation-State and Competitive
Advantage
A country may provide a competitive
advantage for a company
 Need to identify national factors in order
to determine

◦ Where most significant competitors will come
from
◦ Where to locate production activities

Porter’s Diamond of Determinants of
National Competitive Advantage
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Determinants of National Competitive
Advantage
Strategy,
Structure &
Rivalry
Factor
Endowments
National
Competitive
Advantage
Demand
Conditions
Related and
Supporting
Industries
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Strategy, Structures and Rivalry

Different management ideologies lead to
different emphases within a company

Japan and Germany both have engineers
in top management and those country’s
companies concentrate on process and
product improvement

Intense domestic rivalry leads to product
improvements and cost reduction in order
to compete for domestic customers
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Demand Conditions

Large growing markets provide foundation
for global competition

More significant, sophisticated and
demanding consumers force companies to
innovate and improve their products

Advances in products, services and
standards improve companies’ knowledge
and capabilities for selling in other world
markets
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Related and Supporting
Industries

Provide inputs and capabilities that help a
company to improve its own products and
capabilities

Helps reduce manufacturing costs through
cost-effective, timely methods

Ongoing exchange of knowledge through
research and development and joint
projects improves both suppliers and
companies
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Factor Endowments

Availability of traditional factors of production—
land, labor, capital, entrepreneurship—
provide cost advantages to companies located
in countries possessing those factors

More significant, countries and their companies
can create new factors such as a
knowledgeable workforce and infrastructure
that is rare and difficult to imitate

Factor endowments less important than the
speed and efficiency of deploying those
resources.
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Conclusions About
Determinants of National
Competitive Advantage

Firms succeeding in global markets first
succeeded in intense competition in
home countries

Competitive advantage for global firms
comes from continuous improvement,
innovation, and change.
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INTERNAL ANALYSIS

How can we assess the resource capabilities?
◦ Resource Based View

Each firm has three basic kinds of Resources
 Tangible assets
◦
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Ford’s Cash Reserves
3M’s Patents
Georgia Pacific Land holdings
Coca Cola’s formula
 Intangible assets
◦ Nike - Brand Name
◦ Dell – Reputation
◦ GE- Welch’s Leadership
 Organizational capabilities
◦ Dell’s Customer Service
◦ Sony’s Product Development
◦ 3M’s Innovation
How resources become valuable

Competitively Superior
◦ Walmart’s Logistics – Allowed better pricing

Resource Scarcity
◦ OPEC’s Oil Reserves – Finite oil reserves

Appropriability
◦ Who profits from a resource?
 “Mickey Mouse does not have an agent”

Inimitability
◦ Priceline’s pricing for air tickets
◦ Wendy’s Drive Through
 Path dependency - Steinway with Pianos
 Causal ambiguity – South West Airlines
 Economic Deterrence

Durability
◦ How long will the competitive advantage last?
 Patentable products – longer durability
Value Chain Analysis

Disaggregates a business into sets of activities
◦ Primary Activities – Inbound logistics --- Operations ---Outbound logistics ---- marketing and Sales and service
◦ Support activities – General Administration, HRM, R&D,
Systems Development

How to do a VCA
◦
◦
◦
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Identify key activities
Allocate costs to each activity
Identify the activities that differentiate the firm
Examine the Value Chain
 Different activities may be important – industry and strategy
 Importance of activities can vary based on a company
position in a larger scheme of activities
Making meaningful comparisons

Comparison with past performance
◦ Trend analysis – Where are you relative to the
past.
◦ Stages of Industry Evolution
 Emergence, Growth, Maturity and Decline
 Strengths or competencies needed at each stage are
different
◦ Benchmarking with the competitors
 Key competitors
 Best practices irrespective of industry