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CHAPTER 2

STRATEGIC MANAGEMENT INPUTS

The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

Strategic Management
PowerPoint Presentation by Charlie Cook The University of West Alabama 2007 Thomson/South-Western. All rights reserved.

Competitiveness and Globalization: Seventh edition Concepts and Cases

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

FIGURE 2.1

The External Environment

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General Environment
Dimensions in the broader society that influence an industry and the firms within it:
Demographic Economic Political/legal Sociocultural Technological Global

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TABLE

2.1

The General Environment: Segments and Elements

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Industry Environment
The set of factors directly influencing a firm and its competitive actions and competitive responses
Threat of new entrants Power of suppliers Power of buyers Threat of product substitutes Intensity of rivalry among competitors

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Competitor Analysis
Gathering and interpreting information about all of the companies that the firm competes against. Understanding the firms competitor environment complements the insights provided by studying the general and industry environments.

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Analysis of the External Environments


General environment
Focused on the future

Industry environment
Focused on factors and conditions influencing a firms profitability within an industry

Competitor environment
Focused on predicting the dynamics of competitors actions, responses and intentions

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Opportunities and Threats


Opportunity
A condition in the general environment that, if exploited, helps a company achieve strategic competitiveness.

Threat
A condition in the general environment that may hinder a companys efforts to achieve strategic competitiveness.

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Industry Environment Analysis


Industry Defined
A group of firms producing products that are close substitutes Firms that influence one another Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns

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FIGURE

2.2

The Five Forces of Competition Model

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Threat of New Entrants: Barriers to Entry


Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation

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Barriers to Entry
Economies of Scale
Marginal improvements in efficiency that a firm experiences as it incrementally increases its size

Factors (advantages and disadvantages) related to large- and small-scale entry


Flexibility in pricing and market share Costs related to scale economies Competitor retaliation

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Barriers to Entry (contd)


Product differentiation
Unique products Customer loyalty Products at competitive prices

Switching Costs
One-time costs customers incur when they buy from a different supplier New equipment Retraining employees Psychic costs of ending a relationship

Capital Requirements
Physical facilities Inventories Marketing activities Availability of capital

Access to Distribution Channels


Stocking or shelf space Price breaks Cooperative advertising allowances
213

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Barriers to Entry (contd)


Cost Disadvantages Independent of Scale
Proprietary product technology Favorable access to raw materials Desirable locations

Expected retaliation
Responses by existing competitors may depend on a firms present stake in the industry (available business options)

Government policy
Licensing and permit requirements Deregulation of industries

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Bargaining Power of Suppliers


Supplier power increases when:
Suppliers are large and few in number. Suitable substitute products are not available. Individual buyers are not large customers of suppliers and there are many of them. Suppliers goods are critical to the buyers marketplace success. Suppliers products create high switching costs. Suppliers pose a threat to integrate forward into buyers industry.
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Bargaining Power of Buyers


Buyer power increases when:
Buyers are large and few in number. Buyers purchase a large portion of an industrys total output. Buyers purchases are a significant portion of a suppliers annual revenues. Buyers switching costs are low. Buyers can pose threat to integrate backward into the sellers industry. Buyer has full information.
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Threat of Substitute Products


The threat of substitute products increases when:
Buyers face few switching costs. The substitute products price is lower. Substitute products quality and performance are equal to or greater than the existing product.

Differentiated industry products that are valued by customers reduce this threat.

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Intensity of Rivalry Among Competitors


Industry rivalry increases when:
There are numerous or equally balanced competitors. Industry growth slows or declines. There are high fixed costs or high storage costs. There is a lack of differentiation opportunities or low switching costs. When the strategic stakes are high. When high exit barriers prevent competitors from leaving the industry.

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Interpreting Industry Analyses


Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors

Unattractive Industry
Low profit potential

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Interpreting Industry Analyses (contd)


High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors

Attractive Industry
High profit potential

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Strategic Groups
Strategic Group Defined
A set of firms emphasizing similar strategic dimensions and using similar strategies Internal competition between strategic group firms is greater than between firms outside that strategic group. There is more heterogeneity in the performance of firms within strategic groups. Similar market positions Similar products Similar strategic actions
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Strategic Groups
Strategic Dimensions
Extent of technological leadership Product quality Pricing Policies Distribution channels Customer service

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Competitor Analysis
Competitor Intelligence
The ethical gathering of needed information and data that provides insight into: A competitors direction (future objectives) A competitors capabilities and intentions (current strategy) A competitors beliefs about the industry (its assumptions) A competitors capabilities

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FIGURE

2.2

Competitor Analysis Components

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Complementors
Complementors
The network of companies that sell complementary products or services or are compatible with the focal firms own product or service. If a complementors product or service adds value to the sale of the focal firms product or service, it is likely to create value for the focal firm. However, if a complementors product or service is in a market into which the focal firm intends to expand, the complementor can represent a formidable competitor.
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Ethical Considerations
Practices considered both legal and ethical:
Obtaining publicly available information Attending trade fairs and shows to obtain competitors brochures, view their exhibits, and listen to discussions about their products

Practices considered both unethical and illegal:


Blackmail Trespassing Eavesdropping Stealing drawings, samples, or documents
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What Are the Key Factors for Competitive Success?

KSFs are competitive elements that most affect every industry members ability to prosper in the marketplace

Specific strategy elements Product attributes Resources Competencies Competitive capabilities

KSFs spell difference between


Profit and loss Competitive success or failure

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Identifying Industry Key Success Factors

Answers to three questions pinpoint KSFs


On what basis do customers choose between competing brands of sellers? What must a seller do to be competitively successful -what resources and competitive capabilities does it need? What does it take for sellers to achieve a sustainable competitive advantage?

KSFs consist of the 3 - 5 really major determinants of financial and competitive success in an industry

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KSFs for Beer Industry


Utilization of brewing capacity -- to keep manufacturing costs low Strong network of wholesale distributors -- to gain access to retail outlets Clever advertising -- to induce beer drinkers to buy a particular brand

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KSFs for Apparel Manufacturing Industry

Fashion design -- to create buyer appeal

Low-cost manufacturing efficiency -- to keep selling prices competitive

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Example: KSFs for Tin and Aluminum Can Industry

Locating plants close to end-use customers -- to keep costs of shipping empty cans low Ability to market plant output within economical shipping distances

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Strategic Management Principle

A sound strategy incorporates efforts to be competent on all industry key success factors and to excel on at least one factor!
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Chapter 1

Strategic Management and Strategic Competitiveness


Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2000 South-Western College Publishing
Ch1-1

Strategic Competitiveness
Achieved when a firm successfully formulates and implements a value-creating strategy

Sustained Competitive Advantage


Occurs when a firm develops a strategy that competitors are not simultaneously implementing Provides benefits which current and potential competitors are unable to duplicate

Above-Average Returns
Returns in excess of what an investor expects to earn from other investments with similar risk
Ch1-2

The Strategic Management Process


Involves the full set of:

Commitments

Decisions

Actions

which are required for firms to achieve:

Strategic Competitiveness Sustained Competitive Advantage Above-Average Returns


Ch1-3

Chapter One: Key Themes


Challenge of Strategic Management Changing Competitive Landscape Two Models of Superior Profitability Industrial Organization Model Resource-Based Model Key Stakeholder Groups
Ch1-4

Challenge of Strategic Management


Only 16 of the 100 largest U.S. companies at the start of the 20th century are still identifiable today! In a recent year, 44,367 businesses filed for bankruptcy and many more U.S. businesses failed

Competitive success is transient...unless care is taken to preserve competitive position


Ch1-5

21st Century Competitive Landscape


Fundamental nature of competition is changing
Rapid technological changes Rapid technology diffusions Dramatic changes in information and communication technologies Increasing importance of knowledge

The pace of change is relentless.... and increasing Traditional industry boundaries are blurring, such as...
Computers Telecommunications

Ch1-6

21st Century Competitive Landscape


The global economy is changing
People, goods, services and ideas move freely across geographic boundaries New opportunities emerge in multiple global markets Markets and industries become more internationalized

Traditional sources of competitive advantage no longer guarantee success New keys to success include:
Flexibility Innovation Speed Integration
Ch1-7

Alternative Models of Superior Returns


Industrial Organization Model
The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior Returns

Resource-Based Model
Resources Capability Competitive Advantage An Attractive Industry Strategy Implementation Superior Returns
Ch1-8

I/O Model of Superior Returns


The Industrial Organization model suggests that above-average returns for any firm are largely determined by characteristics outside the firm. This model largely focuses on industry structure or attractiveness of the external environment rather than internal characteristics of the firm.
Ch1-9

I/O Model of Superior Returns


External Environment
General Environment Industry Environment Competitive Environment

Action required: Study the external environment, especially the industry environment.

Ch1-10

I/O Model of Superior Returns


External Environment An Attractive GeneralIndustry Environment
Industry Environment An industry whose Competitive structural characteristics Environment suggest above-average returns are possible

Action required: Locate an industry with high potential for aboveaverage returns.

Ch1-11

I/O Model of Superior Returns


External Environment Attractive GeneralIndustry Environment Industry Environment Strategy An industry whose Formulation Competitive structural characteristics Action required: Identify strategy called for by the industry to earn above-average returns.

Environment Selection of a strategy suggest above-average with abovereturns are linked possible average returns in a particular industry

Ch1-12

I/O Model of Superior Returns


Action required: External Develop or acquire assets Environment Attractive and skills needed to GeneralIndustry Environment implement the strategy. Strategy Industry Environment An industry whose Formulation Competitive structural characteristics Environment Assets and Skills Selection of a strategy suggest above-average
with abovereturns are linked possible Assets and average returns in a skills required to implement particular industry a chosen strategy

Ch1-13

I/O Model of Superior Returns


Action required: External Use the firms strengths Environment Attractive (its assets or skills) to GeneralIndustry Environment implement the strategy. Strategy Industry Environment An industry whose Formulation Competitive structural characteristics Environment Assets and Skills Selection of a strategy suggest above-average
with abovereturns are linked possible Assets and skills average returns in a Strategy required to implement Implementation particular industry a chosen strategy Selection of strategic actions linked with effective implementation of the chosen strategy

Ch1-14

I/O Model of Superior Returns


Action required: External Maintain selected strategy Environment Attractive in order to outperform GeneralIndustry Environment industry rivals. Strategy Industry Environment An industry whose Formulation Competitive structural characteristics Environment Assets and Skills Selection of a strategy suggest above-average
with abovereturns are linked possible Assets and skills average returns in a Strategy required to implement Implementation particular industry Superior Returns a chosen strategy Selection of strategic actions linked with Earning of aboveeffective implementation average returns of the chosen strategy

Ch1-15

Resource-Based Model of Superior Returns


The Resource-Based model suggests that above-average returns for any firm are largely determined by characteristics inside the firm. This model focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.
Ch1-16

Resource-Based Model of Superior Returns


Resources
Inputs to a firms production process.

Action required: Identify firm resources. Study strengths and weaknesses relative to rivals.

Ch1-17

Resource-Based Model of Superior Returns


Resources Capability Action required: Determine what firm capabilities allow it to do better than rivals.

Inputs to a firms production process. Capacity for an integrated set of resources to perform a task or activity.

Ch1-18

Resource-Based Model of Superior Returns


Resources Capability Action required: Determine how firms resources and capabilities may create competitive advantage.

Inputs to a firms Competitive production process. Capacity for an integrated set of resources to Advantage integratively perform a Ability of a firm to task or activity. outperform its rivals

Ch1-19

Resource-Based Model of Superior Returns


Resources Capability Action required: Locate an attractive industry.

Inputs to a firms Competitive production process. Capacity for an integrated set of resources to Advantage An Attractive integratively perform a Ability of aIndustry firm to task or activity. outperform its rivals Location of an industry with opportunities that can be exploited by the firms resources and capabilities

Ch1-20

Resource-Based Model of Superior Returns


Resources Capability Action required: Select strategy that best exploits resources and capabilities relative to opportunities in environs.

Inputs to a firms Competitive production process. Capacity for an integrated set of resources to Advantage An Attractive integratively perform a Ability of aIndustry firm to task or activity. outperform its rivalsStrategy Location of an industry Formulation with opportunities that and can be exploited by the Implementation firms resources and Strategic actions taken to capabilities earn above-average returns

Ch1-21

Resource-Based Model of Superior Returns


Resources Capability Action required: Maintain selected strategy in order to outperform industry rivals.

Inputs to a firms Competitive production process. Capacity for an integrated set of resources to Advantage An Attractive integratively perform a Ability of aIndustry firm to task or activity. outperform its rivalsStrategy Location of an industry Formulation with opportunities that and Superior Returns can be exploited by the Implementation firms resources and Strategic actions taken to Earning of abovecapabilities earn above-average average returns returns

Ch1-22

Resources and capabilities lead to Competitive Advantage when they are:


Valuable Rare
allow the firm to exploit opportunities or neutralize threats in its external environment possessed by few, if any, current and potential competitors

Costly to Imitate when other firms either cannot obtain them


or must obtain them at a much higher cost

Nonsubstitutable the firm must be organized appropriately to


obtain the full benefits of the resources in order to realize a competitive advantage

Ch1-23

When these four criteria are met, Resources and Capabilities become:

Core Competencies

Core Competencies are resources and capabilities that can serve as a source of Competitive Advantage. The Resource-Based model argues that Core Competencies are the basis for a firms Competitive Advantage, Strategic Competitiveness and Ability to Earn Above-average Returns.
Ch1-24

Stakeholders:

Groups who are affected by a firms performance and who have claims on its wealth

The firm must maintain performance at an adequate level in order to maintain the participation of key stakeholders

Capital Market
Stock market/Investors Debt suppliers/Banks

Firm
Product Market
Primary Customers Suppliers

Organizational
Employees Managers Non-Managers
Ch1-25