The External Environment

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The External Environment
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.
The I/O model largely focuses on industry
structure or attractiveness of the external
environment rather than internal characteristics
of the firm.
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I/O Model of Above-Average Returns
Industrial Organization Model

• 1. Study the external environment, especially the
  industry environment
• economies of scale
• barriers to market entry
• diversification
• product differentiation
• degree of concentration of firms in the industry

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I/O Model of Above-Average Returns
2. Locate an attractive industry with a high
potential for above-average returns
Industrial Organization Model
Attractive industry one whose structural
characteristics suggest above-average returns
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I/O Model of Above-Average Returns
3. Identify the strategy called for by the
attractive industry to earn above-average returns
Industrial Organization Model
Strategy formulation selection of a strategy
linked with above-average returns in a particular
industry
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I/O Model of Above-Average Returns
4. Develop or acquire assets and skills needed to
implement the strategy
Industrial Organization Model
Assets and skills those assets and skills
required to implement a chosen strategy
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I/O Model of Above-Average Returns
5. Use the firms strengths (its developed or
acquired assets and skills) to implement the
strategy
Industrial Organization Model
Strategy implementation select strategic actions
linked with effective implementation of the
chosen strategy
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I/O Model of Above-Average Returns
Industrial Organization Model
Superior returns earning of above-average returns
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The External Environment Analysis
A continuous process which includes
Scanning Identifying early signals of
environmental changes and
trends Monitoring Detecting meaning through
ongoing observations of
environmental changes and trends Forecasting
Developing projections of anticipated outcomes
based on monitored changes
and trends Assessing Determining the timing
and importance of
environmental changes and trends for firms
strategies and their management
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The External Environment
General Environment
1. Strategy dictated by the external
environments of the firm (what opportunities
exist in these environments?) 2. Firm
develops internal
skills required by external environment (what can
the firm do about the opportunities?)
Industry Environment Threat of new
entrants Power of suppliers Power of
buyers Product substitutes Intensity of rivalry
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General Environment

• Sociocultural Segment

• Women in the workplace
• Workforce diversity
• Attitudes about quality of worklife
• Concerns about environment
• Shifts in work and career preferences
• Shifts in product and service preferences

• Political/Legal Segment

• Antitrust laws
• Taxation laws
• Deregulation philosophies
• Labor training laws
• Educational philosophies and policies

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General Environment

• Economic segment

• Inflation rates
• Interest rates
• Trade deficits or surpluses
• Budget deficits or surpluses
• Personal savings rate
• Business savings rates
• Gross domestic product

• Technological Segment

• Product innovations
• Applications of knowledge
• Focus of private and government-supported RD
  expenditures
• New communication technologies

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General Environment

• Global Segment

• Important political events
• Critical global markets
• Newly industrialize countries
• Different cultural and institutional attributes

• Demographic Segment

• Population size
• Age structure
• Geographic distribution
• Ethnic mix
• Income distribution

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Industry Environment

• Five Competitive Forces
• A set of factors that directly influences a
  company and its competitive actions and responses
• Interaction among these factors determine an
  industrys profit potential

• Threat of new entrants
• Power of suppliers
• Power of buyers
• Product substitutes
• Intensity of rivalry

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Five Forces Model of Competition

• Identify current and potential competitors and
  determine which firms serve them
• Conduct competitive analysis
• Recognize that suppliers and buyers can become
  competitors
• Recognize that producers of potential substitutes
  may become competitors

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Five Forces Model of Competition
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Threat of New Entrants

• Reduced threat if barriers to entry are present.
• Barriers to Entry exist if there are/is
• Economies of scale
• Product differentiation
• High capital requirements
• High experience or learning curve
• High switching costs
• Firms control access to distribution channels
• Firms Control access to raw materials
• Government policy
• Expected retaliation (full-scale counterattack)
  

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Bargaining Power of Suppliers
Supplier Power is high when

• Products in the selling industry are unique
• (high switching costs, no substitutes)
• The selling industry is concentrated
• Competition between suppliers is high
• Threat of forward integration is high
• Ties of selling industry to customer industry
  are weak

Bargaining Power of Buyers
Buyer Power is high when

• The buying industry is concentrated
• Size or volume of purchases are large
• Products are standardized
• There are low switching costs
• Threat of backward integration is high
• Buyers industry is price sensitive

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Threat of Substitute Products
Substitute products are a threat when

• There are low switching costs
• Substitutes have high performance or
  value/price
• The substitute product is lower priced

Intensity of Rivalry among Competitors
Rivalry is high when

• There is low industry growth
• There is equality of size and power Product
• The product lacks differentiation
• There are high exit barriers
• There are high fixed costs
• Diverse set of competitors (no rules)

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Five Forces Model of Competition

• What are the primary problems with the Five
  Forces model?

• Who are your competitors?

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Five Forces Model of Competition
Who are your competitors?
Hotel Industry (abbreviated list)
Marriott Ramada Budgetel Best Western Comfort
Inn Holiday Inn Travelodge Red Lion Inn Motel
6 Hyatt Sheraton La Quinta Residence Inn Hampton
Inn Days Inn Doubletree Hotels
W Hotels Westin Hilton American Inn Econo
Lodge Guest Inn Super 8 Howard Johnson Embassy
Suites Biltmore Ritz Carlton Amerisuites
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Five Forces Model of Competition

• What are the primary problems with the Five
  Forces model?

• Who are your competitors?

• Concept of strategic groups

• Defining the industry correctly

• Regional versus domestic versus global firms