The External Environment Chapter 2

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The External EnvironmentChapter 2
Mr Jeff Stambaugh jeff.stambaugh_at_ttu.edu http//ta
.ba.ttu.edu/jstambaugh
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Todays Objectives

• Understand why and how we do an external analysis
• Understand the components of the general
  environment and how they affect businesses
• Understand the components of the specific
  (industry) environment and how they affect
  businesses

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External Environment

• MotivatorAndy Grove
• External environment whats
• outside your firm that affects your
• performance
• General vs industry / competitive
• a common separation
• Changes in the environment can create threats and
  opportunities
• Threats and opportunities can be viewed as things
  you must do versus resources that tell you what
  you can do

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External Environment
General Environment
Economic
Technological
Specific Environment Industry-Competitors
Substitute Products
Current Rivalry
Organization
Global
Bargaining Power of Suppliers
Potential Entrants
Bargaining Power of Buyers
Political-Legal
Demographic
Sociocultural
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General Environment

• Hard to predict even harder to control
• Trends affect industries differently
• Demographic
• Socio-cultural link
• Political Legal Link
• Technological
• Economic
• Global

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What to Do Forecasting

• Spot these changes before theyre obvious
• Back to that threats and opportunities concept
• Paralysis from analysis
• Where to look

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Dilbert On Forecasts
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Porters Five Forces
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Threat of New Entrants

• Threat of new entrants greatest when
• Low economies of scale (or no cost disadvantages
  independent of scale)
• Low capital requirements
• Low switching costs
• Little Differentiation
• Easy access to distribution channels
• Government policy does not inhibit new entries

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Bargaining Power of Buyer

• Greater when
• Buyer is a major customer for supplier
• Low switching costs
• Undifferentiated products
• Able to backward integrate
• Buyer earns low profits
• Buyer doesnt rely on product for key attributes
  (e.g. quality)

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Bargaining Power of Suppliers

• Greater when
• Few large suppliers and buying firms industry
  not concentrated.
• No substitute products
• Supplier not reliant on buyers business
• Suppliers goods are essential to buyer
• High switching costs for buyers or differentiated
  product
• Suppliers could forward integrate into buyers
  business

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Substitute Products

• The Home-town NFL versus Direct TV
• This is where Andy Groves paranoia comes in
• The car vs Southwest Airlines
• Email fax vs FedExing documents overnight
• Downloading music off the web vs CDs
• Print newspapers vs the Web
• TV versus videogames?

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Rivalry Among Competitors

• Rivalry among existing firms increases when
• Little degree of differentiation
• Low switching costs
• Numerous / equally balanced competitors
• Slow industry growth
• High strategic stakes
• High fixed costs or high storage costs
• High exit barriers

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What hath the internet wrought?

• Made new entrants more likely
• Cut out many intermediaries (in supplier and
  buyer chains)
• Increased (in general) buyer power due to more
  information
• Made buyers more aware of substitute products
• Increased competitive rivalries in general

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Summary of 5 Forces

• Profit potential greatest within an industry
  when
• Low rivalry
• Low threat of new entrants
• Lack of substitute products
• Weak buyers
• Weak suppliers
• Dont forget complementors videogame consoles
  and videogames GPS navigators and auto
  manufacturers

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IO View of Competitive Advantage

• Pick a strong industry
• Pick a strong position
• Fortify / defend it (manipulate the 5 forces)
• How much does industry matter really?

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Who is My Competitor?

• Strategic Groups
• Breadth of product line
• Location
• Price/Quality
• Distribution channels
• Uses ID
• Barriers to moves
• Endangered groups
• Direction of strategies
• Implications of trends

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Competitor Intelligence

• Fair or Not?
• Talking to their customers / supplies
• Shopping at their stores (getting prices)
• Routinely surfing their web site
• Sifting their trash
• Hiring their superstars (or even their Red
  Dwarfs)
• Going on a fake job interview
• Making copies of their proprietary documents

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Competitor Analysis Airbus vs Boeing

• AirbusFounded in 1970 as European consortium
• Strategic Intent Gain more market share than
  Boeing (achieved in 2002)
• Both firms have high market dependence
• Competitive Strategy
• Build great products w/full line
• Gain market share through pricing (Boeing
  alleges!)
• Airbus Strengths / Weaknesses
• Political ties in Europe (S)
• Strong Products (S)
• Launch Aid / Govt Subsidy (S)
• Alliance politics (W) Link

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Summary

• Your business is not in this alone!!
• Changes in external environment can have big
  impact on your businessboth good and bad
• Its a matter of strategic choice how you deal
  with your competitors / customers / suppliers
• Innovator?
• Reactor?
• Defender?
• The most risky of all strategies is to ignore
  your competitors!

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Next Class

• Chap 3 Internal Environments
• CYa

Mans flight through life is sustained by the
power of his knowledge
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