STRATEGY AND EXTERNAL ENVIRONMENT

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Two Most Important Premises

1. Strategy-Context 2. Strategy-Time

Internal Environment

Present

Strategy
External Environment

Strategy
Future

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External Environment
General Environment

Industry

External Environment

Competitor
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General Environment
General Environment

Industry

Strategic Group

Competitors

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The External Environment

Figure 2.1 25

General Environment
Dimensions in the broader society that influence and industry and the firms within it
Economic Sociocultural

Global
Technological Political/legal Demographic
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Industry Environment
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 Environment
All of the companies that the firm competes against.

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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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General Environment (contd)

The Economic Segment Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product

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General Environment (contd)

The Socio-cultural Segment

Reservations Women in the workplace Workforce diversity Attitudes about quality of work-life Concerns about environment Shifts in work and career preferences Shifts in product and service preferences

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General Environment (contd)

The Technological Segment

Product innovations
Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies

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General Environment (contd)

The Political/Legal Segment

Antitrust laws
Taxation laws Deregulation philosophies

Labor training laws

Educational philosophies and policies

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General Environment
The Demographic Segment

Population size
Age structure Geographic distribution

Ethnic mix
Income distribution

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Industry Environment
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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Threat of New Entrant- Entry Barriers

Airlines Industry Retail Industry Power Generation

Substitutes

Tea and Coffee Aluminum and Copper Plastic and Glass Mobile and Landline Radio and TV Petrol to Non fossil fuel

Bargaining Power of Suppliers

PC Manufacturing Metals

Bargaining power of Buyers

Retail Bollywood Producer and Multiplex owners

Five Forces and Industry

The Five Forces of Competition Model

Figure 2.2 222

Threat of New Entrants: Barriers to Entry

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

Supplier power increases when:
Suppliers are large and few in number -concentration E.g. PC vs. Microsoft Suitable substitute products are not available. Plastic and steel, Pilots union, Doctors Suppliers do not depend heavily on industry, E.g. Glass and Automobile, Rubber and Tyre, chip manufactures and PC, Coke and Steel, Gas and Power Suppliers goods are critical to buyers marketplace success E.g. Pharmas patented drugs to hospitals Suppliers products create high switching costs. E.g. Bloomberg , Automobile ancillaries in Jpur, Suppliers pose a threat to integrate forward into buyers industry Mfg vs. Retail
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Bargaining Power of Buyers

Buyer power increase when:
Buyers are large and few in

number (concentration)- E.g.PC vs Chip

Buyers purchase a large portion of an industrys total output E.g. Multiplexes Industry products are undifferentiated Buyers can switch to another product without incurring high switching costs Buyers pose threat to integrate backward into the sellers industry E.g. Retailers

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Bargaining Power of Buyers

Buyer are price sensitive when:
Products purchased by them are
significant part of cost structure E.g. Vermont Milk, Aviation fuel Buyers earn lower profits (Airlines)

Quality of buyers products are not affected

E.g. Camera for production house are very important

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Threat of Substitute Products

The threat of substitute products increases when:
Price-Performance (Computer vs. Typewriter,
Video rentals vs. YouTube, Flix vs. Rentals)

Buyers face few switching costs concentration (Patented to generic drug) Players should be alert to different industry as threats are likely to come from unexpected spaces (Teachers-Search Engines, Airlines - Videoconferencing)

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 Industry rivalry increases when: There are numerous or equally balanced competitors E.g. Soft Drink Industry growth slows declines E.g. Airline in India There are high fixed costs and marginal costs low. There is a lack of differentiation opportunities or low switching costs When the strategic stakes are high E.g Committment When high exit barriers prevent competitors from leaving the industry E.g. Aluminium Perishable Products

Intensity of Rivalry Among Competitors

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Interpreting Industry Analyses

Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products

Unattractive Industry
Low profit potential

Intense rivalry among competitors

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Interpreting Industry Analyses

High entry barriers Suppliers and buyers have weak positions Few threats from substitute products

Attractive Industry
High profit potential

Moderate rivalry among competitors

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