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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

KNOWLEDGE OBJECTIVES Studying this chapter should provide you with the strategic management knowledge needed to:

1. Explain the importance of analyzing and understanding the firms external environment. 2. Define and describe the general environment and the industry environment. 3. Discuss the four activities of the external environmental analysis process. 4. Name and describe the general environments six segments. 5. Identify the five competitive forces and explain how they determine an industrys profit potential.
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KNOWLEDGE OBJECTIVES (contd) Studying this chapter should provide you with the strategic management knowledge needed to:

6. Define strategic groups and describe their influence on the firm.


7. Describe what firms need to know about their competitors and different methods (including ethical standards) used to collect intelligence about them.

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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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Center Stage for the Twenty-first Century Power Plays in the Indian Ocean Americans, in particular, concentrate on the Atlantic and Pacific Oceans

The Indian Ocean is dominated by two immense bays, the Arabian Sea and the Bay of Bengal

Trade in frankincense, spices, precious stones, and textiles brought together the peoples flung along its long shoreline during the Middle Ages.
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Even today, in the jet and information age, 90 percent of global commerce and about 65 percent of all oil travel by sea.
Moreover, 70 percent of the total traffic of petroleum products passes through the Indian Ocean, on its way from the Middle East to the Pacific. Global energy needs are expected to rise by 45 percent between 2006 and 2030, and almost half of the growth in demand will come from India and China. China's demand for crude oil doubled between 1995 and 2005 and will double again in the coming 15 years or so; by 2020, China is expected to import 7.3 million barrels of crude per day -half of Saudi Arabia's planned output. More than 85 percent of the oil and oil products bound for China cross the Indian Ocean and pass through the Strait of Malacca. Indias coal imports from far-off Mozambique are set to increase substantially, adding to the coal that India already imports from other Indian Ocean countries, such as South Africa, Indonesia, and Australia. In the future, India-bound ships will also be carrying increasingly large quantities of liquefied natural gas (LNG) across the seas from southern Africa, even as it continues importing LNG from Qatar, Malaysia, and Indonesia.
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State Capitalism Comes of Age The End of the Free Market?


Across the United States, Europe, and much of the rest of the developed world, the recent wave of state interventionism is meant to the state's heavy hand in the economy is signaling a strategic rejection of free-market doctrine.

PRINCIPAL ACTORS
State capitalism has four primary actors: national oil corporations, state-owned enterprises, privately owned national champions, and sovereign wealth funds (SWFs).
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When thinking of "big oil," most Americans think first of multinational corporations such as BP, Chevron, ExxonMobil, Shell, or Total. But the 13 largest oil companies in the world, measured by their reserves, are owned and operated by governments -- companies such as Saudi Arabia's Saudi Aramco; the National Iranian Oil Company; Petrleos de Venezuela, S.A.; Russia's Gazprom and Rosneft; the China National Petroleum Corporation; Malaysia's Petronas; and Brazil's Petrobras.

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State-owned companies such as these control more than 75 percent of global oil reserves and production. Instead, they want to use the market to bolster their own domestic political positions. State-owned enterprises help them do this, in part by consolidating whole industrial sectors.
Angola's Endiama (diamonds), Azerbaijan's AzerEnerji (electricity generation), Kazakhstan's Kazatomprom (uranium), and Morocco's Office Chrifien des Phosphates -- all of these state-owned firms are by far the largest domestic players in their respective sectors. Some state-owned enterprises have grown particularly enormous, most notably Russia's fixed-line-telephone and armsexport monopolies; China's aluminum monopoly, power-transmission duopoly, and major telecommunications companies and airlines; and India's national railway, which is among the world's largest nonmilitary employers, with over 1.4 million employees.
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A more recent trend has complicated this phenomenon. In some developing countries, large companies that remain in private hands rely on government patronage in the form of credit, contracts, and subsidies.

These privately owned but government-favored national champions get breaks from the government, which sees them as a means of competing with purely commercial foreign rivals, and they are thus able to carve out a dominant role in the domestic economy and in export markets. In turn, these companies use their clout with their governments to gobble up smaller domestic rivals, reinforcing the companies' strength as pillars of state capitalism.

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The largest SWFs are those in the emirate of Abu Dhabi, Saudi Arabia, and China, with Russia playing catch-up. The only democracy represented among the ten largest SWFs is Norway.

The task of financing these companies has fallen in part to SWFs, and this has greatly expanded those funds' size and significance. They act as repositories for excess foreign currency earned from the export of commodities or manufactured goods. But SWFs are more than just bank accounts. They are state-owned investment funds with mixed portfolios of foreign currencies, government bonds, real estate, precious metals, and direct stakes in -- and sometimes majority ownership of -- a host of domestic and foreign firms. Like all investment funds, SWFs look to maximize returns. But for state capitalists, these returns can be political as well as economic.
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In short, despite the global financial crisis, national oil companies still control three-quarters of the world's primary strategic resources, state-owned enterprises and privately owned national champions still enjoy substantial competitive advantages over their private-sector rivals, and SWFs are still flush with cash. These companies and institutions are truly too big to fail. Other protectionist initiatives have begun to weigh on global commerce. China has reinstated tax relief for certain exporters. Russia has limited foreign investment in 42 "strategic sectors" and imposed new duties on imported cars, pork, and poultry. Indonesia has imposed import tariffs and licensing restrictions on over 500 types of foreign products. India has added a 20 percent levy on soybean oil imports. Argentina and Brazil are publicly considering new tariffs on imported textiles and wine. South Korea refuses to drop its trade barriers against U.S. auto imports. France has announced the creation of a state fund to protect domestic companies from foreign takeover.

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A growing number of Americans have come to believe that globalization moves their jobs to other countries, depresses their wages, and exposes U.S. consumers to shoddy foreign products. If U.S. would do well to relearn the lessons of the 1930 SmootHawley Tariff Act, which raised tariffs on 20,000 imported goods to record levels, prompted retaliation in kind, and thus deepened and lengthened the Great Depression.
The global financial crisis has created an illusion of international unity based on the mistaken fear that everyone is sinking in the same boat. A year ago, the talk in policy circles was of "decoupling," the process by which emerging economies develop a domestic base for growth broad enough to free them from dependence on consumer demand in the United States and Europe. Predictions of decoupling have proved premature. Economic problems originating largely in the United States have forced a hard landing in dozens of developing countries by crushing demand for their exports.

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Bangladesh Business Community


1972-75 Mojib Socialistic Approach War 1976-81 Jia Mixed Stability

1981-90 1991-95

Ershad Khaleda
Hasina

Mixed Open market


FDI

Corruption Corruption
And World Market Corruption And World Market

STRATEGIC 1996-2001 MANAGEMENT INPUTS


2001-2006

Khaleda

FDI and Corruption

Corruption

Strategic Management
2007-2008
PowerPoint Presentation by Charlie Cook The University of West Alabama 2007 Thomson/South-Western. All rights reserved.

CaG

Competitiveness and Globalization: ICU Emergency Seventh edition Concepts and Cases
Global Financial Crisis & PPP

2009-till

Hasina

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

Merger, Acquisition & Confusion

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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TABLE

2.2

Components of the External Environmental Analysis

Scanning

Identifying early signals of environmental changes and trends

Monitoring

Detecting meaning through ongoing observations of environmental changes and trends


Developing projections of anticipated outcomes based on monitored changes and trends Determining the timing and importance of environmental changes and trends for firms strategies and their management
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Forecasting

Assessing

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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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Segments of the General Environment


The Demographic Segment
Population size
Age structure Geographic distribution

Ethnic mix
Income distribution

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Segments of the 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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Segments of the General Environment (contd)


The Political/Legal Segment
Antitrust laws Taxation laws

Deregulation philosophies
Labor training laws Educational philosophies and policies

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Segments of the General Environment (contd)


The 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

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Segments of the 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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Segments of the General Environment (contd)


The Global Segment
Important political events Critical global markets Newly industrialized countries Different cultural and institutional attributes

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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
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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.

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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

Attractive Industry
High profit potential

Moderate rivalry among competitors

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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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Competitor Analysis (contd)


Future Objectives How do our goals compare with our competitors goals? Where will the emphasis be placed in the future? What is the attitude toward risk?

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Competitor Analysis (contd)


Future Objectives Current Strategy

How are we currently competing? Does this strategy support changes in the competitive structure?

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Competitor Analysis (contd)


Future Objectives Current Strategy Assumptions Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves?

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Competitor Analysis (contd)


Future Objectives Current Strategy Assumptions Capabilities

What are our strengths and weaknesses? How do we rate compared to our competitors?
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Competitor Analysis (contd)


Future Objectives Current Strategy Assumptions Capabilities Response What will our competitors do in the future? Where do we hold an advantage over our competitors? How will this change our relationship with our competitors?
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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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