SM-CHP-2-UG-2020.ppt chapters tutes and process

Process

1. 2-1
Strategic
Management

2. Chapter two
Analyzing the External
Environment of the Firm
StrategicAnalysis

3. 2-3
INTERNAL (FIRM)
MARKET (INDUSTRY, MICRO,
COMPETITIVE, TASK)
EXTERNAL GENERAL (MACRO)
Organizational Environments

4. 2-4

5. 2-5
ExternalEnvironment–everything
outsideanorganization’sboundaries
thatmightaffectit.
GeneralEnvironment
TaskEnvironment
InternalEnvironment– the
conditionsandforceswithinan
organization.

6. 2-6
Taskenvironmentconsistsof
specificorganizationsorgroups
thatinfluenceanorganization.
Competitors
Customers
Suppliers
Strategicpartners
Regulators

7. 2-7
Competitors
Otherorganizationsthatcompete
withourorganizationfor
resources.
Mostobviousresourceis
customerdollars.
Organizationscompeteforbank
loans,property,qualitylabor,
technologicalbreakthroughs,
patents,scarcerawmaterials.
The Task Environment. . .

8. 2-8
Whoeverpaysmoneytoacquirean
organization’sproductsorservices.
Customersofmajororganizationsmay
include:schools,hospitals,government
agencies,wholesalers,retailersand
manufacturers.
Customershavemorediscriminatingtastes
andnewproducts’andservices’
expectations.
Companieswhoexpandinternationallyface
criticaldifferences[nobeefservedinIndia,
alcoholservedinGermanyandFranceasa
partofthemenu].
Customers

9. 2-9
Suppliers
Organizationsthatprovideresources
forotherorganizations.
McDonald’sdependsonHeinzforits
ketchuppacketsandCoca-Colaforits
softdrinks.

10. 2-10
Twoormorecompaniesthatworktogetherin
jointventuresorsimilararrangement.
McDonald’swithWal-MartandDisney.
Strategicpartnershipsallowcompaniesto
shareexpertisetheylack,spreadriskand
opennewmarketopportunities.
Usuallyoccurswithinternationalfirms.[Ford
sharesadistributionandservicecenterin
SouthAmericawithVolkswagenandbuilds
minivansintheUSwithNissan]
StrategicPartners(Allies)

11. 2-11
Aunitthathasthepotentialtocontrol,
legislateorotherwiseinfluencethe
organization'spoliciesandpractices.
Regulatoryagencies–createdbythe
governmenttoprotectthepublicfrom
certainbusinesspracticesortoprotect
organizationsfromoneanother.
Interestgroups–organizedbytheir
memberstoattempttoinfluence
organizations.Noofficialpower,butuse
themediatocallattentiontotheir
positions.
Regulators

12. 2-12
McDonald’s Task Environment

13. 2-13
MichaelEPorterproposesthat
managersshouldviewthe
organizationalenvironmentsin
termsoffivecompetitiveforces:
Thethreatofnewentrants
Competitiverivalry
Thethreatofsubstituteproducts
Thepowerofbuyers
Thepowerofsuppliers
Competitive Forces

14. 2-14
Porter’s Five Forces
Model of Industry Competition
Threat of
new entrants
Bargaining
power of buyers
Bargaining power
of suppliers
Threat of
Substitute products
and services

15. 2-15
Theextenttowhichnewcompetitors
caneasilyenteramarketormarket
segment.
Entranceiseasierformarket
requiringasmallamountofcapitalto
open.[drycleaner,pizza,hamburger
orsandwichshop,etc.]
Thethreatofnewentrants

16. 2-16
Moredifficultwhenittakesa
tremendousinvestmentinplant,
equipmentanddistributionsystems
[automobilemarket,etc.]
Theinternethasreducedthecosts
andotherbarriersofentryintomany
marketsegmentssothethreathas
increasedformanyfirms.
Thethreatofnewentrants

17. 2-17 The Threat of New Entrants
Profits of established firms in the
industry may be eroded by new
competitors
High entry barriers lead to low
threat of new entries
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy

18. 2-18 Economies of scale
Economies of scale means spreading the costs of
production over the number of units produced.
The cost per unit declines when the number of
products increases.
This prevent entry by forcing the new entrant to
come in at a large scale –risk of strong reaction
from existing firms or-come in at a small scale
and accept a cost disadvantages.
Both are undesirable options.

19. 2-19 Product Differentiation
When existing competitors have strong
brand identification and customer
loyalty,
Differentiation creates a barrier to entry
by forcing entrants to spend heavily to
overcome existing customer loyalties

20. 2-20 Capital Requirements
The need to invest large financial resources
to compete creates a barrier to entry
Especially if the capital is required for risky
or unrecoverable up front advertising or
research and development (R&D)
The need to invest huge financial resources
in manufacturing facilities in order to
produce large commercial airplanes creates
a significant barrier to entry to any
competitor for Airbus.

21. 2-21 Switching Costs
A barrier to entry is created by the
existence of one-time cost that the
buyer faces when switching from one
supplier’s product or service to another
Once a software program such as Excel
or Word becomes established in an
office, office managers are very
reluctant to switch to a new program
because of the high training costs.

22. 2-22Access to distribution channels
The new entrant’s need to secure
distribution for its product can create a
barrier to entry.
Smaller new firms often have difficulty
obtaining supermarket shelf space for
their goods because large retailers
charge for space on their shelves and
give priority to the established firms
who can pay for the advertising needed
to generate high customer demand.

23. 2-23
Cost disadvantages independent of
scale
Some existing competitors may have
advantages that are independent of size
or economies of scale.
These derive from:
1. Proprietary product(as an idea or object that is
owned entirely by the owner. Proprietary products, ideas and objects are the property of the
owner and cannot be recreated without the consent of the owner. It may be protected by
patent, trademark, copyrights, IPR)
2. Favorable access to raw materials
3. Government subsidies

24. 2-24 Government policy
Governments can limit entry into an
industry through licensing requirements
by restricting access to raw materials,
such as oil drilling sites in protected
areas.

25. 2-25
In an environment where, few or none
of these entry barriers are present, the
threat of new entry is high.
Ex: If a new firm can launch its business
with a low capital investment and operate
efficiently despite its small scale of
operation, it is likely to be a threat.

26. 2-26
Theextenttowhichbuyersofthe
productsorservicesinanindustry
havetheabilitytoinfluencethe
suppliers.
Thepowerofbuyers

27. 2-27
The power of buyers
Relativelyfewpotentialbuyers
foraircraft.Therefore,buyers
haveconsiderableinfluence
overthepricetheyarewilling
topay,thedeliverydateofthe
order,etc.
Buyershavevirtuallynopower
withproductsthathavevery
manywillingbuyers.

28. 2-28The Bargaining Power of Buyers
Buyers threaten an industry
Force down prices
Bargain for higher quality or more
services
Play competitors against each
other

29. 2-29The Bargaining Power of Buyers
A buyer group is powerful when
It is concentrated or purchases
large volumes relative to seller sales. If a large
percentage of supplier’s sales are purchased by a
single buyer, the importance of the buyer’s business
to the supplier increases.
The products it purchases from theindustry
are standard or undifferentiated. They can
always find alternative suppliers. Alternative suppliers
are plentiful because the product is standard or
undifferentiated. Ex: Drivers of vehicles can easily
find Oil filling stations in the same quality

30. 2-30A buyer group is powerful when…
The buyer faces few switching
costs: Changing suppliers cost very
little. Switching costs lock the buyer to
particular sellers. Conversely, the
buyer’s power is enhanced if the seller
faces high switching costs. Eg: office
supplies are easy to find.

31. 2-31A buyer group is powerful when…
It earns low profits: Low profits
create incentive to lower purchasing
costs. On the other hand, highly
profitable buyers are generally less
price sensitive. A buyer earns low
profits and thus very sensitive to costs
and service differences. Eg: grocery
stores have very small margins.

32. 2-32A buyer group is powerful when…
The buyers pose a credible threat
of backward integration: If buyers
are either partially integrated or pose a
credible threat of backward integration,
they are typically able to secure
bargaining concessions. They can
produce the product itself. Ex: a
newspaper chain could make its own
paper.

33. 2-33A buyer group is powerful when…
The industry’s product is
unimportant to the quality of the
buyer’s products or services: When
the quality of the buyer’s products is
not affected by the industry’s product,
the buyer is more price sensitive.
Because they can easily substituted
without affecting the final product
adversely . Ex: electric wire bought for
use in lamps.

34. 2-34A buyer group is powerful when…
The purchased product represents
a high percentage of a buyer’s
costs, thus providing an incentive
to shop around for a lower price.

35. 2-35 Backward Integration
Abusinessstrategyemployedtoexpandprofitsand
gaingreatercontroloverproductionofaproduct
wherebyacompanywillpurchaseorbuildabusiness
thatwillincreaseitsownsupplycapabilityorlessen
itscostofproduction.
Examples:
A clothing manufacturer may purchase one of its suppliers of
fabrics to lessen the cost of raw materials and have more control
over the delivery schedules of the finished product.
A bakery business bought a wheat farm in order to reduce the
risk associated with the dependency on flour.

36. 2-36
Theextenttowhichsuppliershave
theabilitytoinfluencepotential
buyers.
Thepowerofthesupplierdepends
ontheproductbeingoffered.The
morerestrictedtheserviceor
product,themorepowertothe
supplier.[electricityproviders,
telephone/internetaccess]
Thepowerofsuppliers

37. 2-37
Powerful suppliers can squeeze the
profitability of firms in an industry so far
that they can’t recover the costs of raw
material inputs.
The factors that make suppliers
powerful tend to mirror those that make
buyers powerful.

38. 2-38
The power of suppliers
Small wholesaler of vegetables has little
power, since if people do not like the
product, they can easily find an
alternative supplier.

39. 2-39The Bargaining Power of Suppliers
Suppliers can exert power by
threatening to raise prices or
reduce the quality of purchased
goods and services

40. 2-40The Bargaining Power of Suppliers
A supplier group will be powerful
when
The supplier group is dominated
by a few companies, but it sells to many. Ex:
petroleum industry
The supplier group is not obliged to contend with
substitute products for sale to the industry. The
power of even large powerful suppliers can be
checked if they compete with substitute. Substitutes
are not readily available. Ex: electricity

41. 2-41
A supplier group will be powerful
when…
A purchasing industry buys only a small
portion of the supplier group’s goods and
services and is thus the industry is not an
important customer of the supplier group.
When suppliers sell to several industries and
a particular industry does not represent a
significant fraction of its sales, suppliers are
more prone to exert power. Ex: sales of
lawn mower tires are less important to the
tire industry than are sales of auto tires.

42. 2-42
A supplier group will be powerful
when…
The supplier’s product is animportant input to
the buyer’s business. When such inputs are
important to the success of the buyer’s
manufacturing process or product quality, the
bargaining power of suppliers is high.
The supplier group’s products are differentiated
or it has built up switching costs for the buyer.
Differentiation or switching costs facing the
buyers cut off their options to play one supplier
against another. Ex: word processing software

43. 2-43
A supplier group will be powerful
when…
The supplier group poses a credible
threat of forward integration. This
provides a check against the industry’s
ability to improve the terms by which it
purchases. Suppliers are able to
integrate forward and compete directly
with their present customers. Eg: a
microprocessor product such as Intel
can make PCs.

44. 2-44
When considering supplier power, we
focus on companies that supply raw
materials, equipment, machinery, and
associated services.
But the supply of labor is also an
important input to businesses, and
labour’s power varies overtime and
across occupations and industries.

45. 2-45 Forward Integration
Abusinessstrategythatinvolvesaformofvertical
integrationwherebyactivitiesareexpandedto
includecontrolofthedirectdistributionofits
productswhichmeansacquisitionoforexpansion
intoadistributionchannel.
Examples:
A farmer sells his/her crops at the local market rather than to a
distribution center.
Wholesaler sells products directly to consumer rather than to
small outlets “Retailers”

46. 2-46
Asubstituteproductisaproductthat
appearstobedifferentbutcansatisfythe
sameneedasanotherproduct.Ex:
textingisasubstitutefore-mail;Internet
isasubstituteforvideostores.
Theextenttowhichalternativeproducts
orservicesmaytaketheplaceofor
diminishtheneedforexistingproducts
and/orservices.
Personalcomputers(PCs)havevirtually
eliminatedtheneedforcalculators,
typewritersandlargemainframe
computers.
Thethreatofsubstituteproducts

47. 2-47The Threat of Substitute Products and Services
Substitutes limit the potential
returns of an industry by placing
A ceiling on the prices that firms
in that industry can profitably charge
To the extent that switching costs are low,
substitutes may have a strong effect on an industry.
Tea can be considered a substitute for coffee. If the
price of coffee goes up high enough, coffee drinkers
will slowly begin switching to tea. The price of tea
thus puts a price ceiling on the price of coffee.
The more attractive the Price/performance ratio of
substitute products the tighter the lid on an
industry’s profits.

48. 2-48
Sometimes a difficult task, the
identification of possible substitute
products or services means searching
for products or services that can
perform the same function, even
though they have a different
appearance and may not appear to be
easily substitutable.

49. 2-49
The airline industry might not consider
video cameras much of a threat. But as
digital technology has improved and
wireless and other forms of
telecommunication have become more
efficient, teleconferencing has become
a viable substitute for business travel
for many executives.
Teleconferencing can save both time
and money.

50. 2-50
The nature ofthecompetitive
relationshipbetween firmsinthe
industry.
Largefirms,dominantinthefield,engage
inpricewars,comparativeadvertising
andnew-productintroductions.
Examplesinclude:CokeandPepsi;American
ExpressandVisa
Smallestablishments,incontrast,donot
generallyengageinsuchpractices.
Competitiverivalry

51. 2-51
The Intensity of Rivalry among
Competitors in an Industry
Competition in an industry takes the form of
Fighting for position
Firms use techniques like Price competition
Advertising battles
Product introductions
Increased customer service or warranties
Price competition, typically highly destabilizing and are likely to
erode the average level of profitability in an industry.
Rivals easily match price cuts, an action that lower the profits
for all firms.

52. 2-52
Interacting factors lead to
intense rivalry
Numerous or equally balanced
competitors. When there are many firms in an
industry, the likelihood of mavericks is great. Even
when there are relatively few firms, and they are
nearly equal in size and resources, instability results
from fighting among companies having the resources,
for sustained and vigorous retaliation or similar
counter attack. They watch each other carefully to
make sure they match any move by another firm with
an equal countermove. Eg: major home appliance
industries.

53. 2-53
Interacting factors lead to
intense rivalry
Slow industry growth: Slow industry
growth turns competition into a fight for
market share, since firms seek to
expand their sales. Eg: any slowing in
passenger traffic tends to set off price
wars in the airline industry because the
only path to growth is to take sales
away from a competitor.

54. 2-54
Interacting factors lead to
intense rivalry
Lack of differentiation or switching costs:
A product can be very unique, with many qualities
differentiating it from others of its kind, or it may be a
commodity, a product whose characteristics are the
same, regardless of who sells it. Ex most people
choose a gas station based on location and pricing
because they view gasoline as a commodity. When
the product or service is perceived as a commodity
(raw material), the buyer’s choice is typically based on
price and service, resulting in pressures for intense
price and service competition. Lack of switching cost
has the same effect.

55. 2-55
Interacting factors lead to
intense rivalry
Capacity increased in large increments:
When economies of scale require that capacity
must be added in large increments, capacity
additions can be very disruptive to the industry
supply/demand balance. If the only way a
manufacturer can increase capacity is in a
large increment by building a new plant, it will
run that new plant at full capacity to keep its
unit cost as low as possible. Thus producing so
much that the selling price falls throughout the
industry.

56. 2-56
Interacting factors lead to
intense rivalry
High exit barriers: Exit barriers are economic,
strategic, and emotional factors that keep firms
competing even though they may be earning low or
negative returns on their investments. Some exit
barriers are specialized assets, fixed costs of exit,
strategic interrelationships ex: relationships between
the business units and others within a company in
terms of image, marketing, shared facilities and so
on. Emotional barriers and government and social
pressures (governmental discouragement of exit out
of concern for job loss.)

57. 2-57Porter's five forces analysis for a car industry.

58. 2-58Threat of new entry (very weak)
Large amount of capital required
Few legal barriers protect existing
companies from new entrants
New entrant could easily access suppliers
and distributors
Governments often protect their home
markets by introducing high import taxes.

59. 2-59 Buyer power (strong)
There are many buyers
Buyers do not threaten backward integration
Buyers can easily choose alternative car
brand
It does not cost much for buyers to switch
to another brand of vehicles or to start
using other type of transportation

60. 2-60Competitive rivalry (very strong)
Moderate number of competitors
Customers are loyal to their brands
Industry is very large but matured
There is moderate threat of being
acquired by a competitor

61. 2-61Supplier power (weak)
Large number of suppliers
Materials widely accessible
Suppliers do not pose any threat of
forward integration
Some suppliers are large but the most if
them are pretty small

62. 2-62Threat of substitutes (weak)
There are many alternative types of
transportation, such as bicycles,
motorcycles, trains, buses or planes
Substitutes can rarely offer the same
convenience
Alternative types of transportation
almost always cost less and sometimes
are more environment friendly

63. 2-63