Strategic Management Chapter 2

The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

Firms need to understand the external environments by acquiring information about competitors, customers and other stakeholders.

The General, Industry and Competitor Environments

The general environment, is composed of dimensions in the broader society that influence an industry and the firms in it. It is broken down into six segments:

• Demographic – information about the people in the segment

• Economic – Monetary information

• Political/Legal – laws that affect firm

• Sociocultural Cultural things in the Environment

• Technological – Changes in technology

• Global – changes in the world Environment

The industry environment is the set of factors that directly influence a firm and how it competes. They include the threat of new entrants, power of suppliers and customers, the threat of substitution and the intensity of rivalries. The firm also needs to do competitor analysis, study the things that make a competitor be able to do the job as well as they do.

External Environmental Analysis

Firms need to analyze things that can give them an opportunity, a condition that if exploited will give them a strategic advantage, and threats, things that can hinder a firm's efforts to gain the same. This is done with the following four things.

Scanning

Scanning is a study of all the segments of the general environment. It allows for a firm to see changes that will affect its business model. Volatile scanning systems will not work in a stable environment and vice-versa.

Monitoring

Monitoring allows firms to observe changes to see if important trends are coming. A firm needs to know who its stakeholders (or potential ones) to be able to use this information to its best advantage.

Forecasting

Forecasting deals with things that will take place in the future. While it can be helpful, it is not a perfect science, things can happen (9/11 for example) that are beyond an forecaster's control

Assessing

Assessing has to do with understanding why the other things mentioned here brought about the results that they did. If we cannot understand why we will just make more mistakes.

Segments of the General Environment

The Demographic Segment

Population size

Firms need to understand how fast a nation is growing (or not growing). This will give them an idea of the markets they need to enter.

Age Structure

As populations shift, marketing to new groups will need to be adjusted for the changing age structure.

Geographic Distribution

Population shifts affect where workers are and people are that will purchace the product.

Ethic Mix

The diversity of a people in a country effect how things are done. What is a majority today, white or male for example in the USA, is not what it is in other countries, nor what it may be shortly in the USA.

Income Distribution

Where are the people that have the money to spend.

The Economic Segment

Economic environment refers to the nature and direction of the economy in which a firm competes or may compete. Nations are now interconnected and what happens economically to one county can affect many others.

The Political/Legal Segment

The political/legal segment is the arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding the interaction among nations. Business will try to influence governments and if they can not they need to see how their policies will affect their business. International organizations can also affect how things are done as well.

The Sociocultural Segment

The sociocultural segment is concerned with a society's attitudes and cultural values. These will differ between countries. Cultural differences can affect employees and purchases and need to be understood.

The Technological Segment

The technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, and materials. Technology is constantly changing and can be a cause of crossing boundaries that we thought were not breakable.

The Global Segment

The global segment includes relevant new global markets, existing markets that are changing, important international political events and critical cultural and institutional characteristics of global markets. Firms need to know what markets they can enter and have a reasonable success in. They also need to understand that some jobs may be able to done more cost effectively in other countries.

Industry Environment Analysis

An industry is a group of firms producing products that are close substitutes. This will have a more direct effect than the general environment. Firms need to know this for not only what they feel is their industry but what also could be a future entry in the industry as lines are now getting blurred.

Threat of New Entrants

New competitors seem to be the hardest for companies to recognize. This can be dangerous because it will take their market share unless the industry is growing. Barriers to entry and fear of retaliation keeps new entrants out sometimes.

Barriers to Entry

• Economies of scale – Smaller firms entering an industry may need to have prices higher that normal as they can not produce a product as cheep as their largest competitor.

• Product Differentiation – A firm needs to spend money to show what makes their product different than what exists already.

• Capital Requirements – without finances it may be hard to enter a field

• Switching cost – many buyers will entail a cost to switch to a new product from what they normally use. If these costs are high, then it may present a problem in selling to them.

• Access to Distribution Channels – existing firms have access to well established distribution channels, doing the job cheaply, new firms have to start from scratch with these.

• Cost disadvantages Independent of Scale – proprietary technology and bad location are things that a new firm may need to overcome.

• Government Policy – licensing and laws can affect how a company enters a market.

Expected Retaliation

Trying to take a part of a market share is sure to bring retaliation to a new firm. But if you establish a niche that they are not serving, you may exist long enough to take them on in the non-niche market.

Bargaining Power of Suppliers

Suppliers can raise prices or lower quality and affect an industry. This is effective for them if they are one of the few suppliers or substitutes are not readily available.

Bargaining Powers of Buyers

Buyers want the lowest price possible and cause a competition to take place for their finances.

Threat of Substitute Products

Availability of substitutes can affect an industry, even if they are not direct substitutes.

Intensity of Rivalry among Competitors

Steps taken by one firm in an industry can affect what others do to compete. Some things are:

• Numerous or Equally Balances Competitors

• Slow industry growth

• High Fixed Cost or High Storage Cost

• Lack of differentiation or low switching costs

• High strategic stakes

• High exit barriers – laws, emotional, specialized assets, etc.

Interpreting Industry Analysis

Much information is available for each industry. Firms need to use this information to help them get a competitive advantage.

Strategic Groups

A strategic group is a set of firms emphasizing similar strategic dimensions to use a similar strategy. Competition between members of this group will be stronger than with those outside the group. Where there are strategic groups their tends to be more stability. Being a member of a group will help you understand your competition better.

Competitor Analysis

Competitor intelligence is the set of data and information the firm gathers to better understand and better anticipate competitors' objectives, strategies, assumptions and capabilities. In collecting this information, companies need to follow ethical standards.

Strategic Management Chapter 1

Strategic Management and Strategic Competitiveness

Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. When a firm can do this and others cannot duplicate it, then the firm has a sustained (or sustainable) competitive advantage. Because of the advantage they will get above average returns, more that what an investor can get in another company, because the risk, the chance of not getting the money back, is much lower. If a company does not have this advantage it will just have a normal or average return.

The full set of commitments, decisions, and actions for a firm to achieve strategic competitiveness is call the strategic management process. These are ever changing and must be adjusted as necessary to keep a company going.

The Challenge of Strategic Management

Business failure is common so the objective is to meet the goal of getting a competitive advantage so it can stay successful. Profits are often not as important as a well though out strategy. Strategy is the integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. Strategy can be effective or ineffective.

The Current Competitive Landscape

The nature of competition in our current time means that companies that an organization competes against may change in the short term future. In some markets this may even result in hypercompetition. This will result in really aggressive marketing by the companies involved.

The Global Economy

A global economy is one in which goods, service, people, skills, and ideas move freely across geographic borders. While the United States is the one leading in competitiveness, other countries are moving in as boundaries break down in tariffs and the like. Many companies see the advantage in to moving into the world markets as a way to grow.

The March of Globalization

Globalization is the increasing economic interdependence among countries reflected in the flow of goods and services, financial capital and knowledge across country borders. Global markets can produce products from many countries or can make standardization of one company over many countries. Many companies are merging with companies from other countries in an order to get competitive advantage. Some of the global competitions can result in higher risks for a company so they need to be done with thought.

Technology and Technological Challenges

Increasing Rate of Technological Change and Diffusion

Both technology and the speed of technology have increased over the most recent years. Perpetual Innovation is the term for rapid and consistently new technology replacing older ones. Many companies use patents to protect a competitive advantage.

The Information Age

There are huge databases of information available for use by companies with access to them. Others build huge networks in an effort to collect the information that they need to build their own. The Internet provides an infrastructure that allows for large amounts of information to be delivered efficiently.

Increasing Knowledge Intensity

Knowledge is the basis of technology. For this reason companies that want a competitive advantage will need to take the knowledge of their employees and put it into a retrievable format. In order for a company to be competitive it will need to be able to mine that knowledge.

Strategic flexibility is a set of capabilities used to respond to various demands and opportunities. In order to do this, companies have to learn to learn. Following a flawed strategy.

The I/O Model of Above-Average Returns

In the 60's through the 80's the external environment was thought to be what influence the successfulness of a company. This was the Industrial Organization (I/O) model. Success was dependent on being in the right company to start with. It had some basic assumptions:

• The external environment is assumed to impose pressures and constraints that determine strategies that will result in above average returns.

• Most firms competing in an industry will be assumed to control some strategic resources.

• Resources used to formulate strategies are highly mobile across the firm.

• Decision makers are assumed to be rational

Above average returns can be earned when firms implement strategy dictated by the characteristics of the general industry and the competitor environments. Research shows that 20% of a firm's profitability has to do with the industry. It also shows 36% has to do with a firm's characteristics and actions.

Obviously Airline industry has shown us that this model is not a 100% fact. Hence we have other models.

The Resource-Based Model of Above-Average Returns

In this model, a firm has a collection of unique resources and capabilities that provide the basis for its strategy. Resources are inputs into a firm's production process. A capability is the capacity for a set of resources to perform a task or an activity in an integrative manner. They are either physical, human or organizational. They are also tangible or intangible in nature. Not all resources are the source of its competitive advantage, just those that are valuable, rare, costly to imitate, or nonsubstitutable. If a firm has all these they are said to have a core competency.

Strategic Intent and Strategic Mission

Strategic Intent

Strategic intent is the leveraging of a firm's resources, capabilities, and core competencies to accomplish the firm's goals in the competitive environment. Some firms may have to change their strategic intent to survive. Apple Computers no longer just make computers but also digital entertainment as well. This now means they have two competitors.

Strategic Mission

Strategic mission is a statement of a firm's unique purpose and the scope of its operations in product and market terms. Missions flow from intent. The mission clearly labels the intent of the company and who it intends to serve.

Stakeholders

Stakeholders are individuals and groups who can affect and are affected by the strategic outcomes achieved and can have enforceable claims on the firm's performance. They will stay with a firm as long as their expectations are at least being met. A firm needs to get along well with the various stakeholders.

Classification of Stakeholders

Shareholders want the return on their investment to be maximized. Short term advancements may hurt long range competitiveness of an organization.

A firm's customers want an investor to get a minimal return so they can get a lower cost, hopefully with an increase in quality.

Capital Market Stakeholders

Stakeholders and lenders have put money into a firm and therefore are important to a firm. Lenders may no longer lend and shareholders may sell their stock thereby lowering confidence in the company. If a firm is aware of this group being dissatisfied it needs to take steps to correct it.

Product Market Stakeholders

Customers demand reliable products at the lowest possible price. Suppliers want customers who are loyal and willing to pay high prices. Host communities want companies to be long term employers and provide a tax base. Union officials want secure good jobs for their members. All of these must be satisfied if a firm is to survive.

Organization Stakeholders

Employees expect a firm to provide a rewarding place to work.

Strategic Leaders

People responsible for designing and execution of strategic management processes are strategic leaders. They usually are top level managers or executives. Small firms may have one person, larger may have one but often have more. They are responsible for leading the company, and making the right decisions, or taking the blame for the failure. They are top level managers, CEOs and other managers in the company. Most leaders have some constraints due to the organizational culture. The organizational culture is the complex set of ideologies, symbols and core values that are shared throughout the firm and therefore influence how the firm conducts business. When strategic change is needed, often an organization will turn to an outsider. They have an advantage of not having the culture, but the disadvantage because they lack knowledge of the firm.

The Work of Effective Strategic Leaders

Leaders need to think clearly, deeply and ask many questions. Strategic leaders work long hours filled with ambiguous questions for a solution that may not be easy to figure out. They cannot be just dreamers or workers, they need to be both.

Predicting Outcomes of Strategic Decisions: Profit Pools

A Profit Pool entails the total profits earned in an industry at all points along the value chain. A firm needs to see where it can add to the industry by linking into some part of the chain.

The Strategic Management Process

The strategic management process is supposed to be a rational approach to help a firm. The strategic inputs provide for strategic actions to take place.