Chapter 2 MGMT481_Fall 2024 PDF

CHAPTER 2 Analyzing the External Environment of the Firm Copyright Anatoli Styf/Shutterstock  Learning Objectives Studying this chapter should provide you with the strategic management knowledge needed to: 1. Explain the importance of analyz...

CHAPTER 2 Analyzing the External Environment of the Firm Copyright Anatoli Styf/Shutterstock  Learning Objectives Studying this chapter should provide you with the strategic management knowledge needed to: 1. Explain the importance of analyzing and understanding the firm’s external environment. 2. Define and describe the general environment and the industry environment. 3. Name and describe the general environment’s seven segments. 4. Identify the five competitive forces and explain how they determine an industry’s profitability potential. 5. Define strategic groups and describe their influence on firms.  Environment Analysis What is Environment Analysis? Environment Analysis is a strategic tool. It is a process to assess the external and internal elements, which can affect the organization's performance. Types of environment: External Environment and Internal Environment.  Insightful diagnosis of an organization’s external and internal environment is often seen as the first step managers should take in crafting a strategy that is good fit with the organizations’ situation.  An appraisal of the organization’s external environment and internal environment (as a basis for deciding on a long-term direction and developing a strategic vision) is often a vital part of the process of strategy development. External Environment Analysis  Introduction External Environment: The various factors and forces outside the organization that affect the organization’s performance. Analysing and Competitive understanding the Strategy development advantages/Higher external (decisions, actions, ….) Performance environment factors - Consumers needs - Competitors’ products, goals, Opportunity: a condition in the general environment strategies, that, if exploited, helps a firm to achieve strategic - Economic changes competitiveness. External changes - Socio-cultural changes (opportunities or threats) Threat : a condition in the general environment that - Technological changes may hinder a firm’s efforts to achieve strategic - Legal changes competitiveness. - Political changes, - Suppliers changes - ….  Types of External Environment 1) General Environment Focused on factors and conditions influencing an industry and firms within it. 2) Industry Environment Focused on factors and conditions influencing a firm’s profitability within an industry. 3) Competitor Environment Focused on predicting the dynamics of competitors’ actions, responses and intentions. Figure - The External Environment General Environment predicting the dynamics of competitors’ actions, responses and intentions General Environment Analysis (Macro-environment)  General Environment Analysis  Definition of General Environment: Dimensions in the broader society that influence an industry and the firms within it:  Dimensions (General Environmental factors): - Demographic - Economic - Political/legal - Sociocultural - Technological - Global - Physical Video: PEST Analysis https://www.youtube.com/watch?v=UYQItP5_1AQ  General Environment Analysis Demographic segment: It is concerned with the characteristics and features of a population. Elements to analyze: Population size Age structure  The world’s population: 7 billion (in 2015). It  Aging population is a significant problem for continues to grow. businesses: (Japan, 23% are 65 or older)  China (1.4 billion), (439 USA), (313  The change in the age of the population have Indonesia), (276 Pakistan), significant implications for availability of qualified  Companies seeking to find growing markets labor, healthcare retirement policy, business to sell their products. opportunities, etc. Ethnic mix Income distribution  Ethnic groups: Hispanics in USA, Indians in  Understanding how income is distributed within and across GCC, population informs firms of different groups’ purchasing  The ethnic diversity of the population is power. important not only because of consumer  Many western multinationals are interested in India as a needs, but also of the labor force consumption market as its middle class grows extensively. composition.  Research has shown that firms with greater  The growth of the economy in China has drown many firms, ethnic diversity in their managerial team are not only for the low-cost production, but also because of the likely to enjoy higher performance. large potential demand for products.  Paying attention to the differences between markets based on income distribution can help companies to take good choices.  General Environment Analysis Economic segment: It refers to the nature and direction of the economy in which a firm competes or may compete. Elements to analyze:  Economic growth  Annual economic growth for 2015-2017: (China, 7%) (India, 6.8%) (Mexico, 3.6%)  Firms seeking opportunities in high economic growth countries and avoiding the threats of slow growth period.  The global recession of 2008 and 2009 created numerous problems for companies: reduced consumer demand, increases in firms’ inventory levels, development of additional governmental regulations, and a tightening of access to financial resources, etc.  Unemployment rate  High unemployment rate is as result of slow economic growth.  Inflation rate  High inflation rate decreases consumer demand.  Interest rate  High interest rate may have a negative impact on the residential home construction industry.  General Environment Analysis Political/Legal segment: It refers to the political and legal decisions and actions. This segment is concerned with how organizations try to understand the influences (current and projected) of the governments on their competitive actions, as well as how organizations try to influence governments. Elements to analyze:  Taxation law  New tax to be applied on businesses (E.g., Kuwait)  Value Added Tax (VAT) was introduced in the UAE on 1st January 2018. (5 per cent).  Value Added Tax. (“VAT”) was introduced in Saudi Arabia on 28 July 2017  Antitrust law (Known as competition law)  Through this law, governments want to protect consumers from predatory business practices.  France: Walmart was not allowed to enter the French market.  Labor law  Minimum wage law which prohibits employers from hiring workers for less than a given hourly, daily or monthly minimum wage.  Minimum wage: (France: 1500 euros , Kuwait: ???).  General Environment Analysis Sociocultural segment: It is concerned with a society’s attitudes and cultural values. People lifestyle can constantly change. Successful firms must have an awareness of cultural changes taking place in the societies. Elements to analyze:  Women in the workplace  Women are allowed to work: What opportunities may exist?  Women are allowed to drive: What opportunities may exist?  Shifts in career preferences  Increase in the number of temporary workers.  More flexibility at work  Shifts in preferences regarding product characteristics  Growing concerns about health and nutrition: What opportunities may exist?  General Environment Analysis Technological segment: It refers to the activities involved in creating new knowledge and practices necessary for a business. Research has shown that firms’ performance has increased because of the adoption of new technology. Elements to analyze:  Growth of the internet  Internet offers firms remarkable capability and tool to analyze and anticipate how it allows firms to create more value for customers.  Websites + Applications  Information and communication technologies  Social media: Advertising and collecting information about customers.  Technological innovative products  Integration of new technological features in the products  Apple Watch series 4: Able to measure heart rate  Nike: sensors in shoes to track and record the distance of walk or run.  Operating systems: Create efficient operating systems with integration of technology.  General Environment Analysis Global segment: It includes new global markets, existing markets that are changing, important international political events, and so on. Elements to analyze:  New global markets  Globalization provides firms opportunities for growth in other markets.  Emergence of the Indian and Chinese economies  Broad base of production factors  Labor, raw materials, skilled managers and workers When studying the global segment, firms should recognize that globalization may create opportunities to entre new markets as well as threats that new competitors from other economies may also enter their market.  General Environment Analysis Physical sustainable segment: It refers to potential and actual changes in the natural environment and business practices that are intended to positively respond to those changes with the intent of creating a sustainable environment. Many companies are interested in sustainable development, which is “the development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Elements to analyze:  Growing concerns for sustainable environment development  Limited natural resources o Going Green: How companies contribute to preserve the natural resources.  Walmart has announced that its goal is to produce zero waste and to use 100 % renewable energy to power its operations.  The Triple Bottom Line: Profit, People, Planet Industry Environment Analysis (Micro-environment)  Industry Environment Analysis Industry: - A group of firms offering similar goods or services. Industry environment: - The set of factors directly influencing a firm and its competitive decisions and actions. The Five Forces Framework (Michael Porter): - There are five forces that determine the competitive intensity and therefore the attractiveness of an industry. - Analysis of the five forces within a given industry allows the firm to determine the industry’s attractiveness in terms of the potential to earn above-average returns. Videos: Porter's Five Forces Framework https://www.youtube.com/watch?v=_IaBZmB09RE https://www.youtube.com/watch?v=5JjNUxxsDP0 Porter’s Five Forces Model  Intensity of Rivalry Among Competitors Industry rivalry increases when: - there is a large number of competitors - there are few customers buying the industry’s products - there is a lack of differentiation opportunities  Threat of New Entrants Threat of new entrants refers to the threat new competitors pose to existing competitors in an industry. The threat of new entrants depends on the presence of entry barriers and the reaction that can be expected from existing competitors.  Barriers to entry: Economies of scale The cost of producing each unit declines as the quantity of a product produced during a given period increases. Capital requirements Switching cost Government policy  Bargaining Power of Suppliers Supplier power increases when:  suppliers are few in number.  Suppliers’ products are in short supply  suppliers’ products create high switching cost.  Software, medical equipment, manufacturing equipment, etc.  Bargaining Power of Buyers Buyer power increases when:  buyers are few in number.  buyers’ switching cost is low.  When buyers facing economic or financial crisis  Threat of Substitute Products Definition of substitute product:  A substitute product is one that serves the same purpose and fulfill the same needs of consumers as another product in the market. A) Perfect substitute: A perfect substitute is a situation where two products are viewed as identical. Examples: Playstation — Xbox / iPhone — Samsung Galaxy B) Imperfect substitute: An imperfect substitute refers to a product that cannot be used in the same way as the product it replaces, or does not fully satisfy the needs of a consumer as another one. For the imperfect substitutes, there is a degree of difference that can be easily perceived by consumers between the two products. Examples: Car — Motorcycle / Generic corn flakes — Kellogg's Corn Flakes.  Threat of Substitute Products The threat of substitute products increases when:  buyers face few switching costs.  the substitute product’s price is lower.  substitute product’s quality and performance are equal to or greater than the existing product. Once you completed the five forces analysis, you will be able to see clearly what are the risks and obstacles so you can overcome any of them.  Interpreting Industry Analyses Low entry barriers Suppliers and buyers have strong positions Unattractive Strong threats from industry substitute products Intense rivalry among (Low profit potential) competitors  Interpreting Industry Analyses (cont’d) High entry barriers Suppliers and buyers have weak power Attractive Few threats from industry substitute products Moderate rivalry (High profit potential) among competitors  In-Class Activity Porter’s Five Forces Low Team Rating High Reasons & Issues 1 5 10 - Large number of - Select one of the following industries in Kuwait (Telecommunication, banking, airlines, education, competitors Intensity of Rivalry transport, restaurant, retail, textile, electronics, …) - Increasing demand - Then, conduct a five forces analysis on the selected 1 industry 1 by evaluating 10 -the Hard strength to getoftheeach force as license shown in the Table below. You must support your evaluation/rating. - High capital requirement Threat of New Entrants - Large number of competitors 1 2 10 - Not used. Threat of Substitutes - Cultural reason 1 6 10 - Easy to switch Bargaining Power of Buyers - Many alternatives 1 9 10 - Two producers of Bargaining Power of Suppliers airplanes - Based on the analysis report, what initiatives/actions would you take as a leader to deal with the issues related to each force? - If you were a strategic adviser, would you recommend entrepreneurs to invest in this industry? Explain? Competitive Analysis  Competitive Analysis Definition: Competitive analysis focuses on each company against which a firm competes directly. Example: Zain vs. STC / Amazon vs. Alibaba / DHL vs. UPS - Competitors are keenly interested in understanding each other’s objectives, assumption, capabilities, strategies, offerings. In a competitive analysis, the firm seeks to gather information and data that provides understanding of what: - drives the competitor, as shown by its future objectives. - the competitor is doing and can do, as revealed by its current strategy. - the competitor believes about the industry, as shown by its assumptions. - the competitor’s capabilities are, as shown by its strengths and weaknesses. An effective competitive analysis helps a firm understand, interpret, and predict its competitors strategic actions, which contributes to the firm’s ability to make effective strategic actions and responses. Video: How to Conduct a Competitive Analysis https://www.youtube.com/watch?v=C91utiNU0cI  Strategic Groups Definition: Strategic group is a small group/set of firms in an industry that share similar competitive characteristics, pursue similar strategies with similar resources, and target the same group (s) of consumers. Categorizing firms in an industry into a set of strategic groups is very useful as a way of better understanding of the competitive environment. Strategic group analysis: is a method which identifies direct competitors that should be studied as part of the competitive analysis. END CHAPTER 2