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egulatory Forces Economic Forces Technological Forces Social Forces Analysis Of The Industry The Elements Of Industries Structure Threat Of New Entrants Threat Of Substitutes Bargaining Power Of Buyers Bargaining Power Of Suppliers Rivalry Among Existing Firms A Framework For Competitor Analysis Future Goals Assumptions History As And Indicator Of Goals And Assumptions Current Strategy Capabilities Putting The Four Components Together Structural Analysis Within Industries Firm's Profitability Industries Change Internal Organizational Analysis The Areas That Most Businesses Should Analyze Environmental Scanning Forecasting The Environment SUMMARY
In addition the basic system of government and the laws the system promulgates, the political environment might include such issues as monitoring government policy toward income tax, relative influence of unions, and policies concerning utilization of natural resources. Political activity my also have a significant impact on three additional governmental functions influencing a firm's external environment: * Supplier function. Government decisions regarding creation and accessibility of private businesses to government-owned natural resources and national stockpiles of agricultural products will profoundly affect the viability of some firm's strategies. * Customer function. Government demand for products and services can create, sustain, enhance, or eliminate many market opportunities. * Competitor function. The government can operate as an almost unbeatable competitor in the marketplace, Therefore, knowledge of government strategies can help a firm to avoid unfavorable confrontation with government as a competitor. In general, the impact of government is far-reaching and increasing.
Technological Forces
Technological forces influence organizations in several ways. A technological innovation can have a sudden and dramatic effect on the environment of a firm. First, technological developments can significantly alter the demand for an organization's or industry's products or services. Technological change can decimate existing businesses and even entire industries, since its shifts demand from one product to another. Moreover, changes in technology can affect a firm's operations as well its products and services. These changes might affect processing methods, raw materials, and service delivery. In international business, one country's use of new technological developments can make another country's products overpriced and noncompetitive. In general, Technological trends include not only the glamorous invention that revolutionizes our lives, but also the gradual painstaking improvements in methods, in materials, in design, in application, unemployment, and the transportation and commercial base. They diffusion into new industries and efficiency" (John Argenti). The rate of technological change varies considerably from one industry to another. In electronics, for example change is rapid and constant, but in furniture manufacturing, change is slower and more gradual. Changing technology can offer major opportunities for improving goal achievements or threaten the existence of the firm. Therefore, "the key concerns in the technological environment involve building the organizational capability to (1) forecast and identify relevant developments - both within and beyond the industry, (2) assess the impact of these developments on existing operations, and (3) define opportunities" (Mark C. Baetz and Paul W. Beamish). These capabilities should result in the creation of a technological strategy. Technological strategy deals with "choices in technology, product design and development, sources of technology and R&D management and funding" (R. Burgeleman and M. Maidique ). The effect that changing technology can have upon the competition in an industry is also dealt with other chapters. Technological forecasting can help protect and improve the profitability of firms in growing industries.
Social Forces
Social forces include traditions, values, societal trends, consumer psychology, and a society's expectations of business.
The following are some of the key concerns in the social environment :ecology (e.g., global warming, pollution); demographics (e.g., population growth rates, aging work force in industrialized countries, high educational requirements); quality of life (e.g., education, safety, health care, standard of living); and noneconomic activities (e.g., charities). Moreover, social issues can quickly become political and even legal issues. Social forces are often most important because of their effect on people's behaviour. For an organization to survive, the product or service must be wanted, thus consumer behaviour is considered as a separate environmental behaviour. Behaviour factors also affect organisations internally, that is, the employees and management. A society's expectations of business present other opportunities and constraints. These expectations emanate from diverse groups referred to as stakeholders. Stakeholders include a firm's owners (stockholders), members of the board of directors, managers and operating employees, suppliers, creditors, distributors, customers, and other interest groups - at the broadest level, stakeholders include the general public. Determining the exact impact of social forces on an organization is difficult at best. However, assessing the changing values, attitudes, and demographic characteristics of an organization's customers is an essential element in establishing organizational objectives.
The word industry is used to refer to a group of firms whose products are sufficiently close substitutes for each other that the member firms are drawn into competitive rivalry to serve the same needs of some or all the same types of buyers. In analyzing an industry, it is also useful to determine if the industry is a global industry, that is, an industry that requires global operations to compete effectively Industries differ widely in their economic characteristics, competitive situations, and future outlooks. Understanding industry structure is the logical starting point for strategic analysis at the business level. The key concerns in the industry environment are as follows: 1. 2. 3. 4. The elements of the industry structure The stage in the life cycle of products in the industry. The direction the industry is headed (for example, overcapacity, requiring rationalization). The forces (for example, political, social, economic, technological) driving the industry in a particular direction. 5. The underlying economics and performance of the business (for example, cost structures, profit levels). 6. The key success factors (for example, cost, delivery). 7. Demand segments and strategic groups The second environment to consider is the competitive environment. The key concerns in the competitive environment are as follows: 1. The forces driving competition in the industry (which is a function of industry structure. 2. The differences in the competitive approaches of rival firms (for example, price competition, advertising battles, increased customer service). 3. Strategies, positions, and competitive strength of market leaders and close rivals. 4. Why some rivals are doing better than others. The value chain is an important tool for analyzing how a company is faring relative to its competitors. The issues of competitive environment and the value chain are described in Chapter 9.
Industry structure can be analyzed by using Porter's framework competition in an industry. Professor Michael E. Porter of Harvard University is the nation's leading authority on industry analysis. Porter identifies five basic competitive forces, which determine the state of competition an its underlying economic structure: 1. 2. 3. 4. 5. The The The The The threat of new competitors entering the industry intensity of rivalry among existing competitors threat of substitute products or services bargaining power of buyers bargaining power of suppliers
These five forces of competition determine the rate of return on invested capital (ROI) in industry, relative to the industry's cost of capital. The strength of each of the competitive forces is determined by a number of key structural variables.
Threat Of Substitutes
All firms in and industry compete with other industries offering substitute products or services. Steel producers are in competition with aluminum producers. Sugar producers are in competition with the firms which are introducing sugar-free products. The competitive force of closely-related substitute products impact sellers in several ways. First, the presence of readily available and competitively priced substitutes places a ceiling on the prices companies in and industry can afford to charge without giving customers an incentive to switch to substitutes and thus eroding their own market position. Another determinant of whether substitutes are a strong or weak competitive force is whether it is difficult or costly for customers to switch to substitutes to substitutes. Typical switching costs include, the cost of purchasing additional equipment, employees retraining costs, the time and costs to test the quality for technical help needed to make the changeover. As a rule, the lower the price of substitutes and the higher the quality and performance of substitutes, the more intense are the competitive pressures posed by substitute products.
These factors change with time and firm's choice of buyers-groups should be regarded as an important element in strategic decision-making.
It is important to recognise that labour is a supplier, and may exert a considerable degree of power in some situation. The power of suppliers can be an important economic factor in the marketplace because of the impact they can have on customer profits.
Rivalry refers to the degree to which firms respond to competitive moves of the other firms in the industry. Rivalry among existing firms may manifest itself in a number of ways- price competition, new products, increased levels of customer service, warranties and guarantees, advertising, better networks of wholesale distributors, and so on. The degree of rivalry in and industry is a function of a number of interacting structural features: Rivalry tends to intensify as the number of competitors increases and as they firms become more equal in size and capability. Market rivalry is usually stronger when demand for the product is growing slowly. Competition is more intense when rival firms are tempted to use price cuts or other marketing tactics to boost unit volume. Rivalry is stronger when the costs incurred by customers to switch their purchases from one brand to another are low. Market rivalry increases in proportion to the size of the payoff from a successful strategic move. Market rivalry tends to be more vigorous when it costs more to get out of a business than to stay in and compete. Rivalry becomes more volatile and unpredictable the more diverse competitors are in terms of their strategies, their personalities, their corporate priorities, their resources, and their countries of origin. Rivalry increases when strong companies outside the industry acquire weak firms in the industry and lunch aggressive, well-funded moves to transform their newly-acquired firms into major market contenders.
Two principles of competitive rivalry are particularly important: (1) a powerful competitive strategy used by one company intensifies competitive pressures on the other companies, and ( 2) the manner in which rivals employ various competitive weapons to try to outmanoeuvre one another shapes "the rules of competition" in the industry and determines the requirements for competitive success.
A central aspect of strategy formulation is preceptive competitor analysis. There are four diagnostic components to a competitor analysis: future goals, current strategy, assumptions, andcapabilities. A basic framework for performing individual competitive analysis has been postulated by Michael Porter.
Future Goals
As can be seen, two factors must be analyzed to determine what drivers the competitor. First, its future goals must be identified. A knowledge of goals will alow predictions about whether or not each competitor is satisfied with its position and financial results, and how likely that competitor is to change strategy. The following diagnostic questions help to determine a competitor's present and future goals: What have the competitors's major goals been in the relatively recent past? Have these goals been achieved? What strategies has the competitor employed in the relatively recent past? Have these strategies been successful?
Assumptions
The second crucial component in competitors analysis is identifying each competitors's assumptions. These fall into two major categories: The competitor's assumptions about itself The competitors's assumptions about the industry and the other companies in it.
Answers to the following questions help identify a competitor's assumption: 1. What does the competitor appear to believe about its relative position - in cost, product quality, technological sophistication, and other key aspects of its business - based on its public statements, claims of management and sales force, and other indications? What does it see as its strengths and weaknesses? Are these accurate? 2. Does the competitor have strong historical or emotional identification with particular products or with particular functional policies, such as an approach to product design, desire for product quality, manufacturing location, selling approach, distribution arrangements, and so on, which will be strongly held to? 3. Are there cultural, regional, or national differences that will affect the way in which competitors perceive and assign significance to events? 4. Are there organizational values or canons which have been strongly institutionalized and will affect the way events are viewed? Are there some policies that the company's founder believed in strongly that may still linger? 5. What does the competitor appear to believe about future demand for the product and about the significance of industry trends? Will it be hesitant to add capacity because of unfounded uncertainties about demand, or likely overbuild for the opposite reasons? Is it prone to misestimate the importance of particular trends? Does it believe the industry is concentrating, for example, when it may not be? 6. What does the competitor appear to believe about the goals and capabilities of its competitors? Will it over- or underestimate any of them? 7. Does the competitor seem to believe in industry "conventional wisdom" or historic rules of thumb and common industry approaches that do not reflect new market conditions?
Current Strategy
The third component of competitor analysis is developing statements of the current strategy of each competitor. Strategy options available to businesses are discussed in detail in next chapter.
Capabilities
A realistic appraisal of each competitor's capabilities - its strengths and weaknesses- is the final diagnostic step in competitor analysis. Its strengths and weaknesses will determine its ability to initiate or react to strategic moves and to deals with environmental or industry events that occur. Identifying strengths and weaknesses is described in more detail in next chapter.
Firm's Profitability
In Porter's view, both the industry and strategic groups determine a firm's profitability as follows: I. Common Industry Characteristics 1. Industry-wide elements of structure that determine the strength of the five competitive forces and that apply equally to all firms; these traits include such factors as the rate of growth of industry demand, overall potential for product differentiation, structure of suppliers industries, aspects of technology, and so on, that set the overall context of competition for all firms in the industry. II. Characteristics of strategic group 2. The height of mobility barriers protecting the firm's strategic group. 3. The bargaining power of the firm's strategic group with customers and suppliers.
4. The vulnerability of the firm's strategic group to substitute products. 5. The exposure of the firm's strategic group to rivalry from other groups. III. Firm's position within its strategic group 6. The degree of competition within the strategic group. 7. The scale of the firm relative to others in its group. 8. Costs of entry into the group. 9. The ability of the firm to execute or implement its chosen strategy in an operational sense. The task of analyzing a company's external situation is not a mechanical exercise in which analysts plug in data and definitive conclusions come out. There can be several appealing scenarios about how an industry will evolve and what future competitive conditions will be like. Moreover, in practice, industry and competitive analysis is an incremental and ongoing process, the result of gradually accumulated knowledge and continuous rethinking and retesting.
Industries Change
Industry structure change, often in fundamental ways. Moreover, some industries go through evolutionary phases or stages development, growth, shakeout, maturity, saturation, and decline, the so-called industry/product life cycle. Industry conditions change because some forces are in motion that create incentives or pressures for change. There are numerous types of driving forces which can exist to produce evolutionary change in an industry: Changes in the long-term industry growth rate Changes in buyer composition Product innovation Technological change Marketing innovation Entry or exit of major firms Diffusion or technical know-how Increasing globalization of the industry Changes in cost and efficiency Emerging buyer preference for a differentiated instead of commodity product (or for a more standardized product instead of strongly differentiated products) Regulatory influences and government policy changes Changing societal concerns, attitudes, and lifestyles Reduction in uncertainty and business risk
The driving forces work to push the current industry structure into a new structure and they usually create new kinds of competitive pressures - both of which have implications for business strategy.
* Step 2 has managers evaluating the firm's status on these factors by comparing their current condition with past abilities of the firm. * In step 3, managers seek some comparative basis - linked to key industry or product/market conditions - against which to more accurately determine whether the company's condition on a particular factor represents a potential strength or weakness. * The final step in internal analysis is to provide the results, or company profile, as input into the strategic management process. This explains internal analysis as a process, but in practice, efforts to distinguish each step are seldom emphasized because the process is very interactive.
Environmental Scanning
The second component of environmental analysis is to develop information about the environment. Information has two primary strategic role - in objective setting and in strategy formulation. As managers scan the environment, they interpret environmental influence in the light of their own perceptions, expectations, and values. Environmental scanning is the process of gathering information about events and their relationships within an organization's internal and external environments. The basic purpose of environmental scanning is to help management determine the future direction of the organization. The most widely accepted method for categorizing different forms of scanning divides into the following three types: 1. Irregular scanning systems: These consist largely of ad hoc environmental studies. 2. Regular Scanning systems: These systems revolve around a regular review of the environment or significant environmental components. This review is often made annually. 3. Continuous scanning systems: These systems constantly monitor components of the organizational environment.