LECTURE 7 The External Environment: Opportunities, Threats, Competition, and Competitor Analysis & Introduction to Marketing MIX spring 2005 Components of the General Environment Economic i Demographic * /---------------s. Sociocultural i ^. / Industry \ir / Environment \ \ Competitive i \ Environment / T* 1 • J • 1 / ^^^- *\ /^ ^^ ^ Political/ ^ ^__Legal ^^ a Global i Technological J Components of the General Environment 1 Demographic 1 Segment ♦ Population size ♦ Age structure ♦ Geographic distribution ♦ Ethnic mix ♦ Income distribution 1 Economic 1 Segment ♦ Inflation rates ♦ Interest rates ♦ Trade deficits or surpluses ♦ Budget deficits or surpluses ♦ Personal savings rate ♦ Business savings rates ♦ Gross domestic product Political/Legal 1 Segment ♦ Antitrust laws ♦ Taxation laws ♦ Deregulation philosophies ♦ Labor training laws ♦ Educational philosophies and policies Sociocultural Segment ♦ Women in the workforce ♦ Workforce diversity ♦ Attitudes about work life quality ♦ Concerns about the environment ♦ Shifts in work and career preferences ♦ Shifts in preferences regarding product and service characteristics Technological Segment ♦ Product innovations ♦ Applications of knowledge ♦ Focus of private and government-supported R&D expenditures ♦ New communication technologies Global Segment ♦ Important political events ♦ Critical global markets ♦ Newly industrialized countries ♦ Different cultural and institutional attributes External Environmental Analysis The external environmental analysis process should be conducted on a continuous basis. This process includes four activities: Scanning Identifying early signals of environmental changes and trends Monitoring Detecting meaning through ongoing observations of environmental changes and trends Forecasting Developing projections of anticipated outcomes based on monitored changes and trends Assessing Determining the timing and importance of environmental changes and trends for firms' strategies and their management Porter's Five Forces Model of Competition Threat of New Entrants Threat of New Entrants J Economies of Scale J Product Differentiation J Capital Requirements -> Switching Costs -> Access to Distribution Channels • Cost Disadvantages Independent of Scale • Government Policy J Expected Retaliation Porter's Five Forces Model of Competition -------------------------------------------- Threat of New v Entrants . Bargaining Power of Suppliers Suppliers are likely to be powerful if: J Supplier industry is dominated by a few firms J Suppliers' products have few substitutes j Buyer is not an important customer to supplier J Suppliers' product is an important input to buyers' product • Suppliers' products are differentiated J Suppliers' products have high switching costs • Supplier poses credible threat of forward integration Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases Porter's Five Forces Model of Competition Bargaining Power of Suppliers Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Buyers Buyer groups are likely to be powerful if: j Buyers are concentrated or purchases are large relative to seller's sales J Purchase accounts for a significant fraction of supplier's sales J Products are undifferentiated J Buyers face few switching costs J Buyers' industry earns low profits J Buyer presents a credible threat of backward integration J Product unimportant to quality J Buyer has full information Buyers compete with the supplying industry by: Bargaining down prices Forcing higher quality * Playing firms off of each other Porter's Five Forces Model of Competition Bargaining Power of Suppliers Threat of New Entrants Bargaining Power of Buyers Threat of Substitute Products Threat of Substitute Products Keys to evaluate substitute products: Products with improving price/performance tradeoffs relative to present industry products Example: j Electronic security systems in place of security guards j Fax machines in place of overnight mail delivery Products with similar function limit the prices firms can charge Porter's Five Forces Model of Competition Bargaining Power of Suppliers Threat of New Entrants Rivalry Among Competing Firms in Industry Threat of Substitute Products Bargaining Power of Buyers Rivalry Among Existing Competitors Intense rivalry often plays out in the following ways: % Jockeying for strategic position j Using price competition j Staging advertising battles j Increasing consumer warranties or service • Making new product introductions Occurs when a firm is pressured or sees an opportunity J Price competition often leaves the entire industry worse off J Advertising battles may increase total industry demand, but may be costly to smaller competitors Rivalry Among Existing Competitors Cutthroat competition is more likely to occur when: j Numerous or equally balanced competitors j Slow growth industry j High fixed costs j High storage costs J Lack of differentiation or switching costs J Capacity added in large increments J Diverse competitors J High strategic stakes J High exit barriers Rivalry Among Existing Competitors High exit barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable. j Specialized assets j Fixed cost of exit (e.g., labor agreements) j Strategic interrelationships -> Emotional barriers • Government and social restrictions Effects of Entry Barriers and Exit Barriers on Industry Profits Exit Barriers Entry Barriers Low Low High s High Effects of Entry Barriers and Exit Barriers on Industry Profits Exit Barriers Low High Low Entry Barriers High Low, Stable Returns Effects of Entry Barriers and Exit Barriers on Industry Profits Exit Barriers Low High Low Entry Barriers High Low, Stable Returns High, Stable Returns Effects of Entry Barriers and Exit Barriers on Industry Profits Exit Barriers Low High Low Entry Barriers High Low, Stable Returns Low, Risky Returns High, Stable Returns Effects of Entry Barriers and Exit Barriers on Industry Profits Low Entry Barriers High Exit Barriers Low High Low, Stable Returns Low, Risky Returns High, Stable Returns High, Risky Returns Competitor Analysis The follow-up to Industry Analysis is effective analysis of a firm's Competitors Industry Environment Competitive 1 Competitor Analysis BBMBBBBHI What assumptions do our competitors hold about the future of industry and themselves? BBHHBBlBfflBi Does our current strategy support changes in the competitive environment? How do our goals compare to our competitors' goals? KflftUUHfl How do our capabilities compare to our competitors? Response J What will our competitors do in the future? J Where do we have a competitive advantage? J How will this change our relationship with our competition? Competitor Analysis Future Objectives ^How do our goals compare to our competitors' goal is Where will emphasis be placed in the future? ^ What is the attitude toward risk? What Drives the competitor? Competitor Analysis Future Objectives ft How do our goals compare to OU] ^whei Current Strategy P 'ft How are we currently ft Whal competing? towai ^------ft Does this strategy support changes in the competitive structure? What is the competitor doing? What can the competitor do? Competitor Analysis Future Objectives ft How do our goals compare to ou ^rWhe] Current Strategy ť \ ft How are we currently ^Wha towal What does the competitor believe about itself and the industry? com Assumptions DOP* W n^k «m nccmA *UÄ 4 ft Doeí <& Do we assume the future supF will be volatile? com <& What assumptions do our competitors hold about thei industry and themselves?i -fr Are we assuming stable competitive conditions^ J tf Competitor Analysis Future Objectives ft How do our goals compare to ou ftwhe] Current Strategy What are the competitor's capabilities? placd ^Wha towal ft How are we currently com Assumptions ft Doe •& Do we assume the future sup] will be volatile? com * Whai comp Capabilities indus . ft What are my competitors' a staf strengths and weaknesses? ft How do our capabilities compare to our competitors? Competitor Analysis Future Objectives ft How do our goals compare to ou ftwhe] Current Strategy placd ^Wha towal ft How are we currently com Assumptions ft Doe -fr Do we assume the future sup] will be volatile? com * Whal----------------------------- comJ Capabilities indu ft Are i a sta Response ft What will our competitors do in the future? Where do we have a competitive advantage? ft How will this change our relationship with our competition? \ft What are my competitors' strengths and weaknesses? ft How do our capabilities compare to our competitors? Elements of a Marketing Strategy Basic elements of a marketing strategy consist of: 1. The target market 2. The marketing mix variables (elements) of: •s Product •S Place (distribution) •S Promotion s Price The Four Ps vs. The Four Cs Customer Solution (Customer Value) Communication Customer Costs Convenience Ps, Ps and the others Packaging Personalization Sales force ^ , t. , .. Public relations Public opinion Politics Prospects SERVICES • Services are deeds, processes and performance • Intangible, but may have a tangible component • Generally produced and consumed at the same time • Need to distinguish between SERVICE and CUSTOMER SERVICE The 7 Ps of Services Marketing Mix 5] PEOPLE - employees 6] PHYSICAL EVIDENCE - environment in which the service is delivered and any tangible goods that facilitate the performance and communication of the service 7] PROCESS (PROCEDURES) -procedures, mechanism and flow of activities by which a service is acquired Marketing Mix Product Strategy • Deciding what goods or services the firm should offer to a group of consumers. • Includes making decisions about - Customer service - Package design - Brand names - Trademarks - Patents - Warranties - Life cycle of a product - Positioning the product in the marketplace - New product development Marketing Mix Distribution Strategy • Ensures that consumers find their products in the proper quantities at the right times and places. • Involves: - modes of transportation -warehousing - inventory control - order processing - selection of marketing channels Marketing Mix Promotion Strategy • The communication link between sellers and buyers - Communicate messages directly through salespeople or indirectly through advertisements and promotions. - Companies use an approach called integrated marketing communications (IMC) so the consumer receives a unified and consistent message. Marketing Mix Pricing Strategy - Methods of setting profitable and justifiable prices. - Closely regulated and subject to considerable public scrutiny. -A major influence is competition.