Chapter 2
This presentation is the property of its rightful owner.
Sponsored Links
1 / 43

Chapter 2 PowerPoint PPT Presentation

  • Uploaded on
  • Presentation posted in: General

Chapter 2. The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis. Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness. Michael Porter

Download Presentation

Chapter 2

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript

Chapter 2

Chapter 2

The External Environment:

Opportunities, Threats, Industry Competition and Competitor Analysis

Chapter 2

  • Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness.

    Michael Porter

  • When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact.

    Warren Buffett

  • Skate to where the puck is going, not to where the puck has been.

    Wayne Gretsky

External analysis

External Analysis

  • It’s not recognizing that change will occur that is the problem, it’s figuring out:

    • what will happen?

    • how it will affect us?

    • what to do about it?

      Therefore, forecasting is necessary to predict direction and the effect of change

External analysis1

External Analysis

  • 1) Analyze the environments

    • General

    • Industry

    • Competitive

  • 2) Identification of key success factors

Components of external analysis

Components of External Analysis

Scanning –

Monitoring –

Forecasting –

Assessing –

Chapter 2

General Environment

Industry Environment











& Legal

Bargaining Power

of Suppliers

Bargaining Power

of Buyers



General environment

General Environment

  • Demographic

  • Economic

  • Political

  • Socioculture

  • Technical

  • Global

1 demographic segment

1) Demographic Segment

  • Characteristics of the population

    • e.g., age, race, gender, sexual orientation and social classes

  • Ethnic structure

  • Income distribution

  • Geographic distribution

2 economic segment

2) Economic Segment

  • General health/wellbeing of the local, regional, national or global economy.

    • e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs

3 political legal segments

3) Political/Legal Segments

  • Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.

4 sociocultural segment

4) SocioculturalSegment

  • Attitudes of society towards work, careers, products, services and consumer activism.

    • e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”, savings rates, etc.

5 technological segment

5) Technological Segment

  • Changes in technology that affect the workplace, and the products and services consumers expect

    • e.g., Information technologies, entertainment technologies, product technologies.

6 global segment

6) Global Segment

New and existing markets around the world, and changes in the political, cultural and institutional terrain.

General environment1

General Environment

  • Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance

  • Cast a wide net and to identify the emerging trends

  • Then determine which factors are relevant, and how these changes will have an effect upon the firm.

Chapter 2

General Environment

Industry Environment











& Legal

Bargaining Power

of Suppliers

Bargaining Power

of Buyers



Roic across industries 1995 2004

ROIC Across Industries 1995-2004

Porter s five forces

Porter’s Five Forces

  • Competitive Rivalry

  • Power of Buyers

  • Power of Suppliers

  • Potential Entrants

  • Substitute Products

    Each of these forces affect costs/prices,

    therefore, profitability

Chapter 2



(of firms in

other industries)





Suppliers of

Key Inputs





Chapter 2

Porter’s 5-forces is all about margins



What factors increase/decrease margins within an industry, thus affecting profitability.



Chapter 2

When industry structural variables are weak…...

Prices can be kept high


Profits can soar

Costs can be kept low

Chapter 2

When industry structural variables are strong

Prices will be pushed down


Profits shrink

Costs will rise

Chapter 2

  • Suppose you had to start a new business and start generating revenues…

    … today

    … in a week

    … in 2 months

    … in 1 year

    What kind of businesses might you start?

Potential new entrants

Potential New Entrants

  • Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents.

  • Firms can create “barriers to enter”

  • Barriers of entry are desirable for entrenched firms

Barriers to entry

Barriers to Entry



  • Who are you key suppliers?

  • Suppliers are a strong competitive force when:

    • Only a few suppliers exist and is more concentrated than industry to which it is selling

    • Few substitutes available to the industry firm

    • Industry not important buyers to supplier group

    • Supplier group provides a product crucial to production process, and/or significantly affects buyers’ product quality

    • It is costly for buyers to switch suppliers

    • Forward integration by suppliers is a credible threat

    • Suppliers can supply at a lower cost



  • Who are your key buyers? - who provides our revenues?

  • Can they force:

    • lower prices, higher quality and service – affect the terms and conditions of the exchange?

  • When do you, as a consumer, have power?

  • Two issues



  • What affect buyers’ power?

    • Volume/Frequency of purchase

    • When buyers represent a large portion of sellers revenues

    • When buyers can easily switch to another product

    • When the product the buyers are buying is undifferentiated

    • When buyers can self-source or backwards integration

    • Criticality

    • Buyers’ knowledge

    • Buyers’ profitability



  • Product/service which fulfills similar need

  • Price cap

  • 3 Questions

    • Are they available?

    • Can we switch?

    • Price-performance relationship?

Rivalry and profitability

Rivalry and Profitability

  • Industry profitability is a collective good.

  • Collective good is served by coordination

    • Are there industries were pricing is coordinated?

  • Incentive to violate

Chapter 2

  • Usually the most powerfulof the five forces

  • How actively and aggressively are rivals employing competitive weapons in jockeying for a stronger market position and increasing sales?

    • Is price competition vigorous?

    • Active efforts to improve quality?

    • Are rivals racing to offer better performance features? better customer service?

    • Lots of advertising/sales promotions?

    • Active efforts to build a stronger dealer network?

    • Active product innovation?

    • Active use of other weapons of rivalry?

Rivalry what drives it

Rivalry – What drives it?

Exit barriers

Exit Barriers

Specialized assets

Fixed costs of exit

Strategic interrelationships among business units

Emotional barriers

Industries and segments

Industries and Segments

  • What is a segment?

  • Different segments…..

    • posses different combinations of 5-forces

    • therefore:

      • reward different strategies

      • possess different levels of profitability

Porter s in conclusion

Porter’ conclusion

  • Attractiveness of industry/segment

    • current industry

    • adjacent segments

    • industries you might consider entering

  • Which forces possess the greatest influence?

    • Can we influence them?

Static model hypercompetition

Static model & Hypercompetition

  • If the pace of transformation is rapid, if entry rapidly undermines the market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for analyzing competition and profit.

Competitor analysis

Competitor Analysis

Chapter 2

  • Strategic group mapping

  • A strategic group consists of those rivals with similar competitive approaches in an industry

Chapter 2


National Jewelry Retailers








Marks & Morgan






Pawn Shop

Chain-by-the-Foot Carts



Breadth of Product Line

Other dimensions for strategic group maps

Other Dimensions for Strategic Group Maps

  • Vertical integration

  • Geographic scope

  • R&D Expenditures

  • Customer Service

  • Number of outlets

  • Reputation

  • Can even be categorical (e.g., Mexican, Italian, pizza, subs, chicken)

Four steps of ca

Four Steps of CA

  • Identify their future objectives

  • Identify their current strategy

  • Identify their assumptions

  • Identity their capabilities







Competitive analysis

Competitive Analysis

  • Important in concentrated industries (few, large share competitors)

  • Benefits

    • forecast future actions, predict reactions

    • can we influence rivals’ behavior?

Identification of key success factors

Identification of Key Success Factors?

  • KSFs areproduct attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability

  • opportunities for competitive advantage

Example ksfs for beer industry

Example: KSFs for Beer Industry

  • Utilization of brewing capacity -- to keep manufacturing costs low

  • Strong network of wholesale distributors -- to gain access to retail outlets

  • Clever advertising -- to induce beer drinkers to buy a particular brand

  • Login