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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

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chapter 2

Chapter 2

The External Environment:

Opportunities, Threats, Industry Competition and Competitor Analysis

slide2
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 –

slide6
General Environment

Industry Environment

Potential

Entrants

Economic

Technical

Competitive

Rivalry

Substitute

Products

Demographic

Political

& Legal

Bargaining Power

of Suppliers

Bargaining Power

of Buyers

Global

Sociocultural

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.
slide15
General Environment

Industry Environment

Potential

Entrants

Economic

Technical

Competitive

Rivalry

Substitute

Products

Demographic

Political

& Legal

Bargaining Power

of Suppliers

Bargaining Power

of Buyers

Global

Sociocultural

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

slide18
Substitute

Products

(of firms in

other industries)

Rivalry

Among

Competing

Sellers

Suppliers of

Key Inputs

Buyers

Potential

New

Entrants

slide19
Porter’s 5-forces is all about margins

{

Price

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

Profits

Costs

slide20
When industry structural variables are weak…...

Prices can be kept high

{

Profits can soar

Costs can be kept low

slide21
When industry structural variables are strong

Prices will be pushed down

{

Profits shrink

Costs will rise

slide22
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
suppliers
Suppliers
  • 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
buyers
Buyers
  • 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
buyers1
Buyers
  • 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
substitutes
Substitutes
  • 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
slide30
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?
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’s..in 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.
slide37
Strategic group mapping
  • A strategic group consists of those rivals with similar competitive approaches in an industry
slide38
Price

National Jewelry Retailers

Cartier

Tiffany

Nordstroms

Sachs

Burdines

Dillards

Jerrods

Marks & Morgan

Sears

JCP

Zales

Kay

Target

Pawn Shop

Chain-by-the-Foot Carts

WalMart

Kmart

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

Strategy

Objectives

Assumptions

Capabilities

Strategic

Action

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
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