Chapter 2:

External Analysis

2-1

External and Internal Analysis

Macroeconomics Economic
Political & Legal Technology Socio-cultural Demographic STRATEGIC GROUPS INDUSTRY STAGE of DEVELOPMENT 5 FORCES MODEL (Plus 1) Rivalry Barriers to entry Suppliers Buyers Substitutes Complementors COMPANY STAGE of DEVELOPMENT VALUE CREATION Efficiency Innovation Customer Responsiveness Quality 2-2

THE MACRO-ENVIRONMENT

THE INDUSTRY

EXTERNAL

THE COMPANY

External Environmental Analysis

The external environmental analysis process should be conducted on a continuous basis. This process includes four activities: Scanning Monitoring Forecasting Assessing
Identifying early signals of environmental changes and trends Explore meaning by ongoing observations of environmental changes and trends Developing projections of anticipated outcomes based on monitored changes and trends Determining the timing & importance of environmental changes and trends for firms' strategies & their management
2-3

The External Environment

Environment
Economic
Industry Environment
5 FORCES MODEL (Plus 1)

Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Complementors
STRATEGIC GROUPS INDUSTRY STAGE of DEVELOPMENT

Technological

Macro2-4

Elements of the MacroMacro-environment

Environment
Economic

Economic
Economic systems. Economic stages. Savings rates Inflation/interest rate Gross domestic prod. Trade deficits or surpluses Budget deficits or surpluses. .

affecting how difficult or easy to be unsuccessful and profitable any time

Macro2-5

Elements of the MacroMacro-environment

Environment

Political / Legal Labour Laws Government econ. involvement views De-/ Regulation views Competition Laws Education policy Taxation laws

influencing the nature of competition -> creating opportunities and threats

Macro2-6

Elements of the MacroMacro-environment

Environment

Sociocultural Enviro. Concerns Workforce diversity Work life quality views Shifts in product / service preferences Shifts in 2 career preferences

Macro-

Driving economic, political/lega l, and technological conditions and changes > creating both opportunities and threats
2-7

Elements of the MacroMacro-environment

Environment

Technological Focus of R&D expenditures Product innovations Knowledge Resources Process Innovations New communication technologies

Technological

Macro-

Including the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, and materials.
2-8

Elements of the MacroMacro-environment

Environment

Demographic Population size Age structure Ethnic Mix Geographic Distribution Income Distribution Immigration

Macro2-9

Elements of the MacroMacro-environment

Environment

Global Big political events Different cultural & institutional attributes Critical global markets Newly industrialized countries

Macro2-10

The Industry Environment

What is an industry
o An industry is a group of companies offering products/services that are close substitutes. o The boundary between industries may change as customer needs change or a change in technology

2-11

The Industry Environment

Other concepts
o The sector is the group of closely related industries of which it is a part. o Market segmentation
The different groups of customers in an industry Each segment has different characteristics and specific needs

2-12

Computer manufacturing sector

2-13

The Industry Environment

The set of factors that directly influences a firm, its competitive actions & competitive responses:
These forces can be strong or weak

Industry Environment
5 FORCES MODEL (Plus 1)

Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry Complementors
STRATEGIC GROUPS INDUSTRY STAGE of DEVELOPMENT

The level of forces can change, when the conditions in the industry of change A weak competitive force can be seen as an opportunity to business or business to earn higher profits A strong competitive pressure can be seen as a threat if it would reduce the profits of business or sector The stronger the force, the more limited to sell products with high price and earning high profit.
2-14

Porters 5 Forces Model of Competition

Threat of New Entrants

Five Forces of Competition

Threat of Substitute Products

The threat of new entrants depends on barriers to entry

2-15
The above image Copyright 2001 Corel & Jerry Sheppard All rights reserved.

Threat of New Entrants *

Barriers to Entry
Economies of Scale

Minimum cost that enterprise has to spend when entering any industry.

* Product Differentiation * Capital Requirements * Switching Costs * Access to Distribution Channels * * *

Cost Disadvantages Independent of Scale Government Policy Expected Retaliation

2-16 *

Threat of New Entrants

Threat of new entrants increases as

Only a small number of potential competitors High entry barriers Current competitors in the industry are struggling to obtain adequate profit The prospect of the industry is risky The growth of the industry is slow and standstill The competition in the industry will react violently with the new entry.

2-17

Threat of New Entrants

Threat of new entrants decreases as

There are a large number of potential competitors Low entry barriers Industry with high growth rate and high profit potential Weak response for new entrants from the companies in the industry \When existing companies in the sector are strategically expanding into new geographic market area.

2-18

Porters 5 Forces Model of Competition

Threat of New Entrants

Bargaining Power of Suppliers

Five Forces of Competition

Threat of Substitute Products

Bargaining Power of suppliers depends on a number of factors

2-19 *

Bargaining Power of Suppliers

Suppliers are likely to be powerful if:
Supplier industry is dominated by a few firms. * Suppliers products have few substitutes. * Threatening to raise prices or to reduce * Buyer is not an important customer to quality supplier. Suppliers product is an important Powerful suppliers * can squeeze industry input to buyers product. profitability if firms * Suppliers products are differentiated.
Suppliers exert power in the industry by:

are unable to recover cost increases

* *

Suppliers products have high switching costs. Supplier poses credible threat of forward integration.
2-20 *

Bargaining Power of Suppliers

Cooperation with suppliers

The company can conduct strategic cooperation with some suppliers to:
- Reduce inventory and supplying costs - Improve the quality of raw materials, spare parts supplied - Tighten cost savings for both parties

Potential competitive advantage can come up with companies that have good management of the relationships in the supply.

2-21

Porters 5 Forces Model of Competition

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Five Forces of Competition

1. Consumers or end-users. 2. Intermediary distributor

Threat of Substitute Products

Bargaining Power of buyers depends on a number of factors

2-22 *

Bargaining Power of Buyers

Buyer groups are likely to be powerful if:

* * * * * * *

There are many small sellers and few large buyers. Buyers purchase in large quantities. Buyers compete A single buyer is a large customer to a firm. with supplying industry by: Buyers can switch suppliers at low cost. * Bargaining down prices Buyers purchase from multiple sellers * Forcing higher quality at once. Buyers can easily vertically integrate to compete with suppliers. Buyer has full information
2-23

* Playing firms off of

each other

Porters 5 Forces Model of Competition

Threat of New Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Five Forces of Competition

Threat of Substitute Products

Replaced products and services of other industries that can satisfy the same needs of customers 2-24 *

Threat of Substitute Products

Threat of Substitute Products

Keys to evaluating substitute products:

*
Products with similar function limit the prices firms can charge

Products with improving price / performance tradeoffs relative to present industry products For Example: Electronic security systems in place of security guards Fax machines or e-mailed attachments in place of overnight mail delivery
2-25

Porters 5 Forces Model of Competition

Threat of New Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms

Bargaining Power of Buyers

Five Forces of Competition Threat of Substitute Products

Threat of Substitute Products

Competition between companies within an industry in order to take other competitors market share. Reduced rivalry means 2-26 * greater profitability

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways

* * * * * * *

Jockeying for strategic position Using price competition Staging advertising battles Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors
2-27

Rivalry Among Existing Competitors

The intensity of competition in an industry arises from:
Industrys competitive structure. Demand (growth or decline) conditions in industry. Height of industry exit barriers.

2-28

Rivalry Among Existing Competitors

Competitive Structure

Continuum of Industry Structures

Fragmented Many firms, no dominant firm Few firms, shared dominance (oligopoly) Consolidated Few, even one firm or one dominant firm (monopoly)

2-29

Rivalry Among Existing Competitors

Height of industry exit barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.

* * * * *

Specialized assets Fixed cost of exit (e.g., labour agreements) Strategic interrelationships Emotional barriers Government and social restrictions
2-30

10

Complementors

Complementors:
Companies whose products are sold with another companys products. Increased supply of a complementary product accordingly increases demand for the primary product.

Example:
Faster CPU chips fuel sales of personal computers.
2-31

Strategic Groups Within Industries

The concept of strategic groups
Within an industry, a competitor grouping using similar strategies that differ from other industry groups.

Cluster of firms that share similar strategies

- Breadth of product and geographic scope - Price/quality - Degree of vertical integration - Type of distribution system

Implications of strategic groups

The closest industry competitors are those in the group. The various industry groups are differentially and competitively advantaged and positioned. Mobility barriers inhibit the movement of competitors from one strategic group to another.
2-32

Strategic Groups in the Pharmaceutical Industry

2-33

11

The World Automobile Industry: Strategic Groups

Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups

Limitations of the Five Forces and Strategic Group Models

Both models are static and ignore innovation. Their focus is on industry and group structures rather than individual companies.
Innovation creates change in industry structures, altering the competitive environment. Industry structure cannot fully explain the performance differences between industry competitors.

2-35

Industry Stages of Development

REVENUE
MATURITY SHAKEOUT

TIME
Time horizon varies depending on industry dynamics

The development stage of an industry (or strategic group) tells you a lot about the environment in which a business operates.
2-36

12

The Embryonic Stage

MATURITY SHAKEOUT

Beginning to develop Perfecting product design Slow growth High prices Undeveloped distribution Education of customers No/low profits Extreme uncertainty Limited competition
2-37

The Growth Stage

MATURITY SHAKEOUT

1st time demand growing Cash intensive; growth takes cash Competition not intense, but growing; new entrants attracted by growth Scale economies and customer loyalty not yet fully developed

2-38

The Shakeout Stage

MATURITY SHAKEOUT

Demand approaches saturation Number of competitors and competitive intensity at their highest; market share is the goal Excess capacity beginning to be evident Prices dropping Margins diminishing; disappearing for weak companies
2-39

13

The Maturity Stage

MATURITY SHAKEOUT

Market totally saturated Weak companies have failed or been acquired Demand stabilizes at demographic growth levels; mainly replacement demand Economies of scale, brand loyalty, profit margins at their peaks Barriers to entry increase Oligopoly/con-centration often emerges

Stability
2-40

The Decline Stage

MATURITY SHAKEOUT

Growth goes negative Competitive rivalry increases; struggle for big share of declining market Can be like shakeout Excess capacity Price competition Declining profit margins

2-41

Regeneration
MATURITY SHAKEOUT

New markets New/modified products Innovation Like embryonic, except:

Established market presence Established capital base Managing transition from old base of business to new base of business

2-42

14

Competitor Environment
Competitor intelligence is the ethical gathering of needed information and data about competitors objectives, strategies, assumptions, & capabilities.
What drives the competitor as shown by its future objectives, What the competitor is doing and can do as revealed by its current strategy, What the competitor believes about itself and the industry, as shown by its assumptions, What the the competitor may be able to do, as shown by its capabilities.
2-43

Competitor Analysis
Future Objectives:
Future objectives How do our goals compare with our competitors goals? Where will the emphasis be placed in the future? What is the attitude toward risk?

2-44

Competitor Analysis
Future objectives

Current Strategy:
Current strategy How are we currently competing? Does this strategy support changes in the competitive structure?

2-45

15

Competitor Analysis
Future objectives

Assumptions:
Current strategy Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves?
2-46

Assumptions

Competitor Analysis
Future objectives

Current strategy

Capabilities:
What are our strengths and weaknesses? How do we rate compared to our competitors?

Assumptions

Capabilities
2-47

Competitor Analysis
Future objectives Response

Current strategy

Response:
What will our competitors do in the future? Where do we hold an advantage over our competitors? How will this change our relationship with our competitors?
2-48

Assumptions

Capabilities

16