Chapter 2 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.

Chapter 2

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

BROAD/REMOTE/MACROENVIRONMENT

Political and

Legal

Societal Values

and Lifestyles Demographics

Technology

The Economy at Large

COMPANY

Suppliers Substitutes

Buyers

NewEntrants

Rival Firms

IMMEDIATE INDUSTRY

AND COMPETITIVE ENVIRONMENT

Broad/Remote/Macroenvironment Segments

Macroeconomic

Demographic

Political/Legal

Technological

Social

Firms CAN NOT

Directly Control Them

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

SubstituteProducts(of firms in

other industries)

RivalryAmong

CompetingSellers

PotentialNew

Entrants

Suppliers of Key Inputs

Buyers

Complementors

Price

Costs

Profits {Porter’s 5-forces is all about margins - What factors increase/decrease margins, i.e., profitability.

Prices can be kept high

Costs can be kept low

Profits can soar {

When industry structural variables are weak…...

Prices will be pushed down

Costs will rise

Profits shrink {

When industry structural variables are strong…...

Potential 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

Threat of Substitutes

Product/service which fulfills similar need

Price cap

3 Questions1) Are they available?

2) Price-performance relationship?

3) Can we switch?

Power of Buyers

Who are the Buyers?

Can they force:lower prices, higher quality and service, or play competitors against one another?

Based on two issues1 Price sensitivity

• purchase is a large portion of costs• no differentiation• if they exist in a competitive, low profit industry

Power of Buyers (cont.)

2 Whether buyers can bargain down prices

• few buyers• buyers are knowledgeable• low switching costs• backward integration is a valid threat

Competitive Force of Suppliers

Who are the suppliers?Suppliers are a strong competitive force when:– Only a few suppliers exist– Few substitutes – Buyers not important customers– Suppliers provide a product crucial to production

process, and/or significantly affects product quality– It is costly for buyers to switch suppliers– Forward integration a credible threat– They can supply a component cheaper than the

buyers can make it themselves

Rivalry and Profitability

Industry profitability is a collective good.

Collective good is served by coordinationAre there industries were pricing is coordinated?

Incentive to violate

Usually the most powerful of the five forcesHow 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?

Porter’s..in conclusion

Determines the attractiveness of industry

Can we influence any of these structural attributes?

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.

Porter’s Five Forces - Two Examples

Campus Bookstore

Rivals? -

Entry Barriers? -

Substitutes -

Supplier Power -

Buyer Power -

Profitable?

PCs

Rivals -

Entry Barriers -

Substitutes -

Supplier Power -

Buyer Power -

Profitable ?

Industries and Segments

What is a segment?

Different segments…..posses different combinations of 5-forces

therefore:reward different strategies

possess different levels of profitability

What Forces Are atWork to Change Industry Conditions?

Industries change because forces are driving industry participants to alter their actions

Driving forces are the major underlying causes of changing industry and competitive conditions

Common Types of Driving Forces

Changes in long-term industry growth rate

Changes in who buys the product and how they use it

Product innovation

Technological change/process innovation

Marketing innovation

Entry or exit of major firms

Diffusion of technical knowledge

Common Types of Driving Forces

Increasing globalization of industry

Changes in cost and efficiency

Market shift from standardized to differentiated products (or vice versa)

New regulatory policies and/or government legislation

Changing societal concerns, attitudes, and lifestyles

Changes in degree of uncertainty and risk

Which Companies are in Strongest / Weakest Positions?

Strategic group mapping

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

Price

Breadth of Product Line

National Jewelry RetailersCartierTiffany Nordstroms

Sachs

WalMartKmart

Target

SearsJCP

BurdinesDillards

ZalesKay

Pawn ShopChain-by-the-Foot Carts

JerrodsMarks & Morgan

What strategic moves are rivals likely to make? - Competitive Analysis

Important in concentrated industries

Benefits– forecast future actions, predict reactions– can we influence rivals’ behavior?

Four Steps of CA

Identify their strategy

Identify the objectives

Identify their assumptions

Identity their capabilities

StrategyObjectivesAssumptionsCapabilities

Strategic Action

What are the Key Success Factors?

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

opportunities for competitive advantage

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

Identifying Key Success Factors (KSFs) - vary by segment

Automotive Industry