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The External Environment:
Opportunities and Threats
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Hierarchy of External Influences
Firm
Social Economic Technical Global Political/Legal
Five Forces Competitor Intelligence Industry Structure Strategic Groups
Political/Legal
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Stakeholders
Firm
Shareholders
Government Financial Community Host Community Ecological Environment
Society in General
Rivals
Customers Suppliers Employees Managers
Board Members
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Industry Vital Statistics
How is the industry defined?
Size
Growth Key Players: Rivals, customers,
suppliers, government agencies
Structure Performance
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Life Cycle Stage
Gr
owthRate
Time
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Concentrated Structure
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Fragmented Structure
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Threat of
Substitute
Products
Threat of
NewEntrants
Threat of
New
Entrants
Porters Five Forces Model of Competition
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Prices
Costs
(+) or (-) influence...
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Threat of New Entrants
Barriers to
Entry
Economies of Scale -- MemoryEconomies of Scale -- MemoryProduct DifferentiationProduct Differentiation
Capital RequirementsCapital Requirements
Switching Costs -- Frequent flyerSwitching Costs -- Frequent flyer
Access to Distribution ChannelsAccess to Distribution Channels
Cost DisadvantagesCost Disadvantages
Independent of ScaleIndependent of Scale
**
**
**
**
**
**
Government PolicyGovernment Policy**
Expected RetaliationExpected Retaliation**
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** Supplier industry is dominated bySupplier industry is dominated by
a few firms -- Microprocessorsa few firms -- Microprocessors
** Suppliers products have fewSuppliers products have few
substitutes -- Intel, PowerPCsubstitutes -- Intel, PowerPC
** Buyer is not an important customerBuyer is not an important customerto supplierto supplier
** Suppliers product is an importantSuppliers product is an important
input to buyers productinput to buyers product
** Suppliers products are differentiatedSuppliers products are differentiated
Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:
** Suppliers products have highSuppliers products have high
switching costsswitching costs
** Supplier poses credible threat ofSupplier poses credible threat offorward integration -- Nikeforward integration -- Nike
Bargaining Power of Suppliers
Powerful
suppliers can
squeeze industry
profits if firms
are unable to
recover cost
increases
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Bargaining Power of Buyers
Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:
** Buyers purchases are large relative toBuyers purchases are large relative tosellers sales -- Wal-Martsellers sales -- Wal-Mart
** Purchase accounts for a significantPurchase accounts for a significant
fraction of suppliers salesfraction of suppliers sales
** Products are undifferentiatedProducts are undifferentiated
** Buyers face few switching costs --Buyers face few switching costs --
GasolineGasoline**
** Buyer presents a credible threat ofBuyer presents a credible threat of
backward integrationbackward integration
** Product unimportant to qualityProduct unimportant to quality
**Buyer has full informationBuyer has full information
Buyers compete
with the supplying
industry by:
* Bargaining down prices
* Forcing higher quality
*Playing firms off of
eachother
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Threat of Substitute Products
** Products with improvingProducts with improving
price/performance tradeoffsprice/performance tradeoffs
relative to present industryrelative to present industry
productsproducts
Products
with similar
functionlimit the
prices firms
can chargeFor ExampleFor Example::
Keys to evaluate substitute products:Keys to evaluate substitute products:
On-line trading in place ofOn-line trading in place ofstock brokersstock brokers
Plastic vs. glass vs. aluminumPlastic vs. glass vs. aluminum
containers for soft drinkscontainers for soft drinks
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Plays out in the following ways:Plays out in the following ways:
** Jockeying for strategic positionJockeying for strategic position
** Using price competition -- AT&T vs. MCIUsing price competition -- AT&T vs. MCI
**Staging advertising battles -- Bud vs. MillerStaging advertising battles -- Bud vs. Miller
** Making new product introductionsMaking new product introductions** Increasing consumer warranties or serviceIncreasing consumer warranties or service
Intensity of Rivalry Among Existing Competitors
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CutthroatCutthroatcompetitioncompetition is more likely to occur when:is more likely to occur when:
** Numerous or equally balanced competitorsNumerous or equally balanced competitors
** Slow growth industry -- Heavy trucksSlow growth industry -- Heavy trucks
** High fixed costsHigh fixed costs
** Lack of differentiation -- Long distance phone svc.Lack of differentiation -- Long distance phone svc.
** High storage costsHigh storage costs
** Capacity added in large incrementsCapacity added in large increments
** High strategic stakesHigh strategic stakes
** High exit barriersHigh exit barriers
** Diverse competitorsDiverse competitors
Intensity of Rivalry Among Existing Competitors
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Environmental Scanning Grid
IMPACTSerious Mild Potential Strong
Threat Threat Benign Oppty. Oppty.
General Economics
Environment Demographics
Political-LegalSociocultural
Technological
Global
Competitive Potential Entry
Environment Suppliers
Customers
Substitutes
Rivalry
TOTAL IMPACT
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Wholesal
e
Clubs
Strategic Group Map
Department Stores
High
Quality
Low
Quality
Low Price High Price
Upscale
Closeout
BrandedChains
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Strategic Group Map: Beer(Pre-light / Pre-microbrew)
Dark/Full
Light
Low Price High Price
Amber
RegularHeineken
MillerBud
Old Swill
Guinness
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Strategic Group Map: Beer
Dark/Full
Light
Low Price High Price
Amber
Regular Old Swill
Guinness
Blackened Voodoo
Anchor Porter
Amstel
CardinalMiller Lite
Bud Ice
Sam Adams
Bass Ale
Pilsner Urquell
Killians RedRed Wolf
Amber Bock
Lowenbrau
Killians Brown
Lowenbrau Dark
Milwaukees
Best Light
Bud
Miller