External Environment Analysis STRATEGY Environment Firm External analysis searches for conditions and trends that could affect the success of the firm

Assumptions 1. Conditions in the environment determine the profit potential for firms in an industry (From industrial organization (IO) economics) 2. The environment presents the same conditions to all firms in an industry, but affects firms differently; 3. Success of individual firms depends on how well they monitor the environment, how well they interpret environmental conditions, and how well they respond to the environmental conditions.

Environmental Analysis External Analysis has two parts 1.Analysis of Industry Conditions Systematic analysis of environmental conditions to identify key factors that determine the profit potential for the firms in an industry and the change drivers that determine the future conditions in the industry 2.Effect of Conditions on Firm Examination of how the firm is affected by conditions and changes in the environment and how the firm has responded.

Environmental Analysis key success factors change driversstrategic environment Purpose is to identify key success factors and change drivers in the strategic environment Remote Environment Industry Macro Conditions Strategic Group Industry Competitive Conditions

General Environment Political/Legal Economic Sociocultural Technical International Demographic Macro environment forces have the least direct impact on a firm’s strategy – but they can be important and must be considered.

Industry Definition and Conditions Life Cycle Market Size and Growth Rate Structure Product Characteristics Technological developments Customers Complementors Sources of Competition

Porter’s Five Forces Model of Industry Competition Threat of new entrants Bargaining power of buyers Bargaining power of suppliers Threat of substitute products and services INDUSTRY COMPETITION Rivalry among existing firms INDUSTRY PROFIT POTENTIAL

Five-Forces Limitations Assumes Zero-Sum Ignores Complementors ‘ Sixth Force’ in Five-Forces Analysis Focuses on Static not Dynamic Conditions Trajectories of Industry Change

Porter’s Five (+1) Forces Model of Industry Competition Threat of new entrants Bargaining power of buyers Bargaining power of suppliers Threat of substitute products and services INDUSTRY COMPETITION Rivalry among existing firms INDUSTRY PROFIT POTENTIAL The suppliers of complements create value for the industry and can exercise bargaining power

Five-Forces Analysis Bargaining Power of Suppliers: High/Medium/Low Rationale (relative concentration; substitutes; switching costs; …) Bargaining Power of Buyers: High/Medium/Low Rationale (relative concentration; substitutes; switching costs; …) Threat of Substitutes: High/Medium/Low Rationale: (switching costs; performance; …) Threat of New Entrants: High/Medium/Low Rationale: (barriers to entry; switching costs; …) Intensity of Competition: High/Medium/Low Rationale: (Structure; life cycle; growth rate; exit barriers; …) Summary: The profit potential is High/Medium/Low Because (forces that increase/decrease profit potential for industry)

What drives competition? What are the main dimensions of competition? How intense is competition? How can we obtain a superior competitive position? Analysis of demand Who are our customers? What do they want? KEY SUCCESS FACTORS Analysis of competition What drives competition? What drives competition? What are the main dimensions of competition? What are the main dimensions of competition? How intense is competition?How intense is competition? How can we obtain a superior competitive position?How can we obtain a superior competitive position? What do customers want? How does the firm survive competition Pre-requisites for success 17 Identifying Key Success Factors

Strategic Group Who are they? What are their current strategies? What are their strengths and weaknesses? How much of a threat are they? How are they changing? Cluster of firms that has similar capabilities and that pursues similar strategies.