1. Chapter 2 The External Environment:
Opportunities, Threats, Industry Competition and Competitor Analysis

2. Skate to where the puck is going, not to where the puck has been.
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

3. 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

4. External Analysis 1) Analyze the environments
General
Industry
Competitive
2) Identification of key success factors

5. Components of External Analysis
Scanning –
Monitoring –
Forecasting –
Assessing –

6. General Environment
Industry Environment
Potential
Entrants
Economic
Technical
Substitute
Products
Competitive
Rivalry
Demographic
Political
& Legal
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Global
Sociocultural

7. General Environment Demographic Economic Political Socioculture
Technical
Global

8. 1) Demographic Segment Characteristics of the population
e.g., age, race, gender, sexual orientation and social classes
Ethnic structure
Income distribution
Geographic distribution

9. 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

10. 3) Political/Legal Segments
Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.

11. 4) Sociocultural Segment
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.

12. 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.

13. 6) Global Segment
New and existing markets around the world, and changes in the political, cultural and institutional terrain.

14. 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.

15. General Environment
Industry Environment
Potential
Entrants
Economic
Technical
Substitute
Products
Competitive
Rivalry
Demographic
Political
& Legal
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Global
Sociocultural

16. ROIC Across Industries 1995-2004

17. Each of these forces affect costs/prices, therefore, profitability
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

18. Substitute Products Rivalry Among Suppliers of Buyers Competing
(of firms in
other industries)
Rivalry
Among
Competing
Sellers
Suppliers of
Key Inputs
Buyers
Potential
New
Entrants

19. { Porter’s 5-forces is all about margins Price
What factors increase/decrease margins within an industry, thus affecting profitability.
Profits
Costs

20. When industry structural variables are weak…...
Prices can be kept high {
Profits can soar
Costs can be kept low

21. When industry structural variables are strong
Prices will be pushed down {
Profits shrink
Costs will rise

22. What kind of businesses might you start?
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?

23. 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

24. Barriers to Entry

25. 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

26. 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

27. 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

28. Substitutes Product/service which fulfills similar need Price cap
3 Questions
Are they available?
Can we switch?
Price-performance relationship?

29. 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

30. Usually the most powerful of 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?

31. Rivalry – What drives it?

32. Exit Barriers Specialized assets Fixed costs of exit
Strategic interrelationships among business units
Emotional barriers

33. Industries and Segments
What is a segment?
Different segments…..
posses different combinations of 5-forces
therefore:
reward different strategies
possess different levels of profitability

34. 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?

35. 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.

36. Competitor Analysis

37. Strategic group mapping
A strategic group consists of those rivals with similar competitive approaches in an industry

38. National Jewelry Retailers Cartier Tiffany Nordstroms Sachs
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

39. 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)

40. Four Steps of CA Identify their future objectives
Identify their current strategy
Identify their assumptions
Identity their capabilities
Strategy
Objectives
Assumptions
Capabilities
Strategic
Action

41. Competitive Analysis
Important in concentrated industries (few, large share competitors)
Benefits
forecast future actions, predict reactions
can we influence rivals’ behavior?

42. Identification of Key Success Factors?
KSFs are product attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability
opportunities for competitive advantage

43. 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