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

2. SWOT is the starting point
It provides an overview of the strategic situation.
It provides the “raw material” to do more extensive internal and external analysis.
An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment.
A THREAT is a factor in your company’s external environment that poses a danger to its well-being.
Opportunities and Threats form a basis for EXTERNAL analysis
By examining opportunities, you can discover untapped markets, and new products or technologies, or identify potential avenues for diversification.
By examining threats, you can identify unfavorable market shifts or changes in technology, and create a defensive posture aimed at preserving your competitive position.
Possible Opportunities:
Emerging customer needs
Product Innovations
Expanding global markets
Declining Interest Rates
Possible Threats:
New entry by competitors
Changing demographics/shifting demand
Emergence of cheaper technologies
Regulatory requirements

3. Components of the General Environment10

4. General Environment Demographic Technological Sociocultural
Population size, Age structure, Geographic distribution, Ethnic mix, Income distribution...
Sociocultural
Workforce diversity,Attitudes about quality of worklife,Concerns about environment, Shifts in product and service preferences...
Economic
Inflation rates, Interest rates, Personal savings rate, Exchange Rates, GDP...
Technological
Product innovations, Increase in R&D expenditures, New communication technologies...
Political / Legal
Antitrust laws, Taxation laws, Environmental Protection Law...
Global
Critical global markets, Newly industrialized countries, Different cultural and institutional attributes...

5. Developments in general environment change competitive battle lines.
The general environment usually holds both opportunities for and threats to expansion.
(+) for
(-) for
DEMOGRAPHIC
Aging Population
Medical Services
TECHNOLOGICAL
Advances in Laser Technology
Long-playing records
Developments in general environment change competitive battle lines.
Tekel sold Yeni Rakı for a long time before the privatization
Market is opened to the competition
The same environmental trend can have different effects on different industries
(+) for
(-) for
SOCIO-CULTURAL
Greater health awareness
Exercise equipments
Meat products

6. The impact of an environmental trend often differs significantly for differnt firms within the same industry
Restructring of the U.S. economy in the 1980s.
Reduced numbers of managers
Decrease in travel budget
Full-service airlines are affected negatively
Low-cost, low-service airlines gained adv.
Many developments in general environment are difficult to predict, while orhers are predictable.
! But even when a trend is easy to predict, it is not always clear what is strategic implications will be.
The affects of general environment may differ from one country to another

7. Porter’s Five-Forces of Competition
A set of factors that directly influences a company and its competitive actions and responses.
Interaction among these factors determine an industry’s profit potential and location of “profit pools”.
Need to understand which competitive factors have power, why they have power, and what you might be able to do about it to improve your own position.
The five forces are environmental forces that impact on a company’s ability to compete in a given market.
The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

8. Porter’s Five Forces Model of Competition
Threat of New Entrants 11

9. Threat of New Entrants Barriers to Entry Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Government Policy
Expected Retaliation
Barriers to Entry 12

10. Bargaining Power of Suppliers
Porter’s Five Forces
Model of Competition
Threat of
New Entrants
Bargaining Power of Suppliers 14

11. Bargaining Power of Suppliers
Suppliers exert power in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Suppliers are likely to be powerful if:
Supplier industry is dominated by a few firms
Suppliers’ products have few substitutes
Buyer is not an important customer to supplier
Suppliers’ product is an important input to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high switching costs
Supplier poses credible threat of forward integration 15

12. Bargaining Power of Buyers
Porter’s Five Forces
Model of Competition
Threat of New Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers 17

13. Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases are large relative to seller’s sales
Products are undifferentiated
Buyers face few switching costs
Buyers’ industry earns low profits
Buyer presents a credible threat of backward integration
Product unimportant to quality
Buyer has full information
Buyers compete with the supplying industry by:
* Bargaining down prices
* Forcing higher quality
* Playing firms off of
each other
Buyer is powerful when:
Buyer purchases large proportion of seller’s products
Buyer has the potential to integrate backward
Alternative suppliers are plentiful
Changing suppliers costs very little
Purchased product represents a high percentage of a buyer’s costs
Buyer earns low profits
Purchased product is unimportant to the final quality or price of a buyer’s products 18

14. Bargaining Power of Suppliers Bargaining Power of Buyers
Porter’s Five Forces
Model of Competition
Threat of New Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products 20

15. Threat of Substitute Products
Keys to evaluate substitute products:
Products with similar function limit the prices firms can charge
Products with improving price/performance tradeoffs relative to present industry products
Example:
Electronic security systems in place of security guards
Fax machines in place of overnight mail delivery
Substitute Products
Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry.
“Substitutes” ARE NOT THE SAME as rivals!
Burger King IS NOT considered a
“substitute” for McDonald’s.
A “substitute” for McDonald’s = 21

16. Porter’s Five Forces Model of Competition
Threat of New Entrants
Bargaining Power of Suppliers
Rivalry Among Competing Firms in Industry
Bargaining Power of Buyers
Threat of Substitute Products 23

17. Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
High strategic stakes
High exit barriers 26

18. Five-Forces Analysis -- SO WHAT?
Consider how opportunities and threats may result from the five competitive forces.
Understand the strength of each competitive force, and underlying reasons for strength.
Select niches where forces are weaker, and profit pools are higher.
Build strategies that defend yourself against strong competitive forces.
Build strategies that influence the forces in your favor.
are The Five Forces Unique to Your Industry???

19. Strategic Groups Defined
A set of firms emphasizing similar strategic dimensions and using similar strategies
Internal competition between strategic group firms is greater than between firms outside that strategic group

20. Strategic Groups Strategic Dimensions
Extent of technological leadership
Product quality
Pricing policies
Distribution channels
Customer service
Target markets
Product breadth
Geographical coverage
Extent of diversification or vertical integration . . .

21. Strategic Group Maps A graphical depiction of rival firms,
using two dimensions that
reflect important aspects of their strategy and
array the firms into groups.
Work best in fragmented industries.
Help show close (within group) rivals, crowded and open strategic positions; assist opportunity and threat interpretation (not all groups are affected equally).

22. Steps to Create a Strategic Group Map
1. Identify two important dimensions that help distinguish the competing firms from each other.
2. Draw a two-dimensional “map” that places each firm in the appropriate position given the two dimensions you are using.
3. Draw circles around firms that cluster together in a similar position.
4. Include arrows to indicate any movement of firms from one position to another.
DO NOT . . .
use unimportant/minor dimensions to create your map
use correlated dimensions (you will basically get a diagonal array of groups)
split one firm apart and map it in numerous positions
limit your thinking to only quantitative dimensions (because some categorical or qualitative dimensions might be useful!)

23. Competitive and Cooperative Dimensions
The Primarily Competitive Dimensions
New Entrants
Threat of New Entrants
Your Direct Rivals
Rivalry Among Competing Firms in Industry
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products
Substitute Products
The Primarily Cooperative Dimensions
Your
Suppliers
Your
Buyers
Your Firm

24. Analyzing the External Environment
Environmental Scanning
Gathering Intelligence
Sources of Competitive Intelligence
Scenario Planning

25. Environmental Scanning
The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation
AIM  to avoid strategic surprise and ensure the long-term health of the firm.
Environmental uncertainty:
The degree of complexity plus the degree of change existing in an organization’s external environment.

26. Competitive Intelligence
Information that is relavant to strategy formulation regarding the environmental context within which a firm competes
Several Uses of Competitive Intelligence
Providing descriptions of the competitive environment (Guide for strategy formulation)
Challenging assumptions about the competitive environment
Forecasting future developments
Identifying and compensating the competitive weaknesses
Determinig the unsustainable strategies
Indentifying the guideline for adjustment to changing environment

27. Sources of Useful Competitive Intelligence
Local newspapers
Government
Databases
Customers and suppliers
Competitors

28. The Environment-Strategy Relationship
How the external environment shapes strategy?
How strategy can influence the external environment?