Chapter 2 The External Environment Opportunities Threats Industry Competition and Competitor Analysis 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 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 External Analysis 1 Analyze the environments General Industry Competitive 2 Identification of key success factors Components of External Analysis Scanning Monitoring Forecasting Assessing General Environment Industry Environment Potential Entrants Technical Substitute Products Political Legal Economic Competitive Rivalry Demographic Bargaining Power Bargaining Power of Suppliers of Buyers Global Sociocultural General Environment 1 2 3 4 5 6 Demographic Economic Political Socioculture Technical Global 1 Demographic Segment Characteristics of the population e g age race gender sexual orientation and social classes Ethnic structure Income distribution Geographic distribution 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 3 Political Legal Segments Tax laws minimum wages environmental laws labor laws consumer protection product liability etc 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 lowcarb dieting health consciousness respect for intellectual property desire for green retailing savings rates etc 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 6 Global Segment New and existing markets around the world and changes in the political cultural and institutional terrain 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 General Environment Industry Environment Potential Entrants Technical Substitute Products Political Legal Economic Competitive Rivalry Demographic Bargaining Power Bargaining Power of Suppliers of Buyers Global Sociocultural ROIC Across Industries 1995 2004 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 Substitute Products Potential New Entrants Suppliers of Key Inputs Rivalry Among Competing Sellers Buyers of firms in other industries Porter s 5 forces is all about margins Price What factors increase decrease margins within an industry thus affecting profitability Profits Costs When industry structural variables are weak Prices can be kept high Profits can soar Costs can be kept low When industry structural variables are strong Prices will be pushed down Profits shrink Costs will rise 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 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 Barriers to Entry 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 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 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 Substitutes Product service which fulfills similar need Price cap 3 Questions 1 2 3 Are they available Can we switch Price performance relationship 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 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 Rivalry What drives it Exit Barriers Specialized assets Fixed costs of exit Strategic interrelationships among business units Emotional barriers Industries and Segments What is a segment Different segments posses different combinations of 5 forces therefore reward different strategies possess different levels of profitability 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 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