Slide 1Slide 2External AnalysisExternal AnalysisComponents of External AnalysisSlide 6General Environment1) Demographic Segment2) Economic Segment3) Political/Legal Segments4) Sociocultural Segment5) Technological Segment6) Global SegmentGeneral EnvironmentSlide 15ROIC Across Industries 1995-2004Porter’s Five ForcesSlide 18Slide 19Slide 20Slide 21Slide 22Potential New EntrantsBarriers to EntrySuppliersBuyersBuyersSubstitutesRivalry and ProfitabilitySlide 30Rivalry – What drives it?Exit BarriersIndustries and SegmentsPorter’s..in conclusionStatic model & HypercompetitionCompetitor AnalysisSlide 37Slide 38Other Dimensions for Strategic Group MapsFour Steps of CACompetitive AnalysisIdentification of Key Success Factors?Example: KSFs for Beer IndustryChapter 2The 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 GretskyExternal 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 changeExternal Analysis1) Analyze the environmentsGeneralIndustryCompetitive2) Identification of key success factorsComponents of External AnalysisScanning – Monitoring – Forecasting – Assessing –Substitute ProductsPotentialEntrantsBargaining Powerof BuyersBargaining Powerof SuppliersCompetitiveRivalryIndustry EnvironmentGeneral EnvironmentTechnicalDemographicSocioculturalPolitical& LegalEconomicGlobalGeneral Environment1) Demographic2) Economic3) Political 4) Socioculture5) Technical6) Global1) Demographic SegmentCharacteristics of the populatione.g., age, race, gender, sexual orientation and social classesEthnic structureIncome distributionGeographic distribution2) 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 costs3) 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, low-carb 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.Substitute ProductsPotentialEntrantsBargaining Powerof BuyersBargaining Powerof SuppliersCompetitiveRivalryIndustry EnvironmentGeneral EnvironmentTechnicalDemographicSocioculturalPolitical& LegalEconomicGlobalROIC Across Industries 1995-2004Porter’s Five ForcesCompetitive RivalryPower of BuyersPower of SuppliersPotential EntrantsSubstitute ProductsEach of these forces affect costs/prices, therefore, profitabilitySubstituteProducts(of firms inother industries)RivalryAmongCompetingSellersPotentialNewEntrantsSuppliers of Key InputsBuyersPriceCostsProfits{What factors increase/decrease margins within an industry, thus affecting profitability.Porter’s 5-forces is all about marginsPrices can be kept highCosts can be kept lowProfits can soar{When industry structural variables are weak…...Prices will be pushed downCosts will riseProfits shrink{When industry structural variables are strongSuppose you had to start a new business and start generating revenues…… today… in a week… in 2 months… in 1 yearWhat 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 firmsBarriers 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Forward integration by suppliers is a credible threatSuppliers can supply at a lower costBuyers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Buyers’ profitabilitySubstitutesProduct/service which fulfills similar needPrice cap3 Questions1) Are they available?2) Can we switch?3) 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