Chapter 2 The External Environment Opportunities Threats Industry Competition and Competitor Analysis Computers in the future may weigh no more than 1 5 tons Computers in the future may weigh no more than 1 5 tons Popular Science Magazine forecasting the relentless march of Science 1949 In 1968 a 100 megabyte hard drive weighed 4 500 pounds cost more than 130 000 I think there is a world market for maybe five computers Thomas Watson Chairman of IBM 1943 But what is it good for Engineer at IBM commenting on the microchip 1968 The idea is interesting and wellformed but in order to earn better than a C the idea must be feasible Yale University Professor in response to Fred W Smith s paper proposing an overnight delivery service FedEx now delivers well over 7 5 million packages a day 2 7 billion a year We don t like their music and guitar music is on the way out Decca Records Company in rejecting the Beatles 1962 Who the hell wants to hear actors talk H M Warner 1927 There is no reason why anyone would want a computer in their home Ken Olson president chairman and founder of Digital Equipment Corporation 1977 This telephone has too many shortcoming to be seriously considered a means of communication The device is inherently of no value to us Internal Memo Western Union 1876 Everything that can be invented has been invented Charles H Duell Commissioner of the U S Patents Office 1899 640K of RAM ought to be enough for anybody Bill Gates 1981 Subway opens a new store every 3 hours Starbucks every 11 hours Quiznos every 16 hours WSJ Oct 1 2003 I see no scenario whatsoever where Toyota will pass us in share Chrysler CEO January 2002 I see no scenario whatsoever where Toyota will pass us in share Chrysler CEO January 2002 September 2003 The Big Three became GM Ford and Toyota Active Blogs Daily Google Searches Daily E mails Text Messages Hard Drive Storage Time Spent Online CD Sales Revenues iTunes Downloads 2000 2010 12 000 100 Million 141 Million 2 Billion 12 Billion 400 000 10 Gigabyte 247 Billion 4 5 Billion 0 06 Gigabyte 2 7 hours week 18 hours per week 943 Million 427 Million 0 10 Billion cumulative Active Blogs Daily Google Searches Daily E mails Text Messages Hard Drive Storage Time Spent Online CD Sales Revenues iTunes Downloads 2000 2010 12 000 100 Million 141 Million 2 Billion 12 Billion 400 000 10 Gigabyte 247 Billion 4 5 Billion 0 06 Gigabyte 2 7 hours week 18 hours per week 943 Million 427 Million 0 10 Billion cumulative Nothing important happened today Journal entry made by King George III July 4 1776 the day the United States declared independence from England 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 Identifying early signals Monitoring Following signals or change identifies in scanning to identify patterns Forecasting Projections of what might happen Assessing Determining the timing and significance of forecasted change 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