Slide 1Slide 2External EnvironmentsComponents of External AnalysisAssessing the General EnvironmentGeneral Environment1) Demographic Segment2) Economic Segment3) Political/Legal Segments4) Sociocultural Segment5) Technological Segment6) Global SegmentGeneral EnvironmentROIC Across Industries 1995-2004Porter’s Five ForcesSlide 16Slide 17Slide 18Slide 19Potential New EntrantsPotential New EntrantsBarriers to Entry – Prevent New EntrantsSuppliersBuyersBuyersSubstitutesSubstitutes and Business DefinitionRivalry and ProfitabilityRivalry – What drives it?Exit BarriersIndustries and SegmentsSegments in the Automotive IndustryPorter’s..in conclusionStatic model & HypercompetitionAnalysis of Direct CompetitorsSlide 36Implications from Strategic Group DynamicsCompetitor Analysis ComponentsIdentification of Key Success Factors?Example: KSFs for Beer IndustryCompeting For AdvantagePart II – Strategic AnalysisChapter 3 – 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 GretskyExternal EnvironmentsKey TermsGeneral Environment – composed of dimensions in the broader society that influence an industry and the firms within itIndustry Environment – set of factors that directly influence a firm and its competitive actions and competitive responsesCompetitor Environment – details about a firm’s direct and indirect competitors and the competitive dynamics expected to impact a firm's efforts to generate above-average returnsComponents 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 changeAssessing the General EnvironmentGeneral 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.ROIC 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, or industry segment, 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 strongPotential New Entrants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?Some industries, by their nature, are easier to enter than othersPotential New EntrantsFirms and individuals search for industries to enter that at attractive/profitable…….unless they find themselves at an immediate disadvantage relative to incumbentsIndustries possess, and firms can create “barriers to enter” Barriers of entry are desirable for entrenched firmsBarriers to Entry – Prevent New EntrantsEconomies of scaleProduct differentiation & loyaltyCapital & resource requirementSwitching costsDistributionCost disadvantage independent of sizeRegulatory policiesAccess to technology & know-howLearning, costs and experience curvesThreat of retaliationSuppliers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 selling to many)Few substitutes available to the industry firmIndustry firms not important 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 threatBuyersWho are your key buyers? - who provides your 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Price sensitivityCan you actually bargain?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