Key Points:

1
Key Points Chapter 2 External Analysis

• Understand and apply the following external
  analysis tools
• Trends and factors in the general environment
• Industry analysis
• Industry a group of firms producing products
  that are close substitutes
• Porters five forces
• Strategic groups
• Competitor analysis

2
General Environment
Industry Environment
Demographic
Sociocultural
Porters Five Forces
Firm
Economic
Global
Political/Legal
Technological
3
General Environment

• Future trends that are likely to impact
  competition in a variety of industries
• May impact different industries in different ways
• Identify driving forces
• Segments of the General Environment
• Demographic
• Economic
• Political/Legal
• Sociocultural
• Technological
• Global

4
Porters Five Forces
Threat of Substitutes Goods/services from another
industry that buyers purchase instead of
the industrys goods/services
Threat of New Entrants How likely is it that
firms not currently in the industry will enter
the industry and begin to compete with existing
firms
Firm N
Substitute Industry Firms X Y
Industry Firms A B C
Suppliers
Buyers
Bargaining Power of Suppliers How much power do
suppliers have compared to firms in the industry
Bargaining Power of Buyers Industry is the
supplier of goods and/or Services to the buyer
Rivalry Among Competing Firms Intensity of
competition among firms in the industry
5
Threat of New Entrants How likely is it that
firms not currently in the industry will enter
the industry and begin to compete with existing
firms
Firm N may be a new startup or may be a firm that
currently competes in other industries, but not
this one
Firm N
Industry Firms A B C
Industry
6
Porters Five Forces Threat of New Entry

• Attractive Low Threat Unattractive High
  Threat
• Likelihood of entry depends on
• BARRIERS TO ENTRY (High Barriers Low Threat)
• Economies of Scale
• Product Differentiation/Brand Loyalty
• Capital Requirements
• Switching Costs
• Access to Distribution Channels
• Cost Disadvantages Independent of Size
• Government Policy
• EXPECTED RETALIATION (High Retal. Low Threat)

7
Bargaining Power of Suppliers How much power do
suppliers have compared to firms in the industry
Industry is the buyer of the suppliers goods
and/or services
Industry Firms A B C
Suppliers
8
Porters Five Forces Bargaining Power Of
Suppliers

• Attractive Low Power Unattractive High Power
• SUPPLIERS ARE MOST POWERFUL WHEN
• Few suppliers, many firms in industry
• Substitutes are not available
• Industry is not an important customer
• Suppliers goods critical to industry firms
  success
• High switching costs
• Suppliers can threaten to integrate forward
• Buyers cannot threaten to integrate backward

9
Bargaining Power of Buyers How much power do
buyers have compared to firms in the industry
Industry is the supplier of goods and/or
services to the buyer
Industry Firms A B C
Buyers
10
Porters Five Forces Bargaining Power of Buyers

• Attractive Low Power Unattractive High Power
• BUYERS ARE MOST POWERFUL WHEN
• Buyers purchase a large portion of industrys
  output
• Industry product is significant portion of
  buyers costs
• Low switching costs
• Industrys products are undifferentiated/standar
  dized
• Buyers can threaten to integrate backward

11
Threat of Substitutes Goods/services from another
industry that buyers purchase instead of
the industrys goods/services
Substitute Industry Firms X Y
Industry Firms A B C
12
Porters Five Forces Threat of Substitutes

• Attractive Low Threat Unattractive High
  Threat
• Substitutes goods or services that perform the
  same
• or similar function as industrys product
• Place an upper limit on prices firm can charge
• Threat of substitutes strongest when
• Low switching costs
• Price of substitutes is low
• Quality/performance of substitutes is high

13
Rivalry Among Competing Firms Intensity of
competition among firms in the industry
Industry Firms A B C
14
Porters Five Forces Intensity of Rivalry Among
Competitors

• Attractive Low Rivalry Unattractive High
  Rivalry
• INTENSITY TENDS TO BE HIGHER WHEN
• Numerous or equally balanced competitors
• Slow industry growth rate
• High fixed or storage costs
• Commodity or low switching costs
• Capacity augmented in large increments
• Diverse competitors
• High strategic stakes
• High exit barriers

15
Interpretation of Industry Analysis

• Overall, is the industry attractive or
  unattractive?
• What is the collective impact of each of the five
  forces?
• Which factors are the most important in your
  analysis?
• Opportunities and Threats
• Can my company maintain or attain a strong market
  position and employ a successful strategy in this
  industry?

16
Strategic Groups

• Similar strategies with similar resources
• Groups within an industry can be identified
• Critical dimensions extent of technological
  leadership, product quality, price, distribution,
  customer service, image, product breadth
• Groups face forces of differing strengths

17
Strategic Groups
18
Competitor Analysis

• Who are the key competitors in the industry?
• Objectives
• Assumptions
• Strategy
• Capabilities
• Who will be the key competitors in the future?
• What moves are these firms likely to make?

19
Key Success Factors

• The major determinants of financial and
  competitive success in the industry
• Usually a few factors (3-4)
• Impact long-term success
• Examples
• Ability to meet specific customer needs (e.g.,
  airlines having on-time arrivals and not losing
  baggage)
• Ability to innovate and offer new
  products/services
• Efficiency
• Excellence in customer service