Analyzing the External Environment

1
Analyzing the External Environment

• Session 5

2
When an industry with a reputation for difficult
economics meets a manager with a reputation for
excellence it is usually the industry that
keeps its reputation intact. - Warren
Buffett
3
Industrial Organization View

• Profitability is a function of industry structure
• Positioning is everything
• Alternative approach Resource dependency theory
  
• Proactive view
• Seeks to manage environment through bridging and
  buffering.

4
Porters Five Forces Model

• Factors shaping industry competition
• Risk of new entry
• Existing rivalry between firms
• Power of buyers
• Power of suppliers
• Threat of substitutes

5
Entry of potential competitors

• Entry barriers
• Product differentiation
• Absolute cost advantages- Proprietary product
  technology, access to raw materials, favorable
  locations, Government subsidies, learning curve,
  Government policy
• Capital requirements
• Switching costs
• Access to distribution channels
• Economies of scale
• Governmental regulation

6
Potential Entrants

• Expected retaliation
• History of retaliation
• Established firms with resources
• Slow industry growth

7
Existing Rivalry

• Industry competitive structure
• Fragmented / Consolidated
• Competitors are diverse in strategies, origins
  personalities
• Demand conditions
• Exit barriers
• Specialized investment
• High cost of exit
• Emotional attachment
• Economic dependence

8
Exit Barriers and Entry Barriers
Low Exit Barriers High
Low
Entry Barriers High
9
Prisoners Dilemma
Player A
Co-operate
Defect
Co-operate
Player B
Defect
10
Power of Buyers

• Concentrated or purchase large volumes
• Product represents a significant fraction of cost
  of purchases
• Products are standard
• Low switching costs
• Buyers can vertically integrate backwards

11
Power of Suppliers

• Few substitutes available
• Differentiated product
• Threat of forward vertical integration

12
Strategic Groups

• Differences in firm strategies within an industry
• Close competition within a strategic group
• Porters 5 competitive forces can have
  differential impacts across strategic groups
• Mobility barriers to movement across groups

13
Role of the Macroenvironment

• Macroeconomic
• Economic growth
• Interest rates
• Currency exchange rates
• Inflation rates
• Technological
• Rate of technological change
• Kind of technological change
• Competence enhancing/destroying

14
Macroenvironment

• Social
• Health conciousness
• Demographic
• Political and Legal
• Deregulation
• Environmental restrictions

15
Snowmobiles and the EPA
Source Yamaha web site
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Political and legal environment

• New emission standards for snowmobiles, ATVs
• Driving force social environment
• Environmentalists concern for wilderness areas,
  national parks
• Implications for manufacturers
• Arctic Cat, Yamaha, Polaris, Bombardier

17
Limitations

• Dynamics of competing
• Insulation/control (barriers to entry)
• Creating a weakness
• Static view
• Innovation as a driver of competitive structure
• Industry evolution not considered
• Focus on industry, not on firm
• Alternative Resource based view Firm
  capabilities drive profitability

18
Value Innovation New approach to external
analysis

• Create products/services for which there are no
  direct competitors
• Looking across
• Industry boundaries Home Depot, Intuit
• Strategic groups Polo Ralph Lauren, Toyota
  Lexus
• Buyer groups Bloomberg
• Complementary Products/Services Barnes Noble,
  Borders
• Functional/ Emotional appeal Starbucks
• Time Cisco Systems

Source Kim Mauborgne
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Industry life cycle

• Embryonic
• Growth
• Shakeout
• Mature
• Declining

20
Globalization and Industry Structure

• Globalization
• Marketing, Production and RD
• Implications of globalization
• Foreign competitors
• Increased competition
• Accelerated rate of innovation
• Opportunity for growth (removal of trade and
  investment barriers)

21
National competitive advantage

• Factor endowments
• Demand conditions
• Related and supporting industries
• Intensity of rivalry