External Environment:

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External Environment
1. Assessing the Industry 2. Assessing the
Competition Irrationally held truths may be
more harmful than reasoned errors. Thomas Huxley
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To act is easy to think is hard Goethe

• It is a capital mistake to theorize before one
  has data.
• unknown

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Economic
Socio-Cultural
Industry Analysis Driving Forces, Key Success
Factors, Profitability Potential
Demographic
Competitive Analysis Threat of new entrants,
Power of suppliers, Power of buyers, Substitutes,
Rivals
Global
Political/Legal
Technological
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External Analysis Should Answer These Questions

• Which macro elements impact this industry the
  most and in what way?
• How strong are each of the competitive forces?
• What forces are driving change in this industry
  and what impact will they have?
• What are the key factors for success in this
  industry?

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External Analysis Should Answer These Questions
(contd)

• Which companies are in the strongest/weakest
  position?
• Who is likely to make what strategic moves next?
• Is this industry attractive based upon these
  analyses and our companys objectives?

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Huge differences between industries
Marine/Boat Rental vs. Lawn Care Fast Food
to Video Games
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Relevance ofKey Economic Features
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What Drives Change in this Industry?
1. Growth Stage of Industry 2. Changes in buyer
demographics - Product Innovation -
Technological Change - Marketing Innovation -
Entry or exit of major firms - Diffusion of
technical know-how - Globalization - Change in
cost and efficiency - Regulatory or Government
Change - Changing societal concerns,
attitudes - Reductions in risk Determine
which 3 or 4 are driving the industry.
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Market growth rate

• Fast growth breeds new entry slow growth spawns
  increased rivalry shake-out of weak rivals

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Capacity surpluses/shortages

• Surpluses push prices profit margins down
  shortages pull them up

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Economies of scale

• Increases volume market share needed to be cost
  competitive

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• What is the competition like?
• How strong are the competitive forces?

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Five Forces Model of Competition
Substitute Products (of firms in other industries)
Rivalry Among Competing Sellers
Suppliers of Key Inputs
Buyers
Potential New Entrants
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How heated is the rivalry in a particular
competitive market?
It depends upon
1. Number and Size of competitors 2. Slow
growth market greater rivalry 3. Industry
conditions which lead to greater rivalry. a.
High fixed costs - Large of total cost b.
Perishable, seasonal or costly to inventory
products - rivalry develops 4. Low
switching costs higher rivalry
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Rivalry (contd)
5. Drastic competitive moves increased
rivalry 6. As size of payoff from a successful
move increases, so does rivalry 7. Higher exit
barriers higher rivalry 8. Greater diversity
of competition greater rivalry 9. Weaker
companies bought by strong companies outside
the industry increased rivalry
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Potential New Entrants to Your Market (another
Competitive Force)
Number or Frequency of new entrants depends upon

• 1. Barriers to entry
• Must be considered realistically, based upon
• power of potential entrants.
• Must be considered based upon profit prospects
• for potential entrants.
• 2. Expected reaction by current industry to new
  entrants

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Five Forces Model of Competition
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Supplier Strength Depends Upon.
1. What are they supplying - undifferentiated
commodity? -main component of
product? -difficult to produce
product? 2. Whom are they supplying - dominant
industry leader 3. Relationship between
suppliers and industry members
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Structural Attractiveness depends upon the
pressures applied by these 5 forces
- Even if a lot of pressure exits, good strategy
well-executed can allow for profit
opportunities
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Coping with the 5 Competitive Forces

• Objective is to craft strategy that will
• Insulate firm from competitive forces
• Influence competitive pressures in ways that
  favor company
• Build a sustainable competitive advantage

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Key Success Factors (KSFs)
- Threshold capabilities a firm must possess
just to play in that industry - Without these
you will fail - Identify them by answering these
questions 1. How do customers choose between
competitors? 2. What must a seller do to be
competitive? 3. What does it take to gain a
sustainable competitive advantage?
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What Forces Are atWork to Change Industry
Conditions?

• Industries change because forces are driving
  industry participants to alter their actions
• Driving forces are the major underlying causes of
  changing industry and competitive conditions

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Analyzing Driving Forces

• 1. Identify those forces likely to exert greatest
  influence over next 1 - 3 years
• Usually no more than 3 - 4 factors qualify
• 2. Assess impact
• What difference will the forces make
  (favorable? unfavorable?)

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Common Types of Driving Forces

• Changes in industry growth rate
• Changes in who buys the product and how they use
  it
• Product innovation
• Technological change/process innovation

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Common Types of Driving Forces (contd)

• Marketing innovation
• Entry or exit of major firms
• Diffusion of technical knowledge

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Awareness of the environment is not a special
project to be undertaken only when warning of
change becomes deafening
- K. R. Andrews
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To determine which companies are strongest or
weakest, create a strategic group map
- Pick 2 variables that drive or define market -
Create a plane using these
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Example Strategic Group Map of Retail
Jewelry Industry
High
Small Independent Guild Jewelers
National, Regional, Local Guild - Fine
Jewelry Stores
Prestige Departmentalized Retailers
Upscale Department Stores
Price / Quality / Image
National Jewelry Chains Local Jewelers
Medium
Chains
Credit Jewelers
Catalog Showrooms Off-Price Retailers
Discounters
Outlet Mall Retailers
Low
Broad-category Retailers
Specialty Jewelers
Full-line Jewelers
Limited-category Retailers
Product Line / Merchandise Mix
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You have a lovely Strategic Group Map. So now
what?
1. Where are you? 2. Are you in the heart of
the competition? 3. Is this where you meant to
be? Want to be? 4. Are any of the groups
threatened by driving forces? 5. Any of the
groups stand to benefit from driving forces?
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Is the industry attractive? Can it satisfy our
profit objectives?

• Use all data collected to answer these
  questions.