External Environmental External Environmental Opportunities and ThreatsOpportunities and Threats

““Things are always different--the Things are always different--the

art is figuring out which differences art is figuring out which differences

matter.”matter.”

Laszlo Birinyi

Three Levels of Analysis

MACROENVIRONMENT

Legislation and

Regulation

Societal Values

and LifestylesPopulatio

n

Demographics

Technology

The Economy at Large

COMPANY

Suppliers Substitutes

Buyers

NewEntrants

Rival Firms

IMMEDIATE INDUSTRY

AND COMPETITIVE ENVIRONMENT

Question 1: What are theIndustry’s Dominant Economic Traits?

Market size andMarket size and growth rategrowth rate Scope of competitive rivalryScope of competitive rivalry Number of competitorsNumber of competitors and their relative sizesand their relative sizes Prevalence of backward/forward integrationPrevalence of backward/forward integration Entry/exit barriersEntry/exit barriers Nature and pace of technological changeNature and pace of technological change Product and customer characteristicsProduct and customer characteristics Scale economies and experience curve effectsScale economies and experience curve effects Capacity utilization and resource requirementsCapacity utilization and resource requirements Industry profitabilityIndustry profitability

Table 3.2: Relevance ofKey Economic Features

Economic Feature

Market Size

Market growth rate

Capacity surpluses/shortages

Industry profitability

Entry/exit barriers

Product is big-ticket item for buyers

Standard products

Rapid technological change

Capital requirements

Vertical integration

Economies of scale

Rapid product innovation

Strategic Importance

Small markets don’t tend to attract new firms; large markets attract firms looking to acquire rivals with established positions in attractive industries Fast growth breeds new entry; slow growth spawns increased rivalry & shake-out of weak rivals

Surpluses push prices & profit margins down; shortages pull them up

High-profit industries attract new entrants; depressed conditions lead to exit

High barriers protect positions and profits of existing firms; low barriers make existing firms vulnerable to entry

More buyers will shop for lowest price

Buyers have more power because it’s easier to switch from seller to seller

Raises risk; investments in technology facilities/equipment may become obsolete before they wear outBig requirements make investment decisions critical; timing becomes important; creates a barrier to entry and exitRaises capital requirements; often creates competitive & cost differences among fully vs. partially vs. non-integrated firms

Increases volume & market share needed to be cost competitive

Shortens product life cycle; increases risk because of opportunities for leapfrogging

Macroenvironmental Forces

Political-Legal ForcesPolitical-Legal Forces Include the outcomes of elections, legislation, and court Include the outcomes of elections, legislation, and court

judgments, as well as decisions rendered by various judgments, as well as decisions rendered by various commissions and agencies at every level of commissions and agencies at every level of government.government.

Economic ForcesEconomic Forces Forces that have a significant impact on business Forces that have a significant impact on business

operations, such as the GDP, interest rates, inflation operations, such as the GDP, interest rates, inflation rates, and the value of the dollar.rates, and the value of the dollar.

Macroenvironmental Forces

Technological ForcesTechnological Forces Include scientific improvements and innovations that Include scientific improvements and innovations that

provide opportunities or threats for business.provide opportunities or threats for business.

Social ForcesSocial Forces Include traditions, values, societal trends, demographic Include traditions, values, societal trends, demographic

trends, and a society’s expectations of business.trends, and a society’s expectations of business.

Assessing Industry Attractiveness Four primary analysesFour primary analyses

Porter’s Five ForcesPorter’s Five Forces Driving ForcesDriving Forces Key Success FactorsKey Success Factors Competitive AnalysisCompetitive Analysis

Assess Assess strengthstrength of each of Porter’s five forces (of each of Porter’s five forces (Strong? Moderate? Weak?Strong? Moderate? Weak? ) ) Rivalry among competitorsRivalry among competitors Substitute productsSubstitute products Potential entryPotential entry Bargaining power of suppliersBargaining power of suppliers Bargaining power of buyersBargaining power of buyers

Explain how Explain how eacheach force acts to create competitive pressure force acts to create competitive pressure Decide whether Decide whether overall competitionoverall competition is brutal, fierce, strong, normal/moderate, is brutal, fierce, strong, normal/moderate,

or weakor weak

Rivalry Among Competing Sellers

Usually the Usually the most powerfulmost powerful of the five forcesof the five forces Check which weapons of competitive rivalry are most Check which weapons of competitive rivalry are most

actively used by rivals in jockeying for positionactively used by rivals in jockeying for position PricePrice QualityQuality Performance features offeredPerformance features offered Customer serviceCustomer service Warranties/guaranteesWarranties/guarantees Advertising/promotionsAdvertising/promotions Dealer networksDealer networks Product innovationProduct innovation

Competitors number and strengthCompetitors number and strength

Threat of New Entrants

How hard is it to get into the industry?How hard is it to get into the industry? Economies of scaleEconomies of scale Product differentiationProduct differentiation Capital requirementsCapital requirements Learning curve effectsLearning curve effects Access to distribution channelsAccess to distribution channels Government policiesGovernment policies Control of key raw materialsControl of key raw materials Inability to gain access to specialized technologyInability to gain access to specialized technology

Threat of Substitutes

SubstitutesSubstitutes matter when customers are attracted to matter when customers are attracted to the products of firms in other industries the products of firms in other industries

Eyeglasses vs. Contact Lens Sugar vs. Artificial Sweeteners Plastic vs. Glass vs. Metal Newspapers vs. TV vs. Internet

Examples

Threat of Suppliers

Suppliers are a Suppliers are a strongstrong competitive force competitive force when:when: Item makes up large portion of product costs, is Item makes up large portion of product costs, is

crucial to production process, and/or significantly crucial to production process, and/or significantly affects product qualityaffects product quality

It is costly for buyers to switch suppliersIt is costly for buyers to switch suppliers They have good reputations and growing demandThey have good reputations and growing demand They can supply a component cheaper than industry They can supply a component cheaper than industry

members can make it themselvesmembers can make it themselves They do not have to contend with substitutesThey do not have to contend with substitutes Buying firms are not important customersBuying firms are not important customers

Threat of Buyers

Buyers are a Buyers are a strongstrong competitive force competitive force when:when: They are large and purchase a sizable percentage of They are large and purchase a sizable percentage of

industry’s productindustry’s product They buy in volume quantitiesThey buy in volume quantities They can integrate backwardThey can integrate backward Industry’s product is standardizedIndustry’s product is standardized Their costs in switching to substitutes or other brands are Their costs in switching to substitutes or other brands are

lowlow They can purchase from several sellersThey can purchase from several sellers Product purchased does not save buyer money Product purchased does not save buyer money

Strategic Implications of theFive Competitive Forces

Competitive environment is Competitive environment is unattractiveunattractive from the standpoint of earning from the standpoint of earning good profits when:good profits when: Rivalry is strongRivalry is strong

Entry barriers are lowEntry barriers are lowand entry is likelyand entry is likely

Competition from Competition from substitutes is strongsubstitutes is strong

Suppliers and customers have considerable Suppliers and customers have considerable bargaining powerbargaining power

Competitive environment is Competitive environment is idealideal from a profit-making standpointfrom a profit-making standpoint when:when:

Rivalry is moderateRivalry is moderate

Entry barriers are highEntry barriers are highand no firm is likely toand no firm is likely toenter enter

Good substitutes do Good substitutes do not existnot exist

Suppliers and customers are in a weak Suppliers and customers are in a weak bargaining positionbargaining position

Strategic Implications of theFive Competitive Forces

Driving ForcesIndustries change because Industries change because forcesforces are are drivingdriving industry industry

participants to alter their actionsparticipants to alter their actions

Driving forces Driving forces are theare the major underlying causes major underlying causes of of changing industry and competitive conditionschanging industry and competitive conditions

•Changes in long-term industry growth rate

•Changes in who buys the product and how they use it

•Product innovation

•Technological change/process innovation

•Marketing innovation

•Entry or exit of major firms

•Diffusion of technical knowledge

Examples

Key Success Factors

KSFsKSFs are competitive elements that most affect are competitive elements that most affect every every industry member’sindustry member’s ability to prosper in the ability to prosper in the marketplacemarketplace Specific strategy elementsSpecific strategy elements Product attributesProduct attributes ResourcesResources CompetenciesCompetencies Competitive capabilitiesCompetitive capabilities

KSFsKSFs spell difference betweenspell difference between Profit and lossProfit and loss Competitive success or failureCompetitive success or failure

Table 3.3: Common Types ofKey Success Factors

Distribution-related

Marketing-related

Skills-related

Organizational capability

Other types

Technology-related

Manufacturing-related

Scientific research expertise; Product innovation capability; Expertise in a given technology; Capability to use Internet to conduct various business activities

Low-cost production efficiency; Quality of manufacture; High use of fixed assets; Low-cost plant locations; High labor productivity; Low-cost product design; Flexibility to make a range of products

Strong network of wholesale distributors/dealers; Gaining ample space on retailer shelves; Having company-owned retail outlets; Low distribution costs; Fast delivery

Fast, accurate technical assistance; Courteous customer service; Accurate filling of orders; Breadth of product line; Merchandising skills; Attractive styling; Customer guarantees; Clever advertising

Superior workforce talent; Quality control know-how; Design expertise; Expertise in a particular technology; Ability to develop innovative products; Ability to get new products to market quickly

Superior information systems; Ability to respond quickly to shifting market conditions; Superior ability to employ Internet to conduct business; More experience & managerial know-how

Favorable image/reputation with buyers; Overall low-cost; Convenient locations; Pleasant, courteous employees; Access to financial capital; Patent protection

Identifying IndustryKey Success Factors

Answers to three questions pinpoint Answers to three questions pinpoint KSFsKSFs On what basis do customers choose between On what basis do customers choose between

competing brands of sellers?competing brands of sellers? What resources and competitive capabilities does a What resources and competitive capabilities does a

seller need to have to be competitively successful?seller need to have to be competitively successful? What does it take for sellers to achieve a sustainable What does it take for sellers to achieve a sustainable

competitive advantage?competitive advantage? KSFsKSFs consist of the consist of the 3 - 5 3 - 5 really really majormajor

determinants of financial and determinants of financial and competitive success in an industrycompetitive success in an industry

Things to Consider inAssessing Industry Attractiveness

Industry’s market size and growth potentialIndustry’s market size and growth potential Whether competitive conditions are conducive to Whether competitive conditions are conducive to

rising/falling industry profitabilityrising/falling industry profitability Will competitive forces become stronger or Will competitive forces become stronger or

weaker weaker Whether industry will be favorably or Whether industry will be favorably or

unfavorably impacted by driving forcesunfavorably impacted by driving forces Potential for entry/exit of major firmsPotential for entry/exit of major firms Stability/dependability of demandStability/dependability of demand Severity of problems facing industrySeverity of problems facing industry Degree of risk and uncertainty in industry’s Degree of risk and uncertainty in industry’s

futurefuture

My Mom!