Chapter 2

External Analysis It’s not recognizing that change will occur that is the problem, it’s figuring out: what will happen? how it will affect us? what to do about it? Therefore, forecasting is necessary to predict direction and the effect of change

BROAD/REMOTE/MACROENVIRONMENT Political and Legal Societal Values and Lifestyles Demographics Technology The Economy at Large COMPANY SuppliersSubstitutes Buyer s New Entrants Rival Firms  IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT

Broad/Remote/ Macroenvironment Segments Macroeconomic Demographic Political/Legal Technological Social Firms CAN NOT Directly Control Them

Porter’s Five Forces Competitive Rivalry Power of Buyers Power of Suppliers Potential Entrants Substitute Products Each of these forces affect costs/prices, therefore, profitability

Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Potential New Entrants Suppliers of Key Inputs Buyers Complementors

Price Costs Profits { Porter’s 5-forces is all about margins - What factors increase/decrease margins, i.e., profitability.

Prices can be kept high Costs can be kept low Profits can soar { When industry structural variables are weak…...

Prices will be pushed down Costs will rise Profits shrink { When industry structural variables are strong…...

Potential Entrants Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents. Firms can create “barriers to enter” Barriers of entry are desirable for entrenched firms

Barriers to Entry

Threat of Substitutes Product/service which fulfills similar need Price cap 3 Questions 1)Are they available? 2)Price-performance relationship? 3)Can we switch?

Power of Buyers Who are the Buyers? Can they force: lower prices, higher quality and service, or play competitors against one another? Based on two issues 1Price sensitivity purchase is a large portion of costs no differentiation if they exist in a competitive, low profit industry

Power of Buyers (cont.) 2Whether buyers can bargain down prices few buyers buyers are knowledgeable low switching costs backward integration is a valid threat

Competitive Force of Suppliers Who are the suppliers? Suppliers are a strong competitive force when: –Only a few suppliers exist –Few substitutes –Buyers not important customers –Suppliers provide a product crucial to production process, and/or significantly affects product quality –It is costly for buyers to switch suppliers –Forward integration a credible threat –They can supply a component cheaper than the buyers can make it themselves

Rivalry and Profitability Industry profitability is a collective good. Collective good is served by coordination Are there industries were pricing is coordinated? Incentive to violate

Usually the most powerful of the five forces How actively and aggressively are rivals employing competitive weapons in jockeying for a stronger market position and increasing sales? –Is price competition vigorous? –Active efforts to improve quality? –Are rivals racing to offer better performance features? better customer service? –Lots of advertising/sales promotions? –Active efforts to build a stronger dealer network? –Active product innovation? –Active use of other weapons of rivalry?

Rivalry – What drives it?

Porter’s..in conclusion Determines the attractiveness of industry Can we influence any of these structural attributes? Static model & Hypercompetition –If the pace of transformation is rapid, if entry rapidly undermines the market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for analyzing competition and profit.

Porter’s Five Forces - Two Examples Campus Bookstore Rivals? - Entry Barriers? - Substitutes - Supplier Power - Buyer Power - Profitable? PCs Rivals - Entry Barriers - Substitutes - Supplier Power - Buyer Power - Profitable ?

Industries and Segments What is a segment? Different segments….. posses different combinations of 5-forces therefore: reward different strategies possess different levels of profitability

What Forces Are at Work 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

Common Types of Driving Forces 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

Common Types of Driving Forces Increasing globalization of industry Changes in cost and efficiency Market shift from standardized to differentiated products (or vice versa) New regulatory policies and/or government legislation Changing societal concerns, attitudes, and lifestyles Changes in degree of uncertainty and risk

Which Companies are in Strongest / Weakest Positions? Strategic group mapping A strategic group consists of those rivals with similar competitive approaches in an industry

Price Breadth of Product Line National Jewelry Retailers Cartier Tiffany Nordstroms Sachs WalMart Kmart Target Sears JCP Burdines Dillards Zales Kay Pawn Shop Chain-by-the-Foot Carts Jerrods Marks & Morgan

What strategic moves are rivals likely to make? - Competitive Analysis Important in concentrated industries Benefits –forecast future actions, predict reactions –can we influence rivals’ behavior?

Four Steps of CA Identify their strategy Identify the objectives Identify their assumptions Identity their capabilities Strategy Objectives Assumptions Capabilities Strategic Action

What are the Key Success Factors? KSFs are product attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability opportunities for competitive advantage

Example: KSFs for Beer Industry Utilization of brewing capacity -- to keep manufacturing costs low Strong network of wholesale distributors -- to gain access to retail outlets Clever advertising -- to induce beer drinkers to buy a particular brand

Identifying Key Success Factors (KSFs) - vary by segment Automotive Industry