1. External Analysis: The Identification of
Opportunities
and
Threats
in the environment outside the company
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2. “To assure victory, always carefully survey the field before battle.”
- Sun Tzu
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3. The Big Picture: the strategy model
Environ-ment
FIRM
Strategy
External Analysis

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External Analysis
The purpose of external analysis is to identify the strategic opportunities and threats in the organization’s operating environment that will affect how it pursues its mission.
External Analysis requires an assessment of:
Industry environment in which company operates
Competitive structure of industry
Competitive position of the company
Competitiveness and position of major rivals
The country or national environments in which company competes
The wider socioeconomic or macroenvironment that may affect the company and its industry
Social
Government
Legal
International
Technological
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External Analysis
Requires an assessment of 4 related environments:
1. The industry environment
2. The country or national environments
3. The wider socioeconomic or macro-environment,
4. including the global environment
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External Analysis
Macroenvironment
National & Global
Industry
Firm
Industry
Firm
Firm
Firm
Industry
Industry
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7. Environmental Analysis: Overview of Topics
Industry Analysis
What is an industry?
Five Forces Model
6th Force
Macroenvironment Analysis
6 Forces or Factors
Other Industry Factors
Strategic Groups
Industry Life Cycle
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8. External Analysis: Where do we start?
Environmental analysis usually begins with industry analysis
What is an industry?
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9. Industry Analysis: What is an industry?
A group of companies offering products or services that are close substitutes for each other and that satisfy the same basic customer needs
Examples?
Industry boundaries may change as customer needs evolve and technology changes
Industry example: Computer Industry: Apple, Dell, etc.
Industry boundaries: cell phones moving towards multi-use instruments: cameras, iPods, minicomputers, calenders, etc
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10. Industry Analysis: What is an industry?
Other useful concepts:
Sector =
A group of closely related industries
Examples?
Market Segments =
Distinct groups of customers within an industry
Segments exist because each segment has distinct attributes and specific demands
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11. The Computer Sector: Industries and Market Segments
Figure 2.1
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12. Environmental Analysis: Overview of Topics
Industry Analysis
What is an industry?
Five Forces Model
6th Force
Macroenvironment Analysis
6 Forces or Factors
Other Industry Factors
Strategic Groups
Industry Life Cycle
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Industry Analysis
How do we analyze the competitive structure of industry?
One answer: the concept of limit price
The concept of limit price says that certain competitive conditions or forces prevent sellers from charging monopoly prices
Porter’s model uses this concept to analyze competition in an industry
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14. Industry analysis: Porter’s Five Forces Model
Figure 2.2
Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.
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15. Industry Analysis: 5 forces
The forces are forces on prices
Forces can be strong or weak
Strength of forces may change
As industry conditions change
A weak competitive force
may be viewed as an opportunity
for the company or industry to earn greater profits
A strong competitive force
may be viewed as a threat if it depresses company or industry profits
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16. How the Five Forces Shape Competition within an Industry
The stronger that each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits within their industry.
Through its choice of strategies, a company may alter the strength of one or more of the five forces to its advantage or disadvantage.
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17. Industry Analysis: 5 Forces
Risk of New Entry
Substitute Products
Bargaining power of buyers
Bargaining power of suppliers
Degree of rivalry among established companies
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18. Industry analysis: Porter’s Five Forces Model
Figure 2.2
Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.
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19. Industry Analysis: 5 Forces
Risk of New Entrants
New entrants =
potential competitors
companies that are not currently competing in an industry but have the capability to do so if they choose.
Entry barriers hinder or prevent companies from entering an industry
5 kinds of entry barriers
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20. Industry Analysis: 5 Forces
5 kinds of entry barriers
Economies of Scale – as firms expand output unit costs fall via:
Cost reductions – through mass production
Discounts on bulk purchases – of raw material and standard parts
Cost advantages – of spreading fixed and marketing costs over large volume
Brand Loyalty
Achieved by creating well-established customer preferences
Difficult for new entrants to take market share from established brands
Absolute Cost Advantages – relative to new entrants
Accumulated experience – in production and key business processes
Control of particular inputs required for production
Lower financial risks – access to cheaper funds
Customer Switching Costs for Buyers – where significant
Government Regulation
May be a barrier to enter certain industries
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21. Industry analysis: Porter’s Five Forces Model
Figure 2.2
Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.
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22. 5 Forces: Substitute Products
Substitute Products or services are those products or services from different businesses or industries that can satisfy similar customer needs.
Substitute products are different from competing products.
LaVie water is not a substitute for Aquafina water, it is a competitor
Substitute products are different from complementary products:
software and computers
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23. Industry Analysis: 5 Forces
Substitute Products or services
The existence of close substitutes is a strong competitive threat.
Substitutes limit the price that companies can charge for their product.
Substitutes are a weak competitive force if an industry’s products have few close substitutes.
Other things being equal, companies in the industry have the opportunity to raise prices and earn additional profits.
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24. Industry analysis: Porter’s Five Forces Model
Figure 2.2
Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.
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25. 5 Forces: Bargaining Power of Buyers
Industry Buyers may be
the consumers or end-users who ultimately use the product
or intermediaries that distribute or retail the products.
6 conditions create more or less power for buyers.
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26. Buyer Power: 6 Conditions that create buyer power
Buyers are dominant.
Buyers are large and few in number.
The industry supplying the product is composed of many small companies.
Buyers purchase in large quantities.
Buyers have purchasing power as leverage for price reductions.
The industry is dependant on the buyers.
Buyers purchase a large percentage of a company’s total orders.
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27. Buyer Power: 6 Conditions that create buyer power
4. Switching costs for buyers are low.
Buyers can play off the supplying companies against each other.
5. Buyers can purchase from several supplying companies at once.
6. Buyers can threaten to enter the industry themselves.
Buyers produce themselves and supply their own product.
Buyers can use threat of entry as a tactic to drive prices down.
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5 Forces: Buyer Power
Strong Buyer Power means
Buyers can set prices
Weak Buyer Power means
Industry can set prices
If industry prices are too low,
weak companies will disappear
Eventually few companies = industry power
If industry prices are too high
High profits will ecourage new entrants and substitues
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29. Industry analysis: Porter’s Five Forces Model
Figure 2.2
Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.
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30. 5 Forces: Bargaining Power of Suppliers
are organizations that provide inputs such as material and labor into the industry.
5 conditions create more or less supplier power
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31. Supplier Power: 5 Conditions
The product supplied is vital to the industry and has few substitutes.
The industry is not an important customer to suppliers.
Suppliers are not significantly affected by the industry.
Switching costs for companies in the industry are significant.
Companies in the industry cannot play suppliers against each other.
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32. Supplier Power: 5 Conditions
4. Suppliers can threaten to enter their customers’ industry.
Suppliers can use their inputs to produce and compete with companies already in the industry.
Vertical or forward integration
5. Companies in the industry cannot threaten to enter suppliers’ industry
Vertical or backward integration
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33. Industry analysis: Porter’s Five Forces Model
Figure 2.2
Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.
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34. 5 Forces: Rivalry Among Established Companies
Competitive Rivalry
Is the competitive struggle between companies in the same industry to gain market share from each other.
 High fixed costs of exit
 Emotional attachment to industry
 Bankruptcy regulations – allowing unprofitable assets to remain
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Rivalry: 4 conditions
1. Industry Competitive Structure
Number and size distribution of companies
Consolidated versus fragmented industries
2. Demand Conditions
Growing demand – tends to moderate competition and reduce rivalry
Declining demand – encourages rivalry for market share and revenue
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Rivalry: 4 Conditions
3. Cost Conditions
High fixed costs – profitability leveraged by sales volume
Slow demand and growth – can result in intense rivalry and lower profits
4. Height of Exit Barriers – prevents companies from leaving industry
Write-off of investment in assets
Economic dependence on industry
Maintain assets - to participate
effectively in an industry
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37. Industry analysis: Porter’s Five Forces Model
Figure 2.2
Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.
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38. Environmental Analysis: Overview of Topics
Industry Analysis
What is an industry?
Five Forces Model
6th Force
Macroenvironment Analysis
6 Forces or Factors
Other Industry Factors
Strategic Groups
Industry Life Cycle
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39. Industry Analysis: The 6th force
Some argue a sixth force affects the industry: complementors
Complementors sell products that add value to other products
Example: software & computers
Cell phones and ……?
Valued complementary products increase demand for both products
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40. Industry analysis: Porter’s Five Forces Model
Figure 2.2
Complementors
Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.
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41. Discuss the case of Vietnam’s clothing industry.
5 Forces Application
Discuss the case of Vietnam’s clothing industry.
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42. Environmental Analysis: Overview of Topics
Industry Analysis
What is an industry?
Five Forces Model
6th Force
Macroenvironment Analysis
6 Forces or Factors
Other Industry Factors
Strategic Groups
Industry Life Cycle
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43. The Role of the Macroenvironment
Figure 2.7
Changes in the forces in the macro-environment can directly impact:
The Five Forces
Relative Strengths of forces
Industry
Attractiveness
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44. 6 Macroenvironment Elements
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45. Macroenvironment Forces: Economic Factors
The national economy affects each industry
Some benefit from growth, others from economic decline
Affects other macroenvironment factors
4 important economic indicators
Growth rate of economy
Interest rates
Currency exchange rate
Inflation rate
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46. 6 Macroenvironment Elements: Technological Forces
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47. Macroenvironment Forces: Technological Change
Technological change reshapes industries
can make industries obsolete: typewriters
Technological change can come from
within the industry
outside the industry:
Suppliers
Unrelated industries
Technological change can appear to be unrelated to the industry
the Internet
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48. 6 Macroenvironment Factors
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49. Macroenvironmental Forces: Demographic Change
Demographic change = change in characteristics of population
Age: proportion of each age group
Gender
Social class
Wealth
Occupations
Ethnic orientation
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50. 6 Macroenvironment Elements
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51. Macroenvironmental Forces: Social Forces
Change in social mores and values:
What the society sees as good or bad
What the society sees as right or wrong
Some social issues
Value of public health
Smoking, alcohol
Gender behaviors
Values of education, religion
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52. 6 Macroenvironment Elements
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53. Macroenvironmental Forces: Political and Legal
Changes in laws & regulations
= the rules of the playing field
Come from & lead to shifts in power
Shifts in political power = shifts in laws and regulations
Relationship with Economic factors
In good times, politics  economics
In hard times, economics  politics
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54. 6 Macroenvironment Elements
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55. Macroenvironmental Forces: Global Forces
Globalization
National Competitive Advantage (NCA)
Which nations are competing?
4 Factors relate to NCA
Factor endowments
Demand conditions
Relating and supporting industries
Intensity of domestic competitive rivalry
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56. Macroenvironment Forces: Globalization
Globalization = growing interconnection and interdependence of national economies.
Some competitive implications of globalization:
Industry competition becomes global
Industry competitive rivalry increases
What does 5 Forces model tell us will happen when rivalry increases?
Rate of innovation increases as firms seek competitive advantage
Creates expanded markets as well as more competitive ones
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57. 6 Macroenvironment Elements
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58. Environmental Analysis: Overview of Topics
Industry Analysis
What is an industry?
Five Forces Model
6th Force
Macroenvironment Analysis
6 Forces or Factors
Other Industry Factors
Strategic Groups
Industry Life Cycle
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Industry Analysis
5 Forces Model
Concept of Strategic Groups
Industry Life Cycle
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60. Strategic Groups Within Industries
Strategic Groups are groups of companies that follow a business model similar to other companies within their strategic group – but are different from that of other companies in other strategic groups.
The basic differences between business models in different strategic groups can be captured by a relatively small number of strategic factors.
Implications of Strategic Groups –
The closest competitors are within the same Strategic Group and may be viewed by customers as substitutes for each other.
Each Strategic Group can have different competitive forces and may face a different set of opportunities and threats.
Mobility Barriers – factors within an industry that inhibit the movement of companies between strategic groups
Include barriers to enter another group or exit existing group
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61. Strategic Groups in the U.S. Pharmaceutical Industry
Figure 2.3
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62. Mobility Barriers in the Pharmaceutical Industry
Strategic Barrier
Lack of R&D Skills to develop new proprietary drugs
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63. Environmental Analysis: Overview of Topics
Industry Analysis
What is an industry?
Five Forces Model
6th Force
Macroenvironment Analysis
6 Forces or Factors
Other Industry Factors
Strategic Groups
Industry Life Cycle
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64. Stages in the Industry Life Cycle
Strength and nature of five forces change as industry evolves
Figure 2.4     
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65. Industry Life Cycle Analysis
Industry Life Cycle Model analyzes the affects of industry evolution on competitive forces over time and is characterized by five distinct life cycle stages:
Embryonic – industry just beginning to develop
Rivalry based on perfecting products, educating customers, and opening up distribution channels.
Growth – first-time demand takes-off with new customers
Low rivalry as focus is on keeping up with high industry growth.
Shakeout – demand approaches saturation, replacements
Rivalry intensifies with emergence of excess productive capacity.
Mature – market totally saturated with low to no growth
Industry consolidation based on market share, driving down price.
Decline – industry growth becomes negative
Rivalry further intensifies based on rate of decline and exit barriers.
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66. Growth in Demand and Capacity
Anticipate how forces will change and formulate appropriate strategy
Figure 2.5
Industry Shakeout: Rivalry Intensifies with growth in excess capacity
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67. Limitations of Models for Industry Analysis
Life Cycle Issues
Industry cycles do not always follow the life cycle generalization.
In rapid growth situations embryonic stage is sometimes skipped.
Industry growth revitalized through innovation or social change.
The time span of the stages can vary from industry to industry.
Innovation and Change
Punctuated Equilibrium occurs when an industry’s long term stable structure is punctuated with periods of rapid change by innovation.
Hypercompetitive industries are characterized by permanent and ongoing innovation and competitive change.
Company Differences
There can be significant variances in the profit rates of individual companies within an industry.
In addition to industry attractiveness, company resources and capabilities are also important determinants of its profitability.
Models provide useful ways of thinking about competition within an industry – but be aware of their limitations.
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68. Punctuated Equilibrium and Competitive Structure
Figure 2.6
Punctuated Equilibrium occurs when an industry’s long term stable structure is punctuated with periods of rapid change by innovation.
Industry Structure revolutionized by innovation
Periods of long term stability
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69. Environmental Analysis: Review
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70. The Big Picture: the strategy model
Environ-ment
FIRM
Strategy
External Analysis

71. Environmental Analysis: Overview of Topics
Industry Analysis
What is an industry?
Five Forces Model
6th Force
Macroenvironment Analysis
6 Forces or Factors
Other Industry Factors
Strategic Groups
Industry Life Cycle
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72. Copyright © Houghton Mifflin Company. All rights reserved.
External Analysis
Macroenvironment
National & Global
Industry
Firm
Industry
Firm
Firm
Firm
Industry
Industry
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73. Industry analysis: Porter’s Five (6) Forces Model
Figure 2.2
Complementors
Source: Adapted and reprinted by permission of Harvard Business Review. From “How Competitive Forces Shape Strategy,” by Michael E. Porter, Harvard Business Review, March/April 1979 © by the President and Fellows of Harvard College. All rights reserved.
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74. 6 Macroenvironment Elements
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75. Strategic Groups in the U.S. Pharmaceutical Industry
Figure 2.3
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76. Stages in the Industry Life Cycle
Strength and nature of five forces change as industry evolves
Figure 2.4     
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77. “Strategy is a choice on how to compete.”
- Michael Porter
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