2. Chapter 3 Evaluating a Company’s External Environment

3. Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness. Competitive strategy must grow out a sophisticated understanding of the rules of competition that determine industry attractiveness. Michael Porter When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact. When an industry with a reputation for bad economics meets a manager with a reputation for excellence, it’s usually the industry that leaves with its reputation intact. Warren Buffett Skate to where the puck is going, not to where the puck has been. Skate to where the puck is going, not to where the puck has been. Wayne Gretsky

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

5. External Analysis 1) Analyze the environment 1) Analyze the environment macroenvironment macroenvironment industry environment industry environment 3) Competitive analysis 3) Competitive analysis 4) Identification of key success factors 4) Identification of key success factors

6. Substitute Products Potential Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Competitive Rivalry Industry Environment Macro Environment Technology Demographic Sociocultural Political & Legal Economic Environment of the Firm

7. Macroenvironment 1) Technology 2) Demographics 3) Socioculture 4) Demographic 5) Economic

8. 1) Technological Forces Changes in technology that affect the workplace, and the products and services consumers expect Changes in technology that affect the workplace, and the products and services consumers expect e.g., Information technologies, entertainment technologies, product technologies. e.g., Information technologies, entertainment technologies, product technologies.

9. 2) Political/Legal Forces Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc. Tax laws, minimum wages, environmental laws, labor laws, consumer protection, product liability, etc.

10. 3) Sociocultural Forces Attitudes of society towards work, careers, products, services and consumer activism. Attitudes of society towards work, careers, products, services and consumer activism. e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing” e.g., concern for quality of life, birth rates, woman in the work force, low-carb dieting, health consciousness, respect for intellectual property, desire for “green retailing”

11. 4) Demographic Forces Characteristics of the population Characteristics of the population e.g., age, race, gender, sexual orientation and social classes e.g., age, race, gender, sexual orientation and social classes Domestically - falling birth rates, falling death rates, increase in minority populations Domestically - falling birth rates, falling death rates, increase in minority populations Internationally – birth rates are increasing in some of the poorest (and most underserved) populations of the world. Internationally – birth rates are increasing in some of the poorest (and most underserved) populations of the world.

12. 5) Economic Forces General health/wellbeing of the local, regional, national or global economy. General health/wellbeing of the local, regional, national or global economy. e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs e.g., Interest rates, unemployment rates, consumer spending, confidence and savings, energy costs, personal disposable income, inflation rates, housing costs

13. Macroenvironment Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance Firms can not influence them, but they can have a significant influence on the firm, its industry, its strategy, and its performance Cast a wide net and to identify the emerging trends Cast a wide net and to identify the emerging trends Then determine which factors are relevant, and how these changes will have an effect upon the firm. Then determine which factors are relevant, and how these changes will have an effect upon the firm.

14. Substitute Products Potential Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Competitive Rivalry Industry Environment Macro Environment Technology Demographic Sociocultural Political & Legal Economic Environment of the Firm

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

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

17. Price Costs Profits { What factors increase/decrease margins within an industry, thus affecting profitability. Porter’s 5-forces is all about margins

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

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

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

21. Barriers to Entry

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

23. Substitutes and Business Definition How we define our business defines our substitutes and our rivals How we define our business defines our substitutes and our rivals Carbonated Soft Drink Soft DrinksBeverages Many Substitutes Few RivalsMany Rivals Few Substitutes

24. Buyers Who are your key buyers? - who provides our revenues? Who are your key buyers? - who provides our revenues? Can they force: Can they force: lower prices, higher quality and service – affect the terms and conditions of the exchange? lower prices, higher quality and service – affect the terms and conditions of the exchange?

25. Buyers What affect buyers’ power? What affect buyers’ power? Volume/Frequency of purchase Volume/Frequency of purchase Portion of buyer’s costs Portion of buyer’s costs Lack of differentiation Lack of differentiation Low switching costs Low switching costs Self-source or backwards integration Self-source or backwards integration Criticality Criticality Buyers’ knowledge Buyers’ knowledge Buyers’ profitability Buyers’ profitability

26. Suppliers Who are you key suppliers? Who are you key suppliers? Suppliers are a strong competitive force when: Suppliers are a strong competitive force when: Only a few suppliers exist Only a few suppliers exist Few substitutes Few substitutes Buyers not important customers to suppliers Buyers not important customers to suppliers Suppliers provide a product crucial to production process, and/or significantly affects product quality Suppliers provide a product crucial to production process, and/or significantly affects product quality It is costly to switch suppliers It is costly to switch suppliers Forward integration a credible threat Forward integration a credible threat They can supply a component at a lower cost They can supply a component at a lower cost

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

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

29. Rivalry – What drives it?

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

31. Porter’s..in conclusion Attractiveness of industry/segment Attractiveness of industry/segment current industry current industry adjacent segments adjacent segments industries you might consider entering industries you might consider entering Which forces possess the greatest influence? Which forces possess the greatest influence? Can we influence them? Can we influence them?

32. 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. 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.

33. What Forces Are at Work to Change Industry Conditions? Industries change because forces are driving industry participants to alter their actions 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 Driving forces are the major underlying causes of changing industry and competitive conditions

34. Common Types of Driving Forces Changes in long-term industry growth rate Changes in long-term industry growth rate Changes in who buys the product and how they use it Changes in who buys the product and how they use it Product innovation Product innovation Technological change/process innovation Technological change/process innovation Marketing innovation Marketing innovation Entry or exit of major firms Entry or exit of major firms Diffusion of technical knowledge Diffusion of technical knowledge

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

36. Competitor Analysis Strategic group mapping Strategic group mapping A strategic group consists of those rivals with similar competitive approaches in an industry A strategic group consists of those rivals with similar competitive approaches in an industry

37. 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

38. Other Dimensions for Strategic Group Maps Vertical integration Vertical integration Geographic scope Geographic scope R&D Expenditures R&D Expenditures Customer Service Customer Service Number of outlets Number of outlets Reputation Reputation Can even be categorical (e.g., Mexican, Italian, pizza, subs, chicken) Can even be categorical (e.g., Mexican, Italian, pizza, subs, chicken)

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

40. Competitive Analysis Important in concentrated industries (few, large share competitors) Important in concentrated industries (few, large share competitors) Benefits Benefits forecast future actions, predict reactions forecast future actions, predict reactions can we influence rivals’ behavior? can we influence rivals’ behavior?

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