The External Environment:
Opportunities, Threats,
Industry Competition and
Competitor Analysis
Chapter Three
© 2006 by Nelson, a division of Thomson Canada Limited.
3-1
The External Environment
Environment
Sociocultural
Industry
Environment
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
Competitor
Environment
Technological
General
© 2006 by Nelson, a division of Thomson Canada Limited.
3-2
Threat of New Entrants
*
* Product Differentiation
* Capital Requirements
* Switching Costs
Barriers
Barriers
Entry
to to
Entry
*
*
*
*
Economies of Scale
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Government Policy
Expected Retaliation
© 2006 by Nelson, a division of Thomson Canada Limited.
3-3
*
Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Supplier industry is dominated by a few
firms.
* Suppliers’ products have few
substitutes.
* Threatening to raise
prices or to reduce
* Buyer is not an important customer to
quality
supplier.
Powerful suppliers
* Suppliers’ product is an important
can squeeze industry
input to buyers’ product.
profitability if firms
* Suppliers’ products are differentiated.
Suppliers exert
power in the
industry by:
*
are unable to
recover cost
increases
Suppliers’ products have high
switching costs.
Supplier poses credible threat of
forward integration.
*
*
© 2006 by Nelson, a division of Thomson Canada Limited.
3-4
*
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
*
*
*
*
*
*
*
*
Buyers are concentrated or purchases are
large relative to seller’s sales
Purchase accounts for a significant
Buyers compete
fraction of supplier’s sales
with supplying
Products are undifferentiated
industry by:
Buyers face few switching costs
Buyers’ industry earns low profits
Buyer presents a credible threat of
backward integration
* Bargaining down prices
* Forcing higher quality
* Playing firms off of
each other
Product unimportant to quality
Buyer has full information
© 2006 by Nelson, a division of Thomson Canada Limited.
3-5
Threat of Substitute Products
Keys to evaluating substitute products:
*
Products
with similar
function
limit the
prices firms
can charge
Products with improving price /
performance tradeoffs relative to
present industry products
For Example:
Electronic security systems in
place of security guards
Fax machines or e-mailed
attachments in place of
overnight mail delivery
© 2006 by Nelson, a division of Thomson Canada Limited.
3-6
Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Rivalry Among Competing
Firms in Industry
Bargaining
Power of
Buyers
Threat of
Substitute
Products
© 2006 by Nelson, a division of Thomson Canada Limited.
3-7
*
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways
*
*
*
*
*
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions
Occurs when a firm is pressured or sees an opportunity
*
*
Price competition often leaves entire industry worse off
Advertising battles may increase total industry
demand, but may be costly to smaller competitors
© 2006 by Nelson, a division of Thomson Canada Limited.
3-8
Strategic Groups
A set of firms emphasizing similar strategic
dimensions to use a similar strategy
© 2006 by Nelson, a division of Thomson Canada Limited.
3-9
Competitor Environment
Competitor intelligence is the ethical gathering of
needed information and data about competitors’
objectives, strategies, assumptions, and
capabilities.
• What drives the competitor as shown by its future
objectives,
• What the competitor is doing and can do as revealed
by its current strategy,
• What the competitor believes about itself and the
industry, as shown by its assumptions,
• What the the competitor may be able to do, as shown
by its capabilities.
© 2006 by Nelson, a division of Thomson Canada Limited.
3-10