Components of External Analysis

Competing For Advantage
Part II – Strategic Analysis
Chapter 3 – The External Environment:
Opportunities, Threats, Industry Competition,
and Competitor Analysis
“Computers in the future may weigh no more
than 1.5 tons”
“Computers in the future may weigh no more
than 1.5 tons”
— Popular Science Magazine, forecasting the
relentless march of Science - 1949
In 1968, a 100 megabyte hard
drive weighed 4,500 pounds
cost more than $130,000
“I think there is a world market for maybe five
— Thomas Watson, Chairman of IBM, 1943
“But what….is it good for?”
— Engineer at IBM, commenting on the
microchip, 1968
“The idea is interesting and well-formed, but in
order to earn better than a “C” the idea must
be feasible”
— Yale University Professor in response to
Fred W. Smith’s paper proposing an
overnight delivery service
FedEx now delivers well over 7.5 million
packages a day – 2.7 billion a year
“We don’t like their music and guitar music is on
the way out”
— Decca Records Company in rejecting the
Beatles, 1962
“ Who the hell wants to hear actors talk”
H. M. Warner, 1927
“There is no reason why anyone would want a
computer in their home”
Ken Olson, president, chairman, and founder of
Digital Equipment Corporation, 1977
“This ‘telephone” has too many shortcoming to
be seriously considered a means of
communication. The device is inherently of no
value to us.”
Internal Memo, Western Union, 1876
“Everything that can be invented has been
Charles H. Duell, Commissioner of the U.S.
Patents Office,
“640K of RAM ought to be enough for anybody”
Bill Gates, 1981
Subway opens a
new store every 3
Starbucks every
11 hours
Quiznos every 16
WSJ, Oct 1, 2003
“I see no scenario whatsoever where Toyota
will pass us in share”
Chrysler CEO, January 2002
“I see no scenario whatsoever where Toyota
will pass us in share”
Chrysler CEO, January 2002
September 2003, “The Big Three” became GM,
Ford, and Toyota
“Nothing important happened today”
Journal entry made by King George III, July 4,
1776, the day the United States declared
independence from England
 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.
Warren Buffett
 Skate to where the puck is going, not to where the
puck has been.
Wayne Gretsky
External Environments
 Key Terms
General Environment – composed of dimensions
in the broader society that influence an industry
and the firms within it
Industry Environment – set of factors that directly
influence a firm and its competitive actions and
competitive responses
Competitor Environment – details about a firm’s
direct and indirect competitors and the
competitive dynamics expected to impact a firm's
efforts to generate above-average returns
Components of External Analysis
 Scanning – Identifying early signals
 Monitoring – Following signals or change
identifies in scanning to identify patterns
 Forecasting – Projections of what might
 Assessing – Determining the timing and
significance of forecasted change
Assessing the General
General Environment
1) Demographic Segment
 Characteristics of the population
e.g., age, race, gender, sexual orientation and
social classes
 Ethnic structure
 Income distribution
 Geographic distribution
2) Economic Segment
 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
3) Political/Legal Segments
 Tax laws, minimum wages, environmental
laws, labor laws, consumer protection,
product liability, etc.
4) Sociocultural Segment
 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”, savings
rates, etc.
5) Technological Segment
 Changes in technology that affect the
workplace, and the products and services
consumers expect
e.g., Information technologies, entertainment
technologies, product technologies.
6) Global Segment
 New and existing markets around the world,
and changes in the political, cultural and
institutional terrain.
General Environment
 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
 Then determine which factors are relevant,
and how these changes will have an effect
upon the firm.
ROIC Across Industries
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
(of firms in
other industries)
Suppliers of
Key Inputs
Porter’s 5-forces is all about margins
What factors
increase/decrease margins
within an industry, or
industry segment, thus
affecting profitability.
When industry structural variables are weak…...
Prices can be kept high
Profits can soar
Costs can be kept low
When industry structural variables are strong
Prices will be pushed down
Profits shrink
Costs will rise
Potential New Entrants
 Suppose you had to start a new business and
start generating revenues…
… today
… in a week
… in 2 months
… in 1 year
What kind of businesses might you start?
Some industries, by their nature, are easier to
enter than others
Potential New Entrants
 Firms and individuals search for industries to
enter that at attractive/profitable…
….unless they find themselves at an
immediate disadvantage relative to
 Industries possess, and firms can create
“barriers to enter”
 Barriers of entry are desirable for entrenched
Barriers to Entry – Prevent New
Economies of scale
Product differentiation & loyalty
Capital & resource requirement
Switching costs
Cost disadvantage independent of size
Regulatory policies
Access to technology & know-how
Learning, costs and experience curves
Threat of retaliation
Who are you key suppliers?
Suppliers are a strong competitive force when:
 Only a few suppliers exist and is more
concentrated than industry to which it is selling
(few selling to many)
 Few substitutes available to the industry firm
 Industry firms not important to supplier group
 Supplier group provides a product crucial to
production process, and/or significantly affects
buyers’ product quality
 It is costly for buyers to switch suppliers
 Forward integration by suppliers is a credible
 Who are your key buyers? - who provides
your revenues?
 Can they force:
lower prices, higher quality and service –
affect the terms and conditions of the
When do you, as a consumer, have power?
• Two issues
Price sensitivity
Can you actually bargain?
 What affect buyers’ power?
 Volume/Frequency of purchase
 When buyers represent a large portion of sellers
 When buyers can easily switch to another product
 When the product the buyers are buying is
 When buyers can self-source or backwards
 Criticality
 Buyers’ knowledge
 Buyers’ profitability
Product/service which fulfills similar need
Price cap
3 Questions
Are they available?
Can we switch?
Price-performance relationship?
Substitutes and Business Definition
 How we define our business defines our
substitutes and our rivals
Carbonated Soft Drink
Many Substitutes
Few Rivals
Soft Drinks
Few Substitutes
Many Rivals
Rivalry and Profitability
 Industry profitability is a collective good.
 Collective good is served by coordination
Are there industries were pricing is
 Incentive to violate
Rivalry – What drives it?
Numerous or equally balanced competitors
Slow growth, excess capacity
High fixed costs
High storage costs
High obsolescence costs
Lack of differentiation
Low switching costs
Perceptions of high payoff from competitive actions
High exit barriers
Exit Barriers
 Specialized assets
 Fixed costs of exit
 Strategic interrelationships among business
 Emotional barriers
Industries and Segments
 What is a segment?
 Different segments…..
posses different combinations of 5-forces
reward different strategies
possess different levels of profitability
Segments in the Automotive
Which segment is more attractive? Why?
Segments in the Automotive
More Rivalry
More Substitutes
More Entrants
More Buyer Power
Porter’ conclusion
 Attractiveness of industry/segment
current industry
adjacent segments
industries you might consider entering
 Which forces possess the greatest influence?
Can we influence them?
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.
Analysis of Direct Competitors
 Key Terms
Strategic Group – set of firms
emphasizing similar strategic
dimensions to use a similar strategy
Strategic Dimensions – areas that
firms in a strategic group treat
Implications from Strategic Group
 Intra-strategic group rivalry is more intense
than inter-strategic group rivalry
 Membership in a strategic group partially
defines the essential characteristics of firms'
 The more similar strategies are seen across
strategic groups, the greater the level of
expected rivalry
 The strengths of industries' five forces differ
across strategic groups
Competitor Analysis Components
Identification of Key Success Factors?
 KSFs are product attributes, competencies,
competitive capabilities, and market
achievements with the greatest direct bearing
on profitability
 opportunities for competitive advantage
 What factors determine winners and losers in
 What about baseball?
 Golf?
 Airlines?
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
 Choose one of the following industries
 Pharmaceuticals
 Airlines
 Aircraft manufacturing
 Grocery store
 Automobile manufacturing
 Tobacco
 Conduct a Porter’s five forces analysis
 How attractive is this industry
 What are the primary forces that shape competition
 How have firms responded to those forces?