Review

Analysis of the external environment includes:

Analysis of the macroenvironment (far environment) Analysis of the microenvironment (near environment, or competitive environment)

Analysis of the Macroenvironment

Tool for analysis: SPENT Analysis Socio-demographic Political Economic Legal Technological

Analysis of the Competitive Environment

Microenvironment Industry Market Substitute products

Purpose of Analysis of Microenvironment (Industry and Markets) Identify opportunities for competence leveraging Understand customers and their needs Identify current and potential threats Understand resource markets

Industry Analysis Checklist

Location Location of support and resource markets Extent of concentration or fragmentation Product types produced Levels of output, growth and lifecycle position Ownership issues Other activities of industry members

Porters 5 Forces Model of Industry Analysis

Developed in 1980 to analyze the nature and extent of competition within an industry Porter identified 5 competitive forces that determine the nature of competition within an industry

Michael Porter
Born 1947 Degree in aeronautical engineering (Princeton); doctorate in economics (Harvard) Member of the faculty at Harvard Seminal work: Competitive Strategy (1980) Other works: The Competitive Advantage of Nations (1990)

Porters 5 Forces Model

Threat of new entrants Threat of substitute products Power of buyers or customers Power of suppliers Rivalry among businesses

Advantage of the Model

According to Porter, businesses can use the model to identify how to position itself to take advantage of opportunities and overcome threats.

Force 1: Threat of New Entrants

Force 1 depends on the height of barriers to entry Barriers to entry include:

Costs of capital investment needed to enter Regulatory and legal barriers Brand loyalty and customer switching costs Economies of scale utilized by existing competitors Access to suppliers and distributors Resistance from existing competitors
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Force 2: Threat of Substitute Products Substitute products: products that meet the same needs The threat existing from substitute products depends upon:

Extent to which price and performance of a substitute can match the industrys product Willingness of buyers to switch to the substitute

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Example: Threat of substitute products The threat of substitutes makes it difficult to increase prices and improve margins Example: The price of aluminum cans is restricted by the threat of substitutes like glass bottles, steel cans and plastic containers

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Force 3: Bargaining Power of Buyers or Customers

The threat is related to how much power buyers or customers have over the industry (the higher the power, the lower the price) Bargaining power of buyers or customers depends upon:

Number of customers and volume of their purchases Number and size of businesses supplying the product Switching costs

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Bargaining Power of Buyers

Monopsony a market where there are many suppliers and one buyer Thus, buyer has a great deal of power over price In order to decrease the power of buyers, sellers need to find buyers with lower power to negotiate, switch suppliers or develop offers strong buyers cant refuse

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Force 4: Bargaining Power of Suppliers The threat is related to how much power suppliers have over the industry Bargaining power of suppliers depends upon:

Uniqueness and scarcity of the supplied resource Switching costs How many industries require the resource Number and size of resource suppliers

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Example: Bargaining Power of Suppliers DeBeers worldwide diamond supplier DeBeers controls most of the productive diamond mines in the world Thus, they have extremely high power in the industry In this situation, its better to build winwin relationships with the supplier

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Force 5: Intensity of Rivalry

Intensity of rivalry of competitors in the industry is related to competition on both price and nonprice bases Force 5 is directly related to the other 4 forces, and depends upon:

Height of entry barriers and number and size of competitors Maturity of the industry Degree of brand loyalty Power of buyers and availability of substitutes
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Intensity of Rivalry

High concentration ratio means the majority of market share is held by a few firms Low concentration ratio means the industry has many rivals, none with significant market share Competitive strategies include:

Changing prices Improving product differentiation Creatively using channels of distribution Exploiting relationships with suppliers
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Porters 5 Forces and Profit

Force
Bargaining power of suppliers

Profitability will be higher if:

Weak suppliers

Profitability will be lower if:

Strong suppliers

Bargaining power of buyers Threat of new entrants Threat of substitutes Competitive rivalry

Weak buyers

Strong buyers

High entry barriers Low entry barriers Few possible substitutes Little rivalry Many possible substitutes Intense rivalry
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Criticisms of Porters 5 Forces Model

Porters 5 Forces is designed to assess industry profitability. Other argue that company-specific factors (for example, competences) are more important Implies the five forces apply equally to all competitors in the industry No consideration of product and resource markets It cannot be applied without consideration of the macroenvironment Assumes relationships with competitors, buyers and suppliers is not cooperative, but competitive
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Co-operative Environment
One of the criticisms of Porters 5 Forces Model is that it views all relationships as competitive, not cooperative BUT: Most organizations have formal and informal co-operative relationships with suppliers and distributors

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Co-operative Environment (Cont.)

Co-operative environment is important because it may:

Help achieve sustainable competitive advantage Produce lower costs Provide sustainable relationships with those outside the organization

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Analysis of the Co-operative Environment

Government Links

Informal Co-operative Links

Organization

Complementors

Formal Co-operative Links

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Co-operative Links

Informal co-operative links organizations link together for mutual or common purpose without legally binding contracts Formal co-operative links links bound by some sort of contract Complementors companies whose products add value to the organizations basic product Government links relationships with governments
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Informal Co-operative Links

Examples: Chambers of Commerce, Industry Associations These networks provide strong support for the organizations which belong to them Strong support links may provide competitive advantage

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Formal Co-operative Links

Examples: Joint Ventures, Strategic Alliances Links can be with suppliers, distributors and even competitors Real world examples: Benetton, Toyota, Strong links may deliver lower prices and higher quality service to the organization

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Complementors
Examples: Software is a complementor of hardware Usually, complementors work with the organization to provide a joint offering Real world example: Intel, IBM

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Government Links
Examples: negotiations with government on tax, investment and legal issues; organization lobbies Real world examples: For companies in the defence and pharmaceutical industries (Boeing, GSK), strong government links are essential

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Co-operative Links: Summary

Co-operative links can be opportunities, and cooperative links of competitors may be threats Porters 5 Forces analysis focuses on the competitiveness of relationships, BUT, competitive advantage may be gained through cooperation Establishing cooperative links is an emergent approach to strategy development

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A Note on Strategic Groupings

Strategic groups the group of competitors representing an organizations closest competitors Example: a group of branded clothes including Polo (Ralph Lauren), Tommy Hilfiger, and Izod (Lacoste), Beneton among others, may be a strategic group, even though there are other lower quality brands that are technically competitors Example 2: Rolex and Tag Heuer may be part of a strategic group that does not include Swatch, Timex, Seiko, even though they are all watchmakers

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