Strategic Management Seminar

Aug 2014
EXTERNAL ANALYSIS:
THE IDENTIFICATION OF
OPPORTUNITIES AND
THREATS
Concepts
Industry
a group of companies offering products or services
that are close substitutes for each other that satisfy
the same basic customer need.

Sector
a group of closely related industries.

Market Segments
distinct groups of customers within a market that
can be differentiated from each other on the basis
of their distinct attributes and specific demands..



The Computer Sector:
Industries and Segments
External Analysis
Identifies strategic
opportunities & threats in
an organization s
operating environment that
will affect how it pursues
its mission.
Requires assessment of:
o Industry environment
Competitive structure of industry
Competitive position of the company
Competitiveness and position of major rivals
o Country/national environments in which a
company competes
o Wider socioeconomic/macroenvironment
that may affect company and its industry
Social
Governmental
Legal
International
Technological
External Analysis
External Analysis:
Opportunities and Threats
Analyzing the dynamics of the industry in which
an organization competes to help identify:
Opportunities
Conditions in the
environment a
company can take
advantage of to
become more
profitable
Threats
Conditions in the
environment endanger
the integrity and
profitability of the
companys business
External Analysis
o Economic overview
o Analysis of critical geographical locations
and industrial sectors
o Technological, human resources, political,
social, and legal trends
o Planning Scenarios: pessimistic,
most likely, optimistic
Porters Five Forces Model
How the Five
Forces Shape Competition
the stronger each of these five forces is, the more
limited is the ability of established companies to raise
prices and earn greater profits.
! Weak competitive force- viewed as an
opportunity as it allows company to
earn greater profits
! Strong competitive force- viewed as a
threat as it depresses industry profits
! Strength of forces may change as
industry conditions change
companies not currently competing in an industry
but have the capability to do so... Barriers include:
Risk of Entry
by Potential Competitors
1. Economies of Scale unit costs fall
" Cost reductions
" Bulk purchase discounts
" Cost savings
2. Brand Loyalty = creating customer preferences
3. Absolute Cost Advantages v. New Entrants
" Experience, patents, processes
" Control of production inputs
" Lower financial risks
4. Customer Switching Costs
5. Government Regulation
" Industry Competitive Structure- Number/size of
companies, consolidated vs. fragmented
" Industry Demand Conditions
" Growing demand reduces rivalry
" Declining demand encourages rivalry
" Cost Conditions
" High fixed costs profitability leveraged by volume
" Slow demand/growth intense rivalry/lower profits
" Exit Barriers
" Economic dependence
" Maintain assets
" High fixed cost
Rivalry Among
Established Companies
competitive struggle between companies in same
industry to gain market share... Function of:
consumers/end-users whouse product or
intermediaries that distribute or retail the products.
Buyers most powerful when:
Bargaining
Power of Buyers
1. Suppliers = many small companies,
buyers large/few
2. Purchase in large quantities
3. Suppliers depend on buyers for large
% of orders
4. Buyers switching costs are low
5. Buyer can purchase from several
6. Buyers supply own needs
provide inputs in the industry. Suppliers most
powerful when:
Bargaining
Power of Suppliers
1. Few substitutes
2. Industry not important to suppliers
3. Buyers- purchase large % of orders
4. Buyers experience significant switching
costs
5. Suppliers can threaten to enter industry
" Produce/supply own product
" Buyers cannot threaten to make own inputs
products from different businesses or
industriescan satisfy similar customer needs.
Substitute Products
1.Existence of close substitutes a
strong threat - Substitutes limit price
that companies can charge for
product
2.Substitutes a weak competitive force
" Few close substitutes
" Companies in industry can raise prices
and earn additional profits.
Industry Force Cost Leadership Differentiation Focus
Entry Barriers Ability to cut price in
retaliation deters
potential entrants.
Customer loyalty can
discourage potential
entrants.
Focusing develops core
competencies that can
act as an entry barrier.
Buyer Power Ability to offer lower
price lo powerful
buyers.
Large buyer have less
power to negotiate
because of few close
alternatives.
Large buyers have less
power to negotiate
because of few
alternatives.
Supplier Power Better insulated
form powerful
suppliers.
Better able to pass on
supplier price
increases to
customers.
Suppliers have power
because of low
volumes, but a
differentiation-focused
form is better able to
pass on supplier price
increases.
Threat of
Substitutes
Can use low price
to defend against
substitutes.
Customers become
attached to
differentiating
attributes, reducing
threat of substitutes.
Specialized products &
core competency
protect against
substitutes.
Rivalry Better able to
compete on price.
Brand loyalty to keep
customers form rivals.
Rivals cannot meet
differentiation-focused
customer needs.
Cost Leadership Strategy
o This generic strategy calls for being the low cost
producer in an industry for a given level quality.
o Firms that succeed in cost leadership often have
the following internal strengths:
1. Access to the capital required to make a significant
investment in production assets.
2. Skill in designing products for efficient
manufacturing.
3. High level of expertise in manufacturing process
engineering,
4. Efficient distribution channels.
Differentiation Strategy
o A differentiation strategy calls for the
development of a product or service
that offers unique attributes that are
val ued by cust omer s and t hat
customers perceive to be better than or
different from the products of the
competition.
Firms that succeed in a differentiation strategy
often have the following internal strengths:
1. Access to leading scientific research.
2. Highly skilled creative product development
team.
3. Strong sales team with the ability to
successfully communicate the perceived
strengths of the product.
4. Corporate reputation for the quality and
innovation.
Differentiation Strategy
Focus Strategy
o The focus strategy concentrates on a
narrow segment and within that
segment attempts to achieve either a
cost advantage or differentiation.
o A firm using a focus strategy often
enjoys a high degree of customer
loyalty, and that discourages other
firms from competing directly.
Porters Generic Strategies
Target
Scope
Broad (Industry
Wide)
Narrow (Market
Segment)
Low Cost
Cost Leadership
Strategy
Focus Strategy
(low cost)
Product
Uniqueness
Differentiation
Strategy
Focus Strategy
(differentiation)
Strategic Groups
Within Industries
follow a business model similar to other
companies within group, but are different from the
business model of other companies in other
groups.
Implications
1. Closest competitors in same strategic group
viewed as substitutes for each other
2. Different competitive forces and may face different
set of opportunities/threats
Mobility Barriers
1. Inhibit movement between strategic groups
2. Include barriers to enter another group or exit
existing
Strategic Groups and the Mobility
Barrier in the US Airline Industry
Alaska
Airlines
Southwest
Airlines
JetBlue
U.S.
Airways
Delta
American
Airlines
United
Airlines
Mobility
Barrier
Routes Serviced
Low
P
r
i
c
e

C
h
a
r
g
e
d

High
Low High
analyzes the effects of industry evolution on competitive
forces over timecharacterized by five distinct life cycle
stages:
Industry Life Cycle Analysis
1. Embryonic- beginning to develop; perfecting
products, educating customers, opening distribution
channels
2. Growth- demand takes-off; focus on keeping up with
high industry growth
3. Shakeout- demand approaches saturation,
replacements; emergence of excess productive
capacity
4. Mature- saturated with low/no growth; consolidation
based on market share, driving down price
5. Decline- growth becomes negative; rivalry further
intensifies based on rate of decline/exit barriers
The Macroenvironment
! Macroeconomic Forces: rates of; interest,
currency exchange, inflation/deflation
! Global Forces: barriers to international trade
and investment
! Technological Forces: new technologies
! Demographic Forces: changes in
characteristics of a population
! Social Forces: social values and mores
! Political & Legal Forces: laws/regulations