Business Policy 445

External Environment

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 Company’s External Environment
Components of
macroenvironment

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 7 Strategic Questions about a
Company’s Industry / Environment
• What Are the Industry’s Dominant Economic Features?
• What Kinds of Competitive Forces Are Industry Members
Facing, and How Strong Is Each Force?
• What Factors Are Driving Industry Change and What
Impacts Will They Have?
• What Market Positions Do Rivals Occupy—Who Is
Strongly Positioned and Who Is Not?
• What Strategic Moves Are Rivals Likely to Make Next?
• What Are the Key Factors for Future Competitive
Success?
• Does the Outlook for the Industry Present an Attractive
Opportunity? 3
Q1: Industry’s Dominant Economic
Features
• Market size and growth rate
• Number of rivals
• Scope of competitive rivalry (Geographic,
population & product lines)
• Buyer needs and requirements
• Degree of product differentiation
• Product innovation
• Supply/demand conditions
• Pace of technological change
• Vertical integration
• Economies of scale
• Learning and experience curve effects 4
 7 Strategic Questions about a
Company’s Industry / Environment
• What Are the Industry’s Dominant Economic Features?
• What Kinds of Competitive Forces Are Industry Members
Facing, and How Strong Is Each Force?
• What Factors Are Driving Industry Change and What
Impacts Will They Have?
• What Market Positions Do Rivals Occupy—Who Is
Strongly Positioned and Who Is Not?
• What Strategic Moves Are Rivals Likely to Make Next?
• What Are the Key Factors for Future Competitive
Success?
• Does the Outlook for the Industry Present an Attractive
Opportunity? 5
Q2: Competitive Forces of the Industry

• Understanding industry’s competition and profitability =

analyzing industry’s underlying structure in terms of the
competitive forces.
• Factors affecting industry profitability in the short run – the
business cycle, weather, etc.
• Industry structure, reflected in the competitive forces, sets
industry profitability in the medium and long run.
• Key analytical tool – Michael Porter’s Five-Forces Model.

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Q2: Competitive Forces of the Industry

(Porter, 2008)

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Michael Porter on Five Competitive
Forces

http://www.youtube.com/watch?v=mYF2_FBCvXw

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 3 Steps for Analysis of Competitive
Forces

Step 1 - Identify the specific competitive

pressures associated with each of the
five forces.

Step 2 - Evaluate the strength of each

competitive force -- fierce, strong,
moderate to normal, or weak.

Step 3 - Determine whether the collective

strength of the five competitive forces is
conducive to earning attractive profits.
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Competitive Pressures Among Rival
Sellers
• Forms of rivalry:
– price discounting,
– new product introductions,
– advertising campaigns, and
– service improvements, etc.

• High rivalry limits the profitability of an industry

• The degree to which rivalry drives down an

industry’s profit potential depends on:
a) the intensity with which companies compete and,
b) the basis on which they compete.
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Competitive Pressures Among Rival
Sellers
The intensity of rivalry is greatest if:
• Competitors are numerous / are roughly
equal in size and power.
• Industry growth is slow.
• Exit barriers are high.
• Rivals are highly committed to the business
and have aspirations for leadership.

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Competitive Pressures Among Rival
Sellers
Most destructive rivalry – price competition –
occurs when:
• Products or services of rivals are nearly
identical and there are few switching costs
for buyers.
• Capacity must be expanded in large
increments to be efficient.
• The product is perishable.
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 Threat of New Entrants
• If entry barriers are low, the threat of entry is high and
industry profitability is moderated.
• It is the threat of entry, not whether entry actually occurs,
that holds down profitability.
Barriers to entry:
– Supply-side economies of scale
– Demand-side benefits of scale
– Customer switching costs
– Capital requirements
– Incumbency advantages independent of size
– Unequal access to distribution channels
– Restrictive government policy
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 The Power of Suppliers
Powerful suppliers capture more value by:
• Charging higher prices,
• Limiting quality or services, or
• Shifting costs to industry participants.
A supplier group is powerful if:
• More concentrated than the industry it sells to;
• Does not depend heavily on the industry for its revenues;
• Industry participants face switching costs in changing
suppliers;
• Suppliers offer products that are differentiated;
• There is no substitute for what the supplier group
provides;
• The supplier group can credibly threaten to integrate
forward into the industry.
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 The Power of Buyers
Buyers are powerful if they have negotiating leverage.
Powerful customers capture value by:
• forcing down prices,
• demanding better quality or more service (thereby driving up
costs), and generally
• playing industry participants off against one another.
A customer group has negotiating leverage if:
• There are few buyers, or each one purchases in volumes that
are large relative to the size of a single vendor. (Monopsony)
• The industry’s products are standardized or undifferentiated.
• Buyers face few switching costs in changing vendors.
• Buyers can credibly threaten to integrate backward and
produce the industry’s product themselves if vendors are too
profitable.
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 The Threat of Substitutes
Substitute products – two or more products for which an
increase in the price of one leads to an increase in the demand
for the other.
• Substitute products or services limit an industry’s profit
potential by placing a ceiling on prices.
• When the threat of substitutes is high, industry profitability
suffers.
The threat of a substitute is high if:
• There is an attractive price-performance trade-off to the
industry’s product
• The buyer’s cost of switching to the substitute is low.

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The Threat of Substitutes

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