External Analysis

Tools for external analysis

- Become aware of factors in a company's broad macro-environment that may have strategic significance : PESTEL analysis - Diagnose the competitive conditions in a company's industry: Five Forces, Industry Structure, Industry Dynamics - Map the market positions of industry members: Strategic Group Mapping - Use multiple frameworks to determine whether industry offers "enough" opportunities for growth and profitability

Strategic group

- Cluster of industry rivals that have similar competitive approaches and market positions - Localized (geographic, strategic, product range, etc) competition - Firms within the same strategic group compete more directly because they have the most potential to affect the profitability of others - although they belong to the same industry, each strategic group differs along the opportunities and threats they are facing

External Analysis

- Explaining and predicting interfirm performance differentials = what makes one company more (or less) successful than others? - Strategy researchers believe that overall firm performance is explained by a firm's strategy - A firm's strategy is defined as the managers' plan about how to gain and sustain competitive advantage (Drucker, 1994) - Achieving sustained superior performance over a company's direct rivals

Diagnose the competitive conditions in a company's industry

- Five Forces - Industry Structure - Industry Dynamics

Constructing a Strategic Group Map

- Identify the competitive characteristics that delineate strategic approaches used in the industry. - Typical variables: the price/quality range (high, medium, low), geographic coverage (local, regional, national, global), degree of vertical integration (none, partial, full), product-line breadth (wide, narrow), choice of distribution channels (retail, wholesale, Internet, multiple channels), and degree of service offered (no-frills, limited, full). - Plot firms on a two-variable map based upon their strategic approaches. - Assign firms occupying the same map location to a common strategic group. - Draw circles around each strategic group, making the circles proportional to the size of the group's share of total industry sales revenues.

Levels of External Analysis

- Macroenvironmental factors Affects all or many industries in an economy Tends to be national or international in focus Firm that sees the trends better than rivals can seize opportunities and avoid threats that will affect many others Example: PESTEL - Industry-level analysis Affects industry and related industries in its supply/distribution chain Company that can defy normal industry dynamics can gain advantage Examples: IDEF, IDFs, 5 forces - Competitive positioning within industry Affects companies within an industry who tend to compete for the same customer in the same way Examples: Strategic groups, KSFs

Strategic Group Mapping

- Map the market positions of industry members - Part of competitive environment (+ Industry)

Bargaining power of buyers

- Negotiation for the economic surplus 𝑉−𝐶 - Buyers bargain to extract greater consumer surplus 𝑉−𝑃 either through lower 𝑃 or higher 𝑉 (higher quality and/or greater service) - Industry profits threatened most if... - A few large buyers (volume discounts, potential collusion) - Large buyers relative to a seller - Product is standardized and undifferentiated - Switching costs low for buyers, high for sellers - Backward integration (eliminate supply chain link)

Bargaining power of suppliers

- Negotiation for 𝐶 (their price = input cost) - Suppliers bargain to reduce economic surplus 𝑉−𝐶 by charging higher prices or offering lower quality and/or lesser service - Industry profits threatened most if... - Input market is dominated by a few suppliers - Suppliers' customer bases are diversified - No substitutes for supplier products - High switching cost - Forward integration (may become a direct competition)

Threat of new entrants

- New entrants typically erode incumbent market share. - High industry profitability attracts new entrants. - Entry barriers: - 𝑐 (unit cost) decreases with - 𝑞 (volume) = Economies of scale - Cumulative 𝑞 = Learning effect (improved productivity over time) - Network effects = 𝑉 (value) increases with 𝑞 - Customer loyalty = 𝑉 for entrants' product decreases with 𝑞 -Switching cost - Access to raw materials & means of distribution (e.g. sales channels) -Preemptive pricing

Industry Structure Continuum

- Perfect compitetion - Monopolistic competition - Oliogopoly - Monopoly

Threat of substitutes

- Products in other industries with similar function - Substitutes almost always exist. - Ex. Coke vs. Pepsi (rivalry) ; Coke vs. Water, coffee, tea (substitute) - Ex. Delta vs. United (rivalry) ; Airline industry vs. car, bus, train - Industry profits threatened most if... - Another product of service fulfills the same need and offers a better price-for-performance trade-off

Social systems (organizations) are embedded in their environment:

- They interact and respond to their environment - They are interrelated and interdependent, but function as a whole - Change in one part creates change in another - Take inputs and transform them into outputs - Outputs are distributed into the environment

Five Force Analysis

-A tool for understanding industry profitability potential -NOT necessarily company profitability -Inter-firm difference in profitability = Intra-industry + Inter-industry

Rivalry among existing competitors

-Bargaining power of suppliers -Bargaining power of buyers -Threat of new entrants -Threat of substitute products or services

Five Forces Model (Porter)

-Existing competitors -Possible competitors -Consumers -Resource providers -Alternative industry providers

PESTEL framework: Macro-environment (global world)

-Political -Economic -Sociocultural -Technological -Environmental -Legal

Industry Life Cycle Model

Factors that change supply and demand over time - Embryonic - Growth - Shakeout - Mature - Declining

Consumers

Individuals/organizations who purchase your products and have the power to force prices down, bargain for higher quality or more services, or play one competitor against another to get the best deal

Existing competitors

Organizations in your industry that produce and market products similar to yours

Possible competitors

Organizations looking to move into your industry, bringing new capacity and competing to gain customers and market share

Alternative industry providers

Other industries that can satisfy the consumer need your industry is satisfying

Tools in the ToolKit

PESTEL IDEFs 5 Forces IDFs Strategic groups Competitive Intelligence KSFs Industry Attractiveness

Industry Dynamics

Static Analysis - How do we explain current rivalry and profitability? Dynamic Analysis - What is the industry going to look like in the future? - Industries evolve over time as the relationships between the Five Forces change

SWOT

Strategic plan reflects the managers' assumptions of internal analysis of the company's Strength and Weaknesses, as well as the external (environmental) Opportunities and Threats. - Stands for Strengths, Weaknesses, Opportunities, Threats - External analysis is concerned with Opportunities and Threats (internal with Strengths and Weaknesses) - Each External Analysis tool or framework provides unique contextual insights that may inform the firm's strategy - There is no one right answer, but rather, insights that show strategic paths that could be effective

Resource Providers

Those individuals or organizations that provide raw materials, equipment, financial resources, or labor and have the power to raise prices, reduce the number of services provided, or reduce quality of these needed resources

Identifying the Market Positions of Rivals

Two variables selected as axes for the map - should not be highly correlated - should reflect differences in how rivals position themselves in the marketplace