Chapter 2

1. Chapter 2

2. Why External Analysis? External analysis allows firms to: • discover threats and opportunities • see if above normal profits are likely in an industry • better understand the nature of competition in an industry • make more informed strategic choices

3. Focal Firm General External Environment Technological Change Specific International Events Demographic Trends Entry Complementors Rivalry Industry Buyers Substitutes Legal/Political Conditions Cultural Trends Suppliers Economic Climate

4. Focal Firm General External Environment Technological Change Specific International Events Demographic Trends PDA’s & Cell Phones European Union Ban on Hormone-Treated U.S. Beef Hispanic Population Growth Changing Policy toward Oil Exploration on Public Lands Changing Image of SUV’s Rising Interest Rates Legal/Political Conditions Cultural Trends Economic Climate

5. Industry Analysis The Structure – Conduct – Performance Model • originally developed to spot anti-competitive conditions for anti-trust purposes • came to be used to assess the possibilities for above normal profits for firms within an industry • Porter’s Five Forces Model was developed from this economic tradition

6. Types of Competition • Perfect Competition (competitive parity) • Large number of firms • Homogeneous products • Low-cost entry and exit • Monopolistic Competition • Large number of firms • Heterogeneous products • Low-cost entry and exit

7. Types of Competition • Oligopoly • Small number of firms • Homogeneous products • Costly entry and exit • Monopoly • One firm • Costly entry

8. Porter’s Five Forces Model Threat of Substitutes • substitutes fill the same need but in a different way - Coke and Pepsi are rivals, milk is a substitute for both • substitutes create a price ceiling because consumers switch to the substitute if prices rise • substitutes will likely come from outside the industry—be sure to look

9. Porter’s Five Forces Model Threat of Suppliers • powerful suppliers can ‘squeeze’ (lower profits) the focal firm Industry conditions that facilitate supplier power: • small number of firms in supplier’s industry • highly differentiated product • lack of close substitutes for suppliers’ products • supplier could integrate forward • focal firm is an insignificant customer of supplier

10. Porter’s Five Forces Model Threat of Buyers • powerful buyers can ‘squeeze’ (lower profits) the focal firm by demanding lower prices and/or higher levels of quality and service Industry conditions that facilitate buyer power: • small number of buyers for focal firm’s output • lack of a differentiated product • the product is significant to the buyer

11. Porter’s Five Forces Model Threat of Buyers Industry conditions that facilitate buyer power: • buyers operate in a competitive market—they are not earning above normal profits • buyers can vertically integrate backwards • many small buyers can be united around an issue to act as a block

12. Focal Firm Porter’s Five Forces Model Entry Industry Rivalry Buyers Threat Substitutes Suppliers expect normal profits If all threats are high expect above normal profits If all threats are low Most industries are somewhere between the extremes

13. Complementors As Another Force Complementors Increase the Value of the Focal Firms Product • customers perceive more value in the focal firm’s product when it is combined with the complementor’s product • complementors may be found outside the focal firm’s industry Example: Goodyear Tires on Corvette

14. Responding to Environmental Threats Neutralizing Threats • most firms cannot unilaterally change the threats in an industry • by altering relationships in an industry, firms may reduce threats and/or create opportunities, thereby increasing profits Examples: Regional Healthcare System, Building Contractor, and the Bakery

15. Exploiting Industry Structure Opportunities Generic Industry Structures • at any point in time, the structure of most industries fits into one of four generic categories • each industry structure presents opportunities that may be exploited • firms can choose to exploit an industry structure, continue business as usual, or exit the industry

16. Exploiting Industry Structure Opportunities Fragmented Industry Structure Opportunity Industry Characteristics Consolidation • large number of small firms • buy competitors • no dominant firms • build market power • no dominant technology • exploit economies of scale • commodity type products • low barriers to entry • few, if any, economies of scale

17. Exploiting Industry Structure Opportunities Emerging Industry Structure Opportunity Industry Characteristics • new industry based on break through technology or product • first mover advantages • technology • no product standard has been reached • locking-up assets • creating switching costs • no dominant firm has emerged • new customers come from non- consumption not from competitors

18. Exploiting Industry Structure Opportunities Mature Industry Structure Opportunities Industry Characteristics • refine current products • slowing growth in demand • technology standard exists • improve service • increasing international competition • process innovation • industry-wide profits declining • industry exit is beginning

19. Exploiting Industry Structure Opportunities Declining Industry Structure Opportunities Industry Characteristics • industry sales have sustained pattern of decline • market leadership • niche • some well-established firms have exited • harvest • firms have stopped investing in maintenance • divest

20. International Opportunities Approaches to International Markets • international markets present opportunities that vary depending on market characteristics • external analysis should include an assessment of international market characteristics • firms can improve the probability of above normal profits by exploiting the opportunities presented by international market characteristics

21. International Opportunities Multinational Opportunity Structural Response Market Characteristics • replicate headquarters functions in multiple markets • no global product standard • tastes and preferences vary • give local managers autonomy to respond • transportation of finished product is cost prohibitive • modify product to local tastes & preferences • governments impose local content rules

22. International Opportunities Global Opportunity Structural Response Market Characteristics • minimal replication of headquarters functions • global product standard • governments allow importation • centralized decision making at headquarters • significant economies of scale exist • centralized manufacturing • little responsiveness to local tastes & preferences • product development costs are significant

23. International Opportunities Transnational Opportunity Structural Response Market Characteristics • headquarters functions are replicated in some but not all regions • product standardization differs from region to region • government policy varies from region to region • high degree of coordi- nation between regions and headquarters • local tastes and preferences vary from region to region • this is a combination of a multinational and global approach

24. Focal Firm General External Environment Technological Change Specific International Events Demographic Trends Entry Complementors Rivalry Industry Buyers Substitutes Legal/Political Conditions Cultural Trends Suppliers Economic Climate

25. Summary External Analysis: • takes time and effort • should include consideration of international markets • helps firms recognize threats and opportunities • provides assessment of likely levels of industry profitability (normal, above, below) • can be applied at the individual level to professional and personal environments