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External Analysis:: The Identification of Opportunities and Threats

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169 views17 pages

External Analysis:: The Identification of Opportunities and Threats

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mutmainnah
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© © All Rights Reserved
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Chapter

Two
External
Analysis:
The
Identification of
Opportunities
and Threats
“To assure victory, always
carefully survey the field
before battle.”
- Sun Tzu

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External Analysis
The purpose of external analysis is to identify
the strategic opportunities and threats in the
organization’s operating environment.
External Analysis requires an assessment of:
 Industry environment in which company operates
• Competitive structure of industry
• Competitive position of the company
• Competitiveness and position of major rivals
 The country or national environments
in which company competes
 The wider socioeconomic or macroenvironment
that may affect the company and its industry
• Social • Legal • Technological
• Government • • Macroeconomic
International
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External Analysis:
Opportunities and Threats
Analyzing the dynamics of the industry in which
an organization competes to help identify:
Opportunities Threats
Conditions in the Conditions in the
environment that a environment that
company can take endanger the integrity
advantage of to and profitability of
become more the company’s
profitable business

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Industry Analysis:
Defining an Industry
 Industry
• A group of companies offering products or services that are
close substitutes for each other and that satisfy the same
basic customer needs
• Industry boundaries may change as customer needs evolve
and technology changes
 Sector
• A group of closely related industries
 Market Segments
• Distinct groups of customers within an industry
• Can be differentiated from each other with distinct attributes
and specific demands
Industry analysis begins by focusing on
the overall industry – before
considering market segment or sector-level issues
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The Computer Sector:
Industries and Segments
Figure 2.1

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Porter’s Five Forces Model

1. Risk of Entry by Potential


Competitors
2. Industry Rivalry
3. Bargaining Power of Buyers
4. Bargaining Power of Suppliers
5. Threat of Substitutes

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How the Five Forces Shape
Competition within an Industry
The stronger that each of these five forces is, the more
limited is the ability of established companies to raise
prices and earn greater profits within their industry.
• A weak competitive force
» may be viewed as an opportunity as it
allows company to earn greater profits
• A strong competitive force
» may be viewed as a threat as it
depresses industry profits
• Strength of forces may change
as industry conditions change

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 Risk of Entry by Potential
Competitors
Potential Competitors are companies that are not
currently competing in an industry but have the capability
to do so if they choose. Barriers to new entrants include:
1. Economies of Scale – as firms expand output unit costs fall via:
 Cost reductions – through mass production
 Discounts on bulk purchases – of raw material and standard parts
 Cost advantages/savings – of spreading costs over large volume
2. Brand Loyalty
 Achieved by creating well-established customer preferences
 Difficult for new entrants to take market share from established brands
3. Absolute Cost Advantages – relative to new entrants
 Accumulated experience – in production and key business processes
 Control of particular inputs required for production
 Lower financial risks – access to cheaper funds
4. Customer Switching Costs for Buyers – where significant
5. Government Regulation
 May be a barrier to enter certain industries

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 Rivalry Among Established
Companies
Competitive Rivalry refers to the competitive struggle
between companies in the same industry to gain market
share from each other. Intensity of rivalry is a function of:
1. Industry Competitive Structure
 Number and size distribution of companies
 Consolidated versus fragmented industries
2. Demand Conditions
 Growing demand – tends to moderate competition and reduce rivalry
 Declining demand – encourages rivalry for market share and revenue
3. Cost Conditions
 High fixed costs – profitability leveraged by sales volume
 Slow demand and growth – can result in intense rivalry and lower profits
4. Height of Exit Barriers – prevents companies from leaving industry
 Write-off of investment in assets  High fixed costs of exit
 Economic dependence on industry  Emotional attachment to industry
 Maintain assets  Bankruptcy regulations

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 Bargaining Power of Buyers
Industry Buyers may be the consumers or end-users who
ultimately use the product or intermediaries that distribute or
retail the products. These buyers are most powerful when:
1. Buyers are dominant.
 Buyers are large and few in number.
 The industry supplying the product is composed of many small companies.
2. Buyers purchase in large quantities.
 Buyers have purchasing power as leverage for price reductions.
3. The industry is dependant on the buyers.
 Buyers purchase a large percentage of a company’s total orders.
4. Switching costs for buyers are low.
 Buyers can play off the supplying companies against each other.
5. Buyers can purchase from several supplying companies at once.
6. Buyers can threaten to enter the industry themselves.
 Buyers produce themselves and supply their own product.
 Buyers can use threat of entry as a tactic to drive prices down.

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 Bargaining Power of Suppliers
Suppliers are organizations that provide inputs such as
material and labor into the industry. These suppliers are
most powerful when:

1. The product supplied is vital to the industry and has few


substitutes.
2. The industry is not an important customer to suppliers.
 Suppliers are not significantly affected by the industry.
3. Switching costs for companies in the industry are significant.
 Companies in the industry cannot play suppliers against each other.
4. Suppliers can threaten to enter their customers’ industry.
 Suppliers can use their inputs to produce and compete with
companies already in the industry.
5. Companies in the industry cannot threaten to enter their
suppliers’ industry by making their own inputs.
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 Substitute Products
Substitute Products are the products from
different businesses or industries that can satisfy
similar customer needs.

1. The existence of close substitutes is


a strong competitive threat.
 Substitutes limit the price that companies
can charge for their product.

2. Substitutes are a weak competitive


force if an industry’s products have few
close substitutes.
 Other things being equal, companies in
the industry have the opportunity to raise
prices and earn additional profits.

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The Macroenvironment
 Macroeconomic Forces: growth rates, interest
rates, currency exchange rates, inflation or
deflation rates
 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 and regulations

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Example of Macroenvironment

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The Role of the Macroenvironment

Changes in one or more forces in the


macroenvironment can affect:
• The competitiveness of the industry
(Porter’s Five Forces)
• The attractiveness of the industry
• Relative strengths (or weaknesses) of a
given company

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“Strategy is a choice
on how to
compete.”
- Michael Porter

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