Strategic Management
Chapter 2 External Analysis
Chapter’s Learning Objectives
Determine the impact of external macro-environmental trends on an industry [PESTEL]
Use the Porter’s 5-forces tool to evaluate an industry
Be able to draw out implications from a 5
Be able to define the 5 forces in an Be able to evaluate the 5 forces in an Be able to evaluate whether or not to
forces analysis for a specific firm in that
industry industry enter an industry based on your analysis
industry
Plot and analyze strategic groups on a strategic group map
Question: What’s the #1 reason CEOs
are fired?
Levels of Environmental Analysis
External / General Environment
• Macro-environment / PESTEL
(Political, Economic, Social,
Technological, Ecological, Legal)
• Global (Porter’s Diamond)
Competitive Environment / Industry
Environment / “Task” Environment
• Structure of the industry /
Porter’s Five Forces analysis
• Strategic groups
• Life cycle
Internal Environment • Competitor analysis
• Firm strengths & weaknesses, capabilities,
core competencies, and sustainable
competitive advantage, V.R.I.O.
• Value chain
External or General Environment / PESTEL Tool
• Significance of External Environmental - firms cannot control them directly.
• Elements:
– Political – the arena in which organizations and interest groups compete for attention
and resources.
– Economic – the nature and direction of the economy.
– Sociocultural and demographic – encompasses society’s attitudes and cultural
values and consists of attributes such as population size, age structure, geographic
distribution, ethnic mix, and income distribution.
– Technological – emerging products & processes which may translate knowledge
into products, processes, and materials.
– Environmental/Ecological – broad environmental issues such as the natural
environment, global warming, and sustainable economic growth
– Legal – laws, regulations, litigious environment, risk management
Political Forces
• _______________
• _______________
General • _______________
Environment • _______________
• _______________
• _______________
Sociocultural • _______________
Political/Legal
Technological
Economic
Ecological
Economic Forces
• _______________
• _______________
General • _______________
Environment • _______________
• _______________
• _______________
Sociocultural • _______________
Political/Legal
Technological
Economic
Ecological
Sociocultural/Demographic Forces
• _______________
• _______________
General • _______________
Environment • _______________
• _______________
• _______________
Sociocultural • _______________
Political/Legal
Technological
Economic
Ecological
Technological Forces
• _______________
• _______________
General • _______________
Environment • _______________
• _______________
• _______________
Sociocultural • _______________
Political/Legal
Technological
Economic
Ecological
Legal
Environmental/Ecological Segment
• _______________
• _______________
General • _______________
Environment • _______________
• _______________
• _______________
Sociocultural • _______________
Political/Legal
Technological
Economic
Environmental/
Ecological
Legal Forces
• _______________
• _______________
General • _______________
Environment • _______________
• _______________
• _______________
Sociocultural • _______________
Political/Legal
Technological
Economic
Ecological
Legal
Competitive Environment / Industry
Environment
Competitive Environment
Sometimes called the task
or industry environment
Competitive
Competitors
(existing and Environment
potential)
Includes Customers
Suppliers
Substitutes
Competitors
Porter’s Five Forces model
Customers
Suppliers
Competitive Environment / Industry Environment
Threat of
New Entrants
Supplier Customer
Power Rivalry
Power
Threat of
Substitutes
Porter’s Five Forces of Competition
Framework
SUPPLIERS
Bargaining power of
suppliers
INDUSTRY
COMPETITOR
S Threat of
POTENTIAL Threat of
new SUBSTITUTES
ENTRANTS
entrants Rivalry among substitutes
existing firms
Bargaining power of buyers
BUYERS
Profits of established firms in the industry may be eroded
by new competitors
High entry barriers lead to low threat of new entries
Economies of scale
The Threat of Product differentiation
New Entrants Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
• Buyers threaten an industry
– Force down prices
The Bargaining – Bargain for higher quality or more
Power of Buyers services
– Play competitors against each other
• A buyer group is powerful when
– It is concentrated or purchases large volumes relative
The to seller sales
– The products it purchases from the industry are
Bargaining standard or undifferentiated
– The buyer faces few switching costs
Power of – It earns low profits
Buyers – The buyers pose a credible threat of backward
integration
(Cont.) – The industry’s product is unimportant to the quality of
the buyer’s products or services
The Bargaining • Suppliers can exert power by threatening
Power of to raise prices or reduce the quality of
purchased goods and services
Suppliers
• A supplier group will be powerful when
– The supplier group is dominated by a
few companies and is more
The Bargaining concentrated than the industry it sells
to
Power of – The supplier group is not obliged to
contend with substitute products for
Suppliers (Cont.) sale to the industry
– The industry is not an important
customer of the supplier group
• A supplier group will be powerful when
– The supplier’s product is an important
The Bargaining input to the buyer’s business
– The supplier group’s products are
Power of differentiated, or it has built up
switching costs for the buyer
Suppliers (Cont.) – The supplier group poses a credible
threat of forward integration
• Substitutes limit the potential returns of
an industry
The Threat of – Ceiling on the prices that firms in that
industry can profitably charge
Substitute
Products and A substitute is a product/service which
provides the same function as the
Services product/service, but in a different
form.
• Jockeying for position
The Intensity of • Price competition
Rivalry among • Advertising battles
Competitors in an • Product introductions
Industry • Increased customer service or
warranties
The Intensity • Interacting factors lead to intense rivalry
– Numerous or equally balanced competitors
of Rivalry – Slow industry growth
among – High fixed costs
– Lack of differentiation or switching costs
Competitors in – Capacity augmented in large increments
an Industry – High exit barriers
(Cont.)
• Two unassailable assumptions in industry analysis
– No two firms are totally different
Strategic – No two firms are exactly the same
• Strategic groups
Groups • Cluster of firms that share similar strategies
within – Breadth of product and geographic scope
– Price/quality
Industries – Degree of vertical integration
– Type of distribution system
Strategic
Groups • Rivalry is strongest in the same strategic group
• Environmental and competitive forces impact the strategic
within groups differently
• Some strategic groups are more profitable than others
Industries • Mobility barriers restrict movement between strategic
groups
(Cont.)
• Value of strategic groups as an analytical
tool
– Identify barriers to mobility that
protect a group from attacks by other
groups
Strategic Groups – Identify groups whose competitive
position may be marginal or tenuous
within Industries – Chart the future direction of firms’
strategies
(Cont.) – Thinking through the implications of
each industry trend for the strategic
group as a whole
Team Exercise
External Analysis
• PESTEL
• Porter’s Five Forces
PESTEL
Factor Strong>Moderate> Impact on Industry
Weak
Political
Economic
Socio-cultural
Technological
Ecological
Legal
Five Forces
Factor/ Low>>>High? Ability to Raise and/or
Strength Capture Profits
Of Force
Rivalry
Suppliers
Customers
Potential
Entrants
Substitutes
Conclusions • Issues/problems to address
regarding
your external • What should the firm do?
analysis