Lecture 6 Porters Strategy Analysis

STRATEGIC
MANAGEMENT
INPUTS
THE EXTERNAL
ENVIRONMENT:
OPPORTUNITIES, THREATS,
INDUSTRY COMPETITION, &
COMPETITOR ANALYSIS
Authored by:
Marta Szabo White. Ph.D
Georgia State University
IMPORTANT DEFINITIONS
A firm’s EXTERNAL ENVIRONMENT is

broken down into three parts:
● General
● Industry
● Competitor
A firm’s strategic actions are influenced

by the conditions in all three parts.
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
IMPORTANT DEFINITIONS
● General Environment
MACRO Dimensions in the broader society that influence
an industry and the firms within it
● Industry Environment
Set of factors that directly influences a firm and its
competitive actions and response
● Competitor Environment
MICRO Focuses on each company against which a firm
directly competes
THE EXTERNAL ENVIRONMENT
EXTERNAL
NG
ENVIRONMENT
UNDERSTANDING
HI
TC
INTERNAL
ENVIRONMENT
MA
KNOWLEDGE
VISION, MISSION,
AND STRATEGY
THE EXTERNAL ENVIRONMENT
GENERAL
● Firms cannot directly CONTROL the general

environment’s segments.
● However, these segments influence the
actions that firms take.
● Successful firms learn how to gather the
information needed to understand all
segments and their implications for selecting
and implementing the firm’s strategies.
EXTERNAL ENVIRONMENTAL
ANALYSIS
External environments are:
• Turbulent
• Complex
• Global
• Uncertain
• Ambiguous
• Incomplete
• Firms engage in external environmental analysis to

better understand and cope with their environments.
• This analysis has four parts:
scanning, monitoring, forecasting, and assessing.
ANALYSIS
• Identifying early signals of
SCANNING environmental changes and
trends.
MONITORI • Detecting meaning through

ongoing observations of
NG environmental changes and

trends.
ly z ing • Developing projections of

Ana ernal FORECASTI anticipated outcomes based
e e xt nt on monitored changes and
th e
en v ir on m
c u lt, NG trends.
a d iffi et • Determining the timing and

is y
if i ca n t, ASSESSING importance of environmental
changes and trends for firms’
sign tivity. strategies and management.
ac
ANALYSIS: SCANNING
Scanning often
Scanning: the study of all
segments in the general reveals ambiguous, incomplete, or
environment; through scanning, unconnected data and
firms identify early signals of information. Environmental
potential changes in the general scanning is challenging but
environment and detect changes critically important for firms,
that are already underway especially those competing in
highly volatile environment.
ANALYSIS: MONITORING
Effective monitoring
Monitoring: analysts requires the firm to
observe Scanning and
identify important
MEANINGFUL monitoring are
stakeholders and
environmental particularly important
understand its
changes to see if an when a firm competes
reputation among
important trend is in an industry with
these stakeholders as
emerging from among the foundation for high technological
those spotted through uncertainty.
scanning
serving their unique
needs.
ANALYSIS: FORECASTING
Forecasting: feasibility
projections developed for Technology trends are
what might happen, and continually driving
During an economic
how quickly, as a result of product life cycles shorter,
downturn, forecasting
the changes and trends which makes forecasting
becomes more difficult
detected through scanning demand for new
and more important.
and monitoring, both of technological products that
which focus on events at a much more challenging.
point in time
ANALYSIS: ASSESSING
Assessing: determining INTERPRETATION Gathering and organizing

the timing and significance IS KEY. Even if information is important,
of the effects of formal assessment is BUT appropriately
environmental trends that inadequate, the interpreting that
have been identified; intelligence to determine if
specifying the implications appropriate an identified trend in the
of the understanding interpretation of that external environment is an
gathered in the previous information is opportunity or threat is
stages important. PARAMOUNT.
INDUSTRY ENVIRONMENT ANALYSIS
An INDUSTRY is a group of firms that produce

similar products or offer similar services that
are close substitutes.
Compared with the general environment, the

industry environment has a more direct effect
on the firm’s:
■ Strategic competitiveness
■ Ability to earn above-average
returns
An industry’s profit potential is a function of

the five forces of competition:
■ The threats posed by new entrants
■ The power of suppliers
■ The power of buyers
■ Product substitutes
■ The intensity of rivalry among competitors
Strategies are chosen, in part, because of the

influence of an industry’s characteristics.
© 2012 South-Western, Cengage Learning, Inc. All rights reserved.
© 2012 South-Western, Cengage Learning, Inc. All rights reserved.
THE FIVE FORCES OF COMPETITION MODEL

1 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY
● Can threaten market share of existing competitors

● May stimulate additional production capacity
● New competitors may force existing firms to be
more efficient and to learn how to compete on new
dimensions
● Entry barriers make it difficult for new firms to
enter an industry and often place them at a
competitive disadvantage even when they are able
to enter

FUNCTION OF TWO FACTORS

1 BARRIERS TO ENTRY
● Economies of scale
● Product differentiation
● Capital requirements
● Switching costs
● Access to distribution channels
● Cost disadvantages independent of scale
● Government policy
2 EXPECTED RETALIATION

ECONOMIES OF SCALE
● Economies of scale are the cost advantages
that enterprises obtain due to their scale of
operation, and are typically measured by the
amount of output produced.
● Economies of scale can be developed in most
business functions, such as marketing,
manufacturing, research and development, and
purchasing

ECONOMIES OF SCALE (cont’d)

FACTORS (advantages/disadvantages) related
to large- and small-scale entry
● Flexibility in pricing and market share
● Costs related to scale economies
● Competitor retaliation
● Flexible manufacturing systems diminishes
the effectiveness of economies scale to act as a
barrier

1/5 THREAT OF NEW ENTRANTS: BARRIERS TO ENTRY
PRODUCT DIFFERENTIATION
● Unique products
● Customer loyalty
● New entrants frequently offer products at
lower prices

SWITCHING COSTS
One-time costs customers incur when they buy
from a different supplier
■ New equipment
■ Retraining employees
■ Psychological costs of ending a
supplier relationship

ACCESS TO DISTRIBUTION CHANNELS

● Stocking or shelf space
● Price breaks/Cooperative advertising
allowances
● Less of a barrier for products that can be
sold on the Internet

COST DISADVANTAGES INDEPENDENT OF

SCALE
● Proprietary product technology
● Favorable access to raw materials
● Desirable locations

GOVERNMENT POLICY
● Licensing and permit requirements
● Regulation/Deregulation of industries
● Antitrust violations resulting from
industry dominance

2/5 BARGAINING POWER OF SUPPLIERS
SUPPLIER POWER INCREASES WHEN:

● Suppliers are large and few in number
● Suitable substitute products are not available
● Industry firms are not a significant customer
for the suppliers
● Suppliers’ goods are critical to buyers’
marketplace success

2/5 BARGAINING POWER OF SUPPLIERS
SUPPLIER POWER INCREASES WHEN (cont’d):

● Suppliers’ products create high switching costs
● Suppliers have substantial resources and
provide a highly differentiated product
● Suppliers pose a credible threat to integrate
forward into the buyers’ industry
3/5
THEBARGAINING
FIVE FORCESPOWER OF BUYERS
OF COMPETITION MODEL
BUYER POWER INCREASES WHEN:
● Buyers purchase a large portion of an
industry’s total output
● Buyers’ purchases are a significant portion
of a seller’s annual revenues
● Switching costs are low (to other industry
product)
o The industry’s products are
undifferentiated or standardized
● Buyers pose a credible threat to integrate
backward into the sellers’ industry
THE FIVE FORCES

4/5 THREAT OF COMPETITION
OF SUBSTITUTE MODEL
PRODUCTS
THREAT OF SUBSTITUTE PRODUCTS INCREASES:
● Buyers face few switching costs
● The substitute product’s price is lower
● Substitute product’s quality and performance are
equal to or greater than the existing product
● Differentiated industry products that are valued by
customers reduce this threat
o Goods or services outside a given industry perform the
same or similar functions at a competitive price (e.g.,
plastic has replaced steel in many applications)
5/5 INTENSITY OF RIVALRY AMONG

THE FIVE FORCES OF COMPETITION
COMPETITORS MODEL
INDUSTRY RIVALRY
● Competitors are rarely homogeneous; they differ in resources
and capabilities and seek to differentiate themselves from
competitors
● Firms seek to differentiate their products in ways that
customers value and in which the firms have a competitive
advantage
● Common rivalry dimensions:
■ Price
■ Service after the sale
■ Innovation

5/5 INTENSITY OF RIVALRY AMONG COMPETITORS
INDUSTRY RIVALRY INTENSIFIES WITH:

● Numerous or equally balanced competitors
● Slow industry growth
● High fixed costs or high storage costs
● Lack of differentiation opportunities or low
switching costs
● High strategic stakes
● High exit barriers

5/5 INTENSITY OF RIVALRY AMONG COMPETITORS
EXIT BARRIERS
High exit barriers prevent competitors from
leaving the industry
EXAMPLES
■ Specialized assets: assets with values linked to
a particular business
■ Fixed costs of exit: such as labor agreements

INTERPRETING INDUSTRY ANALYSES
Low entry barriers
Suppliers and buyers

have strong Unattractive
positions
Strong threats from Industry
substitute products
Intense rivalry among

competitors LOW PROFIT POTENTIAL

INTERPRETING INDUSTRY ANALYSES
High entry barriers
Suppliers and buyers

have weak positions
Attractive
Few threats from Industry
substitute products
Moderate rivalry
among competitors HIGH PROFIT POTENTIAL
INDUSTRY ENVIRONMENT ANALYSIS:
STRATEGIC GROUPS
STRATEGIC DIMENSIONS
● Extent of technological leadership
● Product quality
● Pricing policies
● Distribution channels
● Customer service

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STRATEGIC

A firm’s EXTERNAL ENVIRONMENT is

A firm’s strategic actions are influenced

● Firms cannot directly CONTROL the general

• Firms engage in external environmental analysis to

MONITORI • Detecting meaning through

NG environmental changes and

ly z ing • Developing projections of

a d iffi et • Determining the timing and

Assessing: determining INTERPRETATION Gathering and organizing

An INDUSTRY is a group of firms that produce

Compared with the general environment, the

An industry’s profit potential is a function of

Strategies are chosen, in part, because of the

THE FIVE FORCES OF COMPETITION MODEL

● Can threaten market share of existing competitors

THE FIVE FORCES OF COMPETITION MODEL

FUNCTION OF TWO FACTORS

THE FIVE FORCES OF COMPETITION MODEL

THE FIVE FORCES OF COMPETITION MODEL

ECONOMIES OF SCALE (cont’d)

THE FIVE FORCES OF COMPETITION MODEL

THE FIVE FORCES OF COMPETITION MODEL

THE FIVE FORCES OF COMPETITION MODEL

ACCESS TO DISTRIBUTION CHANNELS

THE FIVE FORCES OF COMPETITION MODEL

COST DISADVANTAGES INDEPENDENT OF

THE FIVE FORCES OF COMPETITION MODEL

THE FIVE FORCES OF COMPETITION MODEL

SUPPLIER POWER INCREASES WHEN:

THE FIVE FORCES OF COMPETITION MODEL

SUPPLIER POWER INCREASES WHEN (cont’d):

THE FIVE FORCES

5/5 INTENSITY OF RIVALRY AMONG

THE FIVE FORCES OF COMPETITION MODEL

INDUSTRY RIVALRY INTENSIFIES WITH:

THE FIVE FORCES OF COMPETITION MODEL

THE FIVE FORCES OF COMPETITION MODEL

Low entry barriers

Suppliers and buyers

Intense rivalry among

THE FIVE FORCES OF COMPETITION MODEL

High entry barriers

Suppliers and buyers

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