External AnalysisExternal Analysis

BUSI 7130/7136BUSI 7130/7136

Dr. ShookDr. Shook

•What’s an Environment?What’s an Environment?• Analyzing the IndustryAnalyzing the Industry

Five ForcesFive ForcesCrown Cork & SealCrown Cork & Seal

TopicsTopics

Everything external to the organization Everything external to the organization

that potentially affects an organization’s that potentially affects an organization’s

performanceperformance

What’s an External Environment?What’s an External Environment?

General vs. SpecificGeneral vs. Specific

• GeneralGeneral = elements in society that can = elements in society that can

indirectly influence an industry and indirectly influence an industry and the the

firms within an industryfirms within an industry

Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment

DemographicDemographic

Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment

EconomicEconomicDemographicDemographic

Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment

Political/Legal

Political/Legal

DemographicDemographic EconomicEconomic

Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment

SocioculturalSociocultural

Political/Legal

Political/Legal

DemographicDemographic EconomicEconomic

Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment

TechnologicalTechnological

Political/Legal

Political/Legal

DemographicDemographic EconomicEconomic

SocioculturalSociocultural

Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment

Political/Legal

Political/Legal

DemographicDemographic EconomicEconomic

TechnologicalTechnological

GlobalGlobal

SocioculturalSociocultural

Components of the General EnvironmentComponents of the General EnvironmentComponents of the General EnvironmentComponents of the General Environment

Political/Legal

Political/Legal

DemographicDemographic EconomicEconomic

TechnologicalTechnological

GlobalGlobal

SocioculturalSociocultural

Specific (or task) =Specific (or task) = parts of the parts of the environment that are directly relevant to environment that are directly relevant to the achievement of an organization’s the achievement of an organization’s goalsgoals

– supplierssuppliers– customerscustomers– competitorscompetitors– governmental agenciesgovernmental agencies– special-interest groups special-interest groups

Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Threat of New EntrantsThreat of New Entrants

Barriers to entryBarriers to entry Threat of retaliationThreat of retaliation

Threat of New EntrantsThreat of New EntrantsThreat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

Economies of ScaleEconomies of Scale

Product DifferentiationProduct Differentiation

Capital RequirementsCapital Requirements

Switching CostsSwitching Costs

Access to Distribution ChannelsAccess to Distribution Channels

Cost Disadvantages Independent Cost Disadvantages Independent of Scaleof Scale

**

**

**

**

**

**

Government PolicyGovernment Policy**

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

** Supplier industry is dominated by Supplier industry is dominated by a few firmsa few firms

** Suppliers’ products have few Suppliers’ products have few substitutessubstitutes

** Buyer is not an important customer Buyer is not an important customer to supplierto supplier

** Suppliers’ product is an important Suppliers’ product is an important input to buyers’ productinput to buyers’ product

** Suppliers’ products are differentiatedSuppliers’ products are differentiated

Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:

** Suppliers’ products have high Suppliers’ products have high switching costsswitching costs

** Supplier poses credible threat of Supplier poses credible threat of forward integrationforward integration

Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:Suppliers exert power in the industry by:

* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of CompetitionPorter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Bargaining Power of Buyers

Bargaining Power of Buyers

Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Bargaining Power of BuyersBargaining Power of BuyersBargaining Power of BuyersBargaining Power of Buyers

Buyers compete with the supplying

industry by:

Buyers compete with the supplying

industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off ofeach othereach other

Bargaining Power of BuyersBargaining Power of BuyersBargaining Power of BuyersBargaining Power of Buyers

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

** Buyers are concentrated or purchases Buyers are concentrated or purchases are large relative to seller’s salesare large relative to seller’s sales

** Purchase accounts for a significant Purchase accounts for a significant fraction of supplier’s salesfraction of supplier’s sales

** Products are undifferentiatedProducts are undifferentiated

** Buyers face few switching costsBuyers face few switching costs

** Buyers’ industry earns low profitsBuyers’ industry earns low profits

** Buyer presents a credible threat of Buyer presents a credible threat of backward integrationbackward integration

** Product unimportant to qualityProduct unimportant to quality

** Buyer has full informationBuyer has full information

Buyers compete with the supplying

industry by:

Buyers compete with the supplying

industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off ofeach

othereach

other

Threat of Substitute Products

Threat of Substitute Products

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

Bargaining Power of Buyers

Bargaining Power of Buyers

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Threat of Substitute ProductsThreat of Substitute ProductsThreat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

Threat of Substitute ProductsThreat of Substitute ProductsThreat of Substitute ProductsThreat of Substitute Products

** Products with improving Products with improving price/performance tradeoffs price/performance tradeoffs relative to present industry relative to present industry productsproducts

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge For Example:For Example:

Keys to evaluate substitute products:Keys to evaluate substitute products:

Electronic security systems in place Electronic security systems in place of security guardsof security guards

Fax machines in place of overnight Fax machines in place of overnight mail deliverymail delivery

Threat of Substitute Products

Threat of Substitute Products

Threat of New

Entrants

Threat of New

Entrants

Threat of New

Entrants

Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition

Rivalry Among Competing Firms

in Industry

Rivalry Among Competing Firms

in Industry

Bargaining Power of Buyers

Bargaining Power of Buyers

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Intensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:

** Jockeying for strategic positionJockeying for strategic position

** Using price competitionUsing price competition

** Staging advertising battlesStaging advertising battles

** Making new product introductionsMaking new product introductions

** Increasing consumer warranties or serviceIncreasing consumer warranties or service

Intense competition is more likely to occur when:is more likely to occur when:

** Numerous or equally balanced competitorsNumerous or equally balanced competitors

** Slow growth industrySlow growth industry

** High fixed costsHigh fixed costs

** Lack of differentiation or switching costsLack of differentiation or switching costs

** High storage costsHigh storage costs

** Capacity added in large incrementsCapacity added in large increments

** High strategic stakesHigh strategic stakes

** High exit barriersHigh exit barriers

Intensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing Competitors

High Exit Barriers are economic, strategic and High Exit Barriers are economic, strategic and emotional factors which cause companies to remain emotional factors which cause companies to remain in an industry even when future profitability is in an industry even when future profitability is questionable.questionable.

** Specialized assetsSpecialized assets

** Fixed cost of exit (e.g., labor agreements)Fixed cost of exit (e.g., labor agreements)

** Emotional barriersEmotional barriers

** Government and social restrictionsGovernment and social restrictions

** Strategic interrelationshipsStrategic interrelationships

Intensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing CompetitorsIntensity of Rivalry Among Existing Competitors