AB3601 Week 2 External Analysis
AB3601 Week 2 External Analysis
AB3601 Week 2 External Analysis
Strategic Management
Chapter 2:
External Environment Analyses
Caleb Tse
Strategy, IB and Entrepreneurship Division
Nanyang Business School
Nanyang Technological University
AY2023-24 S2
AGENDA
• External Analysis
• General-environment
• Industry – Porter’s Five Forces
-- Break ---
• Strategic Groups
• Competitor Analysis
So Far…
Macro-environment
Industry
Services , Manufacturing,
Textile, Gasoline, Electronics, etc.
vs
Strategic
Group
Tools for External Analysis
7 Environment Segments
Industry Analysis
5 Forces Model
10
The General Environment:
Segments and Elements
Sociocultural • Women in the workforce • Shifts in work and career
segment • Workforce diversity preferences
• Attitudes about the quality of • Shifts in preferences regarding
work life product and service
characteristics
11
The General Environment:
Segments and Elements
Global segment • Important political events • Newly industrialized countries
• Critical global markets • Different cultural and institutional
attributes
12
Ripped from the Headlines
Ripped from the Headlines
Ripped from the Headlines
Ripped from the Headlines
Ripped from the Headlines
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Parts of External Environmental Analysis
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Tools for External Analysis
7 Environment Segments
Industry Analysis
5 Forces Model
~25%
To what extent
the performance
of a firm depends
on the industry? ~55%
~20%
Profitability
varies across
industries
Porter (2008)
Industry & Industry Analysis
• Defining an industry?
• Group of incumbent companies
• Relatively the same set of suppliers and buyers
• Tend to offer similar products and services
• Industry Analysis, a method to:
• Identify an industry’s profit potential for average firms
• Derive implications for a firm’s strategic position (Value – Cost)
Industry’s Strategic
profit potential Positioning
Perceived
Value (V):
Willingness to
pay (WTP)
Value created = V - C
Price (P)
Profit = P - C
Cost (C)
Industry Structure & Analysis
供应商的
议价能力
行业企业竞
争激烈程度
Bargaining Vertical
Power of Competition
Suppliers
Horizontal
Competition
Rivalry
among Threat of Substitute
Threat of New Entrants
Existing Products or Services
Competitors
Bargaining
Power of
Buyers
5 Forces: Value Stick Considerations
Perceived
Value (V): Each of the 5 Forces can
Willingness to have an impact on WTP,
price and/or cost (and
pay (WTP)
therefore: on profit
potential).
Price (P)
Profit
Cost (C)
Fundamental Equation:
Unit Profit Margin = Price - Cost
The Force The Impact (on industry) Why?
IF Threat of entry Profitability Prices
IF Supplier power Profitability Costs
IF Buyer power Profitability Prices
IF Substitutes Profitability Prices
IF Rivalry Profitability Prices Costs
Threat of Buyer
Substitutes Entry Power
- - -
Price – Cost = Profit
- + +
Supplier
Rivalry Power
Threat of New Entrants
35
Bargaining Power of Suppliers
36
Bargaining Power of Buyers
Buyer switching
Is buyer group price-
costs to rival
sensitive?
NO HIGH products/svcs
•Differentiated products?
•Form a significant portion
of buyers’ costs? LOW
•Important to the quality of
Bargaining Power
buyers’ products/svcs?
of Buyers
Is buyer group
concentrated or
NO LOW Threat of buyer
purchase in large integrating backward
quantities?
37
Cement Industry in U.S. vs. Mexico
38
Threat of Substitute Products
Substitute
for coffee?
Substitute
for business
travel?
39
Intensity of Rivalry
40
10-min Break
41
Attractive Industry Structure
LOW
Threat of
Entry
LOW
Substitutes
42
Unattractive Industry Structure
HIGH
Threat of
Entry
HIGH
Substitutes
43
Limitation of 5 Forces
45
Example?
A Sixth Force: Complements
Bargaining
Power of
Suppliers
?
Rivalry
Threat of New among Threat of Substitute
Entrants? Existing
Products or Services?
Competitors
?
Bargaining
Power of
Buyers?
Summary & Purpose
• An industry analysis can be used to:
• Identify opportunities to increase profits
• Observe threats to existing profits and design mechanisms to
counter them
• Decide whether or not to enter a market
• Decide whether or not to exit a market
• Position a firm to succeed in an industry
7 Environment Segments
Industry Analysis
5 Forces Model
Strategic Groups
Competitor Environment
❖ Strategic groups
❖ A set of firms emphasizing similar strategic dimensions and
using a similar strategy is called a strategic group.
❖ Competitive rivalry is greater within a strategic group than
between strategic groups.
❖ The strengths of the five forces differ across strategic
groups.
❖ The closer the strategic groups are in terms of their
strategies, the greater is the likelihood of rivalry between
the groups.
Example of a Strategic Group:
The Airline Industry
Rothaermel, 2017
Strategic Group: Issues
Environmental Factors
Industry Analysis
5 Forces Model
Strategic Groups
Competitor Analysis
Competitor Environment
❖ Competitor analysis focuses on each company against which a
firm competes directly.
❖ In competitor analysis, the firm seeks to understand the
following questions:
❖ What drives the competitor, as shown by its future objectives?
❖ What the competitor is doing, as revealed by its current strategy?
❖ What the competitor believes about the industry, as shown by its
assumptions?
❖ What the competitor’s capabilities are, as shown by its strengths and
weaknesses?
❖ Knowledge about these four dimensions helps the firm prepare
an anticipated response profile for each competitor.
Competitor Analysis Components
Sustainability Considerations in
External Analysis
Sustainability considerations include understanding
the impact of sustainability, such as environment (E)
and social (S) factors in the general environment, on
Porter’s Five Forces. Examples include:
❖ Incumbents in the oil and gas industry may experience
higher threat of substitute products from renewables.
❖ Consumer’s bargaining power may increase if there is
lower switching cost to “greener” substitute products.
❖ More examples may be found in Tylenda (2014) -
https://www.sasb.org/blog/five-forces/
See you next week
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