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Unformatted text preview: The External Environment and 5 The External Environment and 5 Forces Model Dr. Daniel Cohen
ILRHR 464 Spring 2009 1 Key Learning Points Key Learning Points What is an external analysis? Differentiate between external opportunities and threats. Explain how an external analysis is more than scanning the environment. How do you do an external analysis? Describe the components in an organization’s specific environment. Understanding customer needs and behaviors Explain each of the forces in Porter’s five forces model. Describe the components in an organization’s general environment. Discuss what types of external information strategic managers need and where they might find this information. Why do an external analysis? Explain the benefits and challenges of doing an external 2 External Analysis External Analysis Scan and evaluate various external environmental Scan sectors impacting performance sectors Opportunities: Positive external environmental trends, forces, events, and ideas that may improve the organization’s performance Threats: Negative external environmental trends or events that may hinder the organization's performance “The essence of formulating competitive strategy is relating a company to its environment” Michael Porter 3 Figure 2.1 Figure 4 Analysis of External Factors Analysis of External Factors Begins with Customers Who are they? How sensitive are they to price? How can they be reached? How are they currently using a particular product or service? Which of their needs are poorly served—or unserved? What level of loyalty do they have to current vendors? Do they seek an arm’s length transaction or a long 5 term relationship? (excerpted from swot 1 article) Role of Customers Role of Customers “A business has no higher requirement than to create customers” Peter Drucker In the absence of customers other functional areas such as product development, manufacturing, shipping, etc…are pointless (SWOT 1 article) 6 Customer/Market Segmentation Customer/Market Segmentation Age—senior citizens, teenagers, college students Gender Geographic location Types of users—frequent flyers, pleasure travel Income Behavior—people who shop over the internet
7 Industry Environment Industry Environment Industry Defined A group of firms producing products that are close substitutes Firms that influence one another Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and aboveaverage returns 8 The Five Forces of The Five Forces of Competition Model Figure 2.2 9 Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation Threat of New Entrants: Threat of New Entrants: Barriers to Entry 10 Bargaining Power of Suppliers Bargaining Power of Suppliers Supplier power increases when: Suppliers are large and few in number Suitable substitute products are not available Individual buyers are not large customers of suppliers and there are many of them Suppliers’ goods are critical to buyers’ marketplace success Suppliers’ products create high switching costs. Suppliers pose a threat to integrate forward into buyers’ industry 11 Bargaining Power of Buyers Bargaining Power of Buyers Buyer power increase when: Buyers are large and few in number Buyers purchase a large portion of an industry’s total output Buyers’ purchases are a significant portion of a supplier’s annual revenues Buyers can switch to another product without incurring high switching costs Buyers pose threat to integrate backward into the sellers’ industry
12 Threat of Substitute Products Threat of Substitute Products The threat of substitute products increases when: 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 13 Industry rivalry increases when: There are numerous or equally balanced competitors Industry growth slows or declines There are high fixed costs or high storage costs There is a lack of differentiation opportunities or low switching costs When the strategic stakes are high Intensity of Rivalry Among Intensity of Rivalry Among Competitors When high exit barriers prevent competitors from leaving the industry 14 Interpreting Industry Analyses
Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors Unattractive Industry
Low profit potential 15 Interpreting Industry Analyses
High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors Attractive Industry
High profit potential 16 Benefits of Doing External Analysis Benefits of Doing External Analysis Proactive managers anticipate change and plan accordingly accordingly Provide information for
Planning Decision making Strategy formulation Acquire and control needed resources Cope effectively with increasingly dynamic Cope environment environment Make a difference with higher performance 17 Challenges Associated with External Challenges Associated with External Analysis
Rapid environmental changes are difficult Rapid to keep up with to Amount of time that analysis can consume Forecasts and trend analyses are not actual Forecasts fact fact 18 Chapter 3 Chapter 3 19 ...
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- Spring '09