CASE ANALYSIS CASE ANALYSIS METHOD: METHOD:

ASSESSING THE ASSESSING THE EXTERNAL BUSINESS EXTERNAL BUSINESS

ENVIRONMENTENVIRONMENT

Prof.Stephen OngProf.Stephen OngBSc(Hons)Econs (LSE), MBA BSc(Hons)Econs (LSE), MBA

(Bradford)(Bradford)Visiting Professor, Shenzhen Visiting Professor, Shenzhen

UniversityUniversity

MBA MBA

Why External Analysis?

External analysis allows firms to:

• discover threats and opportunities

• see if above normal profits are likely in an industry

• better understand the nature of competition inan industry

• make more informed strategic choices

FirmFirm

BuyersBuyers

SuppliersSuppliers

EntryEntry

RivalryRivalry

SubstitutesSubstitutes

ComplementorsComplementors

TechnologicalTrends

Ecological/ EthicsEcological/ EthicsChange

Socio-Cultural/ Socio-Cultural/ DemographicDemographic

TrendsEconomicEconomicClimate

PoliticalPoliticalConditions

Legal/Regulatory/Globalisation

IndustryIndustry

General External EnvironmentGeneral External Environment

PESTEL PESTEL AnalysisAnalysis

PESTEL Local FactorsPESTEL Local Factors

PESTEL Global FactorsPESTEL Global Factors

Porter’s 5 ForcesPorter’s 5 ForcesIndustry AnalysisIndustry Analysis

Industry Analysis :Industry Analysis :Porter’s 5+1 Forces Porter’s 5+1 Forces ModelModel

Porter’s Five Forces Model

1. Threat of Entry1. Threat of Entry• if firms can easily enter the industry, any above

normal profits will be bid away quickly

• barriers to entry lower the threat of entry

• barriers to entry make an industry more attractive

• this is true whether the focal firm isalready in the industry or thinking aboutentering

Porter’s Five Forces Model

1. Threat of Entry1. Threat of EntryBarriers to Entry:

• economies of scale—firm that can’t producethe minimum efficient scale will be at a disadvantage

• product differentiation—entrants are forced toovercome customer loyalties to existing products

• cost advantages independent of scale—incumbentsmay have learning advantages, etc.

• government policies—governments may imposetrade restrictions and/or grant monopolies

Economies of Scale and the Cost of Production

Porter’s Five Forces Model

2. Threat of Rivalry2. Threat of Rivalry• high rivalry means firms compete vigorously—and

compete away above average profits

Industry conditions that facilitate rivalry:

• large numbers of competitors

• slow or declining growth

• high fixed costs and/or high storage costs

• low product differentiation

• industry capacity added in large increments

Porter’s Five Forces Model

3. Threat of Substitutes3. Threat of Substitutes• substitutes fill the same need but in a different way

- Coke and Pepsi are rivals, milk is asubstitute for both

• substitutes create a price ceiling because consumersswitch to the substitute if prices rise

• substitutes will likely come from outside theindustry—be sure to look

Porter’s Five Forces Model

4. Threat of Powerful Suppliers4. Threat of Powerful Suppliers• powerful suppliers can ‘squeeze’ (lower profits)

the focal firm

Industry conditions that facilitate supplier power:

• small number of firms in supplier’s industry

• highly differentiated product

• lack of close substitutes for suppliers’ products

• supplier could integrate forward

• focal firm is an insignificant customer of supplier

Porter’s Five Forces Model

5. Threat of Powerful Buyers5. Threat of Powerful Buyers• powerful buyers can ‘squeeze’ (lower profits)

the focal firm by demanding lower prices and/orhigher levels of quality and service

Industry conditions that facilitate buyer power:

• small number of buyers for focal firm’s output

• lack of a differentiated product

• the product is significant to the buyer

Porter’s Five Forces Model

5. Threat of Powerful Buyers5. Threat of Powerful BuyersIndustry conditions that facilitate buyer power:

• buyers operate in a competitive market—they arenot earning above normal profits

• buyers can vertically integrate backwards

• many small buyers can be united around an issueto act as a block

Example: Monsanto’s Life Sciences Strategy

6. Other Stakeholders :6. Other Stakeholders :Complementors As Another ForceComplementors As Another Force

Complementors Increase the Value of the Firm’s Product

• customers perceive more value in the focal firm’sproduct when it is combined with the complementor’sproduct

• complementors may be found outside the focal firm’sindustry

Example: Goodyear Tires on Corvette

ReferencesReferences

• Johnson, Gerry, Whittington, Richard & Scholes, Kevan (2011) Exploring Strategy, 9th edition, FT Prentice Hall/Pearson UK.

• Barney, J.B. & Hesterley,W.S.(2012) Strategic Management and Competitive Advantage, 4th edition, Prentice Hall

• Wheelen & Hunger (2011) Essentials of Strategic Management, 5th edition, Pearson

• Porter, M.E., (2008) On Competition, Harvard Business Press.