MANCH2, External Analysis

Steps in an external industry analysis:

1. Define your Clients industry

2. Evaluate relevant macro-level forces

3. Examine the industry structure

4. Determine industry competition/attractiveness

5. Analyze direct competitors

Step 1: Define your clients industry

Clearly define the products/services your client sells (NAICS code)

Step 2: Evaluate relevant macro-level forces

Use PESTLE analysis

Step 3: Examine the industry structure

Use structure-conduct-performance (SCP)

Step 4: Determine industry competition/attractiveness

Use porters five forces anlaysis

Step 5: Analyze direct competitors

Use a strategic group map

4 Key Tools for External Analysis:

• PESTLE Framework

• Porters Five Forces

• Strategic group Mapping

• Structure-Conduct-Performance (SCP)

PESTLE Framework

breaks down the macro-environment into 6 areas

• Political, economical, social-cultural, technological, environmental, and legal

  • Spots opportunities and threats

Porters Five Forces

looks at the industry's competitive environment to understand the dynamics affecting probability.

Strategic Group Mapping

helps businesses figure out where they stand in comparison to competitors.

Structure-Conduct-Performance (SCP)

examines the industry from a broader economic standpoint to understand how market structures affect business performance.

PESTLE’s 6 areas

Political, Economic, Sociocultural, Technological, Environmental, Legal

Political Factors

Elements such as tax policies, changes in trade restrictions and tariffs, stability of governments, and proposed legislative changes.

Economic Factors

include elements such as interest rates, inflation rates, gross domestic product, unemployment rates, levels of disposable income, and general growth and decline of the economy.

Sociocultural Factors

how societal and cultural shifts impact business

• Reputation is not an example of sociocultural, seasonality can be a candidate.

Technological Factors

scientific advancements that enhance products and services

Environmental Factors

encompasses the physical and ecological aspects

Legal Factors

focuses on laws and regulations that frame business activities

5 market structures

• perfect competition

• monopolistic competition

• oligopoly

• monopoly

• legal monopoly

Perfect Competition

level playing field, there is an accepted market price determined by supply and demand

• Many small firms

• Firms are price takers

• Commodity product

  • Low entry barriers

Monopolistic Competition

Many sellers selling differentiated products.

• Many firms

• Some pricing power

• Differentiated product

• Medium entry barriers

Oligopoly

Few firms supply a large portion of all products

• High barriers to entry

  • Few large firms

  • Some pricing power

  • Differentiated product

  • High entry barriers

• Competing firms are interdependent (when one company does something, the others do it too)

Monopoly

One seller, legal because they are important, regulated by the government

• One firm

• Considerable pricing power

• Unique product

• Very high entry barriers

Legal Monopoly

Arises when a patent is received

Porters Five Forces

• Rivalry Among Competitors

• Bargaining Power of Suppliers

• Bargaining Power of Buyers

• Threat to new entrants

• Threat of substitute products/services

Rivalry Among Competitors

price discounting, new product introductions, advertising campaigns, and service improvements.

• Limits profitability

• Depends on the intensity and basis in which companies compete

Rivalry Among Competitors is High When

Is high when:

• There are many competitors in the industry

• The competitors are roughly of equal size

• Industry growth is slow, zero, or even negative

• Exit barriers are high

• Products and services are direct substitutes

Bargaining Power of Suppliers

powerful suppliers capture more of the value for themselves, limiting quality or services, and shifting costs.

Bargaining Power of Supplier is high when…

• Incumbent firms face significant switching costs when changing suppliers

• Suppliers offer products that are differentiated

• There are no readily available substitutes for the products or services that the suppliers offer

• Supplier can credibly threaten to forward-integrate into the industry

Bargaining Power of Buyer

buyers hold power if they have negotiating leverage, especially if they are price sensitive.

Bargaining Power of Buyers is High When:

• There are fa few large buyers

• Each buyer purchases large quantities relative to the size of a single seller

• The industry's products are standardized or undifferentiated commodities

• Buyers face little to no switching costs

• Buyers can credibly threaten to backward-integrate into the industry

Threat to new Entrants

bring new capacity and a desire to gain market share

Threat of new entrants is high when

• Customer switching cost is low

• Capital requirements are low

• Incumbents do not possess:

  • Proprietary technology

  • Established brand equity

  • New entrants expect that incumbents will not or cannot retaliate

Threat of substitute products/services

alternatives that exist outside of the current industry

Threat of substitutes is high when:

• The substitute offers an attractive price-performance trade-off

• The buyer's cost of switching to the substitute is low

Strategic Groups

consists of a set of industry competitors that have similar characteristics to one another but differ in important ways from the members of other groups.

Strategic Group Framework

• Clusters different firms into groups

• Based on key strategic dimensions

• Competitive rivalry is strongest between firms within the same strategic group

• Can reveal gaps in the industry that represent untapped opportunities