External Analysis and Porter's Five Forces

SWOT Analysis

• SWOT Analysis stands for “Strengths, Weaknesses, Opportunities and Threats”

  • Strengths: internal characteristics of a business that give it an advantage over others

  • Weaknesses: internal characteristics of the business that place the business at a disadvantage relative to others

  • Opportunities: elements in the environment that the business could exploit to its advantage

  • Threats: elements in the environment that may result in trouble for the business

• SWOT Analysis can be performed for a company, product, place, industry, or person

Porter’s Five Forces

Intensity of Rivalry Among Competitors

• For most industries, the intensity of rivalry among competitors is the biggest determinant of competitiveness for an existing company.

• Factors that currently influence this aspect include:

  • Firm concentration ratio

  • Advertising budget

  • Technological innovation / transparency

  • Online vs. brick-and-mortar businesses

  • Rate of Industry Growth

  • Lack of Differentiation or Low Switching Costs

  • High Strategic Stakes

  • High Exit Barriers

Threats of New Entrants

• New Entrants can threaten to take market share from existing companies.

• Barriers to Entry:

  • Economies of Scale

  • Product Differentiation

  • Capital Requirements

  • Switching Costs

  • Access to Distribution Channels

  • Cost Disadvantages Independent of Scale

  • Government Policy

IMPORTANT:

When Barriers to Entry are WEAK,

Threat of New Entrants is STRONG

(and

When Barriers to Entry are STRONG,

Threat of New Entrants is WEAK)

Threat of Substitute Products

• The existence of Substitute Products can threaten to take sales away from a particular industry.

  • Buyer propensity to substitute

  • Relative price performance of substitute

  • Buyer switching costs

  • Perceived level of product differentiation

  • Number of substitute products available in the market

Other Substitute Products

• Some substitute products are harder to think of than others, but are still in our category of “substitute products”:

  • Do without the product (just don’t buy it – do you really need it?)

  • Can you buy used vs. new?

  • Rent vs. own?

  • Do-it-yourself

Bargaining Power of Suppliers

The ability of suppliers to command higher prices can threaten a company’s profitability and flexibility.

Bargaining Power of Buyers

The ability of buyers to command lower prices can create a serious threat to a company.

External Environment

Physical Segment

The Physical refers to the physical environment, and ecological, social, and economic systems that influence the environment.  Relevant considerations are global warming, energy consumption, and sustainability

Sociocultural Segment

Sociocultural refers to how society’s attitudes and values are changing, and how those changes affect businesses.  These would include, for example, a population’s attitudes toward labor force participation, diversity, religion, child rearing, healthcare, and lifestyles.

Global Segment

Global refers to the evolution of a global marketplace, and new producers and consumers across all parts of the world.  This also includes an understanding of the cultural and institutional attributes of these new market participants.

Technological Segment

Technological encompasses all the technological innovations that are rapidly driving changes throughout society in all parts of the world.

Political/ Legal Segment

Political / Legal refers to the governing organizations (both national and local) and their influence on markets – for example through regulations, tariffs, and policies.

Demographic Segment

Demographic factors include influences of (and changes to) population size, age structure, ethnic mix, income distribution, and geographic distribution.

Economic Segment

The Economic environment refers to stability and direction of the economy and includes factors such as GDP growth, the interest rates and inflation, personal savings rates, and trade or budget deficits.

Scanning

the study of all segments in the general environment

Monitoring

the ongoing observation of any changes which might take place in the environment

Forecasting

the activity of developing projections of how the external environment may change

Assessing

Determining the timing and significance of environmental changes

Strategic Group

a set of firms emphasizing similar strategic dimensions and using similar strategies

Competitor Intelligence

• set of data and information the firm gathers to better understand and anticipate competitors’ objectives, strategies, assumptions, and capabilities

  • Critical to gather competitor intelligence using LEGAL and ETHICAL practices.

Complementors

companies or networks of companies that sell goods or services that are compatible with the firm’s goods or service.

Common Analysis Pitfalls

• Defining industry too broadly or too narrowly

• Making lists instead of engaging in rigorous analysis

• Paying equal attention to all forces rather than digging into the most important ones

• Ignoring industry trends

• Confusing cyclical or transient changes with true structural changes

• Using framework to declare industry attractive or unattractive rather than using it to guide strategic choices