6721 external analysis students

Topic: Environmental Analysis(SWOT)

The External Environment(OT)

Conversation: What’s out there and why does it matter?

Outside your business’ walls, what keeps you awake at night? What gets you out of bed in the morning?

What’s the one think you think about (worry about, obsess about, fret about get excited about) the most?

External analysis: External analysis useful because it

allows you to explore the O&T side of the SWOT

That’s necessary for performing a strategic analysis of a particular firm

It’s so critical as a building block, that our first case analysis is an industry analysis.

External analysis: This section is about doing external

analysis That involves assessing Os and Ts

The industry is the most proximal force We have a framework for that: The 5 forces Within each force different Os and Ts emerge We’ll go into one more deeply in lecture

Macro-level Os and Ts are also important PESTLE

External analysis: The overriding question:

Is this an attractive industry? (Eventually: Is this a game we want to

play?) If so:

What do we need to do to take advantage of, or position ourselves against, as we move ahead with our strategic thinking and planning?

Let’s consider opportunities, broadly defined: What kind of things are we looking

for?

Consider Chinese autos Geely Automobile Company Changfeng Motor Company Ltd.

Let’s consider opportunities, broadly defined:

Opportunities: Large and growing global

markets (e.g., US) But tough logistics

dealer & service networks; transportation

Also, Korean and Japanese firms already manufacturing in US

Solutions?

Build them for other firms: Daimler(Chrysler) AG partnered

with China’s Chery Automobile Co.

Small cars worldwide Chrysler dealerships

Dodge Chrysler Jeep

Of course, we need to look beyond the obvious for Os:

Participant sports industry

What are the major segments?

Participant sports industry

Equipment: $12 billion Medicine & therapy: $15 billion Fees, lessons, memberships: $17

billion

Threats: Consider auto manufacturers What about those $2500 cars?

The Tata Nano Bajaj RE60

Are you afraid of them?

Threats: In 1963, you make these:

Threats: Are you afraid of a company that

makes these?

Threats: How about these?

How about this?

Beyond the obvious Ts:

Looking beyond the obvious for possibilities of threat:

e.g., Why haven’t the Japanese done to us in large appliances what they’ve done in autos, electronics?

Matsushita makes more large appliances than anyone in the world

Why don’t we see Matsushita ranges, refrigerators down at Best Buy?

For GE, Matsushita as potential entrant?

Tools for external analysis:

Industry Porter’s Five Forces

Beyond the industry Macro-environment (PESTLE forces)

Tools for external analysis:


Beyond the industry Macro-environment (PESTLE forces) Let’s begin here

External analysis: Beyond the industry (the macro-environment)

PESTLE forces Political Economic Socio-cultural Technological Legal Environmental

For each: What’s keeping you up at night? What’s getting you up in the morning? (Or should be?)

External analysis: Beyond the industry (the macro-environment)

PESTLE forces Political Economic Socio-cultural Technological Legal Environmental (Note: May be domestic and/or global) (Note: Issues like demography may touch several)

How do each of these influence the business?


What are the major issues, developments, trends, in each?


Assess each for Os & Ts


Do any deserve a place at the table (on par with the 5 Forces)?


Recall where we are; external analysis:


Beyond the industry Macro-environment (PESTLE forces) We began here

Industry analysis

Remember, at the end of this analysis we’re interested in industry attractiveness

That involves an industry look at Opportunities Threats

The search for Os and Ts within an industry isn’t random

Porter guides us in it

There are “Five Forces” that influence the competitive structure of an industry

Current competitors Potential entrants Buyers (customers) Suppliers Substitute products (More on each of these soon)

Industry analysis: Within each of these forces, different

kinds of Os and Ts tend to emerge We’ll go into one a little more deeply, as

an example: The threat of new entrants. For example, barriers to entry is a prime

driver of this threat. But others have similar drivers.

(See text, and see “Competitive Strategy” for an extended discussion of this.)

We’re exploring industry attractiveness

And the Five Forces help to explain why some are more attractive (and/or profitable) than others

External Analysis:

We’re exploring industry attractiveness

And the Five Forces help to explain why some are more attractive (and/or profitable) than others

For example…

External Analysis:

(This is a biggie)

The Five Forces help us to explain differences like these!

Porter’s Five Forces of Competition

Current competitors: Rivalry among them Potential entrants: Threat of entry Buyers/customers: Their bargaining power Suppliers: Their bargaining power Substitute products: Threat of use All matter, because they place caps on

your strategic options (like pricing) and thus, industry attractiveness

Porter’s Five Forces of Competition

Descriptions from Porter’s “Competitive Strategy” book (the supplemental text)

Rivalry among current competitors

"Rivalry among existing competitors takes the familiar form of jockeying for position -- using tactics like price competition, advertising battles, product introductions, and increased customer service warranties."

(Note: That’s Hall’s Model!)

Threat of new entrants "The threat of entry into an

industry depends on the barriers to entry that are present, coupled with the reaction from existing competitors that the entrant can expect."

Bargaining power of buyers

"Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other -- all at the expense of industry profitability."

Bargaining power of suppliers

"Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services."

Threat of substitute products

"All firms in an industry are competing, in a broad sense, with industries producing substitute products. ... Identifying substitute products is a matter of searching for other products that can perform the same function as the product of the industry."

A single firm may reside in more than one cell:

Also, many firms only consider the

core: Current competitors

But to really do this right…you need to “SWOT” all

(major) players in all cells

(How can you assess the Os and Ts they represent, w/out

knowing their strengths &

weaknesses?)

So how will this help? Downstream issues:

These Five Forces, in conjunction with macro- environmental (PESTLE) Os and Ts, constitute the set of things we need, to understand two issues: Is this an attractive industry? (Do we want to

play this game?) If so, how do we take advantage of (or defend

ourselves against) these Os & Ts as we move ahead with our strategic thinking and planning?

Relates directly to Case 1 (Industry Analysis):

Explore each of the Five Forces (Your group might consider consulting

“Competitive Strategy” book) Porter does this by:

Overall, or not for each force? Brings those together for overall assessment

of industry attractiveness: (no s to )

(But don’t forget PESTLE forces, too…)

Relates directly to Case 1 (Industry Analysis):

Recall the macro-environment issues: All of these matter somewhat. Some picked up in 5 Forces. Beyond that, any worthy of a special spot at

the table? (If so, add/subtract s)

In all: Is this an attractive industry? And remember, it can be attractive, but not

a good fit for us (separate question)

Relates to Case 2: Moving from industry analysis to (firm)

strategic analysis: Top 3 (or so) opportunities and threats

resulting from each of the five forces Top 3 (or so) opportunities and threats

resulting from any macro-environmental issues you’ve elevated to the table

Cull those to top 3 (or so) overall Those flow directly into the SWOT for Case 2

Of course, when you dig into Porter, there’s more to it…

Threat of new entrants

Porter (CS) guides us here:

Barriers to entry Expected reaction from incumbents

Factors affecting severity of threat from potential entrants

Barriers to entry: Economies of scale (airlines, to follow) Product differentiation (soft drink branding) Capital requirements (airliner mfg, to follow) Switching costs (consumer, producer) Access to dist. channels (new automakers in

US) Cost disadvantages independent of scale

(airline mfg. learning curve, to follow) Government policy

Factors affecting threat severity from potential entrants

Barriers to Entry: Airline Ind.

20-40 year gate leases 95% landing rights Reservation systems Frequent flyer programs Computer pricing systems Hub and spoke feeder system Deep pockets

Barriers to Entry: Aircraft Ind.

Boeing: 787 “Dreamliner”

$13 billio

n


Airbus “superjumbo” A380 550-800 passengers

$19.5billio

n


Development costs of $20 billion Break even @ 250 units, $280 million

each. $70 billion! (They say 3 years.) Optimistic? (Boeing’s last new jet:

420 units, 10 years) In addition:

Economies of scale Learning curve (20% reduction in cost

with doubled production)

Barriers to Entry: Your industry

What keeps others out of your industry?

Alternatively, what makes it easy for them to enter?

Beyond barriers to entry According to Porter (CS book) barriers

to entry is only one aspect of threats due to new entrants (The other isretaliation by incumbents)

And there are four other forces remaining on the table that represent potential threats (and opportunities)

Ch 1 of the CS book will take you

right through more factors to

consider for each

Digging deeper?

External Analysis:A recap to this point

The essence of strategy is relating a firm to its environment

The key aspect of external environment is the industry

Competitive intensity in an industry isn’t luck or fate; it’s the result of five forces (Porter).

Those forces dictate to industries (and possibly more, with PESTLE factors)

So for a particular industry, why the Five Forces matter…

They identify the broad constellation of industry dynamics at work

The point to specific aspects of the industry that provide a + or – influence on competitive structure

They provide an overall assessment of industry attractiveness

Opportunities and Threats:

Some special challenges to consider

1: Strategic inflection points Andy Grove’s Only the Paranoid Survive (A little mistitled)

Fundamental change in an “industry” creates tremendous threats or opportunities

The strategic inflection curve

InflectionPoint Decline

New Heights

1: Strategic inflection points Andy Grove’s Only the Paranoid Survive (A little mistitled)

Fundamental change in an “industry” creates tremendous threats or opportunities

Problems: They aren’t a point. They are a period. They don’t come via FedEx. You don’t

know when they’ve arrived, usually until much later.

Examples:

The music industry

Examples:

The phone industry

Examples: In banking: ATMs In retailing: Superstores In telecom: Fiber optics, satellites In computing: PCs by mail In television: Cable, satellites In film: Sound In policing: COP

The critical question:Is it signal or noise?

Change in key competitor? Change in key

complementor? The Silver Bullet Test



complementor?Bob’s Office Supply vs.

Sue’s Stationery Store



complementor?Bob’s Office Supply vs.

Staples & OfficeMax



complementor?Paul’s Paperw/

Wendy’s Whiteout



complementor?Paul’s Paperw/

Linda’s LaserJetCartridges



complementor? The Silver Bullet Test…

Opportunities and Threats:

Some special challenges to consider, continued…

2: Black Swans (Nassim Taleb’s The Black Swan: The Impact of the Highly Improbable)

History doesn’t crawl, it jumps Even experts are terrible at

forecasting


Even experts are terrible at forecasting Huge events/innovations mostly not predicted Almost no evidence of accurate prediction of major

turning points in U.S. or global economies over last 50 years:

U.S. economy, Japanese industrial policy, Soviet economy, role of innovation in large companies, pollution, socialism, 9/11, etc.

(See: Sonic Boom: Globalization at Mach Speed by Gregg Easterbrook)

Why?


Even experts are terrible at forecasting We tunnel

(That allows our narratives to take over) We don’t know what we don’t know

(We’re wrong by larger degrees than we think) We ignore variation

(The river averages 3 ft. deep) We ignore silent evidence

(Consider the dinosaurs)

The moral of the story… What you see might be important But what you don’t see might be far

more important Look for the things you aren’t

currently seeing. In Black Swan terms: Avoid tunneling Seek out silent evidence

6721 external analysis students

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