Business Strategy level > EXTERNAL ANALYSIS:

-> DEF: Evaluation of the attractiveness of a business area and identification of the main threats and opportunities;

-> OBJ: identify Opportunities and Threats;

• Define the level of attractiveness.

-> HP:

• Competition is driven by industry structure;
• BA’s attractiveness is inversely proportional to the level of competition of the competitive environment;

• All the competitors can see the external analysis;
• Referred to a specificic Business Area;
• extended rivalry: Competition in an industry goes well beyond established players.

-> METHODOLOGY:

• Porter’s 5 competitive Froces model;
• PEST model

INDUSTRY STRUCTURE: Inner characteristics and defining elements an industry is built on.

PERFECT COMPETITION: all players operate at zero economic surplus and attractiveness drops dramatically;

PEST: Political, Economic, Social and Technological MACRO-TRENDS may affect the industry.

-> Industry Structure + Macro-Trends = Impacts (✔ or ❌);

The Five Competitive Forces Model:

-> The five competitive forces are:

1. Internal Rivalry;
2. Potential New Entrants;
3. Substitute Products;
4. Bargaining Power of Buyers;
5. Bargaining Power of Suppliers.

1.Internal Rivalry:

-> Depends:

• Level of Structural Determinant 🔺High/🔻Low;
• Level of Competition 🔺High/🔻Low;
• Level of Attractiveness 🔺High/🔻Low;

-> The STRUCTURAL DETERMINANTS:

1.Concentration and Unbalance: # of competitors	🔺 =>  LC🔻 & LA🔺.
2.Industry Growth	🔺 =>  LC🔻 & LA🔺.
3.Differentiation (produc and services) Diversity of competitors	🔺 =>  LC🔻 & LA🔺.
4.Switching Costs Money that customer has to pay to change a product with one of the competitor Employee retraining; New ancillary equipment; Testing or qualifiying a new source; Need for techincal help; Product re-design; Psychic costs of serving a relationship.	🔺 =>  LC🔻 & LA🔺.
5.Fixed Costs Impact All the business that has fisical infrastructure need high investments	🔺 =>  LC🔺 & LA🔻.
6.Storage Costs Depend on the industry (big wharehouse has big storage costs)	🔺 =>  LC🔺 & LA🔻.
7.Exit Barriers Specialised assets; Fixed costs of exit; Strategic interrelationships; Emotional barriers; Government and social restrictions.	🔺 =>  LC🔺 & LA🔻.

2.Potential New Entrants:

-> DEF: competitive force applied by those companies that do not yet operate in the industry analyzed, but may have the resources and the willingness to enter it.

Threat of Entry:

• Barriers: Structural determinants;
• Retaliation: Dynamic barriers that depend on incumbents’ moves.

=> 🔺BARRIERS + 🔺RETALIATION => 🔻 THREAT OF ENTRY & MRK WELL PROTECTED.

Barriers:

ECONOMY OF SCALE ↑ => ↓average cost per unit => incumbents would decrease their prices neutralizing new entrances	🔺 => Threat of Entry 🔻 & Level of Attractiveness 🔺;
PRODUCT DIFFERENTATION or Brand Identity how much the market is charaterized by entrance and how much the entrance can influence the brands;	🔺 => Threat of Entry 🔻 & Level of Attractiveness 🔺;
CAPITAL REQUIREMENTS	🔺  => Threat of Entry 🔻 & Level of Attractiveness 🔺;
SWITCHING COSTS	🔺  => Threat of Entry 🔻 & Level of Attractiveness 🔺;
ACCESS TO DISTRIBUTIONS CHANNELS: -> in terms of: – Long Relationships – High-quality service – Exclusive Relationship	🔺  => Threat of Entry 🔻 & Level of Attractiveness 🔺;
COST DISAVANTAGES – Proprietary product technology; – Favourable access to raw materials; – Favourable location;	🔺  => Threat of Entry 🔻 & Level of Attractiveness 🔺;
GOVERNMENT POLICY or legislation	🔺  => Threat of Entry 🔻 & Level of Attractiveness 🔺;

Retaliation:

-> Expected Retaliation of Incumbents:

• A history of vigorous retaliation of entrants;
• Established firms with substancial resources to fight back;
• Established firms with great commitment to the industry;
• Slow industry growth;

Condition of entry in an Indystry:

• Entry Deterring Price;
• Prevaling structure of prices -> If higher than first (EDP) => Entry can occour;

3.Threat of Substitutes:

• Technologycally different;
• Same customer pool.

-> Threats:

• PRICE/PERFORMANCE TRADE-OFF
• AVERAGE PROFIT

-> In particulare the constraints are referred to price definition: substitutes place a celing on the prices internal firms in the BA can set.

=> 🔺 Attractive price/ performance ratio of substitutes <=>🔺 risk to lose customers to the advantage of substitutes.

4.Bargaining Power of Buyers:

-> DEF: how bargaining of buyers influence the incumbents.

•  🔗 Price Reduction;

-> They:

• Forces Down Prices;
• Higher quality/ more services;
• Playing competitors against each other;

Determinants:

1.Relative concentration	– If a group is concentrated (↓ # of customers) or purchases large volumes the companies wouldn’t lose one of their customers.	=> 🔺 Competition; 🔻 Attractiveness;
2.Product’s Features	– If products purchased are standard or undifferentiated (can easily find other suppliers) – If buyer faces few switching costs – If industry’s product is unimportant to the quality and performance of the buyers’ products or services	=> 🔺 Competition; 🔻 Attractiveness;
3.Buyer’s own characteristics	– Buyesr’s low profitability. High profitability buyers would take a longer run view toward preserving health of their suppliers (if item doesn’t rappresent high fraction of their costs) – Threat of Backward Integration – The buyer has full information – The products the buyer purchases are significant fraction of the cost	=> 🔺 Competition; 🔻 Attractiveness;

5.Bargaining Power of Suppliers:

-> DEF: how bargaining of suppliers influence the incumbents.

• 🔗 Cost Increase

-> Can be:

• Customers B2C;
• Companies B2B;

-> They:

• Threating to raise prices;
• Reducing the quality of goods and services;

Determinants:

• Suppliers’ market is more concentrated than the industry it sells to
• Products are differentiated;
• Switching costs;
• Low Threat of substitute products;
• Suppliers’ product is an importanti input for buyers;
• Supplier group is no very profitable;
• Threat of forward integration;
• Suppliers have protected information about products and costs;
• The industry is not an important customer of the supplier’s group

6.Complementors

-> Are not a competitive force

-> Important in affecting the overall demand for an industry’s product

-> Example: in the video game industry the producers of software (games) are complementors to the producers of hardware (consoles)

Key Questions:

• What are boundaries of the business area to which the model is applied?
• What are the key forces at work in the competitive environment?
• Are there underlying forces driving competitive forces?
• Will competitive forces change?
• How attractive is this industry?
• Can competitive strategy implemented by players influence competitive forces (e.g. by building barriers to entry or reducing competitive rivalry)?

-> External Analysis continue with the PEST model.