External analysis is an important part of strategic analysis, as it helps to identify the

opportunities and threats that a company may face in its external environment.

When it comes to industry structure, it's important to look at factors such as the number and size
of competitors, the level of product differentiation, and the barriers to entry. This information can
help a company understand their position in the market and develop strategies to stay
competitive.

Additionally, analyzing competitive forces such as the bargaining power of suppliers and
customers, the threat of new entrants, and the intensity of rivalry can help a company identify
areas of potential risk and develop strategies to mitigate them.

Overall, by conducting a thorough external analysis, companies can gain a better understanding
of the opportunities and threats that they face in their industry and develop effective strategies to
stay ahead of the competition.
We analyze how the five forces define industry structure and shape the nature of competition
within the industry.
Understanding competitiveness and its underlying causes reveals the roots of an industry's
current profitability and provides a framework for predicting and influencing competition (and
profitability) over time. .
A healthy industry structure should be as much of a competitive advantage for strategists as it is
for the companies themselves.
This theory is based on his concept that there are five forces that determine the competitiveness
and attractiveness of a market.
Porter's five strengths help identify where power lies in business situations. Strategy analysts
often use Porter's five forces to understand whether a new product or service is potentially
profitable.
Five Forces Analysis helps companies understand the factors that impact profitability in a given
industry and make informed decisions related to:
Whether to enter a particular industry. Whether to increase production capacity in a particular
industry. Developing a competitive strategy.
Porter believed that understanding both competitiveness and overall industry structure was
critical to effective strategic decision-making.
In Porter's model, his five forces that shape industry competition are:
1.
Threat of new entrants This force determines how easy (or not) it is to enter a particular industry.
If an industry is profitable and there are few barriers to enter, rivalry soon intensifies.
It is essential for existing organizations to create high barriers to enter to deter new entrants.
Threat of new entrants is high when:
• Low amount of capital is required to enter a market; • Existing companies can do little to
retaliate; • Existing firms do not possess patents, trademarks or do not have established brand
reputation; • There is no government regulation; • Customer switching costs are low (it doesn't
cost a lot of money for a firm to switch to other industries); • There is low customer loyalty; •
Products are nearly identical; • Economies of scale can be easily achieved.
Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to
their buyers.
Suppliers have strong bargaining power when:
• There are few suppliers but many buyers; • Suppliers are large and threaten to forward
integrate; • Few substitute raw materials exist; • Suppliers hold scarce resources; • Cost of
switching raw materials is especially high. 3. Buyer bargaining power.
If bargaining power is strong, buyers have the power to demand lower prices and higher product
quality from industrial producers.
Lower prices reduce profits for manufacturers, while higher quality products usually increase
production costs.
Buyers exercise strong bargaining power when:
• Buy in bulk or control a large number of access points to your end customers. • Few buyers. •
Low cost of switching to another provider. • They threaten backward integration. • There are
many alternatives. • Buyers are price sensitive. This force is especially threatening when buyers
can easily find cheaper or better-quality substitutes, and when buyers can switch from one
product or service to another at low cost. increase.
This power is the most important factor that determines the competitiveness and profitability of
the industry.
In a highly competitive industry, companies have to compete aggressively for market share,
resulting in lower profits.
Competition among competitors increases when:
• There are many competitors. • Exit barriers are high. • Growth industries are slow or negative.
• Products are non-differentiated and easily replaceable. • Participants are the same size. • Low
customer loyalty.
How can a strategic group analysis help you understand the competitive advantage some
companies enjoy over their industry peers? A strategic group is a group of companies within an
industry pursuing the same or similar strategies.