Chapter: 3

EXTERNAL
ANALYSIS

Prepared by: Samia Shanjabin

Department of Innovation & Entrepreneurship
 CONTENTS
• Porters five forces model
• Risk of entry by potential competitors (Potential competitors,
economics of scale, brand loyalty, absolute cost advantage).
• Case study of soft drink industry (Forum discussion)
• Rivalry among established companies
• Bargaining power of buyer
• Bargaining power of supplier
EXTERNAL ANALYSIS
 Porter’s Five Forces model
• Porter’s Five Forces analysis is a framework that helps analyzing the level of
competition within a certain industry.
• It is especially useful when starting a new business or when entering a new industry
sector. According to this framework, competitiveness does not only come from
competitors. Rather, the state of competition in an industry depends on five basic
forces: threat of new entrants, bargaining power of suppliers, bargaining power of
buyers, threat of substitute products or services, and existing industry rivalry.
• The collective strength of these forces determines the profit potential of an industry
and thus its attractiveness. If the five forces are intense (e.g. airline industry), almost
no company in the industry earns attractive returns on investments. If the forces are
mild however (e.g. softdrink industry), there is room for higher returns.
1. Risk of entry by potential competitors

Potential competitors
Potential competitors are those that aren't currently in the market but
may enter the market in the future. These organisations may be new
entrants or existing firms that identify as having a strong potential to
compete with you.
1. Risk of entry by potential competitors

Economics of scale
 1. Risk of entry by potential competitors
Brand Loyalty
1. Risk of entry by potential competitors

Absolute cost advantage

New entrants can not match with the established companies lower cost
structure.
- Superior production in operation
- Control of particular inputs (labor, materials, equipment)
- Cheaper funds
- Managerial skills
2. Competitive Rivals
The number of competitors
Industry competitive structure
Industry growth
Similarities in what's offered
Exit barriers
2. Competitive Rivals
Industry competitive structure
1. Fragmented industry: Consists of a large number of small and
medium sized company. No one is here to set the industry price.

2. Consolidated industry: Small number of large companies dominated

the market. Oligopoly remains in the company.
Bargaining power of buyer
Bargaining power refers to the ability of customers to influence the
prices of the products and services they buy and suppliers to set the
prices they charge for what they sell.
 Buyers are dominant
 They purchase in large quantities
 Industry is dependent on buyer
 Buyer threaten to others to enter in the company
Bargaining power of supplier
The bargaining power of suppliers is one of Porter's Five Forces, and
is the concept that suppliers can apply pressure to companies by
lowering product quality or availability, or raising product prices.
 Number of suppliers relative to buyers
 Dependence of a supplier’s sale on a particular buyer
 Switching cost (switching costs of suppliers)
 Availability of suppliers for immediate purchase
 Possibility of forward integration by suppliers
THREAT OF SUBSTITUTES
The threat of substitutes is high when rivals or even companies outside
the industry offer more attractive and/or lower cost products. Buyers
then have the opportunity to make a price/performance trade-off. The
cost of switching is also a factor; if it is high, the treat of substitution is
low.