Step 1. Analyze External Environment

Tool To Identify Attractive Markets

Steps in Analyzing Environment

1. Identify Market.

2. Identify environment factor (s). / Focus on factor (s) which most impact your business

3. Classify as threat or opportunity & estimate magnitude of threat/opportunity

4. Evaluate importance of factor and its impact on product/market

1. Identify Market(Alternative Diaper Markets)

• Super premium branded disposable diapers for children in California– Diaper Rash Market– Special Occasion Market

• Versus• Hospitals• Daycare Operations• Private Label

2. Evaluate External Environment (forces and conditions which affect the corporation’s strategy).

Components of External Environment(Disposable Diaper Market)

1. Macro environment trends– Demographic

• E.g. Aging: Baby boomers

– Socio cultural • E.g. Self denial vs. self fulfillment

– Economic • E.g. GDP and purchasing power

– Technological• E.g. Cloning, internet, velcro

• 1. Stay-dry bottom barrier - keeps moisture away from your baby's skin.

• 2. No-leak inner cuffs and comfortable outer leg gathers for proper fit and leakage protection.

• 3. Soft Super-absorbent core - quickly pulls wetness into carefully positioned moisture pockets.

• 4. Gentle Foam Waistband - soft, comfortable and moves with baby.

• 5. Colorful, Easy to use fastening tapes - The diaper fastening tapes are easy to fasten and easy to release.

• 6. Soft Cloth Outer Cover - makes our diaper more comfortable for you and your baby.

• 7. Refastenable tabs

– Physical• E.g. Global warming,

shortage of raw materials, pollution

– Political/legal • E.g. Taxes, copyright

laws

Components of External Environment

2. Competition– Rivalry among competitors (Porter)– Threat of new entrants (Porter)– Threat of substitute products (Porter)

Components of External Environment

3. Market/Customers– Size/Potential– Growth Rate– Seasonality– Bargaining power of buyers (Porter)– Sensitivity to price

Components of External Environment

4. Industry– Bargaining power of suppliers (Porter)– Industry profitability– Barriers to entry/exit

Steps in Analyzing Environment

1. Identify factor

2. Focus on factor (s) which most impact your business

3. Classify as threat or opportunity & magnitude of threat/opportunity

4. Evaluate importance of factor and its impact on product/market

Porter Five Forces Is it threat or opportunity?

• Bargaining Power of Buyers

• Threat of New Entrants

• Threat of Substitute Products

• Bargaining Power of Suppliers

• Rivalry Among Competitors

Is it threat or opportunity?E.g. Bargaining Power of Buyers

• Threat, If bargaining power of buyers is high. • Conditions leading to high bargaining power

– There are few large buyers who can band together to get concessions

– Switching costs are low– Possibility of backward integration (eliminate supplier)– Low importance of product to performance of buyer’s

product– If buyers earn low profits then likely to bargain harder

Is it threat or opportunity?E.g. Threat of New Entrants

• Threat, If threat of new entrants is high.

• Conditions discouraging new entrants:– Industry requires strong economies of scale i.e. it

takes time to obtain volume and learning to yield necessary low cost per unit

– Industry has strong capital requirements– Strong product differentiation exists– Gaining distribution is particularly difficult– If buyer incurs switching cost in moving from one

supplier to another

Is it threat or opportunity?E.g. Threat of Substitute Products

• Threat, If threat of substitute products is high. – Profits reduced because prices are lower

Is it threat or opportunity?E.g. Bargaining Power of Suppliers

• Threat, If bargaining power of suppliers is high.

• Conditions leading to high bargaining power– Industry has limited number of suppliers– Switching costs from one supplier to another

or to substitute product are high– Supplier’s product contributes large part of

buyer’s value added

Is it threat or opportunity?E.g. Rivalry Among Present Competitors

• Threat, If Rivalry is intense.

• Conditions leading to greater rivalry:– Industry requires high capital investment

(requires firm to operate at or near capacity; strong downward pressure on prices when demand weakens)

– Industry consists of many small firms or no dominant firm

– Little product differentiation

Evaluating Market Demand/PotentialIs it threat or opportunity?

• Market Demand – total volume that would be bought by a defined customer group in a defined geographical area in a defined time in a defined marketing environment under a defined marketing program.

Market Demand

Estimating Demand

• Market-Buildup Method– Identify number of purchasers X amount of

their purchase

• Multiple –Factor Index– Identify factor(s) correlated to sale of product,

e.g. % of U.S. population in state correlated to % of Drug Sales

Steps In Calculating Demand Potential

1. Target Market Total Number2. Geographic Territory3. Consumption Constraints4. Average Purchases per Year per Customer5. Total Purchases per year per Customer6. Average Price7. Total Dollar Purchases per Year8. Your Company's Share of Purchases

Competition

Competition Is it threat or opportunity?

• Direct Competitors - Firms likely to gain or lose a substantial share of customers from each other over time because they serve the same customers and offer similar benefits.

Factors Affecting Competitive Intensity

• Are Competitors numerous or roughly equal in size & power?

• Is Industry growth slow?• Are Products and services essentially undifferentiated?• Is Cost to buyers of switching from one supplier to

another low because sellers have not developed a way to tie their customers into long term relationships?

• Do Companies remain in the market in spite of low profits because of management’s loyalty to a business or because the business involves specialized assets which are difficult to sell?

Barriers to Entry

Barriers to Entry (Conditions which make it difficult to become a significant competitor in a new market)

Are they threat or opportunity?

• Economies of scale in production, delivery, advertising, selling

• Initial financial investment requires extensive resources

• Lack of access to sources of production (raw materials, technology, labor skills)

• Limited access to distribution channels• Government regulations• Customer loyalty to existing sellers

Barriers and Profitability

Low Exit Barriers High Exit Barriers

Low Entry Barriers **Profit potential low but stable

*Profit potential low but difficult to leave so industry depressed, overcapacity

High Entry Barriers ****Few new firms can enter; Unprofitable firms can exit. Profit potential high, stable returns.

***Profit potential is high, but riskier since low performers must fight it out. High profit potential; risky returns