Analyzing Strategic Issues

The External Environment: Opportunities,

Threats, Industry Competition, and
Competitor Analysis

Date Session Time

02.02.2009. 8 & 9 1115 -1500

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Environments

 External

 Internal
External Environment

•Proximate
•Distant
Proximate

 Suppliers and Vendors

 Some control
 Manageable
 Could be industry specific
Distant
 Regulations
 Laws
 Global treaties
 Organizations have no control
 Less manageable
 Are similar to all industry firms
The External Environment
Environment
Economic

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Threat of new entrants
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Power of suppliers
De

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Power of buyers
Product substitutes
Intensity of rivalry
Po

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Competitor

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Environment

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Technological
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General
External Environment

 General Environment
 Industry Environment
 Competitive Environment
External Environment

 General Environment
– Influences the industry and firms inside the industry
– Firms can not directly control these but collect
information and formulate strategies
– Six Segments
• Demographic
• Economic
• Political/legal
• Socio- cultural
• Technological
• Global
Demographic Elements

 Population size
 Age Structure
 Geographic distribution
 Environmental Changes
•Social Changes
•Double income, consumerism, superior- higher education for
kids, working women, less time for household work, health
consciousness, healthy food, vacations.
•Subway, Pizza Hut, Fortune hotels, Apollo Executive Health Check,
Crèche
•Demographical Changes
•People live longer - Old age requirements, homes, security,
superior health services, self reliant, gadgets, entertainment to
keep busy meaningfully, to learn new hobbies without physical
demands, will remain active and healthy- find a product or
service, psychological demand - sense of belongingness-
counseling, spending of time
•Medical insurance
Economic Elements

 Inflation rate
 Interest rates
 Trade deficit or surplus
 Personal savings rate
 Business savings rates
 Gross domestic product
 Budget deficit or surplus
Political/Legal Elements

 Laws
 Taxation
 Monopolies
 Political pluralism
 Political philosophy
 Judicial System
•Legal Changes
•Governmental regulations
•Helmets, fire extinguishers in vehicles, pollution control devices
and checking centers, window screens, seat belts, waste water
management in house, alternative sources of energy

•Market Changes
•Demand Changes,
•Economic growth, leading to increase in variety and
demand
•New product and services, retailing
•Bharti-Wal-Mart, Reliance Fresh, Subhiksha, Biyanis
•Services-BPO, KPO
•Power windows, AB, ALS
•Low cost carriers > Go Air, Jet Lite
•Outsourcing-Medical Transcription
•SEZs
•Land Banking
•Technological Changes
•New product leading to ancillary, supporting and
enriching products and services
•Mobile phone
•Camera, Hands free, FM, Video, Mobile car charger, e-mail,
internet browsing
•Internet
•Medical transcription, on line teaching, e-bay, on line sales,
virtual showrooms, video conferencing
•Ecological Changes
•Tsunami, Earthquake, Floods
•Low cost pre – fab housing
•Warning Systems
•Rapid Evacuation
•Ozone Layer depletion
•Controlling of Chlorofluorocarbons release
•Industry > air-conditioning, refrigeration, aviation
Socio - Cultural Elements
 Women in Work
 Work force diversity
 Cultural values
 Attitude towards life and quality of life and
products
 Education
 Materialist aspects
Technological Elements
 Product Innovation
 R & D spending
 Quick diffusion of technology
 Applications of knowledge
 Focus of private and government-supported R&D
expenditures
 New communication technologies
 Product Obsolescence
Global Elements
 Forex
 Treaties
 WTO
 UN
 Trade Barriers
 Industry Environment
 Influence the firm directly and Its competitive action:
– Threat of new entrants
– Bargaining power of suppliers
– Bargaining power of buyers
– The threat of product substitute
– Intensity of rivalry
 These 5 forces determine industry profit potential
 Position your firm to influence these and defend your
firm from influence of these
Competitive Environment

 Competitive analysis – in similar industries

– Jet and King Fisher
 What drives the competitor
– As shown by its future objectives
 What competitor is doing and can do
– As revealed by its current strategies
 What competitor believes about the industry
– As shown by its assumptions
 What the competitors capabilities are
– As shown by its strengths and weaknesses
External Environments
 Features as of now
– Turbulent
– Complex
– Demanding
– Unknown trajectory and velocity
Handling Mode or Coping Mode

 Scanning
– Identify early signals of environmental changes and trends
 Monitoring
– Detecting meaning through ongoing observations of
environmental changes and trends
 Forecasting
– Developing projections of anticipated outcomes based on
monitored changes and trends
 Assessing
– Determining timing and importance of environmental changes
and trends for firms’ strategies and their management
 External Environmental Analysis
A continuous process which includes

• Scanning: Identifying early signals of environmental

changes and trends
• Monitoring: Detecting meaning through ongoing observations
of environmental changes and trends
• Forecasting: Developing projections of anticipated outcomes
based on monitored changes and trends
• Assessing: Determining the timing and importance of
environmental changes and trends for firms’ strategies and their
management
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External Environmental Analysis
Analysis of general environment
Analysis of industry environment
Analysis of competitor environment

The External
Environment
Strategic Intent
Strategic Mission

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Industry Environment
 A set of factors that directly influences a
company and its competitive actions and
responses
 Interaction among these factors determine an
industry’s profit potential
 Threat of new entrants
 Power of suppliers
 Power of buyers
 Product substitutes
 Intensity of rivalry
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Porter’s Five Forces Model
 Identify current and potential consumers and
determine which firms serve them
 Conduct competitive analysis
 Recognize that suppliers and buyers can become
competitors
 Recognize that producers of potential substitutes
may become competitors

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Five Forces Model of Competition
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Bargaining Power of
Buyers 27
Threat of New Entrants
 Barriers to entry
 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of scale
 Government policy
 Expected retaliation

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Bargaining Power of Suppliers
 A supplier group is powerful when:
 it is dominated by a few large companies
 satisfactory substitute products are not available to
industry firms
 industry firms are not a significant customer for the
supplier group
 suppliers’ goods are critical to buyers’ marketplace
success
 effectiveness of suppliers’ products has created high
switching costs
 suppliers are a credible threat to integrate forward into the
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buyers’ industry
Bargaining Power of Buyers
 Buyers (customers) are powerful when:
 they purchase a large portion of an industry’s total
output
 the sales of the product being purchased account for a
significant portion of the seller’s annual revenues
 they could easily switch to another product
 the industry’s products are undifferentiated or
standardized, and buyers pose a credible threat if they
were to integrate backward into the seller’s industry

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Threat of Substitute Products
 Product substitutes are strong threat when:

 customers face few switching costs

 substitute product’s price is lower
 substitute product’s quality and performance capabilities
are equal to or greater than those of the competing product

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Intensity of Rivalry
 Intensity of rivalry is stronger when competitors:

 are numerous or equally balanced

 experience slow industry growth
 have high fixed costs or high storage costs
 lack differentiation or low switching costs
 experience high strategic stakes
 have high exit barriers

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High Exit Barriers
 Common exit barriers include:
 specialized assets (assets with values linked to a
particular business or location)
 fixed costs of exit such as labor agreements
 strategic interrelationships (relationships of mutual
dependence between one business and other parts of a
company’s operation, such as shared facilities and access
to financial markets)
 emotional barriers (career concerns, loyalty to employees,
etc.)
 government and social restrictions
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Strategic Groups
Strategic group: a group of firms in an
industry following the same or similar
strategy along the same strategic dimensions
The strategy followed by a strategic group
differs from strategies being implemented by
other companies in the industry

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Competitor Analysis
Future Objectives:
Future objectives  How do our goals compare with
our competitors’ goals?
 Where will the emphasis be
placed in the future?
 What is the attitude toward
risk?

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Competitor Analysis
Future objectives
Current Strategy:
 How are we currently
competing?
Current strategy
 Does this strategy support
changes in the competitive
structure?

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Competitor Analysis
Assumptions:
Future objectives
 Do we assume the future will
be volatile?
 Are we operating under a status
Current strategy
quo?
 What assumptions do our
competitors hold about the
Assumptions
industry and themselves?

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Competitor Analysis
Future objectives
Capabilities:
 What are our strengths and
weaknesses?
Current strategy
 How do we rate compared to
our competitors?

Assumptions

Capabilities
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Competitor Analysis
Future objectives Response

Response:
Current strategy  What will our competitors do
in the future?
 Where do we hold an
Assumptions advantage over our
competitors?
 How will this change our
Capabilities relationship with our
competitors? 39
Competitive Profile Matrix (CPM)

Identifies firm’s major competitors

and their strengths and weaknesses in
relation to a specific firm’s strategic
positions
Value Assignment for CPM
Absolutely Arbitrary

Major Strength 4

Minor Strength 3

Minor Weakness 2

Major Weakness 1
 Lenovo Apple Dell
CSF’s Weight Rating Weighted Rating Weighted Rating Weighted
Score Score Score

Market Share 0.15 3 0.45 2 0.30 4 0.60

Inventory System 0.08 2 0.16 2 0.16 4 0.32

Financial Position 0.10 2 0.20 3 0.30 3 0.30

Product Quality 0.08 3 0.24 4 0.32 3 0.24

Consumer Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distribution 0.10 3 0.30 2 0.20 3 0.30
Global Experience 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
Production Capacity 0.04 3 0.12 3 0.12 3 0.12
E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Service 0.10 3 0.30 2 0.20 4 0.40
Price Competitiveness 0.02 4 0.08 1 0.02 3 0.06
Managerial Experience 0.01 2 0.02 4 0.04 2 0.02
Total 1.00 2.83 2.47 3.49
 Industry Analysis CPM
Just because one firm receives a 3.49 rating and another
receives a 2.47 rating, it does not follow that the first firm
is 41% better than the second.
Numbers reveal the relative strengths of firms but implied
precision is an illusion.
Numbers are not magic.
The aim is to assimilate and evaluate information in a
meaningful manner so that correct decision -making may
take place.