External Environmental Analysis - Strategic Decision Making

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The External Environment: Opportunities, The External Environment: Opportunities, Threats, Industry Competition, and Threats, Industry Competition, and

Competitor AnalysisCompetitor Analysis

Date Session TimeDate Session Time02.02.2009. 8 & 9 1115 -150002.02.2009. 8 & 9 1115 -1500

Analyzing Strategic Issues Analyzing Strategic Issues

EnvironmentsEnvironments

External

Internal

External EnvironmentExternal Environment

•Proximate

•Distant

ProximateProximate

Suppliers and Vendors Some control Manageable Could be industry specific

DistantDistantRegulationsLawsGlobal treatiesOrganizations have no controlLess manageableAre similar to all industry firms

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General

Env

iron

men

t

General

Environment

Gen

eral

Environm

ent

EconomicEconomic

Political/Legal

Political/Legal

TechnologicalTechnologicalG

loba

lG

loba

l

Dem

ogra

phic

Dem

ogra

phic Sociocultural

Sociocultural

The External EnvironmentThe External Environment

IndustryIndustryEnvironmentEnvironment

Threat of new entrantsThreat of new entrantsPower of suppliersPower of suppliersPower of buyersPower of buyers

Product substitutesProduct substitutesIntensity of rivalryIntensity of rivalry

CompetitorCompetitorEnvironmentEnvironment


General EnvironmentIndustry EnvironmentCompetitive 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 ElementsDemographic Elements

Population sizeAge StructureGeographic distribution

Environmental ChangesEnvironmental 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 ElementsEconomic Elements

Inflation rateInterest ratesTrade deficit or surplusPersonal savings ratePersonal savings rateBusiness savings ratesBusiness savings ratesGross domestic productGross domestic productBudget deficit or surplus

Political/Legal ElementsPolitical/Legal Elements

LawsTaxationMonopoliesPolitical pluralismPolitical philosophyJudicial 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 ElementsSocio - Cultural Elements

Women in Work Work force diversity Cultural values Attitude towards life and quality of life and

products Education Materialist aspects

Technological ElementsTechnological Elements

Product Innovation R & D spending Quick diffusion of technology Applications of knowledgeApplications of knowledge Focus of private and government-supported R&D Focus of private and government-supported R&D

expendituresexpenditures New communication technologiesNew communication technologies Product Obsolescence

Global ElementsGlobal Elements Forex Treaties WTO UN Trade Barriers

Industry EnvironmentIndustry 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 EnvironmentCompetitive 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 EnvironmentsExternal Environments

Features as of now– Turbulent– Complex– Demanding– Unknown trajectory and velocity

Handling Mode or Coping ModeHandling 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

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External Environmental AnalysisExternal Environmental AnalysisA continuous process which includesA 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 AnalysisExternal Environmental Analysis

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

The ExternalThe ExternalEnvironmentEnvironment

Analysis of general environmentAnalysis of general environment

Analysis of industry environmentAnalysis of industry environment

Analysis of competitor environmentAnalysis of competitor environment

The ExternalThe ExternalEnvironmentEnvironment

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Industry EnvironmentIndustry EnvironmentA 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 ModelPorter’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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Threat of New Entrants

Threat of New Entrants

Bar

gain

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Pow

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f

Bar

gain

ing

Pow

er o

f Su

pplie

rsSu

pplie

rs

Bargaining Power of Bargaining Power of BuyersBuyers

Threat of Substitute

Threat of Substitute

Products

Products

Rivalry A

mong

Rivalry A

mong

Competing Firm

s

Competing Firm

s

Five Forces Model of CompetitionFive Forces Model of Competition

Five Forces ofFive Forces ofCompetitionCompetition

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Threat of New EntrantsThreat of New EntrantsBarriers 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 SuppliersBargaining Power of SuppliersA 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

buyers’ industry

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Bargaining Power of BuyersBargaining 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 ProductsThreat 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 RivalryIntensity 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 BarriersHigh Exit BarriersCommon 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 GroupsStrategic 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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Future Objectives:Future objectivesFuture 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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Current strategyCurrent strategy

Current Strategy: How are we currently

competing? Does this strategy support

changes in the competitive structure?

Future objectivesFuture objectives

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AssumptionsAssumptions

Assumptions: Do we assume the future will

be volatile? Are we operating under a status

quo? What assumptions do our

competitors hold about the industry and themselves?



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CapabilitiesCapabilities

Capabilities: What are our strengths and

weaknesses? How do we rate compared to

our competitors?




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ResponseResponse

Response: What will our competitors do

in the future? Where do we hold an

advantage over our competitors?

How will this change our relationship with our competitors?

CapabilitiesCapabilities




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

Major Strength 4

Minor Strength 3

Minor Weakness 2

Major Weakness 1

Absolutely Arbitrary

Lenovo Apple Dell

CSF’s Weight Rating Weighted Score

Rating Weighted Score

Rating Weighted 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 CPMJust 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.

External Environmental Analysis - Strategic Decision Making

Business

industry firms

monitored changes

industry competition

industry specific

demand new product

external environments

trends monitoring

environments external