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External and Industry Environment Analysis
Dr. K. Rangarajan
23 May 2017
Two Determinants of Profitability
SESSION : 2
Advantage
Competitive
Position
Disadvantage
Low
High
Environmental Attractiveness
Business Environment
SESSION : 2
External & internal conditions effecting the firm
Firm trades & competes within an economy, & an industry
Constant changes require systematic monitoring
Environmental changes destroy & create business opportunities
External Environment
SESSION : 2
Outside forces which impact on the firm
Economy
Technology
Society
Government
Competitors
Customers
Suppliers
Internal Environment
SESSION : 2
Conditions & forces within the firm
Owners
Managers
Employees
Firm culture
Physical resources
Environmental Uncertainty
SESSION : 2
Level of uncertainty depends on 2 dimensions:
Degree of change within the industry
Stable to dynamic
Degree of Homogeneity within industry
Simple to complex
Environmental Turbulence
SESSION : 2
Amount of simultaneous expansion, contraction, entry & exit within
an industry
Small firms exhibit higher level of turbulence than big business
Less able to control environment through market dominance &
political lobbying
Strategy Making
Department
Competition
SESSION : 2
Grounded in underlying industry economics + other external forces:
government, suppliers etc
Porter’s model for analyzing industry attractiveness useful tool
Knowledge of competitive pressure within an industry provides basis
for strategy formulation
Questions to Ask in Societal
Environmental Analysis
SESSION : 2
What are the current and emerging trends in each segment?
What are the indicators of these trends?
What is the historic evolution of these trends?
What is the degree of change within these trends?
How will competitors deal with these trends?
How will these trends impact my organization?
Strategic Issues and Strategic
Factors
SESSION : 2
Strategic Issues
Trends likely to affect future environment
Strategic Factors
Those strategic issues with high probability of occurrence and high
probable impact on corporation
Issues Priority Matrix
SESSION : 2
Probable Impact on Corporation
Medium
Low
High
Priority
High
Priority
Medium
Priority
High
Priority
Medium
Priority
Low
Priority
Medium
Priority
Low
Priority
Low
Priority
Probability of Occurrence
High
Source: Adapted
from L. L. Lederman,
“Foresight Activities in
the U.S.A.: Time for a
Reassessment?” Long
Range Planning (June
1984), p. 46.
Copyright © 1984 by
Pergamon Press, Ltd.
Reprinted with
permission.
Some Important Variables in the
Societal Environment
SESSION : 2
Economic
Technological
Political-Legal
Socio-cultural
GDP trends
Interest rates
Money supply
Inflation rates
Unemployment levels
Wage/price controls
Devaluation/
revaluation
Energy availability
and cost
Disposable and
discretionary income
Total government
spending for R&D
Total industry
spending for R&D
Focus of technological
efforts
Patent protection
New products
New developments in
technology transfer
from lab to
marketplace
Productivity
Improvements
through automation
Antitrust regulations
Environmental
protection laws
Tax laws
Special incentives
Foreign trade
regulations
Attitudes toward
foreign companies
Laws on hiring and
promotion
Stability of
government
Lifestyle changes
Career expectations
Consumer activism
Rate of family
formation
Growth rate of
population
Age distribution of
population
Regional shifts in
population
Life expectancies
Birth rates
Porter’s Diamond
SESSION : 2
Chance
Firm strategy
structure and
rivalry
Factor
conditions
Demand
conditions
Related and
supporting
industries
Government
Determinants in the Diamond
SESSION : 2
I. Factor Conditions
The nation’s position in factors of production
These factors can be grouped as follows:
Human Resource; Physical Resource; Knowledge Resource;
Capital Resource; Infrastructure
Competitive advantage from factors depends on how efficiently and
effectively they are deployed
II. Demand Conditions
The quality of home demand determines competitive advantage
Nature of domestic Buyers + Size and Pattern of Growth +
Competitive Advantage
Transmission to Foreign Market
Determinants in the Diamond
(Contd.)
SESSION : 2
III. Related and Supporting Industries
The presence or absence of supplier industries and related industries
that are internationally competitive
IV. Firm Strategy, Structure and Rivalry
The conditions in the nation governing how companies are created,
organised and managed and the nature of domestic rivalry
Inter-relationship in the Diamond
SESSION : 2
Determinants
Factor conditions
Factor
conditions
Demand
conditions
Related &
Supported
Industries
Firm Stgy.
Structure and
Rivalry
Influence priorities
for faster creation
of investments
Create or
stimulate creation
of transferable
factors
Stimulates faster
creation though
rivalry/ challenges
Pull foreign
demand for the
industry product
Rivalry boosts
home demand and
its specification
Demand
conditions
Attract Foreign
firms/individuals for
the nation’s products
Related &
Supported
Industries
Factor pools are
transferable to related
industries
Stimulated growth
of supplier
industries
Firm Stgy.
Structure and
Rivalry
Attracts New Entrants
though factor
abundance or
specialisation
Early product
penetration feeds
industry
Encourages
formation of more
specialists
New Entrants
Competitive Diamond Indian Apparel
Cluster
SESSION : 2
Weak/Medium
Basic=Strong
Advanced=Weak
Factors
Basic:
+Proximity to Stgic. Mkts.
+Good IT Support
+Good managerial/supervisory base
+Favorable tax incentives
+Good park infrastructure and policy
+Relatively low labor costs
Advanced:
-Weak Telecom support
- Weak port and airport
-Weak in higher skills training
--Weak financial sector
+/-Transport logistics and costs
+Some emerging CAD capability
Strategy
Structure
Rivalry
-Over-dependence on privileged market access
-Mainly supplying labor
-Mainly commodity/price competition
+Some moving to full package/design
+Many industry participants
Weak-With
Potential
Cluster
-Lack of local base of critical related industries
-Dependency on foreign providers of technology
-Inadequate schools and training providers
-Lack Govt. vision for cluster development
-Bureaucracy & Red-tapisim
Weak
Demand
Condition
s
-Dependency on intermediaries
-Lack of first-hand exposure to demanding
or trend-setting consumers
-Low knowledge of high-income segments
-Dependency on foreign brands
-Poorly Exposed to stringent buyer
requirements
+Entrepreneurs read and travel widely
+Indirect exposure via clients
Industry Analysis
SESSION : 2
An Industry is defined as:
A group of organizations offering products or services which are
close substitutes for each other
Boundaries of the industry are determined from a user’s point of
view
Forces in the Industry Analysis
SESSION : 2
Threat of
new entrants
Bargaining
power of
suppliers
New
Entrants
Industry
Competitors
Bargaining
power of
buyers
Buyers
Suppliers
Intensity
of rivalry
Threat of
substitutes
Substitutes
Intensity of Rivalry
SESSION : 2
Determinants of rivalry
Industry growth
Share of fixed costs to total value added
Depth of product differentiation
Concentration and balance among competitors
Strong Rivalry Occurs When:
SESSION : 2
Low industry growth
High relative fixed costs
Little product differentiation
Fragmented industry with different competitive perspectives
Rivalry Among Established
Companies
SESSION : 2
Industry Competitive Structure
Fragmented
Consolidated
Many firms.
No dominant
firm
One firm or one
dominant firm.
(monopoly)
Few firms,
Shared
dominance
(Oligopoly)
The Continuum of Industry Structures
Threat of New Entrants
SESSION : 2
Likelihood of New Entrants is Determined by Height of
Entry Barriers
Some Barriers to Entry:
SESSION : 2
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Size
Government Policy
High Entry Barriers Means High
Profitability
SESSION : 2
High barriers restrict new entrants
Bargaining Power of Buyers
SESSION : 2
Buyers as consumers of the industry’s output
Powerful buyers can demand lower prices, higher quality or better
services
Powerful buyers reduce industry profitability
Buyers become powerful when:
SESSION : 2
Few important buyers
Buyer switching costs are low
Buyers can easily vertically integrate
Substitutes for the industry’s product are readily available
Bargaining Power of Suppliers
SESSION : 2
Suppliers provide inputs to the industry
Powerful Suppliers--raise prices or reduce quality of raw materials
Powerful suppliers reduce industry profitability
Suppliers become powerful when:
SESSION : 2
Few substitutes exist
Differentiation or high switching costs
Small number of suppliers
Supplier threat of vertical integration is high
Threat of Substitutes
SESSION : 2
Substitutes can replace the industry’s products and services or
present an alternative to fulfill demand
Substitutes establish a price ceiling for the industry’s product
Substitutes establish a quality threshold for the industry’s product
Substitutes become powerful when:
SESSION : 2
Buyers perceive performance and value of the substitute to be
similar to the industry’s product
Buyer’s switching cost is low
Substitutes are readily available
Vs.
The Five Forces are Unique to Your
Industry
SESSION : 2
Five-Forces Analysis is a framework for analyzing a particular
industry
Yet, the five forces affect all the other businesses in that industry
Industry Scenarios
SESSION : 2
1. Examine possible shifts in societal variable globally.
2. Identify uncertainties in each of the six forces of the task
environment.
3. Make a range of plausible assumptions about future trends.
4. Combine assumptions into internally consistent scenarios.
5. Analyze the industry situation under each scenario.
6. Determine sources of competitive advantage under each scenario.
7. Predict competitors’ behavior under each scenario.
8. Select most likely scenario to use in strategy formulation.
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