lecture 2 sm

8/8/2019 Lecture 2 Sm

1/58

Session 2Session 2

The External Environment:

Opportunities, Threats, IndustryCompetition, and Competitor Analysis

The External Environment:

Opportunities, Threats, IndustryCompetition, and Competitor Analysis


2/58

Political/

Legal

Political/

Legal

EconomicEconomic

TechnologicalTechnological

GlobalGlobal

DemographicDemographicSocioculturalSociocultural

CompetitiveCompetitive

EnvironmentEnvironment

IndustryEnvironment

IndustryEnvironment

Components of the General EnvironmentComponents of the General Environment


3/58


4/58

The purpose of SWOT Analysis

It is an easy-to-use tool for developing an

overview of a companys strategic situation

It forms a basis for matching your companys

strategy to its situation


5/58

SWOT is the starting point

It provides an overview of the strategic

situation.

It provides the raw material to do more

extensive internal and external analysis.


6/58

Opportunities

An OPPORTUNITY is a chance for firmgrowth or progress due to a favorable

juncture of circumstances in the businessenvironment.

Possible Opportunities:

Emerging customer needs Quality Improvements

Expanding global markets

Vertical Integration


7/58

Threats

A THREAT is a factor in your companysexternal environment that poses a danger

to its well-being. Possible Threats:

New entry by competitors

Changing demographics/shifting demand Emergence of cheaper technologies

Regulatory requirements


8/58

Opportunities and Threats form a

basis for EXTERNAL analysis

By examining opportunities, you can

discover untapped markets, and new products or technologies,

identify potential avenues for

diversification.


9/58

By examining threats, you can

identify unfavorable market shifts

changes in technology, and

create a defensive posture aimed atpreserving your competitive position.


10/58

Competitive Analysis

Who are your competitors?

Do you know about your close competitorsstrengths and weaknesses?

How detail should we analyze thecompetition?

Use a systematic approach

Analysis competition at various levels (next slide)


11/58

Levels of Competition

Generic Competition

Form Competition

Industry Competition

Brand Competition


12/58

Levels of Competition (contd)

Generic competitione.g. Honda against Silver Sea Cruisefor the same consumer dollars

Form competitione.g. Toyota against manufacturers ofother vehicles that provide the same service such asYamaha (motorcycle)

Industry competitione.g. Honda against Mercedes,Lexus etc who make the same products or class ofproducts (different prices)

Brand competitione.g. Honda against Toyota, Nissan etc.who offer similar products and service to the samecustomers at similar prices


13/58


14/58

The purpose of

Five-Forces Analysis

The five forces are environmental forces

that impact on a companys ability tocompete in a given market.

The purpose of five-forces analysis is todiagnose the principal competitivepressures in a market and assess howstrong and important each one is.


15/58

Threat of

New

Entrants

Threat of

New

Entrants

Threat of

New

Entrants

Threat of

New

Entrants

Porters Five Forces

Model of Competition

Porters Five Forces



16/58

Threat of New Entrants

The competition in an industry will be the higher, the easier it is for other

companies to enter this industry. In such a situation, new entrants could

change major determinants of the market environment (e.g. marketshares, prices, customer loyalty) at any time. There is always a latent

pressure for reaction and adjustment for existing players in this industry.


17/58

The threat of new entries will depend on the extent

to which there are barriers to entry. These are

typically

Economies of scale (minimum size requirements for

profitable operations),

High initial investments and fixed costs,

Cost advantages of existing players due to experiencecurve effects of operation with fully depreciated

assets,

Brand loyalty of customers


18/58

Protected intellectual property like patents, licenses etc,

Scarcity of important resources, e.g. qualified expert staff

Access to raw materials is controlled by existing players,

Distribution channels are controlled by existing players,

Existing players have close customer relations, e.g. fromlong-term service contracts,

High switching costs for customers

Legislation and government action


19/58

Threat of New EntrantsThreat of New Entrants

Barriers to

Entry

Barriers to

Entry

GovernmentPolicyGovernmentPolicy

Economies of ScaleEconomies of Scale

Product DifferentiationProduct Differentiation

Capital RequirementsCapital Requirements

Switching CostsSwitching Costs

Access to Distribution ChannelsAccess to Distribution Channels


20/58

Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Threat of

New

Entrants

Threat of

New

Entrants

Threat of

New

Entrants

Porters Five Forces


Porters Five Forces



21/58

Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are

needed in order to provide goods or services.

Supplier bargaining power is likely to be high when:

The market is dominated by a few large suppliers rather thana fragmented source of supply,

There are no substitutes for the particular input,

The suppliers customers are fragmented, so their bargaining

power is low, The switching costs from one supplier to another are high,


22/58

There is the possibility of the supplier integrating forwards in order to obtainhigher prices and margins. This threat is especially high when

The buying industry has a higher profitability than the supplying industry,

Forward integration provides economies of scale for the supplier,

The buying industry hinders the supplying industry in their development (e.g.reluctance to accept new releases of products),

The buying industry has low barriers to entry.

In such situations, the buying industry often faces a high pressure on margins fromtheir suppliers. The relationship to powerful suppliers can potentially reducestrategic options for the organization.


23/58


24/58

Bargaining

Power of

Buyers

Bargaining

Power of

Buyers

Threat of

New

Entrants

Threat of

New

Entrants

Threat of

New

Entrants

Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Porters Five Forces


Porters Five Forces



25/58

Bargaining Power of Customers

Similarly, the bargaining power of customers determines how much

customers can impose pressure on margins and volumes.

Customers bargaining power is likely to be high when:

They buy large volumes, there is a concentration of buyers,

The supplying industry comprises a large number of small operators

The supplying industry operates with high fixed costs,

The product is undifferentiated and can be replaces by substitutes,


26/58

Switching to an alternative product is relatively simple and is not related

to high costs,

Customers have low margins and are price-sensitive,

Customers could produce the product themselves,

The product is not of strategic importance for the customer,

The customer knows about the production costs of the product

There is the possibility for the customer integrating backwards.


27/58

Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete

with the supplying

industry by:

Buyers compete

with the supplying

industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off of

each othereach other

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

Buyers are concentrated orpurchasesBuyers are concentrated orpurchases

are large relative to sellers salesare large relative to sellers sales

Products are undifferentiatedProducts are undifferentiated

Buyers face few switchingcostsBuyers face few switchingcosts

Product unimportant toProduct unimportant toqualityquality

Buyer has fullBuyer has fullinformationinformation


28/58

Threat of

Substitute

Products

Threat of

Substitute

Products

Threat ofNew

Entrants

Threat of

New

Entrants

Threat of

New

Entrants

Bargaining

Power of

Buyers

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Porters Five Forces


Porters Five Forces



29/58

Threat of Substitutes

A threat from substitutes exists if there are alternative

products with lower prices of better performance parameters

for the same purpose. They could potentially attract a

significant proportion of market volume and hence reduce the

potential sales volume for existing players. This category also

relates to complementary products.


30/58

Similarly to the threat of new entrants, the threat of

substitutes is determined by factors like

Brand loyalty of customers,

Close customer relationships, Switching costs for customers,

The relative price for performance of substitutes,

Current trends.


31/58

Threat of Substitute ProductsThreat of Substitute Products

Products

with similar

functionlimit the

prices firms

can charge

Products

with similar

functionlimit the

prices firms

can charge

Keys to evaluate substitute products:Keys to evaluate substitute products:

Products with improvingProducts with improving

price/performance tradeoffsprice/performance tradeoffs

relative to present industryrelative to present industryproductsproducts

Example:Example:

Electronic security systems inElectronic security systems inplace of security guardsplace of security guards

Fax machines in place ofFax machines in place of

overnight mail deliveryovernight mail delivery


32/58

Threat of

Substitute

Products

Threat of

Substitute

Products

Threat of

New

Entrants

Threat of

New

Entrants

Threat of

New

Entrants

Rivalry Among

Competing Firms

in Industry

Rivalry Among

Competing Firms

in Industry

Bargaining

Power of

Buyers

Bargaining

Power of

Buyers

Bargaining

Power of

Suppliers

Bargaining

Power of

Suppliers

Porters Five Forces


Porters Five Forces



33/58

Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players(companies) in an industry. High competitive pressure results in pressure onprices, margins, and hence, on profitability for every single company in theindustry.

Competition between existing players is likely to be high when:

There are many players of about the same size,

Players have similar strategies

There is not much differentiation between players and their products, hence,there is much price competition

Low market growth rates (growth of a particular company is possible only atthe expense of a competitor),

Barriers for exit are high (e.g. expensive and highly specialized equipment).


34/58

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:

Usingprice competitionUsingprice competition

Staging advertising battlesStaging advertising battles

Making new product introductionsMaking new product introductions

Increasingconsumer warranties or serviceIncreasingconsumer warranties or service


35/58

CutthroatCutthroat competitioncompetition is more likely to occur when:is more likely to occur when:

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Numerous or equally balanced competitorsNumerous or equally balanced competitors

Slow growth industrySlow growth industry

High fixed costsHigh fixed costs

Lack of differentiation or switchingcostsLack of differentiation or switchingcosts

High storage costsHigh storage costs

Capacity added in large incrementsCapacity added in large increments

High strategic stakesHigh strategic stakes

High exit barriersHigh exit barriers

Diverse competitorsDiverse competitors


36/58

The Five Forces are Unique to

Your Industry

Five-Forces Analysis is a framework for

analyzing a particular industry. Yet, the five forces affect all the other

businesses in that industry.


37/58

Competitor AnalysisCompetitor Analysis

The followThe follow--up to Industry Analysis isup to Industry Analysis iseffective analysis of a firmseffective analysis of a firms CompetitorsCompetitors

CompetitiveCompetitive

EnvironmentEnvironment

Industry

Environment

Industry

Environment


38/58


AssumptionsAssumptions

What assumptions do ourcompetitors hold about the futureofindustry and themselves?

Current StrategyCurrent Strategy

Does ourcurrent strategy supportchanges in the competitiveenvironment?

Future ObjectivesFuture Objectives

How do ourgoals compare to ourcompetitorsgoals?

CapabilitiesCapabilities

How do ourcapabilities compare

to ourcompetitors?

ResponseResponse

What will ourcompetitors do in the

future?

What will ourcompetitors do in the

future?Where do we have acompetitiveadvantage?

Where do we have acompetitiveadvantage?

How will this changeour relationship withourcompetition?

How will this changeour relationship withourcompetition?


39/58

Future ObjectivesFuture ObjectivesHow do our goals compare

to our competitors goals?

How do our goals compare


Where will emphasis be

placed in the future?



What is the attitudetoward risk?What is the attitudetoward risk?

What Drives the competitor?



40/58

What is the competitor doing?What can the competitor do?











How are we currently

competing?


competing?

Does this strategy

support changes in the

competitive structure?

Does this strategy


competitive structure?



41/58


42/58


43/58












competing?


competing?

Does this strategy


competition structure?

Does this strategy


competition structure?

Do we assume the future

will be volatile?

Do we assume the future

will be volatile?

Are we operating under

a status quo?

Are we operating under

a status quo?

What assumptions do our

competitors hold about the

industry and themselves?

What assumptions do our

competitors hold about the

industry and themselves?

AssumptionsAssumptions

ResponseResponse

What will our competitors

do in the future?

What will our competitors

do in the future?

Where do we have a

competitive advantage?

Where do we have a

competitive advantage?

How will this change ourrelationship with our

competition?

How will this change ourrelationship with our

competition?

CapabilitiesCapabilities

What are my competitors

strengths and weaknesses?

What are my competitors

strengths and weaknesses?

How do our capabilities

compare to our

competitors?

How do our capabilities

compare to our

competitors?



44/58

PESTEL Analysis

In analyzing the macro-environment, it isimportant to identify the factors thatmight in turn affect a number of vitalvariables that are likely to influence theorganizations supply and demand levelsand its costs

The radical and ongoing changesoccurring in society create an uncertainenvironment and have an impact on the

function of the whole organization


45/58

A number of checklists have beendeveloped as ways of cataloguing the vastnumber of possible issues that might affectan industry.

A PEST analysis is one of them that is

merely a framework that categorizesenvironmental influences as political,economic, social and technological forces.S

ometimes two additional factors,environmental and legal, will be added tomake a PESTEL analysis,


46/58

The analysis examines the impact of each

of these factors (and their interplay witheach other) on the business.

T

he results can then be used to takeadvantage of opportunities and to makecontingency plans for threats whenpreparing business and strategic plans


47/58

Kotler (1998) claims that PESTEL analysisis a useful strategic tool for understanding

market growth or decline,

business position,

potential and direction for operations.


48/58

The headings of PEST are a framework forreviewing a situation, and can in additionto SWOT and Porters Five Forces models,be applied by companies to review astrategic directions, including marketingproposition.


49/58

Main Aspects of PEST Analysis

Political:

elections,

inter-countryrelationships/attitudes,

war,

terrorism,

politicaltrends,

governmentalleadership,

taxes,and

governmentstructures.


50/58

Economic:

economic growth trends (various countries),

taxation, government spending levels,,

job growth/unemployment,

exchange rates,

tariffs,

inflation,

consumer confidence index, import/export ratios, and

production levels.

Social:


51/58

Social:

demographics (age, gender, race, family size,

etc.), lifestyle changes, population shifts, education,

trends, diversity, immigration/emigration, health, living standards, housing trends,

fashion, attitudes to work, leisure activities, earning capacity.

T h l i l


52/58

Technological:

inventions, new discoveries,

research,

energy uses/sources/fuels,

communications,

rates of obsolescence, health (pharmaceutical, equipment, etc.),

manufacturing advances, information

technology, internet, transportation, bio-tech, genetics, agri-tech, wasteremoval/recycling, and so on.


53/58

Ethical

Sociocultural beliefs

Introvertness/orthodox percetions

emotional /physical harm to society


54/58


55/58

How to Write a Good PEST Analysis

InwritingagoodPESTEL,subjectshouldbea

cleardefinitionofthemarketbeingaddressed,whichmightincludethefollowingissuesof:

acompanylookingatitsmarket

aproductlookingatitsmarket abrand inrelationtoitsmarket alocalbusinessunit astrategicoption,suchasenteringanewmarket orlaunchinganewproduct apotentialacquisition apotentialpartnership aninvestmentopportunity


56/58

Finding Information for PESTEL Analysis

AnyreliablesecondarydatasourceofcurrenteventsandprojectedfuturetrendswillprovideinformationforthePESTELanalysis,including:

Newspapers,periodicals,currentbooks Tradeorganizations Governmentagencies Industryanalysts Financialanalysts


57/58

PEST analysis is also known as:

STEP,

PESTEL,

PESTLE, PESTE,

PESTLIED,

SLEPT,

STEEPLE,

STEEPLED,

LE PEST and

LEPEST analysis


58/58

Presentation Schedule

Resume your groups of first assignment and

prepare a presentation on Porters Five forces

on any industry of your choice.

Right now give me names of group members

and Industry title.

lecture 2 sm

Documents