the external environment (1)

8/12/2019 The External Environment (1)

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1

The External Environment: Opportunities,

Threats, Industry Competition, Competitive

Dynamics and Competitor Analysis


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External Audit

2

To assure victory, alwayscarefully survey the field

before battle.Sun Tzu


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3General

Environment

Economic

Technological

The External Environment

IndustryEnvironment

Competitor

Environment


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5

PEST

PESTELSTEEPA


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6

General Environment

Demographic Environmental Analysis

Population

Age

Geographic distribution

Ethnicity

Income


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Economic Environmental Analysis

General Environment

GDP

Inflation Interest

Trade deficits and surpluses

BOP

Personal savings rate Financial environment

Economic infrastructure


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General Environment

Political and Legal Environmental Analysis

Legal Systems

Monopolies

Taxes

Competition

Personnel and Labour Welfare & Development Legal platforms and structuredevelopments

thereof


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General Environment

Technological Environmental Analysis

R&Dexpenditure, infrastructure and availability

Innovations

Applications of knowledge

Focus of private and government-supported R&D

expenditures

New communication technologies


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General Environment

Global Environmental Analysis

Political events

Global markets

NIC

BEMs Trade Barriers and international institutions


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Industry Environment

A set of factors that directly influences acompany and its competitive actions and

responses Interaction among these factors determine

an industrys profit potential

Threat of new entrants Power of suppliers

Power of buyers

Product substitutes

Intensity of rivalry


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Porters 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 potentialsubstitutes may become competitors


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Bargaining Power of Buyers

Five Forces Model

Five Forces


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Threat of New Entrants

Barriers to entry

Bring additional capacity

Increase process efficiency

Internet marketing

Firm entry is function of two factors

Barriers to entry

Retaliation

High barrier increase return of existing players

Exceptions

Ryan Air

Made Aer Lingus bankrupt


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Economies of scale

Outcome of incremental efficiency

Airtel mobile telephone/landline/Internet/Dish TV

New entrants dilemma

Small scale entry puts them at a cost disadvantage- they can not

derive economies of scale

If they make a large entryinvite retaliation by being large and

visible


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Product differentiation

L'Oral, Revlon, Estee Lauder, Levi jeans

Customer loyalty

Capital requirements

Boeing or Airbus, oil refinery

Switching costs

If high, no entryOperating systems/softwares on Windows/Mac If low, easier entryBisleri/Acquafina, Sugar Free

Access to distribution channelsCoke/UL

Government policy- New banks, new private universities

Expected retaliation Honda entry to US with small model to avoid Harley Davidson

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 industryfirms

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 Buyers

Buyers (customers) are powerful when

they purchase a large portion of an industrys total

output the sales of the product being purchased account for a

significant portion of the sellers annual revenues

they could easily switch to another product

the industrys products are undifferentiated orstandardized, and buyers pose a credible threat if they

were to integrate backward into the sellers industry


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Threat of Substitute Products

Product substitutes are strong threat when

customers face few switching costs

substitute products price is lower

substitute products quality and performance

capabilities are equal to or greater than those of thecompeting product


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Intensity of Rivalry Intensity of rivalry is stronger when competitors are numerous and/or equally balanced

Desktop at home

experience slow industry growth

have high fixed costs and/or high storage cost lack differentiation or low switching costs

Commodities

Petrol

Cement

have high exit barriers Airline industry/ Steel industry

Jetlite, Go Air, Kingfisher, Spice, Indigo

high strategic stakes

Japanese automobiles in US as it is the largest market


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High Exit Barriers

Common exit barriers include specialized assets (assets with values linked to a

particular business or location)

Heart Lung Machine, MRI fixed costs of exit such as labor agreements

strategic interrelationships (relationships of mutual

dependence between one business and other parts of a

companys operation, such as shared facilities and accessto financial markets)

emotional barriers (career concerns, loyalty to employees,

etc.)

government and social restrictions


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Complementors

Good roads for high speed carsAvailability of inexpensive fuel for SUV/biggervehicles

Continues electricity for deep freezercomplementing purchase of milk weekly


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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

Strategic dimensions in luxury hotel are

Swimming pool, atleast two restaurants, Gym, Room service, High prices,High level of comfort, Wifi

Taj, Marriott, ITC, Sheraton, Intercontinental

Competition within strategic groups will be intense than

between groups or a firm outside that strategic group

Sheraton competing with Fortune

Ginger competing with Intercontinental/Ibis competing with Marriot

The strategy followed by a strategic group differs from

strategies being implemented by other companies in the

industry


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Competitor Environment

Competitor intelligence is the ethical gathering of

needed information and data about competitorsobjectives, strategies, assumptions, and capabilities

Airbus and Boeing

Embraer, Cessna and Lear Jet

Collection of information along four dimensions helpsfirms prepare anticipated response profile


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What drives the competitor as shown by its future

objectives

What the competitor is doing and can do as revealed byits current strategy

What the competitor believes about itself and the

industry, as shown by its assumptions

What the competitor may be able to do as shown by itscapabilities


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Competitor Analysis

Future Objectives:Future objectives

How do our goals compare with

our competitors goals? Gulf Stream/Embraer for

personal jets/Boeing and Air

bus for mass transportation

Where will the emphasis beplaced in the future?

Cargo or Human

What is the attitude toward risk?

Risk averse or risk taker


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Competitor Analysis

Current strategy

Current Strategy:

How are we currently

competing? Between Airbus and Boeing-

on fuel consumption or

speed or capacity or price

Does this strategy supportchanges in the competitive

structure?

Future objectives


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Competitor Analysis

Assumptions

Assumptions:

Do we assume the future will

be volatile? Are we operating under a

status quo?

What assumptions do our

competitors hold about theindustry and themselves?

Current strategy

Future objectives


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Competitor Analysis

Capabilities

Capabilities:

What are our strengths and

weaknesses? How do we rate compared to

our competitors?

Assumptions

Current strategy

Future objectives


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Competitor Analysis

Response

Response: What will our competitors do in

the future?

Where do we hold an

advantage over ourcompetitors?

How will this change our

relationship with our

competitors?

Capabilities

Assumptions

Current strategy

Future objectives


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Creating EFE Matrix

Allows strategists to summarize and evaluate STEEPAinformation. Can be developed in 5 steps

1. Include total of 10-20 factors, both from opportunities & threats

2. Assign each factor a weight from 0 (absolutely unimportant) to 1 (very important). Sum

should be 13. Assign a rating from 1 to 4 to each factor to indicate how effectively firms current

strategies respond to the factor where,

4=response is superior, 3=response is above average, 2=response is average,

1=response is poor

Weights in #2 are industry based, ratings at #3 are company based

4. Multiply each factors weight by its rating to determine weighted score

5. Sum the weighted score for each variable

EFE Matrix Mobile Phone Nokia


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EFE Matrix Mobile Phone-Nokia

Key External Factors Weight RatingWeighted

Score

OPPORTUNITIES

Global mobile phone market to grow 20% in 2014, compared to 12% in

2013 0.10 3 0.3Cost of Mobile phone components to decrease by 10% in 2014 0.05 3 0.15Growth in young population in BRIC 0.10 2 0.2China opened its market 0.10

3

0.3

Average incomes rising in India-DINKs 0.10 3 0.3THREATS

Intense rivalry in industry 0.10 2 0.2Financial Melt Down in General especially in Greece & Ireland 0.20 4 0.8Birth rate declining in Europe 0.05 1 0.05Medical advice against mobile phone use 0.05 1 0.05Disruptive Technologies (Higher R&D Expenses) 0.05 2 0.1China and India started selling cheaper models 0.10 2 0.2TOTAL 1 2.65

IFE Sony TV (2014)


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IFESony TV (2014)

Key Internal Factors Weight RatingWtd

Score

STRENGTHS

Several executive with world-class skills and leadership experience 0.05 4 0.2

Continuous decline in operating costs and cost of goods sold 0.05 3 0.15

Well-known brand name 0.05 3 0.15

Consumer Reports (Sept 13) recommended SONY as #1 0.1 4 0.4

As a direct seller, Sony holds high brand recognition 0.05 3 0.15

Sony diversifying into TV productsSet Top box/Serials/Movies 0.1 3 0.3

Good relationship with its suppliers 0.05 4 0.2

Economies of scale, the 3rdlargest TV maker in the world 0.05 4 0.2

Sony World retails stores excellent 0.05 3 0.15

WEAKNESSES

High operating expense (22% of revenue vs 10% for LG) 0.05 3 0.15

12% budget for R&D vs LGs 18% of revenue 0.1 1 0.1

Low return on assets ratio 0.05 1 0.05

No niche market 0.05 2 0.1

Shortage of cash due to expansion 0.1 2 0.2

Limited number of stores 0.05 2 0.1

Weak performance in Asian market 0.05 2 0.1

TOTAL 1.00 2.70


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Competitive Profile Matrix (CPM)

Identifies firms major

competitors and their

strengths and weaknesses in

relation to a specific firms

strategic position


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Value Assignment for CPM

Major Strength 4

Minor Strength 3

Minor Weakness 2

Major Weakness 1

Absolutely Arbitrary

Lenovo Apple Dell


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pp

CSFs Wt Rating Wtd

Score

Rating Wtd

Score

Rating Wtd

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

Fin. 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

Cons. 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 Expansion 0.15 3 0.45 2 0.30 4 0.60

Org. Structure 0.05 3 0.15 3 0.15 3 0.15

Prod. 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 competitive 0.02 4 0.08 1 0.02 3 0.06

Mgt. experience 0.01 2 0.02 4 0.04 2 0.02

Total 1.00 2.83 2.47 3.49

Industry Analysis CPM


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Industry Analysis CPM

Just because one firm receives 3.49and other 2.47

it does not follow that the first firm is 41%betterthan the second

Numbers reveal relative strengths of firms but

implied precision is an illusion

Numbers are not magic

The aim is to assimilate and evaluate information in

meaningful manner so that correct decision-making

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the external environment (1)

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