External analysis

EXTERNAL ANALYSIS

The General EnvironmentThe Competitive Environment

EXTERNAL ANALYSIS

• Clear Idea of the Industry • Industry & Sector• Industry & Market Segment• Changing Industry Boundaries• Strategic Groups within industries• Industry Life cycle analysis

Defining the Industry

• An industry is a group of companies offering products & services that are close substitutes for each other – that is products or services that satisfy the same customer needs

• A company’s closest competitors or its rivals are those that satisfy the same customer needs

• Examples Personal Computer industry,

Industry & Sector

• Sector – a gp. of closely related industries of which it is a part.

• E.G Telecommunication sector has two industries – Telecommunication equipment industry & Telecommunication service industry

Changing Industry Boundaries

• This seems to be a very thin line between industries

• How Technological Change has altered the industry boundaries – Telecommunication and computer industries

Strategic Group Within Industries

• Companies within an Industry can differ on various lines such as distribution channels, market segments, quality, technology, leadership, customer service & pricing etc & as such they may be having different positioning strategies. Such companies may formulate themselves into groups and each group having a different strategy. Each such group within an industry is refereed to as a strategic group E. G in Pharama we may have Generic and Proprietary Groups.

Implications of Strategic Group

• Companies closest competitors are those within the same strategic group i.e companies within a strategic group are direct substitutes for each other. E. G in the retail industry there may be group of discounters who are competing with each other

• Each Strategic Group within an industry may be having a different sets of opportunities or threats (Porters five forces and the degree of complimentarily will vary from one strategic group to another E. G Pharmaceuticals (Generic & Proprietary

Role of Mobility Barriers

• Some strategic groups within an industry are more desirable than others, that is there may be more opportunities or less threats in a strategic group resulting in more profits and weak competitive forces (porters). In such situation companies from one strategic group may try to alter their positioning approach & move to compete in the strategic group.

Role of Mobility Barriers

• Taking advantage of this opportunity may be difficult because of the mobility barriers between strategic groups.

• These include barriers to entry or exit• For example A company in a generic strategic

group will encounter mobility barriers if it tries to enter a proprietary group as it will lack R & D skills and building these skills will be an expensive proposition

Industry Life Cycle Analysis

• External factors (opportunities & Threats) will have a varied impact on an industry depending upon at what stage of the life cycle industry is.

• The similarities & differences between companies in an industry often become more pronounced overtime.

• The strategic group structure may also change as the industry evolves

Industry Life Cycle Five Stages

• Embryonic• Growth• Shakeout• Mature• Decline

Industry Life Cycle

Embryonic Industries

• Growth is slow• Buyers are unfamiliar• Distribution channels are poorly developed• Prices may be high• Products poorly designed• Innovators have a great opportunity to master

the art and be the leaders.

Growth Industries

• Demand of the product takes off/New Customers

• Distribution channels improve• Prices change• New Rivals can be absorbed

Industry Shakeout

• Demand reaches saturation levels• Few potential new buyers• Rivalry becomes intense as growth can only be

achieved through replacement• Price war• Competition for market share• Variation between growth in demand and

capacity

Mature Industries

• Market is totally saturated• Brand loyalty• Entry of potential competitors is diminished &

the prices and profits can increase• Consolidation• Price leadership agreement / but this can

break and price war can start again

Declining Industries

• Technological substitution• Social changes• International competition• Falling demand leads to emergence of excess

capacity

Industry Environment

• External Environment• Internal Environment

External Environment

• Competitive Environment• General Environment

Competitive Environment

• Identification of the competitive forces that have a bearing on industries opportunities & Threats

• Michael E Porters Five forces model identifies five forces that shape competition within an industry

Porter’s Five Forces Model

• Risk of Entry of Potential Competitors• Intensity of Rivalry among established firms• Bargaining power of buyers• Bargaining power of suppliers• Threat of Substitutes

Sixth Force is Complementors

Porters Five Force Model

1. Risk of Entry of Potential Competitors

• It is in part a function of the height of Barriers to Entry which can be made stronger through

1. Brand Loyalty2. Absolute Cost Advantage3. Economies of Scale4. Customer Switching Costs5. Government Regulations

Brand Loyalty can be achieved through

• Continuous advertising• Patent Protections• Continuous Innovation• High Product quality• After sale service

Absolute Cost Advantage can arise from

• Superior production operations/processes• Control of Particular Inputs• Access to Cheaper Funds

Economies of Scale can be achieved through

• Cost reduction through Mass Production• Discounts on Bulk purchases of Raw material• Spreading Fixed Production costs over a large

production volume• Spreading marketing & promotion costs over

large production volume

Customer Switching Costs

• Time• Energy• Money

Government Regulations

• When government regulations are high it is difficult for new entrants to enter into the industry/market

2. Rivalry Among Established Companies

• Intense rivalry constitutes a strong threat to profitability & it is a function of

1. Industry Competitive Structure2. Demand Conditions3. Exit Barriers

Industry Competitive Structure

• Fragmented Industry• Consolidated Industry

Industry Demand

• Growing Demand• Declining Demand

Exit Barriers

• When exit barriers are high companies become locked in an industry & a static or declining demand will mean excess capacity resulting in declining price wars

Exit Barriers include

• Investment in assets• High Fixed cost of exit• Emotional attachment to an industry• Economic Dependence on an industry

3. Bargaining power of Buyers

• More Suppliers Few Buyers• Buyers Purchase in Large quantities• Switching costs for the buyers are low• Buyers can threaten to enter into the market

4. Bargaining Power of Suppliers

• Powerful suppliers are a threat & suppliers can be powerful when

1. Few substitutes for the product suppliers supply2. When industry is not an important customer to the

suppliers3. Large switching costs4. Suppliers threaten to enter into the industry

themselves5. Companies in an industry can not enter into the

suppliers market

5. Threat of Substitutes

• If the substitutes are high threat to the existing profits is more, and one can not raise prices enormously

• If the substitutes are few or non existent companies can charge higher prices

Sixth Force Complementors

• More complementors in an industry can boost the demand and create more opportunities

General Environment/ Macro Environment

• PEST Analysis• Any change in any of the above mentioned

factors will have a direct impact on Porters 5 forces and this can alter the equation positively or Negatively