External and Industry Environment Analysis Dr. K. Rangarajan 15 April 2019

Two Determinants of Profitability Environmental Attractiveness Competitive Position a Advantage Disadvantage Low High

Business Environment 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 Outside forces which impact on the firm Economy Technology Society Government Competitors Customers Suppliers

Internal Environment Conditions & forces within the firm Owners Managers Employees Firm culture Physical resources

Environmental Uncertainty 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 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 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 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 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 High Priority Medium Low Probable Impact on Corporation Probability of Occurrence 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 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 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 Regional shifts in Life expectancies Birth rates

Firm strategy structure and rivalry Related and supporting industries Porter’s Diamond   Firm strategy structure and rivalry Chance Factor conditions Demand conditions Related and supporting industries Government

Determinants in the Diamond 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 + Transmission to Foreign Market Competitive Advantage

Determinants in the Diamond (Contd.) 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 New Entrants Early product penetration feeds industry Attracts New Entrants though factor abundance or specialisation Firm Stgy. Structure and Rivalry Encourages formation of more specialists Stimulated growth of supplier industries Factor pools are transferable to related industries Related & Supported Industries Rivalry boosts home demand and its specification Pull foreign demand for the industry product Attract Foreign firms/individuals for the nation’s products Demand conditions Stimulates faster creation though rivalry/ challenges Create or stimulate creation of transferable factors Influence priorities for faster creation of investments Factor conditions Determinants

Competitive Diamond Indian Apparel Cluster Weak/Medium Weak Weak-With Potential Basic=Strong Advanced=Weak Demand Conditions Strategy Structure Rivalry Factors Cluster -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 -Over-dependence on privileged market access -Mainly supplying labor -Mainly commodity/price competition +Some moving to full package/design +Many industry participants 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 -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

Industry Analysis 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 New Entrants Threat of new entrants Buyers Bargaining power of buyers Suppliers Bargaining power of suppliers Industry Competitors Intensity of rivalry Substitutes Threat of substitutes

Intensity of Rivalry 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: Low industry growth High relative fixed costs Little product differentiation Fragmented industry with different competitive perspectives

Rivalry Among Established Companies Industry Competitive Structure Consolidated One firm or one dominant firm. (monopoly) Fragmented Many firms. No dominant firm Few firms, Shared dominance (Oligopoly) The Continuum of Industry Structures

Threat of New Entrants Likelihood of New Entrants is Determined by Height of Entry Barriers

Some Barriers to Entry: 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 High barriers restrict new entrants

Bargaining Power of Buyers 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: 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 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: Few substitutes exist Differentiation or high switching costs Small number of suppliers Supplier threat of vertical integration is high

Threat of Substitutes 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: 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 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 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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