Analyzing the environment Objectives To analyze the 5-forces To evaluate the 5-forces model To investigate the application of environmental scanning and scenario planning

Demographic Economic Socio cultural Technological Global Industry environment threat of new entrants Power of Suppliers Power of Buyers Product Substitute Intensity of Rivalry Socio cultural Political/ Legal Technological Global

What environmental factors are affecting the organization? Which of these are the most important at the present time? In the next few years? Political/ Legal Economic factors ● Monopolies legislation ● Business cycles ● Environmental protection laws ● GNP trends ● Taxation policy ● Interest rates ● Foreign trade regulations ● Money supply ● Employment law ● Inflation ● Government stability ● Unemployment ● Disposable income ● Energy resources and cost

What environmental factors are affecting the organization? Which of these are the most important at the present time? In the next few years? Socio-cultural factors Technological ● Population demographics ● Government spending on research ● Income distribution ● Government and industry focus on ● Social mobility technological effort ● Lifestyle changes ● New discoveries/ development ● Attitudes to work and leisure ● Speed of technology ● Consumerism ● Rates of obsolescence ● Levels of education

Key questions to ask regarding the external environment What are the industry’s dominant economic traits? What competitive forces are at work in the industry and how strong are they? What are the drivers of change in the industry and what impact will they have? Which companies are in the strongest/ weakest positions?

Key questions to ask regarding the external environment … Who is likely to make what competitive move next? What key factors will determine competitive success or failure? How attractive is the industry in terms of its prospects for above-average profitability?

Michael Porters’s Five Forces Model Analysis Bargaining Power of Buyers Threat of Forward Integration Can Influence Price/ Volume Few Suppliers High Switching costs Bargaining Power of Suppliers Backward Integration Few Buyers Excess Supply Influence Price/ Volume High Switching Costs Competitive Rivalry Threat of Substitute Products Threat of New Entrants Price War Quality Diff Features Customer Service Easy Access Low Price Better Quality Replacement Phenomenon Govt. Regulation Capital Intensive Cost Disadvantages Technology Barriers

Rivalry among competing sellers Usually the most powerful of the five forces Check which weapons of competitive rivalry are most actively used by rivals in jockeying for position Price Quality Performance features offered Customer service Warranties/ guarantees Advertising/ promotions Dealer networks Product innovation

What causes rivalry to be stronger? Lots of firms, more equal in size and capability Slow market growth Industry conditions tempt some firms to go on the offensive to boost volume and market share Customers have low costs in switching brands One or more firms initiates moves to bolster their standing at expense of rivals A successful strategic move carries a big payoff Costs more to get out of business than to stay in Firms have diverse strategies, corporate priorities, resources, and countries of origin

The Industry is Highly competitive if the following conditions prevail High Threat of Substitutes Low Entry Barriers High Bargaining Power of Buyers Intense Competitive Rivalry The Industry is less competitive if the Following Conditions Prevail Low Threat of Substitutes High Entry Barriers Low Bargaining Power of Buyers Moderate Competitive Rivalry e. g. Video Rentals Telecom e. g. Bio Pharma Bio Fertilizers

Implications: Future Strategy Absurd to stop abruptly after analyzing The external environment using the 5 force model Develop strong alliance with buyers/ suppliers Achieve cost efficiency Adopt superior technology Competitive pricing Deliver value to customer

Environmental scanning Monitoring and interpreting sweep of Social Political Economic Ecological Technological events To spot budding trends that could eventually impact industry

Environmental scanning … Its purpose is to Raise consciousness of managers about potential developments that could Have an important impact on industry conditions Pose new opportunities and threats

Competitor Analysis Framework Response What will our competitors do in the Future? Where do we held an advantage over our competitors? How will this change our relationship with our competitors? Future Objectives How do our goals compare with our competitors goals? Current Strategy How are we currently competing? Does this strategy support changes in the competitive structure Capabilities What are our strengths & weaknesses? How do we rate compared to our competitors?

Identifying industry key success factors Answers to three questions pinpoint KSFs On what basis do customers choose between competing brands of sellers? What must a seller do to be competitively successful – what resources and competitive capabilities does it need? What does it take for sellers to achieve a sustainable competitive advantage? KSFs consist of the 3-5 really major determinants of financial and competitive success in an industry

Example: KSFs for the brewery industry Utilization of brewing capacity – to keep manufacturing costs low Strong network of wholesale distributors – to gain access to retail outlets Clever advertising – to induce beer drinkers to buy a particular brand

Example: KSFs for the aluminum industry Locating plants close to end-use customer – to keep costs of shipping empty cans low Ability to market plant output within economical shipping distances Locating plants closer to bauxite reserves Captive power plants