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

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

3. 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

4. External Environment Outside forces which impact on the firm Economy
Technology
Society
Government
Competitors
Customers
Suppliers

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

6. 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

7. 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

8. 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

9. 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?

10. 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

11. 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.

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. Strong Rivalry Occurs When:
Low industry growth
High relative fixed costs
Little product differentiation
Fragmented industry with different competitive perspectives

22. 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

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

24. Some Barriers to Entry:
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Size
Government Policy

25. High Entry Barriers Means High Profitability
High barriers restrict new entrants

26. 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

27. 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

28. 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

29. Suppliers become powerful when:
Few substitutes exist
Differentiation or high switching costs
Small number of suppliers
Supplier threat of vertical integration is high

30. 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

31. 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.

32. 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

33. 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.

34. THANK YOU