Lovely L.

De Castro
BSMA 2A

OPPORTUNITIES & THREATS – ANALYZING THE EXTERNAL ENVIRONMENT

An industry is a group of manufacturers or businesses that produce a particular kind of
goods or services.
Close substitute goods are in indirect competition, i.e., they are similar products that
target the same customer group and satisfy the same needs.

Problems of steel industry

The steel industry is known for being cyclical and reflective of overall market
conditions—demand increases during economic booms and plummets during global
recessions. But they face certain problems that affect their profitability. One of which is it
is cost-efficient international producers have taken away market share from the once-
dominantly integrated steel producers. There are also threat of new domestic
competition in the form of minimally. Lastly, the demand for steel decreased as
customers switched to substitutes such as aluminum, plastics, composites.
The combination of increased supply and declining demand led to overcapacity.

Response of steel cos. to the excess capacity

Steel products, on continues research, cut their prices in order to try to attract
more customers and to cover their fixed costs, only for rivals to match. It results to
intense rivalry in costs and low profits. Their market could quickly turn demand from
business to business and reduce rates further down. Additionally, they created strong
unions & costs of closing a plant impeded overcapacity reduction.

Profit turnaround in 2008

1. Steel demand is rising from the rapidly developing economies of China, India,
Russia, and Brazil.
2. Two decades of bankruptcies & consolidation, there has been much of the
excess capacity in the U.S. & worldwide has been removed. They held their own
against imports.
3. Depreciation of the U.S. dollar Made steel imports relatively more expensive and
increased demand for steel exports from the U.S.
Illustrated in the picture the kind of strategy in order to solve business problems, which
are business investment, new ideas, solution and analysis. In order to boost your
business, business owners should have a mindset of creating an environment where
new ideas are open for the improvement of the business.

Competitive environment – Prices/profits surged

It is included in the presentation the Hot rolled steel plate. United states steel and
Nucor steel are competitors in which the US steel boost more profit than the other. U.S.
Steel produces $406M on 2003 and it increased in 2008 with a profit of $2B.
Porter's Five Forces is a model that identifies and analyzes five competitive
forces that shape every industry and help determine the weaknesses and strengths of
the industry. Five Forces analysis is often used to identify the structure of the industry to
determine the corporate strategy. Risk of new entry, bargaining power of suppliers,
extent of rivalry, threat of substitute products and bargaining power of buyers but the
focus here is the risk of new entry. A company's power is also affected by the force of
new entrants into its market. An industry with strong barriers to entry is ideal for existing
companies within that industry since the company would be able to charge higher prices
and negotiate better terms.

Important barriers to entry

 Economies of scale
 Brand loyalty
 Absolute cost advantages
 Customer switching costs
 Government regulation
First in the list on the important barriers to entry is economies of scale.
Economies of Scale refer to the cost advantage experienced by a firm when it increases
its level of output. The advantage arises due to the inverse relationship between per-
unit fixed cost and the quantity produced. The greater the quantity of output produced,
the lower the per-unit fixed cost. Brand loyalty is a pattern of consumer behavior in
which consumers continue to devote themselves to a specific brand or product and
make frequent purchases over time. The consumer has the perception that the
particular brand has the qualities that will meet their expectations and identifies with the
consumer at a personal level. Next is absolute advantage is when a producer can
produce a good or service in greater quantity for the same cost, or the same quantity at
lower cost, than other producers. An entity with an absolute advantage, using a smaller
number of inputs or a more efficient process, may produce a product or service at a
lower total cost per unit than another entity producing the same good or service.
Switching costs are the costs borne by a customer as a result of changing brands,
suppliers or goods. While most prevalent switching costs are monetary in nature,
psychological, effort-based, and time-based switching costs are also involved. Many
businesses prosper and others can suffer as a result of complex regulations and codes
– while consumers can claim the same dual results – some are protected while others
may be harmed. So, it is safe to say the Government regulation is vital to a country in
order to protect health, safety, fairness and a competitive business environment. It may
also result to higher profits because the level of competition reduced due to some
regulations.

Factors affecting extent of rivalry

The factor of competitive rivalry has significant impact on the competitive
environment a company operates in because the degree of competitiveness has direct
impact on the potential for profit that a company can expect. The competitive pressure
in an industry may manifest itself through several different tactics. These can include
competition based on price, advertising wars, new products, etc. A good illustration is of
the competition that exists between T-Mobile, AT&T, and Verizon in the United States.
All three are mobile phone companies that compete for the same group of consumers.
They achieve this by lowering their prices and offering incentives to customers who
decide to switch to their company.
Regulators and customers also pursue competition with a view to establishing a
healthy and successful market. By means of healthy competition, consumers can end
up getting the best value for their money, which they cannot do otherwise. Competition
allows consumers to make a variety of decisions about who delivers the product or
service they're interested in. Industry consolidation is characterized by the
amalgamation of smaller operators into larger companies, resulting in fewer but more
powerful industry participants. Includes, fragmented industry is one without a dominant
player. Many times, the business itself is small, but the industry overall can be large.
Two examples would be landscaping companies and barbers. There's plenty of them,
but there's not really a major player in most markets. Another type of industry is
consolidation industry which it usually means an industry as established operators
acquire competitors to reinforce their market position. Consolidation rationale includes
increased negotiating power with suppliers and customers, access to new technology
and practices, and product line expansion. Example of this are aerospace, soft drink
automobile, pharmaceutical, stockbrokerage, beer.
Industry demand consists of the aggregate demand made for the product of
different companies. Industry covers all the firms or companies which produce close
substitutes for a single product with different brand names. For instance, there are
several companies manufacturing toothpaste like CloseUp, Colgate, Promise, Neem
etc. All these companies come under the category of single industry namely toothpaste
industry. On the other hand, cost conditions is defined as fixed costs are high,
profitability tends to be highly leveraged by sales volumes, the desire to increase
volumes may trigger intense rivalry, example is FedEx cap. Investments. Lastly is
barriers to exit these are obstacles or impediments that prevent a company from exiting
a market in which it is considering cessation of operations, or from which it wishes to
separate.

Exit barriers in industry

This includes investments in assets for specific machines, equipment, &
operating facilities which will be written off in case of exit. Economic dependence which
relies on a single industry for its revenue and profit. High fixed costs of exit include
Severance pay, health benefits, pensions of workers. Another exit barrier is at or above
minimum level because it is difficult to participate effectively in the industry, it became a
hindrance to the business to exit. Additionally, emotional attachments of the business
owner’s refusal to exit for sentimental reasons or because of their pride. It is visible in
the Unites States rule Bankruptcy regulations which allow insolvent enterprises to
reorganize under bankruptcy protection.

Circumstances – buyers are most powerful

Porter’s Five Forces of buyer bargaining power refers to the pressure consumers
can exert on businesses to get them to provide higher quality products, better customer
service, and lower prices. When analyzing the bargaining power of buyers, conduct the
industry analysis from the perspective of the seller. According to Porter’s 5 forces
industry analysis framework, buyer power is one of the forces that shape the
competitive structure of an industry. Buyers purchase in large quantities that is why
supply industry depends on buyers for a large percentage of its total orders. Buyers
threaten to enter the industry & produce the product themselves. One example is an
auto component supply industry has large auto manufacturers as buyers another
example are Pharmaceuticals vs. hospitals.

Circumstances – suppliers are most powerful

Suppliers are most powerful when a company depends on them for business but
they them- selves are not dependent on the company. In such circumstances, suppliers
are a threat. In Porter’s five forces, supplier power refers to the pressure suppliers can
exert on businesses by raising prices, lowering quality, or reducing availability of their
products. When analyzing supplier power, you conduct the industry analysis from the
perspective of the industry firms, in this case referred to as the buyers.
 Substitute products are the products of companies serving customer needs like
the needs served by the industry being analyzed. The more similar the substitute
products are to each other, the lower is the price that companies can charge without
losing customers to the substitutes.
An industry life cycle depicts the various stages where businesses operate,
progress, prospect and slump within an industry. An industry life cycle typically consists
of five stages — startup, growth, shakeout, maturity, and decline. These stages can last
for different amounts of time, some can be months or years.
The introduction phase of the industry life cycle is defined as the infancy or
embryonic stage. This is where early adopters of new products, technology or
processes are typically carving out a niche market and developing products and
services in response to an identified need. There is little to no competition unless similar
companies have identified the same opportunity. Companies involved in this stage are
typically active in sourcing investment capital to execute their business plans. Profits are
not yet created because the industry is new to the market and revenue is usually
reinvested in business expansion. Growing the industry awareness and positioning the
product is the primary promotional focus at this stage. May also be the creation of a
company’s innovative efforts. Example of this are Intel, Hoover, Xerox, FedEx, Google.
The growth stage of the industry life cycle is characterized by reinvestment of the
industries growing earnings into plant and equipment to meet the expanding demand
and to create economies of scale. Firms active in the market are focusing on building
market share and differentiating their product. Customers become familiar with the
product; prices fall because experience & economies of scale have been attained;
distribution channels develop.
Industry shakeout is when the demand approaches saturation levels; most of the
demand is limited to replacement because there are few potential first-time buyers left.
Rivalry becomes intense. It results to excess capacity, price wars, bankruptcy of most
inefficient cos. enough to deter any new entry. In order to survive, they minimize costs
and build brand loyalty. Airlines hired nonunion labor; build brand loyalty thru frequent-
flyer programs. For PCs, excellent after-sales service, lower cost structures.
The maturity stage of the industry life cycle is where profitability hits a peak.
Successfully positioned companies emerge as cash cows and have an abundance of
cash to pay out as dividends to shareholders. New competitors enter the market at this
stage to capitalize on market profitability. Price wars intensify in response to growing
competition and to consolidate market share. Marketing strategies continue to amplify
differentiation and brand awareness. Examples are beer, breakfast cereal and
pharmaceutical industries.
The declining stage of the industry life cycle is when some companies start to
exit the industry and mergers and acquisitions hit a peak. Profitability starts to decrease,
and companies focus on cost cutting initiatives in the production process and streamline
marketing initiatives. Sometimes this stage occurs as a result of changing consumer
tastes or preferences, the emergence of new products or the invention of a new
technology which redefines the industry and consumer preferences.
The Macroenvironment
A macroeconomic factor is an influential fiscal, natural, or geopolitical event
that broadly affects a regional or national economy. Macroeconomic factors tend to
impact wide swaths of populations, rather than just a few select individuals. Examples of
macroeconomic factors include economic outputs, unemployment rates, and inflation.
These indicators of economic performance are closely monitored by governments,
businesses and consumers alike.
The four most important macroeconomic forces are growth rate of the economy,
interest rates, currency exchange rates and inflation (or deflation) rates. Economic
growth, it leads to an expansion in customer expenditures, tends to produce a general
easing of competitive pressures within an industry. Interest rates can determine the
demand for a company’s products. Important whenever customers borrow money to
finance their purchase. The lower the interest rates are, the lower the cost of capital for
companies will be, and the more investment there will be. Currency exchange rates
define the value of different national currencies against each other. Has a direct impact
on the competitiveness of a company’s products in the global marketplace. Price
inflation can destabilize the economy, producing slower economic growth, higher
interest rates, and volatile currency movements. Investments are held back, depressing
economic activity, & pushing the economy into recession. Price deflation can also
destabilize the economy. If prices are falling, the real price of fixed payments goes up.
The increase in the real value of debt consumes more of household and corporate cash
flows, leaving less for other purchases & depressing the overall level of economic
activity.
Global Forces Barriers to international trade & investment have tumbled, & more
& more countries have enjoyed sustained economic growth in which they can enter
foreign countries as new markets for goods & services. For technological forces, the
process called a “perennial gale of creative destruction” in which they can make
established products obsolete overnight & simultaneously create a host of new product
possibilities. Both creative & destructive – both opportunity & threat. Demographic
Forces outcomes of changes in the characteristics of a population, such as age, gender,
ethnic origin, race, sexual orientation, & social class. Like in 1950s & 1960s baby
boomers newly-weds – upsurge in demand for washing machines, dishwashers, dryers.
1990s saving for retirement into mutual funds, 2000s boom in retirement communities.
For social forces way in which changing social mores & values affect an industry. Social
movement – toward greater health consciousness, low-calorie beer diet colas, fruit-
based soft drinks, decline in tobacco industry. Lastly, political & legal forces result from
political & legal developments within society. The growth in passenger demand has
contributed to overcapacity, severe competition and fare wars.