Session 2

The External Environment:

Opportunities,
Opportunities, Threats,
Threats, Industry
Industry
Competition,
Competition, and
and Competitor
Competitor
Analysis
Analysis
Components of the General Environment
Economic

Demographic
Sociocultural
Industry
Environment

Competitive
Environment
Political/
Legal Global

Technological
 SWOT Analysis
• Strengths
• Weaknesses
• Opportunities
• Threats
The purpose of SWOT Analysis
• It is an easy-to-use tool for developing an
overview of a company’s strategic situation
– It forms a basis for matching your company’s
strategy to its situation
 SWOT is the starting point
• It provides an overview of the strategic
situation.
• It provides the “raw material” to do more
extensive internal and external analysis.
 Opportunities
• An OPPORTUNITY is a chance for firm
growth or progress due to a favorable
juncture of circumstances in the business
environment.
• Possible Opportunities:
– Emerging customer needs
– Quality Improvements
– Expanding global markets
– Vertical Integration
 Threats
• A THREAT is a factor in your company’s
external environment that poses a danger
to its well-being.
• Possible Threats:
– New entry by competitors
– Changing demographics/shifting demand
– Emergence of cheaper technologies
– Regulatory requirements
Opportunities and Threats form a
basis for EXTERNAL analysis
• By examining opportunities, you can
• discover untapped markets, and
• new products or technologies,
• identify potential avenues for
diversification.
• By examining threats, you can
• identify unfavorable market shifts
• changes in technology, and
• create a defensive posture aimed at
preserving your competitive position.
 Competitive Analysis
• Who are your competitors?
• Do you know about your close competitors’
strengths and weaknesses?
• How detail should we analyze the
competition?
– Use a systematic approach
– Analysis competition at various levels (next slide)
Levels of Competition

Generic Competition

Form Competition

Industry Competition

Brand Competition
 Levels of Competition (cont’d)
• Generic competition—e.g. Honda against Silver Sea Cruise
for the same consumer dollars

• Form competition—e.g. Toyota against manufacturers of

other vehicles that provide the same service such as
Yamaha (motorcycle)

• Industry competition—e.g. Honda against Mercedes,

Lexus etc who make the same products or class of
products (different prices)

• Brand competition—e.g. Honda against Toyota, Nissan

etc. who offer similar products and service to the same
customers at similar prices
 Industry Competition

• Different industries can sustain different

levels of profitability; partly due to the
difference in industry structure

• Porter’s Model of Industry Competition,

commonly know as Porter’s Five Forces
provides a framework for analyzing the
influence of the forces on the industry to
determine the industry’s profitability and
competitiveness
 The purpose of
Five-Forces Analysis
• The five forces are environmental forces
that impact on a company’s ability to
compete in a given market.
• The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
• Threat of New Entrants

The competition in an industry will be the higher, the easier it is for other
companies to enter this industry. In such a situation, new entrants could
change major determinants of the market environment (e.g. market
shares, prices, customer loyalty) at any time. There is always a latent
pressure for reaction and adjustment for existing players in this industry.
• The threat of new entries will depend on the extent
to which there are barriers to entry. These are
typically
•   Economies of scale (minimum size requirements for
profitable operations),
• High initial investments and fixed costs,
• Cost advantages of existing players due to
experience curve effects of operation with fully
depreciated assets,
• Brand loyalty of customers
• Protected intellectual property like patents, licenses etc,
• Scarcity of important resources, e.g. qualified expert
staff
• Access to raw materials is controlled by existing players,
• Distribution channels are controlled by existing players,
• Existing players have close customer relations, e.g. from
long-term service contracts,
• High switching costs for customers
• Legislation and government action
 Threat of New Entrants

Economies of Scale
Barriers to Product Differentiation
Entry
Capital Requirements
Switching Costs
Access to Distribution Channels
GovernmentPolicy
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining
Power of
Suppliers
 Bargaining Power of Suppliers

         
• The term 'suppliers' comprises all sources for inputs that are
needed in order to provide goods or services.
• Supplier bargaining power is likely to be high when: 
• The market is dominated by a few large suppliers rather than
a fragmented source of supply,
• There are no substitutes for the particular input,
• The suppliers customers are fragmented, so their bargaining
power is low,
• The switching costs from one supplier to another are high,
• There is the possibility of the supplier integrating forwards in order to obtain
higher prices and margins. This threat is especially high when

• The buying industry has a higher profitability than the supplying industry,

• Forward integration provides economies of scale for the supplier,

• The buying industry hinders the supplying industry in their development (e.g.
reluctance to accept new releases of products),

• The buying industry has low barriers to entry.

• In such situations, the buying industry often faces a high pressure on margins from
their suppliers. The relationship to powerful suppliers can potentially reduce
strategic options for the organization. 
 Bargaining Power of Suppliers
Suppliers are likely to be powerful if:

Supplier industry is dominated by a

Suppliers exert power
few firms
in the industry by:
Suppliers’ products have few substitutes
* Threatening to raise
prices or to reduce quality Buyer is not an important customer to
supplier
Powerful suppliers
can squeeze industry Suppliers’ product is an important
profitability if firms input to buyers’ product
are unable to recover
cost increases Suppliers’ products are differentiated
Suppliers’ products have high
switching costs
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers
 Bargaining Power of Customers

• Similarly, the bargaining power of customers determines how much

customers can impose pressure on margins and volumes.

• Customers bargaining power is likely to be high when:

• They buy large volumes, there is a concentration of buyers,

• The supplying industry comprises a large number of small operators
• The supplying industry operates with high fixed costs,
• The product is undifferentiated and can be replaces by substitutes,
• Switching to an alternative product is relatively simple and is not related
to high costs,

• Customers have low margins and are price-sensitive,

• Customers could produce the product themselves,

• The product is not of strategic importance for the customer,

• The customer knows about the production costs of the product

• There is the possibility for the customer integrating backwards.

 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases

are large relative to seller’s sales Buyers compete
with the supplying
Products are
undifferentiated industry by:
Buyers face few switching costs
* Bargaining down prices
Product unimportant to
quality * Forcing higher quality

Buyer has full * Playing firms off of

each other
information
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
 Threat of Substitutes

• A threat from substitutes exists if there are alternative

products with lower prices of better performance parameters
for the same purpose. They could potentially attract a
significant proportion of market volume and hence reduce
the potential sales volume for existing players. This category
also relates to complementary products.
• Similarly to the threat of new entrants, the threat of
substitutes is determined by factors like
• Brand loyalty of customers,
• Close customer relationships,
• Switching costs for customers,
• The relative price for performance of substitutes,
• Current trends.
 Threat of Substitute Products
Keys to evaluate substitute products:

Products Products with improving

with similar price/performance tradeoffs
function relative to present industry
limit the products
prices firms
can charge Example:
Electronic security systems in
place of security guards
Fax machines in place of
overnight mail delivery
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
 Competitive Rivalry between Existing Players

• This force describes the intensity of competition between existing players

(companies) in an industry. High competitive pressure results in pressure on
prices, margins, and hence, on profitability for every single company in the
industry.

• Competition between existing players is likely to be high when:

• There are many players of about the same size,

• Players have similar strategies
• There is not much differentiation between players and their products, hence,
there is much price competition
• Low market growth rates (growth of a particular company is possible only at
the expense of a competitor),
• Barriers for exit are high (e.g. expensive and highly specialized equipment).
 Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:

Using price competition

Staging advertising battles
Increasing consumer warranties or service
Making new product introductions
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
 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.
 Competitor Analysis
The follow-up to Industry Analysis is
effective analysis of a firm’s Competitors

Industry
Environment

Competitive
Environment
 Competitor Analysis
Assumptions
What assumptions do our
competitors hold about the future Response
of industry and themselves?
What will our
Current Strategy competitors do in the
Does our current strategy support future?
changes in the competitive Where do we have a
environment? competitive
Future Objectives advantage?
How do our goals compare to our How will this change
competitors’ goals? our relationship with
our competition?
Capabilities
How do our capabilities compare
to our competitors?
 Competitor Analysis
Future Objectives What Drives the
How do our goals competitor?
compare to our
competitors’
Where will emphasis
goals? be
placed in the future?
What is the attitude
toward risk?
 Competitor Analysis
Future Objectives What is the competitor doing?
How do our goals What can the competitor do?
compare to our
Where Current
competitors’ goals?Strategy
will emphasis be
placed inHow
the future?
are we currently
What is the attitude
competing?
toward risk?
Does this strategy
support changes in the
competitive structure?
 Competitor Analysis
Future Objectives What does the competitor believe
How do our goals about itself and the industry?
compare to our
Where Current
competitors’ goals?Strategy
will emphasis be
placed in the future?
How are we currently
What is the attitude
competing?
toward risk? Assumptions
Does thisDo
strategy
we assume the future
support changes in the
will be volatile?
competition
What structure?
assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?
 Competitor Analysis
Future Objectives What are the competitor’s
How do our goals capabilities?
compare to our
Where Current
competitors’ goals?Strategy
will emphasis be
placed in the future?
How are we currently
What is the attitude
competing?
toward risk? Assumptions
Does this
Dostrategy
we assume the future
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitorsCapabilities
hold about the
industry and themselves?
What are my competitors’
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
 Competitor Analysis
Future Objectives Response
How do our goals What will our competitors
compare to our do in the future?
Where Current
competitors’ goals?Strategy
will emphasis be Where do we have a
placed in the future? competitive advantage?
How are we currently
What is the attitude
competing? How will this change our
toward risk? Assumptions relationship with our
Does this
Dostrategy
we assume the future competition?
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitors Capabilities
hold about the
industry and themselves?
What are my competitors’
Are we operating
strengths under
and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
 PESTEL Analysis

• In analyzing the macro-environment, it is

important to identify the factors that
might in turn affect a number of vital
variables that are likely to influence the
organization’s supply and demand levels
and its costs
• The “radical and ongoing changes
occurring in society create an uncertain
environment and have an impact on the
function of the whole organization
• A number of checklists have been
developed as ways of cataloguing the vast
number of possible issues that might affect
an industry.
• A PEST analysis is one of them that is
merely a framework that categorizes
environmental influences as political,
economic, social and technological forces.
Sometimes two additional factors,
environmental and legal, will be added to
make a PESTEL analysis,
• The analysis examines the impact of each
of these factors (and their interplay with
each other) on the business.

• The results can then be used to take

advantage of opportunities and to make
contingency plans for threats when
preparing business and strategic plans
• Kotler (1998) claims that PESTEL analysis
is a useful strategic tool for understanding

• market growth or decline,

• business position,
• potential and direction for operations.
• The headings of PEST are a framework for
reviewing a situation, and can in addition
to SWOT and Porter’s Five Forces models,
be applied by companies to review a
strategic directions, including marketing
proposition.
 Main Aspects of PEST Analysis
Political:

• elections,
• inter-country relationships/attitudes,
• war,
• terrorism,
• political trends,
• governmental leadership,
• taxes, and
• government structures.
 Economic:
• economic growth trends (various countries),
• taxation,
• government spending levels,,
• job growth/unemployment,
• exchange rates,
• tariffs,
• inflation,
• consumer confidence index,
• import/export ratios, and
• production levels.
Social:

• demographics (age, gender, race, family size,

etc.),
• lifestyle changes,
• population shifts,
• education,
• trends,
• diversity,
• immigration/emigration,
• health, living standards, housing trends,
• fashion,
• attitudes to work,
• leisure activities,
• earning capacity.
Technological:
• inventions, new discoveries,
• research,
• energy uses/sources/fuels,
• communications,
• rates of obsolescence,
• health (pharmaceutical, equipment, etc.),
• manufacturing advances, information
technology, internet, transportation, bio-
tech, genetics, agri-tech, waste
removal/recycling, and so on.
Ethical

• Sociocultural beliefs
• Introvertness/orthodox percetions
• emotional /physical harm to society
Legal

• employment law,
• consumer protection,
• environmental regulations,
• industry-specific regulations,
• competitive regulations,
 How to Write a Good PEST Analysis
• In writing a good PESTEL, subject should be a
clear definition of the market being addressed,
which might include the following issues of:

• a company looking at its market

• a product looking at its market
• a brand in relation to its market
• a local business unit
• a strategic option, such as entering a new
market or launching a new product
• a potential acquisition
• a potential partnership
• an investment opportunity
 Finding Information for PESTEL Analysis

• Any reliable secondary data source of current

events and projected future trends will provide
information for the PESTEL analysis, including:

• Newspapers, periodicals, current books

• Trade organizations
• Government agencies
• Industry analysts
• Financial analysts
• PEST analysis is also known as:
• STEP,
• PESTEL,
• PESTLE,
• PESTE,
• PESTLIED,
• SLEPT,
• STEEPLE,
• STEEPLED,
• LE PEST and
• LEPEST analysis
 Presentation Schedule

• Resume your groups of first assignment and

prepare a presentation on Porter’s Five forces
on any industry of your choice.

• Right now give me names of group members

and Industry title.