Analyzing a Companys External Environment

Contents
The Strategically relevant components of a companys external environment Industry Analysis Porters dominant economic features Competitive Environment Analysis Porters five force model Industry driving forces key success factors- concept and implementation.

Organization's Environment
The environment of business is the aggregate of conditions, events and influences that surround and affect it.
Since organization is part of broader social system, it has to work within the framework provided by the society Two categories- a) Internal Environment b) External Environment

Layers of the business environment

Internal
Consists of conditions and forces within the organization that affect its management Ex- Mission, corporate culture, owners and BOD, employees, unions and etc

External
Consists of those factors that affect a firm form outside its organizational boundaries. The factors are uncontrollable by the business Its not always clear and precise. Ex- Shareholders, Corporate Governance , Corporate Responsibility

External Environment
What the Firm Might Do

Sustainable Competitive Advantage

Internal Environment
What the Firm Can Do

The strategically relevant components of a company's external environment

A company' macro environment includes all relevant factors and influence outside the company's boundaries that have a bearing on the decisions the company makes about its strategy, objectives and business. These macro environment factors are outer ring, societal values and lifestyles E.g- 1.McDonalds not using beef in India 2.Population demographics e.g. Insurance companies designing Products for young population in India 4.Legislation and regulations e.g. No FDI in sectors like retail(*) 5.General economic conditions e.g. cost cutting by companies 6.Technology e.g. companies using video-conferencing

Macro-environment PESTEL

OR
Components of External Environment

Macro-environment PESTEL
Political
Government stability Tax policy Foreign trade regulations Social welfare policies

Economic
Business cycles GNP trends(gross National Income) Interest rates Money supply Inflation Unemployment Disposable income

GDP

GNP

Definition:

An estimated value of the total worth of a countrys production and services, calculated over the course on one year

GDP (+) total capital gains from overseas investment (-) income earned by foreign nationals domestically

Macro-environment PESTEL
Sociocultural
Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Consumerism Levels of education

Technological
Government spending on research Government and industry focus on technological effort New discoveries /developments Speed of technology transfer

Macro-environment PESTEL
Environmental
Environmental protection laws Waste disposal Energy consumption

Legal
Competition law Employment law Health and safety Product safety

Components of the External Environmental Analysis

Scanning
Monitoring

Identifying early signals of environmental changes and trends

Detecting meaning through ongoing observations of environmental changes and trends Developing projections of anticipated outcomes based on monitored changes and trends

Forecasting

Assessing

Determining the timing and importance of environmental changes and trends for firms strategies and their management

The General Environment: Segments and Elements

Industry

A group of firms producing a similar product or service, such as soft drinks or financial services.

Industry analysis

A tool that facilitates a company's understanding of its position relative to other companies that produce similar products or services.

Industry Analysis:
Industries differ widely in their economic features, competitive character, and profit outlook. Ex-1.The economic features and competitive character of the trucking industry bear little resemblance to those of discount retailing. 2.The fast-food business has little in common with the business of developing software for internet applications.

 Understanding the forces at work in the overall industry is an important component of effective strategic planning. Industry analysis enables small business owners to identify the threats and opportunities facing their businesses, and to focus their resources on developing unique capabilities tha could lead to a competitive advantage.

Industry Analysis
Industry analysis involves reviewing the

economic, political and market factors that influence the way the industry
develops. Major factors can include the power wielded by suppliers and buyers, the condition of competitors, and the likelihood of new market entrants.

7 questions to be questioned
1. What are the dominant economic features of the industry in which the company operates? 2. What kinds of competitive forces are industry members facing, and how strong is each force? 3. What forces are dividing changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?

4.Does the outlook for the industry present the company with sufficiently attractive prospects for profitability? 5.What are the key factors for future competitive success? 6.What strategic moves are rivals likely to make next? 7.What market positions do industry rivals occupy-who is strongly positioned

Industry analysis
An in-depth examination of key factors within a corporations task environment

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Industry's dominant economic features

What Factors Are Driving Industry Change and What Impacts Will They Have?

Industries change because forces are driving industry participants to alter their actions Driving forces are the major underlying causes of changing industry and competitive conditions Where do driving forces originate?
Outer ring of macro environment Inner ring of macro environment

Industry Driving Forces Increasing Globalization

Product Innovation Entry or Exit of major firms Emerging internet Capabilities and applications Reductions in uncertainty and business risk

Competitor analysis in marketing and strategic management an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats. Competitor profiling coalesces all of the relevant sources of competitor analysis into one framework in the support of efficient and effective strategy formulation, implementation, monitoring and adjustment

Competitor Analysis
Sizing up strategies and competitive strengths and weaknesses of rivals involves assessing
Which rival has the best strategy? Which rivals appear to have weak strategies? Which firms are poised to gain market share, and which ones seen destined to lose ground?

Which rivals are likely to rank among the industry leaders five years from now?
Do any up-and-coming rivals have strategies and the resources to overtake the current industry leader?

Study your customers

What are their main characteristics? Research the expectations of your customers. Learn what factors are most important to your customers (such as price, technology, easiness of use, etc). What can motivate them to purchase your product? A basic analysis of consumers is made to determine: what brands do they purchase, why they purchase them, what are they looking for, and how can they be described in enduring characteristics or psychographic variables? Research how representatives of your target audience decide to purchase a product Identify and categorize your targeted customers by their consumer budgets

Levels of Competition
Generic Competition
Form Competition

Industry Competition
Brand Competition

Levels of Competition (contd)

Generic competition Competition among products that are different, but solve the same problem the same benefit or utility , e.g audio cassettes and CDs,adhesive tape and glue-sticks, carpets and tiles Form competitione.g. Toyota against manufacturers of other vehicles that provide the same service such as Yamaha (motorcycle)

 Industry competitione.g. Honda against Mercedes, Lexus etc who make the same products or class of products (different prices) Brand competitione.g. Honda against Toyota, Nissan etc. who offer similar products and service to the same customers at similar prices

 Predicting rivals next moves involves

Analyzing their current competitive positions Examining public pronouncements about what it will take to be successful in industry Gathering information from grapevine(learn something by informal) about current activities and potential changes Studying past actions and leadership Determining who has flexibility to make major strategic changes and who is locked into pursuing same basic strategy

Steps to beat competition strategy

Predict what they will do.

Identify their strengths & weaknesses/relative capabilities

Identify their strategy

Identify what they want

Identify the competitors

Study your competitors:

Identify your direct and indirect competitors Decide what companies serve same markets or market segments with you. Identify CSF's (critical success factors) for your industry Perform analysis of your competitors according to most used methods Research their strengths and weaknesses, research how well do they focus on CSF'. Research what products (services, pricing, and promotion) your competitors offer to customers Identify the features that make your product different...

Key success factors / Critical Success Factor

Critical Success Factor Any of the aspects of a business that are identified as vital for successful targets to be reached and maintained. Critical success factors are normally identified in such areas as production processes, employee and organization skills, functions, techniques, and technologies. The identification and strengthening of such factors may be similar. .. Key success factors are those competitive factors that most affect industry members ability to prosper in the market place. Its a business term for an element which is necessary for an organization or project to achieve its mission. For example, a CSF for a successful Information Technology (IT) project is user involvement Strong and week competitor The particular strategy elements produce attribute, resource availability, competitive capabilities and market achievements that spell the difference between being a strong competitor and weak competitor.

Q. What key factors will determine success or failure?

Key success factors (KSF) are crucial elements that lead to success. What are they now? What will they be? Ex In beer production KSF can be brewing skills In retail apparel KSF can be low cost, superior service, superior design In your industry, KSF=????

Importance of Key success factors / Critical Success Factor:

KSFs are very important for companys future competitive success They are must factor without them industry can not achieve success It determines financial and competitive success It provides a right direction to grow

It Increases the Business Value

Improve product Management Increase Client Satisfaction Building Relationships with vendors and Customers

Example: KSFs for Beer Industry

Full 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 Apparel Manufacturing Industry

Appealing designs and color combinations to create buyer appeal

Low-cost manufacturing efficiency to keep selling prices competitive

Example: KSFs for Tin and Aluminum Can Industry

Locating plants close to end-use customers to keep costs of shipping empty cans low

Ability to market plant output within economical shipping distances

 A strategic group is a concept used in Strategic management that groups companies within an industry that have similar business models or similar combinations of strategies. For example, the restaurant industry can be divided into several strategic groups including fast-food and fine-dining based on variables such as preparation time, pricing, and presentation. The number of groups within an industry and their composition depends on the dimensions used to define the groups

Question : What Market Positions Do Rivals Occupy?

One technique to reveal different competitive positions of industry rivals is strategic group mapping

A strategic group is a cluster of firms in an industry with similar competitive approaches and market positions

History
Introduction Evolved from the 4-perspective model of Balanced scorecard. Strategy maps add a second layer of detail that illustrates the time-based dynamics of a strategy. Represents how an Organization creates value.

Strategic Group Mapping

Firms in same strategic group have two or more competitive characteristics in common
Have comparable product line breadth Sell in same price/quality range Emphasize same distribution channels Use same product attributes to appeal to similar types of buyers Use identical technological approaches Offer buyers similar services

Cover same geographic areas

Uses/Benefits
1. Helps any firm to make its position strong enough in an industry. This is the best way with the help of which a firm can stay back for a long time and can enjoy numerous benefits. 2. Firms easily identify about their rivals and then work accordingly in order to gain potential advantages and to be the one who can achieve high benefits.

3.An important area with the help of which firms can easily analyze where they actually need betterments and with the help of this firms do well and gain well. 4.Is a challenging task in which firms requires a clear and vivid analysis in order to gain effective outcomes.

Uses
5.Helps identify who the most direct competitors are and on what basis they compete. 6.Raises the question of how likely or possible it is for another organization to move from one strategic group to another. 7.Used to identify opportunities. 8.Can also help identify strategic problems

Example: Strategic Group Map of Selected Retail Chains

Questions to Think
What market positions do industry rivals occupy-who is strongly positioned and who is not? What strategic moves are rivals likely to make next? What are the key factors for future competitive success? Does the outlook for the industry present the company with sufficiently attractive prospects for profitability?