Structural Analysis


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P.E.S.T Analysis, Four characteristics of Industry Structure, Porter's Five Forces, Strategic Planning Analytical Categories

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Structural Analysis

  1. 1. BY: RONA DJOHANNA FONTANILLA ORTIZ DM 214 Strategic Planning MDM – 1st Semester 2013
  2. 2. Porter's Five Forces Model: Analyzing Industry Structure Central to Michael E. Porter's landmark works on Competitive Strategy (1980) and CompetitiveAdvantage (1985) are the framework of structural analysis and the definition of an industry. According to Porter, “industry structure has a strong influence in determining the competitive rules of the game as well as the strategies potentially available to the firm”.
  3. 3. By providing considerable freedom for firms to draw the boundaries, Porter ensures that firms which apparently view themselves as part of an industry are, in fact, more realistically parts of different industries.This paradox is visible in multi- product industries such as automobile industry wherein each product group, trucks, buses, cars, three-wheelers, two-wheelers and tractors could each be considered as an industry based on the fact that different customers use these different product groups. Porter’s paradox
  4. 4. Porter’s paradox Structural analysis is rooted in the industry whose definition itself is not rooted in any particular methodology.There would also be a possibility of defining the industry in terms of broad factor commonalities such as four-wheelers and two- wheelers. Strategy formulation is expected to be based on structural analysis based on multiple industry and market segments.
  5. 5. At another level, the distinction between a product and its service has blurred, and the symbiosis between a product and its applications has increased enormously.The application of structural analysis, therefore, seems imperfect whichever canvas is chosen to define the industry. There seems to be a case for redrawing the parameters of structural analysis and industry definition in the current era, which has been a resultant of over three decades of profound technological changes. Porter’s paradox Source:
  6. 6. P.E.S.T. Analysis is a scan of the external macro-environment in which an organization exists. It is a useful tool for understanding the political, economic, socio-cultural and technological environment that an organization operates in.
  7. 7. Industry Structure  A final dimension of industry that is important to the performance of new firm is industry structure. The structure of the industry refers to the nature of barriers to entry and competitive dynamics in the industry.
  8. 8.  Four characteristics of industry structure are particularly important to the performance of new firms in the industry Industry Structure Capital intensity Advertising intensity concentration Average size firm
  9. 9. Capital Intensity  Capital intensity measures the importance of capital as opposed to labor in the production process.
  10. 10. Advertising Intensity  Advertising is a mechanism through which companies develop the reputations that help them sell their products and services.
  11. 11. Concentration Intensity  Concentration is a measure of the market share that is held by the largest companies in an industry.
  12. 12. Average Firm Size  New firms perform better in industries in which the average size of firms is small. New firms tend to begin small as a way to minimize the risk of entrepreneurial miscalculation.That is, if entrepreneurs begin small, they have a lower downside loss if they are incorrect. In industries in which most firms are small, starting a new firm at a small scale does not create much of a disadvantage relative to the established firms in the industry.In contrast, in industries where the average firm size is large, starting small creates a number of disadvantages, such as the inability to purchase in volume and higher average manufacturing and distribution costs due to the absence of economies of scale.
  13. 13. P.E.S.T. Analysis POLITICAL FACTORS  These include government regulations such as employment laws, environmental regulations and tax policy. Other political factors are trade restrictions and political stability.  eg – tax policy, employment laws P-Noy signs law strengthening NEA
  14. 14. P.E.S.T. ANALYSIS ECONOMIC FACTORS  These affect the cost of capital and purchasing power of an organization. Economic factors include economic growth, interest rates, inflation and currency exchange rates. eg – economic growth, interest rates World Competitiveness Rank In a neighborhood of so-called "Asian tigers," the Philippines has quietly emerged as the region's newest economic darling. At 6.6 percent, the Filipino economy's current GDP growth rate is the second highest in Asia, behind only China's.
  15. 15. P.E.S.T. ANALYSIS SOCIAL FACTORS  These impact on the consumer’s need and the potential market size for an organization's goods and services. Social factors include population growth, age demographics and attitudes towards health. eg – health consciousness, population growth rate The country is being heralded as the new Asian success story, but only an elite few reap the rewards (JILLIAN KEENAN MAY 7 2013, 8:06 AM ET).
  16. 16. P.E.S.T. ANALYSIS TECHNOLOGICAL FACTORS  These influence barriers to entry, make or buy decisions and investment in innovation, such as automation, investment incentives and the rate of technological change.  eg – R & D activity, automation, technology incentives
  17. 17. Industry Structure (Porter’s 5 Forces) Porter's five forces of competitive position analysis was developed in 1979 by Michael E. Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organization. This theory is based on the concept that there are five forces which determine the competitive intensity and attractiveness of a market. Porter’s five forces helps to identify where power lies in a business situation.This is useful both in understanding the strength of an organization's current competitive position, and the strength of a position that an organization may look to.
  18. 18. the PORTER DIAGRAM Porter’s Five Forces of Competition Framework SUPPLIERS POTENTIAL ENTRANTS SUBSTITUTES BUYERS INDUSTRY RIVALRY Threat of new entrants Threat of substitutes
  19. 19. NEUTRALIZING THE FIVE FORCES FORCE METHOD FOR NEUTRALIZING Entry Erecting barriers (isolating mechanisms) Rivalry Compete on non-price dimensions Substitutes Improve attractiveness compared to substitutes Buyers Reduce buyer uniqueness Suppliers Reduce supplier uniqueness
  20. 20. Preparing for the Future : The Role of ScenarioAnalysis in Adapting to Industry Change Stages in undertaking multiple Scenario Analysis:  Identify major forces driving industry change  Predict possible impacts of each force on the industry environment  Identify interactions between different external forces  Among range of outcomes, identify 2-4 most likely/ most interesting scenarios: eg: configurations of changes and outcomes  Consider implications of each scenario for the company  Identify key signposts pointing toward the emergence of each scenario  Prepare contingency plan
  21. 21. Efficiency Relevance Effective ness Impact Sustaina bility Replicabili ty The Analytical Categories
  22. 22. Efficiency Analysis of Electric Cooperatives in the Philippines. Philippine Management Review 2011,Vol. 19, 1‐10. University of the Philippines, College of Business Administration, Diliman, Quezon City 1101, Philippines
  23. 23. The Analytical Categories  Efficiency With this is meant the amount of outputs created and their equality in relation to the resources (capital and human efforts) invested. The efficiency of electricity distribution in remote areas of the Philippines by 120 electric cooperatives (ECs) is examined using data envelopment analysis (DEA). Using data from 2001to 2006, the study finds that most ECs can reduce all their inputs proportionately by up to 18percent and still produce the same level of output. The study shows that efficiency of ECs rises with size. This result is robust with respect to how size is defined. Unsurprisingly, the levels of inefficiency are inversely related to system losses. The study also shows that structural and operational characteristics significantly affect EC efficiency. EC are likewise found to be inefficient in the non-technical component of their distribution costs vis‐à‐vis their line operations and maintenance costs (Valderrama, et al: 2011)
  24. 24. Efficiency This study has shown that a number of structural as well as operational factors significantly affect the efficiency of grid- connected ECs. These are sales ands customer density, customer structure, size,( as measured by sales volume and number of customers), systems loss and number of customers per employee. These are not totally surprising results. What they imply, however, is that ECs should in the Philippines resist external pressure (usually from local resist external pressure (usually from local politician) to expand in areas with low density so as not to sacrifice their efficiency even more. The study also identifies two initiatives ECs can undertake to improve their technical efficiency, reduce systems loss and personnel. The most efficient ECs had an average 303 customer per employee, while the least efficient ones had only 221 customers per employee.
  25. 25. The Analytical Categories Relevance The issue here is to what extent the program or project has addressed or is addressing problems of high priority, mainly as viewed by actual and potential stakeholders, particularly the program’s beneficiaries and any other people who might have been its beneficiaries.
  26. 26. The Analytical Categories  Effectiveness Effectiveness expresses to what extent the planned outputs, expected changes, intended effects (immediate and effect objectives) and intended impact (development objective) are being or have been produced or achieved.
  27. 27. The Analytical Categories  Impact Means the overall consequences of the program or project for the intended beneficiaries and any other people. The productivity of the EC as a whole seems to have stagnated during the post –EPIRA period. A possible reason for this is that demand in the last three years (2004-2006) have been flat (the compound annual growth rate is 1.1 % with 37 ECs experiencing negative growth) compared with the 21.7% sales growth rate the cooperative experienced during the period 2001-2003. As a reversal in demand growth trend is not foreseeable given the present economic conditions, efficiency in the sector have become more of an imperative than ever (Valderrama, et al: 2011).
  28. 28. Impact  Since the passage of the Electric Power Industry Reform Act (EPIRA) in 2001, the Philippines embarked on a comprehensive restructuring of its power industry. From a vertically integrated, extensively publicly owned utility business, the industry was envisioned to be broken down into its main components with a deregulated and effectively privatized generation and supply sectors. Despite the reform efforts through the EPIRA enactment however, power rates in the Philippines continue to be among the highest in Asia and remain a source of concern for industries in the country struggling to remain competitive with their regional counterparts (Valderrama, et al: 2011)
  29. 29. The Analytical Categories  Sustainability This means the maintenance or argumentation of positive achievements induced by the evaluated program or project (or any component of it) after the scheme (or any component of it) has been terminated.
  30. 30. The Analytical Categories  Replicability Replicability means the feasibility of repeating the particular program or project or parts of it in another context i.e. at a later time, in other areas, for other groups of people, by other organizations, etc.
  31. 31. TRIVIA: In putting up a business, the following factors should be considered. Stop! Don't Do It!  Don't start a business in a capital intensive industry.  Don't start a business in an advertising intensive industry.  Don't start a business in an industry in which the average sized firms are large.  Don't start a business in a concentrated market.
  32. 32. Questions to Ask Yourself  Is the industry that I am planning to enter a good one for starting a new company?  Are the knowledge conditions in the industry favorable to a start-up?  Are demand conditions in the industry favorable to a start-up?  Is the industry at the right stage of the life cycle for a start-up?  Is the industry structure favorable for a start- up?
  33. 33. Sources:  Helena Agnes S.Valderrama and Carlos C. Ba utista (2011) Efficiency Analysis of Electric Cooperatives in the Philippines. Philippine Management Review 2011,Vol. 19, 1‐10. University of the Philippines, College of Business Administration, Diliman, Quezon City 1101, Philippines  Edwin B.R. Gbargaye (2010) Lecture of Strategic Planning Analytical Categories. Sual, Pangasinan
  34. 34. Thank you for Listening