Unit - 3_Strategic Management (18MBA25)_ External Analysis

External Environment
Analysis
Macro and Micro Factors
MBA Programme – BIET, DavangereProf. Vijay K S
Unit - 3

Strategic Management
18MBA25
As Per the VTU Syllabus
Unit - 3

Analyzing
Company’s
External
Environment
Macro Environment
Economic Conditions
Legal/Regulatory
Factors
Immediate Industry and Competitive Environment
Company
Substitute
Products
Buyers
New
Entrants
Rival
Firms
Suppliers

Analyzing
Company’s
External
Environment
• Macro Environment:
• Economic Forces
• That regulates the exchange of materials, money, energy and information
• Technological Forces
• That generate problem-solving intentions
• Political & Legal Forces
• Power, Laws and Regulations
• Socio-cultural Forces
• That regulates the values, traditions and Customs

Analyzing Company’s External Environment
• Economic Forces
• GDP Trends
• Interest Rates
• Money Supply
• Inflation Rates
• Unemployment Levels
• Wage/Price Controls
• Energy Availability & Cost
• Disposable & Discretionary
Income

• Technological Forces
• Total government spending for R&D
• Total industry spending for R&D
• Focus of technological efforts
• Patent protection
• New products
• New developments in technology transfer
from lab to marketplace
• Productivity improvements through
automation

• Political and Legal Forces
• Antitrust regulations
• Environmental protection laws
• Tax laws
• Special incentives
• Foreign trade regulations
• Attitudes toward foreign companies
• Laws on hiring and promotion
• Stability of government

• Socio-cultural Variable
• Lifestyle Changes
• Career Expectations
• Regional Shifts in Population
• Life Expectancies
• More women in workforce
• Greater concern for fitness
• Postponement of family formation
• Increase in temporary workers

Is it Possible / Viable to consider all the
Macro economic factors / components
for Strategy …..
Why are some companies better able
to adopt than others?

Successful Companies Consider…..
Strategically relevant components of
a Company’s External Environment

• Difference in the ability of managers
• Choice of factors
• Difference in considering Important or not
• Ignorance on new development
• Personal and functional experiences
• Success of current strategies may likely bias
their perception
Companies who
fail to
understand
the Strategically
relevant
components

The willingness reject unfamiliar as well
as negative information is called
Strategic Myopia

Strategic myopia is a condition in which the management of a business can see clearly
those things that are to take place in the short term, but have only a fuzzy view of what
their future might be over the longer term.

Strategically
relevant
components of
a Company’s
External
Environment
High
Priority
High
Priority
Medium
Priority
High
Priority
Medium
Priority
Low
Priority
Medium
Priority
Low
Priority
Low
Priority
Issue Priority Matrix
High Medium Low
High
Medium
Low
Probable Impact on Corporation
ProbabilityofOccurrence
The High priority ones are the strategic factors and they are the strategically relevant
components MBA Programme – BIET, DavangereProf. Vijay K S

Industry
Analysis
Competitive
Environment
Analysis
- Porter’s Five
Forces Model
Industry
Competition
Threat of
new
entrant
Bargaining
Power of
Buyers
Threat of
Substitutes
Bargaining
Power of
suppliers

Industry
Competition
Rivalry among
existing firms
Threat of
new
entrant
Bargaining
Power of
Buyers
Threat of
Substitutes
Bargaining
Power of
suppliers
An abstraction that makes it
difficult for a company to
enter an industry
The extent to which corporations
are mutually dependent
By satisfying the same needs
as another products
Ability to force down prices,
Bargain for higher quality and
Play a higher competition
Ability to rise prices or reduce
the quality of purchased goods
And services
Industry
Analysis
Competitive
Environment
Analysis
- Porter’s Five
Forces Model
Prof. Vijay K S MBA Programme – BIET, Davangere

1. Threat of New Entrants
 Economies of scale
 Product differentiation
 Capital requirement
 Switching costs
 Access to distribution channels
 Cost disadvantages independent if size
 Government policy
Industry
Analysis
Competitive
Environment
Analysis
- Porter’s Five
Forces Model

2. Rivalry Among Existing Firms
 Number of competitors
 Rate of Industry Growth
 Produce or Service Characteristics
 Amount of Fixed Costs
 Capacity
 Height of Exit Barriers
 Diversity of Rivals
Industry
Analysis
Competitive
Environment
Analysis
- Porter’s Five
Forces Model

3. Threat of substitutes
 Switching cost
 Prices
 Alternate Uses
 Access
Industry
Analysis
Competitive
Environment
Analysis
- Porter’s Five
Forces Model

4. Bargaining Power of Buyers
 Number of buyer companies
 Uniqueness of product
 Availability of substitutes
 Threat of backward integration
 Purchasing Industries purchase behavior
Industry
Analysis
Competitive
Environment
Analysis
- Porter’s Five
Forces Model

5. Bargaining Power of Suppliers
 Number of Supplier companies
 Uniqueness of supplied product
 Availability of substitutes
 Threat of forward integration
 Purchasing Industries purchase behavior
Industry
Analysis
Competitive
Environment
Analysis
- Porter’s Five
Forces Model

What you can do after conducting the
Porter’s Five Force Analysis?
Position
Exploit
Reshape
- Porter’s Five
Forces Model
In Practice

If Intel wants to analyze – Industry’s dominant economic features
What factors,
it has to analyse ?

8000 Crores USD Market
AMD and Intel
AMD and Intel Competing Across the globe
Buyers - PC
manufacturers
Intel faces stiffer competition from 'resurgent'
Nvidia, AMD, BofA says
https://www.cnbc.com/2017/06/21
AMD is coming-up
With innovative Products
Technological
Change
Learning Experience
Curve

Industry
Analysis
Competitive
Environment
Analysis
- Dominant
Economic
features
• Market Size and growth rate
• Number of rivals
• Scope of Competitive rivals
• Number of buyers
• Degree of product differentiation
• Product innovation
• Supply / Demand Condition
• Pace of technology changes
• Vertical integration
• Economies of Scale
• Learning / Experience curve effect

Market Size and growth rate
Number of rivalsScope of Competitive rivals
Number of buyers Degree of product differentiation
Product innovation Supply / Demand Condition
Pace of technology changes
Vertical integration
Economies of Scale Learning / Experience curve effect

1. Market Size and growth rate
- Dominant Economic features
 FMCG sector in India-market size of around. US$ 29.4 billion in 2016-17
 Expected Growth Rate – 12-14%
 How big the industry and how fast is it growing?
 What does the industries position in the life cycle? – Reveals the Industry’s growth prospects.
India 2020: 5 Sectors Driving The Country's Growth
https://www.forbes.com/sites/oppenheimerfunds/2017/05/31/india-2020-5-sectors-driving-the-countrys-
growth/#32c980b02fae

2. Number of Rivals
 There are only two rivals in PC Processor market – Intel and AMD
 Is the industry fragmented into many small companies or concentrated and dominated by a few large
companies
 Is the industry going through a period of consolidation to a smaller number of competitors
Telecom enters final phase of consolidation as RCom exits
-Once the RCom asset sale is completed, Aircel will be the sole remaining small telecom firm in India amid giants Reliance Jio,
Airtel and the Vodafone-Idea combine

3. Scope of Competitive Rivals
 Scope available to expand
 Geographical - companies compete local, regional, national, multinational or Global?
 Relevance of foreign country presence

4. Number of Buyers
 The buyers of FMCG products are fragmented and it is difficult to have
consolidation
 Is market demand fragmented among many buyers
 Do some buyers gave bargaining power because they purchase in large volume?

5. Degree of Product Differentiation
 Apple, Nike and Puma enjoys the product differentiation
 Are the products of rivals becoming more differentiated or less differentiated?
 Are increasingly look-alike products of rivals causing heightened price competition?

6. Product Innovation.
 Is Industry characterised by Rapid Innovation and Short product life cycle?
 How important is the R & D and Product Innovation?

7. Supply or Demand Conditions
 Is a surplus of capacity pushing prices and profit margins down?
 Is the industry overcrowded with too many competitors?
 Are short supplies creating a sellers’ market?

8. Pace of Technological Change
 Role of advancing technology ?
 Change in the facility/equipment essential to meet the requirement of advanced production process
 Do most industry members have or need strong technological capabilities

9. Vertical Integration
 Do most competitors operate in only one step or in this industry or do some competitors operate in
multiple stages?
 Pros and Cons of Integration

10. Economies of Scale
 Is the industry characterised by economies of scale?
 Cost advantages of large scale companies over the small size companies?

11. Learning / Experience Curve Effect
 Are certain industry activities characterized by strong learning / experience curve effects
 Cost advantages due to learning / Experience curve effect

- Industry Driving Forces

Industry
Analysis
Competitive
Environment
Analysis
- Industry
Driving Forces
 Emerging new internet capabilities and Application
 Increasing globalization
 Changes in long-term industry growth rate
 Changes in who buys the product & how they use it
 Product innovation
 Technological change/Manufacturing process innovation
 Marketing innovation

Industry
Analysis
Competitive
Environment
Analysis
- Industry
Driving Forces
 Entry or exit of major firms
 Diffusion of technical knowledge
 Change in cost and efficiency
 Growing Buyer preference for differentiated products
 Reduction in uncertainty and Business risk
 Regulatory influence and Government policy changes
 Change in societal concerns, attitude and life style

- Who is the competitor for

- Key Success Factors
Factors which affect Industry members’ ability to prosper in the market place

- Key Success Factors
Determines strong competitors and weak competitors
Strategy elements
Product Attributes
Resources
Competencies
Competitive capabilities
Market Achievements
How well a company’s product offering, resources, and capabilities
measure up against an industry’s KSFs?

- Key Success Factors Full Utilization of
Production
CapabilitiesExample - FMCG
Strong
Distribution
Channel
Clever Marketing
Product
Innovation Attractive
packages

Key Success Factors– Three basic questions need to be asked
On what basis do buyers of the Industry’s product choose between the
competing brands of seller? AMD V/S Intel
What resources and competitive capabilities does a company need to
have to be competitively successful? Technology, Human, Product,
Marketing …..
What shortcomings are almost certain to put company at a significance
competitive disadvantage Wastage in F&V retail, NPA in Banking

Industry
Analysis
Competitive
Environment
Analysis
- Key Success
Factors
 Technology related KSFs
 Manufacturing related KSFs
 Distribution related KSFs
 Marketing related KSFs
 Skills and Capability related KSFs
 Other types of KSFs

Industry
Analysis
Competitive
Environment
Analysis
- Key Success
Factors
 Technology related KSFs
 Technology expertise or Scientific research
Example – Pharmaceuticals, Internet applications,
Mobile communication
 Improve production processes
Manufacturing efficiency and lowering production
cost

Industry
Analysis
Competitive
Environment
Analysis
- Key Success
Factors
 Manufacturing related KSFs
 Achieve scale of economies
 Quality control know how's?
 High utilization of fixed assets
 Access to attractive skilled labors
 High labor productivity
 Low cost production design
 customized to buyer specification

Industry
Analysis
Competitive
Environment
Analysis
- Key Success
Factors
 Distribution related KSFs
 A strong network of wholesale distributors /
dealers
 Strong direct sales via internet
 Company owned retail shops
 Ability to secure favorable display space on
retailer shelves

Industry
Analysis
Competitive
Environment
Analysis
- Key Success
Factors
 Marketing related KSFs
 Breadth of product line and product selection
 Well-respected brand name
 Fast, accurate technical assistance
 Courteous, personalized customer service
 Accurate filling of buyer orders
 Clever advertising

Industry
Analysis
Competitive
Environment
Analysis
- Key Success
Factors
 Skills and Capability related KSFs
 A talented workforce
 National or global distribution capabilities
 Product innovation capabilities
 Design expertise
 Short delivery time capability
 Supply chain management capabilities
 Strong e-commerce capabilities

Industry
Analysis
Competitive
Environment
Analysis
- Key Success
Factors
 Other types of KSFs
 Overall low costs – Which leads to low cost
 Convenient locations
 Ability to provide fast, convenient after-the-sale
repairs and service
 A strong balance sheet and access to financial
capital
 Patent protection

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Unit - 3_Strategic Management (18MBA25)_ External Analysis