External Analysis in Strategic Management.

1. EXTERNAL ANALYSIS
The General Environment
The Competitive Environment

2. EXTERNAL ANALYSIS
• Clear Idea of the Industry
• Industry & Sector
• Industry & Market Segment
• Changing Industry Boundaries
• Strategic Groups within industries
• Industry Life cycle analysis

3. Defining the Industry
• An industry is a group of companies offering
products & services that are close substitutes
for each other – that is products or services
that satisfy the same customer needs
• A company’s closest competitors or its rivals
are those that satisfy the same customer
needs
• Examples Personal Computer industry,

4. Industry & Sector
• Sector – a gp. of closely related industries of
which it is a part.
• E.G Telecommunication sector has two
industries – Telecommunication equipment
industry & Telecommunication service
industry

5. Changing Industry Boundaries
• This seems to be a very thin line between
industries
• How Technological Change has altered the
industry boundaries – Telecommunication and
computer industries

6. Strategic Group Within Industries
• Companies within an Industry can differ on
various lines such as distribution channels,
market segments, quality, technology, leadership,
customer service & pricing etc & as such they
may be having different positioning strategies.
Such companies may formulate themselves into
groups and each group having a different
strategy. Each such group within an industry is
refereed to as a strategic group E. G in Pharama
we may have Generic and Proprietary Groups.

7. Implications of Strategic Group
• Companies closest competitors are those within the
same strategic group i.e companies within a strategic
group are direct substitutes for each other. E. G in the
retail industry there may be group of discounters who
are competing with each other
• Each Strategic Group within an industry may be having
a different sets of opportunities or threats (Porters five
forces and the degree of complimentarily will vary
from one strategic group to another E. G
Pharmaceuticals (Generic & Proprietary

8. Role of Mobility Barriers
• Some strategic groups within an industry are
more desirable than others, that is there may
be more opportunities or less threats in a
strategic group resulting in more profits and
weak competitive forces (porters). In such
situation companies from one strategic group
may try to alter their positioning approach &
move to compete in the strategic group.

9. Role of Mobility Barriers
• Taking advantage of this opportunity may be
difficult because of the mobility barriers
between strategic groups.
• These include barriers to entry or exit
• For example A company in a generic strategic
group will encounter mobility barriers if it tries
to enter a proprietary group as it will lack R &
D skills and building these skills will be an
expensive proposition

10. Industry Life Cycle Analysis
• External factors (opportunities & Threats) will
have a varied impact on an industry
depending upon at what stage of the life cycle
industry is.
• The similarities & differences between
companies in an industry often become more
pronounced overtime.
• The strategic group structure may also change
as the industry evolves

11. Industry Life Cycle Five Stages
• Embryonic
• Growth
• Shakeout
• Mature
• Decline

12. Industry Life Cycle

13. Embryonic Industries
• Growth is slow
• Buyers are unfamiliar
• Distribution channels are poorly developed
• Prices may be high
• Products poorly designed
• Innovators have a great opportunity to master
the art and be the leaders.

14. Growth Industries
• Demand of the product takes off/New
Customers
• Distribution channels improve
• Prices change
• New Rivals can be absorbed

15. Industry Shakeout
• Demand reaches saturation levels
• Few potential new buyers
• Rivalry becomes intense as growth can only be
achieved through replacement
• Price war
• Competition for market share
• Variation between growth in demand and
capacity

16. Mature Industries
• Market is totally saturated
• Brand loyalty
• Entry of potential competitors is diminished &
the prices and profits can increase
• Consolidation
• Price leadership agreement / but this can
break and price war can start again

17. Declining Industries
• Technological substitution
• Social changes
• International competition
• Falling demand leads to emergence of excess
capacity

18. Industry Environment
• External Environment
• Internal Environment

19. External Environment
• Competitive Environment
• General Environment

20. Competitive Environment
• Identification of the competitive forces that
have a bearing on industries opportunities &
Threats
• Michael E Porters Five forces model identifies
five forces that shape competition within an
industry

21. Porter’s Five Forces Model
• Risk of Entry of Potential Competitors
• Intensity of Rivalry among established firms
• Bargaining power of buyers
• Bargaining power of suppliers
• Threat of Substitutes
Sixth Force is Complementors

22. Porters Five Force Model

23. 1. Risk of Entry of Potential
Competitors
• It is in part a function of the height of Barriers
to Entry which can be made stronger through
1. Brand Loyalty
2. Absolute Cost Advantage
3. Economies of Scale
4. Customer Switching Costs
5. Government Regulations

24. Brand Loyalty can be achieved through
• Continuous advertising
• Patent Protections
• Continuous Innovation
• High Product quality
• After sale service

25. Absolute Cost Advantage can arise
from
• Superior production operations/processes
• Control of Particular Inputs
• Access to Cheaper Funds

26. Economies of Scale can be achieved
through
• Cost reduction through Mass Production
• Discounts on Bulk purchases of Raw material
• Spreading Fixed Production costs over a large
production volume
• Spreading marketing & promotion costs over
large production volume

27. Customer Switching Costs
• Time
• Energy
• Money

28. Government Regulations
• When government regulations are high it is
difficult for new entrants to enter into the
industry/market

29. 2. Rivalry Among Established
Companies
• Intense rivalry constitutes a strong threat to
profitability & it is a function of
1. Industry Competitive Structure
2. Demand Conditions
3. Exit Barriers

30. Industry Competitive Structure
• Fragmented Industry
• Consolidated Industry

31. Industry Demand
• Growing Demand
• Declining Demand

32. Exit Barriers
• When exit barriers are high companies
become locked in an industry & a static or
declining demand will mean excess capacity
resulting in declining price wars

33. Exit Barriers include
• Investment in assets
• High Fixed cost of exit
• Emotional attachment to an industry
• Economic Dependence on an industry

34. 3. Bargaining power of Buyers
• More Suppliers Few Buyers
• Buyers Purchase in Large quantities
• Switching costs for the buyers are low
• Buyers can threaten to enter into the market

35. 4. Bargaining Power of Suppliers
• Powerful suppliers are a threat & suppliers can be
powerful when
1. Few substitutes for the product suppliers supply
2. When industry is not an important customer to
the suppliers
3. Large switching costs
4. Suppliers threaten to enter into the industry
themselves
5. Companies in an industry can not enter into the
suppliers market

36. 5. Threat of Substitutes
• If the substitutes are high threat to the
existing profits is more, and one can not raise
prices enormously
• If the substitutes are few or non existent
companies can charge higher prices

37. Sixth Force Complementors
• More complementors in an industry can boost
the demand and create more opportunities

38. General Environment/ Macro
Environment
• PEST Analysis
• Any change in any of the above mentioned
factors will have a direct impact on Porters 5
forces and this can alter the equation
positively or Negatively