06 – External Environment AnalysisKarel Pernica | 30.03.2021

External environment is full of risks !!!

COMPANYInternal factors

MICRO

Environment

MACRO

Environment

Customers

Demographical

environment

Subcontractors

StakeholdersKey players

Competitors

Political

environment

Social

environment

Economic

environment

Technological

environment

Legislative

environment

Natural

conditions

External environment is full of opportunities !!!

External environment analysis

Czech Republic RussiaMeasure 2004 2010 2012 Evaluation 2004 2010 2012 EvaluationWEF (position) 40 36 39 Stable 70 63 67 StableCPI(position)

51 53 54 Worsening 90 154 133 ?

Country rating (Moody´s)

A1 A1 A1 Stable Baa3 Baa1 Baa1 Stable

Doing business index (position)

77 50 Improving 108 109 Stable

CLEAR index 30 (2005)

22 (2009)

Improving

GDP Growth 4,7 % 2,20% -1,00% Worsening 7,20% 4,30% 3,50% ImprovingTotal tax burden (%)

49,6% (2005)

48,80% 49,20% Stable60%

(2005)46,50% 54,10% ?

Inflation 2,83 % 1,50% 1,94% Improving 11,50% 6,90% 4,80% ImprovingUnemployment 8,3 % 7,30% 8,70% Stable 7,80% 7,50% 6% Improving

General analysis of Macro environment

PESTEL Analysis

Political factorsEconomic factor

Social factorsTechnological factors

Environmental factorsLegal factors

PESTEL Analysis Political factors

Economic factors

Social factors

Technological factors

Environmental factors

Legal factors

• decline of real incomes• rising energy prices• Central bank plan to devaluate/revaluate CZK

• taxes• the process of incorporation• state control of internet• military conflicts

• cultural factors• demographic factors• population aging, etc.

• use of Cloud• access to 4G - LTE

• the end of the world• natural disasters• environment protection rules

• intellectual property protection• law enforcement

PESTEL AnalysisPolitical factors

Economic factors

Social factors

Technological factors

Ecological factors

Legal factors

• Decline of real incomes (consumers seek for budget brands)• Rising energy prices• Central bank strategy to devaluate CZK (export support)

• State support in brand suits with Anheuser Busch company (Budweiser Budvar and BUD)• Potential privatization of the company

• The growth in popularity of flavoured beers with a low alcohol content• The growth in popularity of wine • Persistent beer patriotism is partly hampered by the temptation to experiment with new brands

• Innovations in new beer flavours• Innovations in new package materials and design• The use of cylindrical-conical tanks to reduce costs and speed up the production cycle

• The obligation to repurchase returnable bottles

• Zero tolerance of alcohol in the blood when driving a motor vehicle• Potential growth of excise and other taxes

From environment to industry analysisMajor corporate goal = create value for customer => create value for the organization

Major corporate goal

Create value for customers

Create value for the organization

=>=

Value for customers

Price the customer is willing to pay= > Costs incurred by

the firm

Price the customer is willing to pay - Costs incurred by

the firm ≠ Firm´s profit

=

Consumer surplus

Producer surplus(economic rent)

Price the customer is willing to pay - Costs incurred by

the firm

Firm´s profit

The value of the product to customers The intensity of competition The bargaining power of industry members

“If everyone can do it, it’s difficult to create and capture value from it.” or, alternatively

“In a perfectly competitive market, no firm realizes economic profits (rents).”

First Corollary to the Fundamental Principle

“Imitation is the sincerest form of flattery.”

“If some competitive positions are more favorable than others, we would expect firms to adopt those strategies.”

Second Corollary to the Fundamental Principle

“Change is the only constant.”

“Over time, economic profits (rents) tend to dissipate as markets evolve.”

The Fundamental Principle of Business Strategy

Q

P

S

D

Monopoly Rents(industrial organization view)

• Barriers to entry• Industry structure matters

S´P

AC1

Ricardian Rents(resource-based view)

AC2

MC1

MC2

The Fundamental Principle of Business StrategyPerspectives on economic rents

q1 q2

• Barriers to imitation• Firm structure matters

time

Revenue

Entrepreneurial or Schumpeterian rents(dynamic capabilities view)

• Markets are dynamic• Innovation matters

Emerging & growth stage

Maturestage Counterattack

& decline stage

Technology A Technology B Technology C

Economic rents are temporal Timing and adaptation is critical

The Fundamental Principle of Business StrategyPerspectives on economic rents

Analysing industry attractiveness

Micro-environment analysis

Type of industry Cyclical

Anti-cyclical

Neutral

Porter´s Five Forces Model

Competition within industry

Substitutes

Suppliers Buyers

New incumbents

Rivalry

Threat of newentrants

Threat of substitutes

Bargaining powerof buyers

Bargaining powerof suppliers

5F – Negotiation power of suppliers

Sources of negotiation power of suppliers

• Monopoly power on supply side

• High costs of switching to another supplier or the use of substitute products

• Supplier's ability to shorten the distribution channel to the end customer by

omitting intermediaries, i.e. forward vertical integration,

• Highly specialized product which cannot be easily substituted on the

market

5F – Negotiation power of buyers

Sources of negotiation power of buyers

• Monopoly power on demand side

• Limited number of buyers and a high level of their concentration

• Low switching costs to buy from other suppliers

• The ability of buyers to skip (bypass) suppliers and buy directly from primary

producers (backward vertical integration)

• High level of buyers´ awareness about other offers on the market

5F – Threat of substitutesThread of substitutes

• Are there substitutes for our products?

• What is the customer's sensitivity to price changes of our products / services,

i.e. What is the price elasticity of demand for our products?

• What are the switching costs for our customers when switching to other

producers?

Is a train substitute to air travel?What do we have to take into consideration when evaluating the level of threat?

5F – Threat of new entrants

Are there any entry / exit barriers in the industryAre there new competitorsWhat attracts new competitors to enter the industryHow to prevent new incumbents to enter the industry

Barriers to entry

Brand awareness

Capital requirements

High level of sunk costs

Economies of scale (low cost advantage)

Product differentiation

Access to distribution channels

Government policy (support of limitations)

Technological conditions

Expected retaliation

The higher the barriers to entry there are, the more attractive the industry is…

5F - Rivalry

What is the level of rivalry and what stands in behind

Number and size of companies in the industry

Available production capacities, size of demand and industry growth

Size of fixed costs

Low level of differentiation

High exit costs

The level of globalization in the industry

5F - Rivalry

Concentration within industry

Monopoly

Oligopoly

Monopolistic competition

Perfect competition

Percentage of variance in firms´ ROA explained by

Industry effects(%)

Firm effects(%)

Unexplained variance (%)

Schmalensee (1985) 19,6 0,6 79,9

Rumelt (1991) 4,0 44,2 44,8

McGahan and Porter (1997) 18,7 31,7 48,4

Hawawini at al. (2003) 8,1 35,8 52,0

Roquebert et al. (1996) 10,2 55,0 32,0

Misangyi at al. (2006) 7,6 43,8 n.a.

Challenging 5 Forces analysis

The level of demand for complementary productsThe level of offer of complimentary products

Competition within industry

Substitutes

Suppliers Buyers

New incumbents

Rivalry

Threat of newentrants

Threat of substitutes

Bargaining powerof buyers

Bargaining powerof suppliers

Complementaryproducts

+ we cannot just learn about the Status Quo – 6 Forces analysis is usedto understand (forecast) Industry profitability

5 Forces analysis - modification

Monopoly/Oligopoly Monopolistic / Perfect competition

Introduction Growth Maturity Decline

Rivalry

Competitive adv.

Barriers to entry

Power of buyers

Power of suppliers

Low

Innovation, differentiat.

Low

Weak

Weak

Growing

Differentiat., price

Low

Weak

Growing

High

Price

High

High

Growing

High

Price war

Low

High

Neutral

Mar

ket s

ize

/ Sal

es

Time

5 Forces analysis - modification

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FACULTY OF BUSINESS ADMINISTRATION, PRAGUE UNIVERSITY OF ECONOMICS AND BUSINESS 32

Faculty of Business AdministrationPrague University of Economicsand BusinessW. Churchill Sq. 4130 67 Prague 3, Czech Republic

How to get in touch with me?

Karel PernicaLecturer

karel.pernica@vse.cz

https://fba.vse.cz/