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Session 2Session 2
The External Environment:
Opportunities, Threats, IndustryCompetition, and Competitor Analysis
The External Environment:
Opportunities, Threats, IndustryCompetition, and Competitor Analysis
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Political/
Legal
Political/
Legal
EconomicEconomic
TechnologicalTechnological
GlobalGlobal
DemographicDemographicSocioculturalSociocultural
CompetitiveCompetitive
EnvironmentEnvironment
IndustryEnvironment
IndustryEnvironment
Components of the General EnvironmentComponents of the General Environment
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The purpose of SWOT Analysis
It is an easy-to-use tool for developing an
overview of a companys strategic situation
It forms a basis for matching your companys
strategy to its situation
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SWOT is the starting point
It provides an overview of the strategic
situation.
It provides the raw material to do more
extensive internal and external analysis.
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Opportunities
An OPPORTUNITY is a chance for firmgrowth or progress due to a favorable
juncture of circumstances in the businessenvironment.
Possible Opportunities:
Emerging customer needs Quality Improvements
Expanding global markets
Vertical Integration
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Threats
A THREAT is a factor in your companysexternal environment that poses a danger
to its well-being. Possible Threats:
New entry by competitors
Changing demographics/shifting demand Emergence of cheaper technologies
Regulatory requirements
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Opportunities and Threats form a
basis for EXTERNAL analysis
By examining opportunities, you can
discover untapped markets, and new products or technologies,
identify potential avenues for
diversification.
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By examining threats, you can
identify unfavorable market shifts
changes in technology, and
create a defensive posture aimed atpreserving your competitive position.
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Competitive Analysis
Who are your competitors?
Do you know about your close competitorsstrengths and weaknesses?
How detail should we analyze thecompetition?
Use a systematic approach
Analysis competition at various levels (next slide)
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Levels of Competition
Generic Competition
Form Competition
Industry Competition
Brand Competition
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Levels of Competition (contd)
Generic competitione.g. Honda against Silver Sea Cruisefor the same consumer dollars
Form competitione.g. Toyota against manufacturers ofother vehicles that provide the same service such asYamaha (motorcycle)
Industry competitione.g. Honda against Mercedes,Lexus etc who make the same products or class ofproducts (different prices)
Brand competitione.g. Honda against Toyota, Nissan etc.who offer similar products and service to the samecustomers at similar prices
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The purpose of
Five-Forces Analysis
The five forces are environmental forces
that impact on a companys ability tocompete in a given market.
The purpose of five-forces analysis is todiagnose the principal competitivepressures in a market and assess howstrong and important each one is.
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Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Threat of New Entrants
The competition in an industry will be the higher, the easier it is for other
companies to enter this industry. In such a situation, new entrants could
change major determinants of the market environment (e.g. marketshares, prices, customer loyalty) at any time. There is always a latent
pressure for reaction and adjustment for existing players in this industry.
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The threat of new entries will depend on the extent
to which there are barriers to entry. These are
typically
Economies of scale (minimum size requirements for
profitable operations),
High initial investments and fixed costs,
Cost advantages of existing players due to experiencecurve effects of operation with fully depreciated
assets,
Brand loyalty of customers
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Protected intellectual property like patents, licenses etc,
Scarcity of important resources, e.g. qualified expert staff
Access to raw materials is controlled by existing players,
Distribution channels are controlled by existing players,
Existing players have close customer relations, e.g. fromlong-term service contracts,
High switching costs for customers
Legislation and government action
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Threat of New EntrantsThreat of New Entrants
Barriers to
Entry
Barriers to
Entry
GovernmentPolicyGovernmentPolicy
Economies of ScaleEconomies of Scale
Product DifferentiationProduct Differentiation
Capital RequirementsCapital Requirements
Switching CostsSwitching Costs
Access to Distribution ChannelsAccess to Distribution Channels
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Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Bargaining Power of Suppliers
The term 'suppliers' comprises all sources for inputs that are
needed in order to provide goods or services.
Supplier bargaining power is likely to be high when:
The market is dominated by a few large suppliers rather thana fragmented source of supply,
There are no substitutes for the particular input,
The suppliers customers are fragmented, so their bargaining
power is low, The switching costs from one supplier to another are high,
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There is the possibility of the supplier integrating forwards in order to obtainhigher prices and margins. This threat is especially high when
The buying industry has a higher profitability than the supplying industry,
Forward integration provides economies of scale for the supplier,
The buying industry hinders the supplying industry in their development (e.g.reluctance to accept new releases of products),
The buying industry has low barriers to entry.
In such situations, the buying industry often faces a high pressure on margins fromtheir suppliers. The relationship to powerful suppliers can potentially reducestrategic options for the organization.
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Bargaining
Power of
Buyers
Bargaining
Power of
Buyers
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Bargaining Power of Customers
Similarly, the bargaining power of customers determines how much
customers can impose pressure on margins and volumes.
Customers bargaining power is likely to be high when:
They buy large volumes, there is a concentration of buyers,
The supplying industry comprises a large number of small operators
The supplying industry operates with high fixed costs,
The product is undifferentiated and can be replaces by substitutes,
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Switching to an alternative product is relatively simple and is not related
to high costs,
Customers have low margins and are price-sensitive,
Customers could produce the product themselves,
The product is not of strategic importance for the customer,
The customer knows about the production costs of the product
There is the possibility for the customer integrating backwards.
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Bargaining Power of BuyersBargaining Power of Buyers
Buyers compete
with the supplying
industry by:
Buyers compete
with the supplying
industry by:
* Bargaining down prices* Bargaining down prices
* Forcing higher quality* Forcing higher quality
* Playing firms off of* Playing firms off of
each othereach other
Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:
Buyers are concentrated orpurchasesBuyers are concentrated orpurchases
are large relative to sellers salesare large relative to sellers sales
Products are undifferentiatedProducts are undifferentiated
Buyers face few switchingcostsBuyers face few switchingcosts
Product unimportant toProduct unimportant toqualityquality
Buyer has fullBuyer has fullinformationinformation
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Threat of
Substitute
Products
Threat of
Substitute
Products
Threat ofNew
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Bargaining
Power of
Buyers
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Threat of Substitutes
A threat from substitutes exists if there are alternative
products with lower prices of better performance parameters
for the same purpose. They could potentially attract a
significant proportion of market volume and hence reduce the
potential sales volume for existing players. This category also
relates to complementary products.
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Similarly to the threat of new entrants, the threat of
substitutes is determined by factors like
Brand loyalty of customers,
Close customer relationships, Switching costs for customers,
The relative price for performance of substitutes,
Current trends.
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Threat of Substitute ProductsThreat of Substitute Products
Products
with similar
functionlimit the
prices firms
can charge
Products
with similar
functionlimit the
prices firms
can charge
Keys to evaluate substitute products:Keys to evaluate substitute products:
Products with improvingProducts with improving
price/performance tradeoffsprice/performance tradeoffs
relative to present industryrelative to present industryproductsproducts
Example:Example:
Electronic security systems inElectronic security systems inplace of security guardsplace of security guards
Fax machines in place ofFax machines in place of
overnight mail deliveryovernight mail delivery
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Threat of
Substitute
Products
Threat of
Substitute
Products
Threat of
New
Entrants
Threat of
New
Entrants
Threat of
New
Entrants
Rivalry Among
Competing Firms
in Industry
Rivalry Among
Competing Firms
in Industry
Bargaining
Power of
Buyers
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Bargaining
Power of
Suppliers
Porters Five Forces
Model of Competition
Porters Five Forces
Model of Competition
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Competitive Rivalry between Existing Players
This force describes the intensity of competition between existing players(companies) in an industry. High competitive pressure results in pressure onprices, margins, and hence, on profitability for every single company in theindustry.
Competition between existing players is likely to be high when:
There are many players of about the same size,
Players have similar strategies
There is not much differentiation between players and their products, hence,there is much price competition
Low market growth rates (growth of a particular company is possible only atthe expense of a competitor),
Barriers for exit are high (e.g. expensive and highly specialized equipment).
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Rivalry Among Existing CompetitorsRivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:
Usingprice competitionUsingprice competition
Staging advertising battlesStaging advertising battles
Making new product introductionsMaking new product introductions
Increasingconsumer warranties or serviceIncreasingconsumer warranties or service
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CutthroatCutthroat competitioncompetition is more likely to occur when:is more likely to occur when:
Rivalry Among Existing CompetitorsRivalry Among Existing Competitors
Numerous or equally balanced competitorsNumerous or equally balanced competitors
Slow growth industrySlow growth industry
High fixed costsHigh fixed costs
Lack of differentiation or switchingcostsLack of differentiation or switchingcosts
High storage costsHigh storage costs
Capacity added in large incrementsCapacity added in large increments
High strategic stakesHigh strategic stakes
High exit barriersHigh exit barriers
Diverse competitorsDiverse competitors
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The Five Forces are Unique to
Your Industry
Five-Forces Analysis is a framework for
analyzing a particular industry. Yet, the five forces affect all the other
businesses in that industry.
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Competitor AnalysisCompetitor Analysis
The followThe follow--up to Industry Analysis isup to Industry Analysis iseffective analysis of a firmseffective analysis of a firms CompetitorsCompetitors
CompetitiveCompetitive
EnvironmentEnvironment
Industry
Environment
Industry
Environment
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Competitor AnalysisCompetitor Analysis
AssumptionsAssumptions
What assumptions do ourcompetitors hold about the futureofindustry and themselves?
Current StrategyCurrent Strategy
Does ourcurrent strategy supportchanges in the competitiveenvironment?
Future ObjectivesFuture Objectives
How do ourgoals compare to ourcompetitorsgoals?
CapabilitiesCapabilities
How do ourcapabilities compare
to ourcompetitors?
ResponseResponse
What will ourcompetitors do in the
future?
What will ourcompetitors do in the
future?Where do we have acompetitiveadvantage?
Where do we have acompetitiveadvantage?
How will this changeour relationship withourcompetition?
How will this changeour relationship withourcompetition?
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Future ObjectivesFuture ObjectivesHow do our goals compare
to our competitors goals?
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
Where will emphasis be
placed in the future?
What is the attitudetoward risk?What is the attitudetoward risk?
What Drives the competitor?
Competitor AnalysisCompetitor Analysis
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What is the competitor doing?What can the competitor do?
Future ObjectivesFuture ObjectivesHow do our goals compare
to our competitors goals?
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
Where will emphasis be
placed in the future?
What is the attitudetoward risk?What is the attitudetoward risk?
Current StrategyCurrent Strategy
How are we currently
competing?
How are we currently
competing?
Does this strategy
support changes in the
competitive structure?
Does this strategy
support changes in the
competitive structure?
Competitor AnalysisCompetitor Analysis
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Future ObjectivesFuture ObjectivesHow do our goals compare
to our competitors goals?
How do our goals compare
to our competitors goals?
Where will emphasis be
placed in the future?
Where will emphasis be
placed in the future?
What is the attitudetoward risk?What is the attitudetoward risk?
Current StrategyCurrent Strategy
How are we currently
competing?
How are we currently
competing?
Does this strategy
support changes in the
competition structure?
Does this strategy
support changes in the
competition structure?
Do we assume the future
will be volatile?
Do we assume the future
will be volatile?
Are we operating under
a status quo?
Are we operating under
a status quo?
What assumptions do our
competitors hold about the
industry and themselves?
What assumptions do our
competitors hold about the
industry and themselves?
AssumptionsAssumptions
ResponseResponse
What will our competitors
do in the future?
What will our competitors
do in the future?
Where do we have a
competitive advantage?
Where do we have a
competitive advantage?
How will this change ourrelationship with our
competition?
How will this change ourrelationship with our
competition?
CapabilitiesCapabilities
What are my competitors
strengths and weaknesses?
What are my competitors
strengths and weaknesses?
How do our capabilities
compare to our
competitors?
How do our capabilities
compare to our
competitors?
Competitor AnalysisCompetitor Analysis
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PESTEL Analysis
In analyzing the macro-environment, it isimportant to identify the factors thatmight in turn affect a number of vitalvariables that are likely to influence theorganizations supply and demand levelsand its costs
The radical and ongoing changesoccurring in society create an uncertainenvironment and have an impact on the
function of the whole organization
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A number of checklists have beendeveloped as ways of cataloguing the vastnumber of possible issues that might affectan industry.
A PEST analysis is one of them that is
merely a framework that categorizesenvironmental influences as political,economic, social and technological forces.S
ometimes two additional factors,environmental and legal, will be added tomake a PESTEL analysis,
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The analysis examines the impact of each
of these factors (and their interplay witheach other) on the business.
T
he results can then be used to takeadvantage of opportunities and to makecontingency plans for threats whenpreparing business and strategic plans
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Kotler (1998) claims that PESTEL analysisis a useful strategic tool for understanding
market growth or decline,
business position,
potential and direction for operations.
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The headings of PEST are a framework forreviewing a situation, and can in additionto SWOT and Porters Five Forces models,be applied by companies to review astrategic directions, including marketingproposition.
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Main Aspects of PEST Analysis
Political:
elections,
inter-countryrelationships/attitudes,
war,
terrorism,
politicaltrends,
governmentalleadership,
taxes,and
governmentstructures.
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Economic:
economic growth trends (various countries),
taxation, government spending levels,,
job growth/unemployment,
exchange rates,
tariffs,
inflation,
consumer confidence index, import/export ratios, and
production levels.
Social:
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Social:
demographics (age, gender, race, family size,
etc.), lifestyle changes, population shifts, education,
trends, diversity, immigration/emigration, health, living standards, housing trends,
fashion, attitudes to work, leisure activities, earning capacity.
T h l i l
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Technological:
inventions, new discoveries,
research,
energy uses/sources/fuels,
communications,
rates of obsolescence, health (pharmaceutical, equipment, etc.),
manufacturing advances, information
technology, internet, transportation, bio-tech, genetics, agri-tech, wasteremoval/recycling, and so on.
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Ethical
Sociocultural beliefs
Introvertness/orthodox percetions
emotional /physical harm to society
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How to Write a Good PEST Analysis
InwritingagoodPESTEL,subjectshouldbea
cleardefinitionofthemarketbeingaddressed,whichmightincludethefollowingissuesof:
acompanylookingatitsmarket
aproductlookingatitsmarket abrand inrelationtoitsmarket alocalbusinessunit astrategicoption,suchasenteringanewmarket orlaunchinganewproduct apotentialacquisition apotentialpartnership aninvestmentopportunity
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Finding Information for PESTEL Analysis
AnyreliablesecondarydatasourceofcurrenteventsandprojectedfuturetrendswillprovideinformationforthePESTELanalysis,including:
Newspapers,periodicals,currentbooks Tradeorganizations Governmentagencies Industryanalysts Financialanalysts
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PEST analysis is also known as:
STEP,
PESTEL,
PESTLE, PESTE,
PESTLIED,
SLEPT,
STEEPLE,
STEEPLED,
LE PEST and
LEPEST analysis
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Presentation Schedule
Resume your groups of first assignment and
prepare a presentation on Porters Five forces
on any industry of your choice.
Right now give me names of group members
and Industry title.