Module – 3

Strategic Management
Ms. Archana Vijay
Topics to be covered :
Analyzing a Company’s External Environment, The Strategically Relevant Components of a
Company’s External Environment
Industry Analysis, Porter’s dominant economic features, Competitive Environment Analysis
Porter’s five forces model, Industry diving forces, Key Success Factors, concept and
implementation

Analyzing a Company’s External Environment

Strategic Analysis is concerned with understanding the relationship between the forces of
change and their impact on the choice of strategies by the organization. The benefits of an
environmental study are as follows :
 Development of broad strategies and long term policies of the firm..
 Development of action plans to deal with technological advancements.
 To foresee the impact of socio-economic changes at the national and international
levels on the firm’s stability..
 Analysis of competitor’s strategies and formulation of effective counter measures to
keep oneself dynamic.

Components of a Business Environment

The environment in which an organization exists can be broadly divided into two parts : the
external and the internal environment.
General Economic Conditions
Demographics
Global Forces
The Natural Environment
Social Forces
Political / Regulatory / Legal factors
Technological Factors

Component Description
Demographics Demographics includes the size, growth rate and age distribution
of different sectors of the population. It includes the geographic
distribution of the population, the distribution of income across the
population and trends in these factors. Population demographics
can have large implications for industries such as health care,
where costs and service needs vary with demographic factors such
as age and income distribution.
Social Forces Includes the societal values, attitudes, cultural factors, and
lifestyles that impact businesses. Social forces vary by locale and
change over time. Example is the trend towards healthier lifestyles,
which can shift spending towards exercise equipment and health
clubs and away from alcohol and junk foods.
Political, legal and regulatory factors Include political policies and processes, as well as the regulations
and laws with which companies must comply. Examples include
labour laws, antitrust laws, tax policy, regulatory policy, the
 political climate and the strength of institutions such as the court
system.
Natural environment This includes ecological and environmental forces such as weather,
climate, climate change and associated factors like water
shortages. These factors can directly impact industries such as
insurance, farming, energy production and tourism.
Technological factors Include the pace of technological change and technical
developments that have the potential for wide-ranging effects on
society, such as genetic engineering, the rise of the internet and
changes in communication technologies. Technological change can
encourage the birth of new industries, such as those based on
nanotechnology and disrupt others, such as the recording industry.
Global forces Include conditions and changes in global markets, including
political events and policies toward international trade. They also
include sociocultural practices and the institutional environment in
which global markets operate. Global forces influence the degree
of international trade and investment through such mechanisms as
trade barriers, tariffs, import restrictions and trade sanctions. Eg.
Import restrictions on steel.
General economic conditions Include economic factors at the local, state, national or
international level that affect firms and industries. These include
the rate of economic growth, unemployment rates , inflation rates,
interest rates, trade deficits or surpluses, saving rates and per capita
domestic product. Some industries, such as construction, are
particularly vulnerable to economic downturns but are positively
affected by factors such as low interest rates.

Industry Analysis
Effective Industry analyses are very important due to globalization, international markets and
rivalry must be included in the company’s analyses; in fact, research shows international
variables may have more impact on strategic competitiveness than domestic ones. An industry is
a group of companies producing products that are close substitutes of each other. In order to have
a better understanding of the external environment, analyzing the industry in detail is critical. In
conducting an industry analysis manager need to analyse seven aspects carefully :
1. General features and basic conditions of the industry : General features / basic
conditions of the industry include factors such as the current size of the industry, product
categories / sub categories, their relative volumes, the performance of the industry in
recent years.

2. Industry environment : Industries can be classified based on their settings /

environment. Porter classified industries as fragmented, and global industries. Based on
their stage in the Industry life cycle, it is classified as emerging, growing, matured and
declining industries.

3. Industry structure : Industry structure essentially means the underlying fundamental

economic and technical forces of an industry. Each company will have its own key
structural features such as number of players, market size, the relative shares of the
player, nature of the competition, differentiation practiced by the various players in the
 industry, the cost structure of the players etc. These features determine the strength of
competitive forces operating in the industry and thereby serve as direct indicators to the
attractiveness and profitability of the industry.

4. Industry attractiveness : The various determinants of industry attractiveness are

industry potential, industry growth, industry profitability, future pattern of the industry
barriers and forces shaping the competition in the industry.

5. Industry performance : Industry performance entails looking at production, sales,

profitability and technological development.

6. Industry practices : Refer to what a majority of the players do in the industry with
respect to essential aspects of the business such as distribution, pricing, promotion,
methods of selling service field support, R&D and legal tactics.

7. Emerging trends and likely future : The emerging trends / likely future pattern of the
industry can be discerned by analyzing issues such as the product life cycle, stage of the
industry, rate of growth, changes of buyer needs, innovation in product/process, entry and
exit of firms and emerging changes in the regulatory environment governing the industry.

The automobile industry in India is expected to be the world's third largest by 2016, with the
country currently being the world's second largest two-wheeler manufacturer. Two-wheeler
production is projected to rise from 18.5 million in FY15 to 34 million by FY20. Furthermore,
passenger vehicle production is expected to increase to 10 million in FY20 from 3.2 million in
FY15.
Automobile exports grew at a CAGR of 14.65 per cent during 2010-15. Passenger Vehicles,
Commercial Vehicles, Three Wheelers and Two Wheelers grew by 6.89 per cent, 13.77 per cent,
18.69 per cent and 16.60 per cent CAGR during 2010-15. Two wheelers accounted for the largest
share of exports at 69.4 per cent in FY15. Passenger vehicles comprised a sizeable 16.7 per cent
of overall exports. Exports of three wheeler vehicles registered around 11.1 per cent share in
exports in FY15.
The government aims to develop India as a global manufacturing as well as a research and
development (R&D) hub. It has set up National Automotive Testing and R&D Infrastructure
Project (NATRiP) centres as well as a National Automotive Board to act as facilitator between
the government and the industry.
Alternative fuel has the potential to provide for the country's energy demand in the auto sector as
the CNG distribution network in India is expected to rise to 250 cities in 2018 from 125 cities in
2014. Also, the luxury car market could register high growth and is expected to reach 150,000
units by 2020.
Major players are Maruti, Hyundai, Volkswagen, Mercedes, GM, Toyota, Honda etc.
Maruti being the market leader in India and Toyota in the world market.

Porter’s Dominant Economic Features

Identification of dominant economic features is very important because the company could
understand about competitive environment. Some of the dominant economic features :
1. Market size and Growth rate : Market size indicates the number of firms in the
industry. It is also important to know whether the industry is growing or declining. It
depends upon the position of an industry in the business life cycle.
 2. Number of rivals : The organization should be aware of small rivals or dominated by a
few large firms. Similarly, they should also know about the various developments in the
industry such as merger and acquisitions etc.
3. Scope of competitive rivalry : Scope of competitive rivalry is an important factor for the
organization to know the level of competition. Industry members must know about the
nature of future competition.
4. Buyer need and requirement : Industry members must take into consideration the need
and taste of buyers as well as the middlemen. Basically, organization has to do a lot of
periodic research in order to know the major shifts in buyer needs requirements, and its
effect on consumer behavior.
5. Degree of Product Differentiation : If all the products of industry are not fully
differentiated, then it will increase competition among the members of the industry. In
such case price of the products will be low and the new entrants will find it difficult to
compete with the existing firms.
6. Technological change : If the industry is characterized by rapid pace of technological
change, then the art of the state technology is imperative for the success of organization;
for example, industry of mobile phones requires rapid changes in the technology in order
to meet the changing consumer demands.
7. Vertical Integration : It is important to know whether the competitors in the industry are
partially or fully integrated, similarly the competitive advantages and disadvantages of
fully, partially and non integrated firms should be taken into consideration. Vertical
integration can cause the potential cost of production differences.
8. Economies of Scale : The organization must also know about the different economies of
scale in purchasing, manufacturing, transportation and other activities. They should
analyse whether the companies with higher scale operations has any cost advantage or
not. Any reduction in the cost of production leads to higher competitiveness which
ultimately results higher profits.
9. Product Innovation : If the industry is characterized by rapid product innovation and
short product lifecycle then the research and development is very important for the
success of an organization. In such cases, members of the industry must come up with
new products to compete effectively.

Competitive Environment Analysis

An industry analysis provides information regarding potential sources of competition. However, a
structured competitor analysis enables a company to focus its attention on those companies with
which it will directly compete and is especially important when a company faces a few powerful
competitors. Competitor analysis is ultimately interested in developing a profile on how
competitors might be expected to react in response to a company’s strategic moves.
Through the competitor analysis, we can understand the :
1. What are the major competitor’s strengths?
2. What are the major competitor’s weaknesses?
3. What are the major competitor’s objectives and strategies?
4. How will the major competitors most likely respond to current economic, social, cultural,
demographic, geographical, political, technological trends affecting our industry?

Competitor Analysis Components

Strategy
Objectives (How are we currently
(what are the competing?)
objectives of
competitors)
 Competitor Response
(what will our competitors
do in the future)
Resources and
Assumptions Capabilities
(Do we assume the The information obtained through competitor (what are our strengths and
future will be analysis often helps a firm understand, interpret weakness)
volatie) and predict its competitor’s actions and
initiatives.

a) Competitor’s current strategy : The two main sources of information about a

competitor’s strategy is what the competitor says and what it does. What a competitor is
saying about its strategy is revealed in :
 Annual shareholder reports
 Interviews with analysts
 Statements by managers
 Press releases
However, this stated strategy often differs from what the competitor actually is doing.
What the competitor is doing is evident in where its cash flow is directed, such as in the
following tangible actions :
 Hiring activity
 R&D Projects
 Capital investments
 Promotional campaigns
 Strategic partnerships
 Mergers and acquisitions

b) Competitor’s objectives : Knowledge of a competitor’s objectives facilitates a better

prediction of the competitor’s reaction to different competitive moves. For eg. A
competitor that is focused on reaching short-term financial goals might not be willing to
spend much money responding to a competitive attack. Rather, such a competitor might
favor focusing on the products that hold positions that better can be defended.
Competitor objectives may be financial or other types. Some examples include growth rate,
market share and technology leadership.

c) Competitor’s Assumptions : The assumptions that a competitor’s managers hold about

their firm and their industry help to define the moves that they will consider. For eg., if in
the past the industry introduced a new type of product that failed, the industry executives
may assume that there is no market for the product. Such assumptions are not always
accurate and if incorrect may present opportunities.
For eg. Honda was able to enter the US motorcycle market with a small motorbike
because US manufacturers had assumed that there was no market for small bikes based
on their past experience.

d) Competitor’s resources and capabilities : Company’s resources and capabilities

determine its ability to respond effectively.
A competitor’s capabilities can be analysed according to its strengths and weaknesses in
various functional areas, as is done in a SWOT analysis. The competitor’s strengths
 define its capabilities. The analysis can be taken further to evaluate the competitor’s
ability to increase its capabilities in certain areas.

d) Competitor Response Profile : Information from an analysis of the competitor’s

objectives, assumptions, strategy and capabilities can be compiled into a response profile
of possible moves that might be made by the competitor. This profile includes both
potential offensive and defensive moves. The specific moves and their expected strength
can be estimated using information gleamed from the analysis.

Michael Porter’s Five Forces Model

Firms in other industries

offering substitute products

Competitive pressures
coming from the producers
of substitute products

Bargaining power of Rivalry among competing

Suppliers sellers Bargaining power of Buyers

Competitive pressures Competitive pressures Competitive pressures

stemming from supplier coming from other firms in stemming from buyer
bargaining power. the industry. bargaining power.

Potential New Entrants

Competitive pressures
coming from the threat of
entry of new rivals.

1. Rivalry among competing sellers : A market is a competitive battlefield where the

contest among competitors is ongoing and dynamic. Competitive battles among rival
sellers can assume many forms that extend well beyond lively price competition. For eg.,
rivalry firms may resort to such marketing tactics as special sales promotions, heavy
advertising, rebates or low interest rate financing to drum up additional sales.
 Rivalry increases as it becomes less costly for buyers to switch brands.
 Rivalry increases as the products of rival sellers become more alike, and it
diminishes as the products of industry rivals become more strongly
differentiated.
 Rivalry is more intense when there is unused production capacity, especially if
the industry’s product has high fixed costs or high storage costs.
  Rivalry intensifies as the number of competitors increases and as competitors
become more equal in size and competitive strength.
Rivalry can be characterized as cut throat or brutal when competitors engage in price
wars or habitually undertake other aggressive strategic moves that prove mutually
destructive to profitability.

2. Competitive Pressures Associated with the Threat of new entrants : New entrants to
a market bring new production capacity, the desire to establish a secure place in the
market, and sometimes substantial resources. Entry firms have a second thought if they
conclude that existing firms are likely to give newcomers a hard time by offering price
discounts, spending more on advertising, running frequent sales promotions, adding
attractive new product features or providing additional services to customers.
A barrier to entry exists whenever it is hard for a newcomer to break into the market and
the economies of the business put a potential at a disadvantage. The most widely
encountered such barriers that entry candidates must hurdle include the following :
 Sizable economies of scale in production, distribution, advertising or other areas
of operation.
 Significant cost advantages held by existing firms due to experience and learning
curve effects.
 Strong brand preferences and high degrees of customer loyalty.
 Cost advantages like access to raw materials, favorable locations and low fixed
costs enjoyed by industry.
 Restrictive government policies (eg. In Monopoly)
 The difficulties of building a network of distributors or dealers and securing
adequate space on retailer’s shelves.

3. Competitive Pressures from the Sellers of Substitute Products : Companies in one

industry come under competitive pressure from the actions of companies in a closely
adjoining industry whenever buyers view the products of the two industries as good
substitutes. For eg. Newspapers are struggling to maintain their relevance to subscribers
who can watch the news on any of numerous TV Channels and use Internet sources to get
information about sports, stock and job opportunities. The retailers of music CD’s are
experiencing competitive pressure from downloadable digital music on sites such as
iTunes.
Competitive pressures from substitute products are strong, moderate or weak depends on
three factors :
1. Whether substitutes are readily available.
2. Whether buyers view the substitutes as attractively priced in relation to their quality,
performance and other relevant attributes.
3. Whether the costs that buyer incur in switching to the substitutes are low or high.
As a rule, the lower the price of the substitutes, the higher their quality and performance and
the lower the user’s switching costs, more intense the competitive pressures posed by
substitute products.

4. Competitive Pressures Stemming from Bargaining Power of Suppliers

Whether the suppliers of industry members represent a weak or strong competitive force
depends on the degree to which suppliers have sufficient bargaining power to influence the
terms and conditions of supply in their favor. Suppliers with strong bargaining power can
erode industry profitability by charging industry members higher prices, passing costs on to
them, and limiting their opportunities to find better deals. For eg, Microsoft & Intel both of
 whom supply PC makers with essential components, have been known to use their dominant
market status not only to charge PC makers premium prices but also to leverage PC makers in
other ways.
A variety of factors determine the strength of supplier’s bargaining power :
 Whether supplier’s products are in short supply.
 Whether suppliers provide a differentiated input that enhances the performance or
quality of the industry’s product.
 Whether there are good substitutes available for the supplier’s products.
 Whether it is difficult or costly for industry members to switch their purchases from
one supplier to another.
 Whether industry members account for a sizable fraction of supplier’s total sales.
 Whether the supplier industry is dominated by a few large companies and whether it
is more concentrated than the industry it sells to.
 Whether it makes good economic sense for industry members to integrate backward
and self manufacture items they have been buying from suppliers.

5. Competitive Pressures Stemming from Bargaining Power of Buyers : Whether

buyers are able to exert strong competitive pressures on industry members depends on 1)
the degree to which buyers have bargaining power which may vary according to buyer
group (eg. Wholesalers, large retail chains, small retailers, consumers) and 2) the extent
to which buyers are price sensitive.. Buyers with strong bargaining power can limit
industry profitability by demanding price concessions, better payment terms or additional
features and services that increase industry members’ costs .
For eg. Large retail chains like Walmart, Staples, Target typically have considerable
negotiating leverage in purchasing products from manufacturers because of
manufacturer’s need for broad retail exposure and the most appropriate
environment to sell their brands.
 Buyer’s bargaining power is greater when their costs of switching to competing
brands or substitutes are relatively low.
 Buyer power increases when industry goods are standardized or differentiation is
weak.
 Buyers have more power when they are large and few in number relative to the
number of sellers.
 Buyers gain leverage if they are well informed about various seller’s products,
prices and costs.
 Buyer’s bargaining power is greater when they pose a credible threat of
integrating backward into the business of sellers. For eg. Heinz Ketchup has
integrated backward into metal can manufacturing to gain bargaining power.
 Buyer leverage increases if buyers have discretion to delay their purchases or
perhaps even not make a purchase at all.
Example
Porter’s Five Forces analysis is a useful methodology and a tool to analyze the external
environment in which any industry operates.The key aspect about using Porter’s Five
Forces for the airline industry is that the airline industry has been suffered from a
host of external factors that include declining passenger traffic, increasing
operating expenses, high fuel prices, and greater landing and maintenance costs,
apart from intense competition from low cost carriers that has led to a cutthroat
price war which has led the industry severely affected.

Supplier Power
The power of suppliers in the airline industry is immense because of the fact that the three inputs
that airlines have in terms of fuel, aircraft, and labor are all affected by the external environment.
For instance, the price of aviation fuel is subject to the fluctuations in the global market for oil.

Buyer Power

With the proliferation of online ticketing and distribution systems, fliers no longer have to be at the
mercy of the agents and the intermediaries as well the airlines themselves for their ticketing
needs. Apart from, the entry of low cost carriers and the resultant price wars has greatly benefited
the fliers. And thus the bargaining power of buyers has increased.

Entry and Exit Barriers

The airline industry needs huge capital investment to enter and even when airlines have to exit
the sector, they need to write down and absorb many losses. This means that the entry and exit
barriers are high for the airline industry.

Threat of Substitutes

The airline industry has a threat from substitutes like train or the bus for journeys. People also
use their personal cars to travel and thus the threat is high.

Intensity of Competitive Rivalry

The airline industry is extremely competitive because of a number of reasons which include entry
of low cost carriers and the tight regulation of the industry wherein safety become paramount
leading to high operating expenses.

Factors Driving Industry Change

Industry conditions change because of important forces that are driving industry participants
(competitor, customer or suppliers)to alter their actions; the driving forces in an industry are the
major underlying causes for the changes and competitive conditions.

Industry’s Driving Forces :

1. Emerging new internet capabilities and applications : Internet usage is very important
in the global business environment which open up all kinds of new business to business
and business to consumer market opportunities and threats, sparks competition from new
enterprises and mandates fundamental changes in business practices.
2. Increasing globalization : Competition begins to shift from regional, national to an
international or global focus. Industry members begin seeking out customers in foreign
market.
3. Changes in who buys the product and how they use it : Shift in buyer demographics and
new ways of using the product can alter the state of competition by forcing adjustments
in customer service offerings, opening the way to market the industry’s product through a
different mix of dealers and retail outlets and prompting producers to broaden or narrow
their product lines, bringing different sales and promotion approaches into play.
4. Product innovation : Successful new product introductions strengthen the market
positions of the innovating companies, usually at the expense of companies that stick
with their old products. Eg. Digital cameras, Video games, Toys and Medical drugs.
5. Technological change : Advances in the technology can dramatically alter an industry’s
landscape, making it possible to produce new and better products at lower cost and
opening up whole new industry frontiers.
  Smart phones are stealing market from basic landline telephones.
 LCD and Plasma screen televisions killing flat screen televisions.
 Digital tech driving huge change in camera and the film industry.
 MP3 technology is transforming how people listen to music.

6. Marketing innovation : Change in marketing from offline mode to online mode is

transforming the industry.
7. Change in cost and efficiency : Widening or shrinking differences in the costs among
key competitors tend to dramatically alter the state of competition. Low cost fax and
email put mounting pressure on the inefficiency and high cost operation of postal
department.
8. Growing buyer preferences : for differentiated products instead of a commodity product
when buyers taste and preference start to diverge, sellers can win a loyal following by
providing different variants and tastes than the competitors.
9. Regulatory Influence and government policy changes : Govt. regulatory actions can
often force significant changes in industry practices and strategic approaches.
Deregulation has proved to be a potent pro competitive force in the airline, banking,
natural gas and telecommunications industries. Govt. efforts to reform Medicare and
Health Insurance have become potent driving forces in the health care industry.

Common Key Success Factors

Key success factors are the product attributes, competencies, competitive capabilities and market
achievements with the greatest impact on future competitive success in the marketplace.
The following are the key success factors of the industry :
Technology related KSFs
 Expertise in a particular technology or in scientific research (important in
pharmaceuticals, Internet Applications, mobile communications and most high-tech
industries).
 Proven ability to improve production processes (important in industries where advancing
technology opens the way for higher manufacturing efficiency and lower production
costs)
Manufacturing related KSFs
 Ability to achieve Economies of Scale : eg. Walmart’s success factor and/or capture
learning/ experience curve effects.
 Quality-control know how (important in industries where customers insist on product
reliability).
 High-utilization of fixed assets (important in capital intensive, high fixed cost industries)
 Access to attractive supplies of skilled labour.
 High Labor productivity (important for items with high labor content).
 Low-cost product design and engineering (reduces manufacturing costs)
 Ability to manufacture or assemble products that are customized to buyer specifications.
Distribution-related KSFs
 A strong network of wholesale distributors/dealers.
 Strong direct sales capabilities via the Internet and/or having company-owned retail
outlets.
 Ability to secure favorable display space on retailer shelves.
Marketing-related KSFs
 Breadth of product line and selection : Jabong, online outlet has wide variety of product
line.
 A well known and well respected brand name.
 Fast, accurate technical assistance.
 Courteous, personalized customer service.
 Accurate filling of buyer orders (few back orders or mistakes).
 Customer guarantees and warranties (important in mail order and online retailing, new
product introductions)
Skills and capability related KSFs
 A talented workforce (important in professional services like accounting and investment
banking). IBM claims to have the most technical employees.
 National or global distribution capabilities.
 Product innovation capabilities (important in industries where rivals are racing to be first-
to-market with new product attributes).
 Design expertise (important in fashion and apparel industries).
 Short delivery time capability.
 Supply chain management capabilities : Toyota is able to implement Just in Time
production process because of its supply chain capabilities.
 Strong e-commerce capabilities-a user friendly website and skills in using Internet
Technology.
Other types of KSFs
 Overall low costs so as to be able to meet customer expectations of low price. Indigo
Airlines.
 Convenient locations (important in many retailing businesses.
 Ability to provide fast, convenient after-the sale repairs and service.
 Patent protection
Thank You