Course: Strategic Management

Analysis of External Environment of Business

Dr. Pratima Verma

Email: Pratima@iimk.ac.in

Pratima Verma, Indian Institute of Management, Kozhikode

 External Environment
• Firms understand the external environment by acquiring information about
competitors, customers, and other stakeholders to build their own base of
knowledge and capabilities.

Pratima Verma, Indian Institute of Management, Kozhikode

 The General, Industry, and
Competitor Environments
• The general environment is composed of dimensions in the broader society that
influence an industry and the firms within it.

• Seven environmental segments:

• Demographic,
• Economic,
• Political/legal,
• Sociocultural,
• Technological,
• Global, and
• Sustainable physical.

Pratima Verma, Indian Institute of Management, Kozhikode

 Industry Environment Analysis

• The industry environment is the set of factors that directly influences a firm and
its competitive actions and responses.

• How companies gather and interpret information about their competitors is

called competitor analysis.

Pratima Verma, Indian Institute of Management, Kozhikode

Pratima Verma, Indian Institute of Management, Kozhikode
 Why Industry Analysis is important?

• Gain insights about your competitors.

• Compare your business or business idea to

the industry as a whole.
Industry • Develop a marketing plan to move your
Analysis business forward.

• Offers insights for business planning.

• Important in business plan when you start

a new business.

• Identifies threats and opportunities.

Pratima Verma, Indian Institute of Management, Kozhikode

 Three Key Questions

• When studying an industry, an entrepreneur/business owner must answer three

questions before pursuing the idea of starting a firm.

Is the industry Are there positions in

Does the industry
accessible—in other the industry that avoid
contain markets that
words, is it is realistic some of the negative
are ripe for innovation
place for a new attributes of the
or are underserved?
venture to enter? industry as a whole?

Pratima Verma, Indian Institute of Management, Kozhikode

 Industry Environment Analysis

Porter’s five forces model is an analysis tool that uses five industry forces to determine
the intensity of competition in an industry and its profitability level.

Assessing and evaluating the competitive strength and position of a business

organization.

The five competitive forces model is a framework for understanding the structure of an
industry.

What is the threat to profits from...?

Competitors
Suppliers
Buyers
Substitutes
Entrants

Pratima Verma, Indian Institute of Management, Kozhikode

 Five force analysis: why?

Competition Position of strength

Pratima Verma, Indian Institute of Management, Kozhikode

 Porter’s five forces model

Pratima Verma, Indian Institute of Management, Kozhikode

 Force 1: Threat of New Entrants

If the firms in an industry are highly profitable, the industry becomes a magnet to new
entrants.

Unless something is done to stop this, the competition in the industry will increase, and
average industry profitability will decline.

Try to keep the number of new entrants low by erecting barriers to entry.

Pratima Verma, Indian Institute of Management, Kozhikode

 Barriers to Entry

Barrier to Entry Explanation

Economies of Scale Large economies of scale are difficult for new firms to enter

Product e.g.: soft drink industry that are characterized by firms with
differentiation strong brands
Capital The need to invest large amounts of money to gain entrance to
requirements an industry is another barrier to entry.

Government and Some industries, such as broadcasting, require the granting of a

legal barriers license by a public authority to compete.

Pratima Verma, Indian Institute of Management, Kozhikode

 Non Traditional Barriers to Entry

It is difficult for start-ups to execute barriers to entry that are expensive, such as
economies of scale etc.

Start-ups have to rely on non-traditional barriers to entry to discourage new entrants, such
as assembling a world-class management team that would be difficult for another
company to replicate.

Pratima Verma, Indian Institute of Management, Kozhikode

 Non Traditional Barriers to Entry

Barrier to Entry Explanation

Strength of It may give potential rivals pause in taking on the start-up in its chosen
Management team industry.

First-mover If a start-up pioneers an industry or a new concept within an industry,

advantage the name recognition the start-up establishes may create a barrier to
entry.

Passion of the Unique culture of a start-up, motivated team and anticipate large
management team financial reward.
and employees

Unique Business Able to construct a unique business model and establish a network of
Model relationships that makes the business model work.

Inventing a new If a start-up invents a new approach to an industry and executes it in an

approach to an exemplary fashion, these factors create a barrier to entry for potential
industry imitators..

Pratima Verma, Indian Institute of Management, Kozhikode

 Threat of New Entrants (Brand loyalty)
Smartphone Business

E.g.: Apple has generated such strong brand loyalty with its iPhone offering and its
related products.

Microsoft launched Windows 8 phone in late 2011.

Microsoft find difficult to attract customers away from Apple and build demand for its
new windows phone.

After one year launching the windows phone, Microsoft’s US market share mired at
around 2.7% whereas Apple led the market with a 53% share.

Pratima Verma, Indian Institute of Management, Kozhikode

 Threat of New Entrants (Switching Cost)
Operating System

E.g.: Switching from one computer operating system to another.

Person currently uses Microsoft’s Windows operating system and has a Library of related
software applications and document files.

It is expensive for a person to switch to another computer operating system (viz. Linux
and Ubuntu).

Pratima Verma, Indian Institute of Management, Kozhikode

 Force 2: Rivalry Among Existing Firms

Rivalry refers to the competitive struggle between companies within an industry

to gain market share from each other.

In most industries, the major determinant of industry profitability is the level of
competition among existing firms.
Industry competitive structure

Industry Demand

Exit barriers

Pratima Verma, Indian Institute of Management, Kozhikode

 Force 3: Bargaining Power of Suppliers

Suppliers can suppress the profitability of the industries to which they sell by raising
prices or reducing the quality of the components they provide.

If a supplier reduces the quality of the components it supplies, the quality of the finished
product will suffer, and the manufacturer will eventually have to lower its price.

If the suppliers are powerful relative to the firms in the industry to which they sell,
industry profitability can suffer.

• Supplier are powerful when:

1. Supplier concentration
2. Switching cost
3. Attractiveness of substitutes
4. Threat of forward integration

Pratima Verma, Indian Institute of Management, Kozhikode

 Intel (The Bargaining Power of Suppliers )

• E.g.: Personal computer industry.

Personal computers firms are heavily dependent on Intel.
Intel is the worlds largest manufacturer of microprocessor chips for PCs.
Intel microprocessor chips are the industry standard for personal computers.
Intel competitor is Advanced Micro Devices (AMD) must develop the supply chips that
are compatible with Intel standards.
Although, AMD has developed chips, but Intel still supplies 85% of the chips used in the
PC.
Intel has the manufacturing capacity required to serve a large share of the market.
Moreover, PC manufactures can purchase some microprocessor from Intel rivals i.e.
AMD, but they still turn to Intel for bulk of the supply.
So, Intel is an powerful bargaining position, it can charge higher price for its
microprocessor, if any competitors were stronger.

Pratima Verma, Indian Institute of Management, Kozhikode

 Force 4: Bargaining Power of Buyers

• Buyers are most powerful when:

There are many sellers, (Buyer group Concentration)

The product sold is identical, (standardization)

Buyers purchase in large quantities

Switching from one seller to another is inexpensive for the buyers,

Buyers can make the needed product themselves (Threat of backward integration).

Pratima Verma, Indian Institute of Management, Kozhikode

 Automobile Manufactures
(The Bargaining Power of Buyers )

The Automobile component supply industry, whose buyers are large manufacturing such
as GM, Ford, and Toyota.

The suppliers of auto components are numerous and typically smaller in scale.

The buyers- the auto manufactures are large in size and few in numbers.

Auto manufactures try or force to keep the price of the component down and demanding
the better quality of components.

If a components supplier objects, the automaker can use the threat of switching to another
supplier as a bargaining tool.

Pratima Verma, Indian Institute of Management, Kozhikode

 Force 5: Threat of Substitutes

The price that consumers are willing to pay for a product depends in part on the
availability of substitute products.

For example, there are few if any substitutes for prescription medicines, which is one of
the reasons the pharmaceutical industry is so profitable.

In contrast, when close substitutes for a product exist, industry profitability is suppressed,
because consumers will opt out if the price gets too high.

• E.g.: Starbuck’s

Pratima Verma, Indian Institute of Management, Kozhikode

 Threat of Substitutes (Star bucks Coffee)

A customer could easily get a cup of coffee cheaper at one of Starbuck’s competitors.

To decrease the likelihood of this, Starbucks offers high-quality fresh coffee, good
service, and a pleasant atmosphere.

Starbucks has therefore reduced the threat of substitutes.

Pratima Verma, Indian Institute of Management, Kozhikode

 Thank you!
谢谢你
Xièxiè nǐ

Pratima Verma, Indian Institute of Management, Kozhikode