The External Environment: Opportunities, Threats, Industry Competition, Competitive Dynamics and Competitor Analysis

External Audit
To assure victory, always carefully survey the field before battle.
Sun Tzu

The External Environment

Environment

Economic

Industry Environment

Competitor Environment

Technological
General
3

External Environmental Analysis

Analysis of general environment Analysis of industry environment

Analysis of competitor environment

The External Environment Strategic Vision and Mission

PEST PESTEL STEEPA

General Environment

Demographic Environmental Analysis

Population Age Geographic distribution Ethnicity Income

General Environment

Social Environmental Analysis

Gender emancipation Workforce diversity Attitudes about quality of work life Ecology

General Environment

Economic Environmental Analysis

GDP Inflation Interest Trade deficits and surpluses BOP Personal savings rate Financial environment Economic infrastructure
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General Environment

Political and Legal Environmental Analysis

Legal Systems Monopolies Taxes Competition Personnel and Labour Welfare & Development Legal platforms and structure developments thereof
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General Environment

Technological Environmental Analysis

R&D expenditure, infrastructure and availability Innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies

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General Environment

Global Environmental Analysis

Political events Global markets NIC BEMs Trade Barriers and international institutions

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Industry Environment
A set of factors that directly influences a company and its competitive actions and responses Interaction among these factors determine an industrys profit potential

Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry
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Porters Five Forces Model

Identify current and potential consumers and determine which firms serve them Conduct competitive analysis Recognize that suppliers and buyers can become competitors Recognize that producers of potential substitutes may become competitors
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Five Forces Model

Five Forces

Bargaining Power of Buyers

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Threat of New Entrants

Barriers to entry
Bring additional capacity Increase process efficiency
Internet marketing Barriers to entry Retaliation Exceptions
Ryan Air Made Aer Lingus bankrupt
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Firm entry is function of two factors

High barrier increase return of existing players

Economies of scale

Outcome of incremental efficiency

Airtel mobile telephone/landline/Internet/Dish TV

New entrants dilemma

Small scale entry puts them at a cost disadvantage- they can not derive economies of scale If they make a large entry invite retaliation by being large and visible

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Product differentiation

L'Oral, Revlon, Estee Lauder, Levi jeans

Customer loyalty

Capital requirements

Boeing or Airbus, oil refinery If high, no entry Operating systems/softwares on Windows/Mac If low, easier entry Bisleri/Acquafina, Sugar Free

Switching costs

Access to distribution channels Coke/UL Government policy- New banks, new private universities Expected retaliation

Honda entry to US with small model to avoid Harley Davidson retaliation

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Bargaining Power of Suppliers

A supplier group is powerful when

it is dominated by a few large companies satisfactory substitute products are not available to industry firms industry firms are not a significant customer for the supplier group suppliers goods are critical to buyers marketplace success effectiveness of suppliers products has created high switching costs suppliers are a credible threat to integrate forward into the 18 buyers industry

Bargaining Power of Buyers

Buyers (customers) are powerful when

they purchase a large portion of an industrys total output the sales of the product being purchased account for a significant portion of the sellers annual revenues they could easily switch to another product the industrys products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the sellers industry
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Threat of Substitute Products

Product substitutes are strong threat when

customers face few switching costs substitute products price is lower substitute products quality and performance capabilities are equal to or greater than those of the competing product

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Intensity of Rivalry

Intensity of rivalry is stronger when competitors

are numerous and/or equally balanced

Desktop at home

experience slow industry growth have high fixed costs and/or high storage cost lack differentiation or low switching costs

Commodities

Petrol Cement

have high exit barriers

Airline industry/ Steel industry

Jetlite, Go Air, Kingfisher, Spice, Indigo

high strategic stakes

Japanese automobiles in US as it is the largest market

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High Exit Barriers

Common exit barriers include

specialized assets (assets with values linked to a particular business or location)

Heart Lung Machine, MRI

fixed costs of exit such as labor agreements strategic interrelationships (relationships of mutual dependence between one business and other parts of a companys operation, such as shared facilities and access to financial markets) emotional barriers (career concerns, loyalty to employees, etc.) 22 government and social restrictions

Complementors

Good roads for high speed cars Availability of inexpensive fuel for SUV/bigger
vehicles Continues electricity for deep freezer complementing purchase of milk weekly
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Strategic Groups
Strategic

group: a group of firms in an industry following the same or similar strategy along the same strategic dimensions
Strategic dimensions in luxury hotel are
Swimming pool, atleast two restaurants, Gym, Room service, High prices, High level of comfort, Wifi Taj, Marriott, ITC, Sheraton, Intercontinental

Competition

within strategic groups will be intense than between groups or a firm outside that strategic group
Sheraton competing with Fortune Ginger competing with Intercontinental/Ibis competing with Marriot
The

strategy followed by a strategic group differs from strategies being implemented by other companies in the industry

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Competitor Environment
Competitor

intelligence is the ethical gathering of needed information and data about competitors objectives, strategies, assumptions, and capabilities
Airbus and Boeing Embraer, Cessna and Lear Jet
Collection

of information along four dimensions helps firms prepare anticipated response profile
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What drives the competitor as shown by its future objectives What the competitor is doing and can do as revealed by its current strategy What the competitor believes about itself and the industry, as shown by its assumptions What the competitor may be able to do as shown by its capabilities

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Competitor Analysis
Future objectives

Future Objectives:

How do our goals compare with our competitors goals? Gulf Stream/Embraer for personal jets/Boeing and Air bus for mass transportation Where will the emphasis be placed in the future? Cargo or Human What is the attitude toward risk? Risk averse or risk taker27

Competitor Analysis
Future objectives

Current Strategy:

Current strategy

How are we currently competing? Between Airbus and Boeingon fuel consumption or speed or capacity or price Does this strategy support changes in the competitive structure?
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Competitor Analysis
Future objectives

Assumptions:

Current strategy

Assumptions

Do we assume the future will be volatile? Are we operating under a status quo? What assumptions do our competitors hold about the industry and themselves?

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Competitor Analysis
Future objectives

Capabilities:

Current strategy

What are our strengths and weaknesses? How do we rate compared to our competitors?

Assumptions

Capabilities
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Competitor Analysis
Future objectives Response

Response:
Current strategy

Assumptions

Capabilities

What will our competitors do in the future? Where do we hold an advantage over our competitors? How will this change our relationship with our competitors? 31

Creating EFE Matrix

Allows strategists to summarize and evaluate STEEPA information. Can be developed in 5 steps
1. 2. 3. Include total of 10-20 factors, both from opportunities & threats Assign each factor a weight from 0 (absolutely unimportant) to 1 (very important). Sum should be 1 Assign a rating from 1 to 4 to each factor to indicate how effectively firms current strategies respond to the factor where,

4. 5.

4=response is superior, 3=response is above average, 2=response is average, 1=response is poor Weights in #2 are industry based, ratings at #3 are company based

Multiply each factors weight by its rating to determine weighted score Sum the weighted score for each variable

EFE Matrix Mobile Phone-Nokia

Key External Factors
OPPORTUNITIES
Global mobile phone market to grow 20% in 2014, compared to 12% in 2013 Cost of Mobile phone components to decrease by 10% in 2014 Growth in young population in BRIC China opened its market Average incomes rising in India-DINKs 0.10 0.05 0.10 0.10 0.10 3 3 2 3 3 0.3 0.15 0.2 0.3 0.3 Weight Rating Weighted Score

THREATS
Intense rivalry in industry 0.10 2 0.2

Financial Melt Down in General especially in Greece & Ireland

Birth rate declining in Europe Medical advice against mobile phone use Disruptive Technologies (Higher R&D Expenses) China and India started selling cheaper models TOTAL

0.20
0.05 0.05 0.05 0.10 1

4
1 1 2 2

0.8
0.05 0.05 0.1 0.2 2.65

IFE Sony TV (2014)

Key Internal Factors
STRENGTHS
Several executive with world-class skills and leadership experience Continuous decline in operating costs and cost of goods sold Well-known brand name Consumer Reports (Sept 13) recommended SONY as #1 As a direct seller, Sony holds high brand recognition Sony diversifying into TV products Set Top box/Serials/Movies Good relationship with its suppliers Economies of scale, the 3rd largest TV maker in the world Sony World retails stores excellent 0.05 0.05 0.05 0.1 0.05 0.1 0.05 0.05 0.05 4 3 3 4 3 3 4 4 3 0.2 0.15 0.15 0.4 0.15 0.3 0.2 0.2 0.15 Weight Rating Wtd Score

WEAKNESSES
High operating expense (22% of revenue vs 10% for LG) 12% budget for R&D vs LGs 18% of revenue Low return on assets ratio No niche market Shortage of cash due to expansion Limited number of stores Weak performance in Asian market TOTAL 0.05 0.1 0.05 0.05 0.1 0.05 0.05 1.00 3 1 1 2 2 2 2 0.15 0.1 0.05 0.1 0.2 0.1 0.1 2.70

Competitive Profile Matrix (CPM)

Identifies firms major competitors and their strengths and weaknesses in relation to a specific firms strategic position

Value Assignment for CPM

Absolutely Arbitrary
Major Strength Minor Strength Minor Weakness 4 3 2

Major Weakness

Lenovo

Apple

Dell

CSFs
Market Share

Wt
0.15

Rating
3

Wtd Rating Wtd Rating Score Score

0.45 2 0.30 4

Wtd Score
0.60

Inventory System
Fin. Position Product Quality Cons. Loyalty Sales Distribution Global Expansion Org. Structure Prod. Capacity E-commerce Customer Service Price competitive Mgt. experience

0.08
0.10 0.08 0.02 0.10 0.15 0.05 0.04 0.10 0.10 0.02 0.01

2
2 3 3 3 3 3 3 3 3 4 2

0.16
0.20 0.24 0.06 0.30 0.45 0.15 0.12 0.30 0.30 0.08 0.02

2
3 4 3 2 2 3 3 3 2 1 4

0.16
0.30 0.32 0.06 0.20 0.30 0.15 0.12 0.30 0.20 0.02 0.04

4
3 3 4 3 4 3 3 3 4 3 2

0.32
0.30 0.24 0.08 0.30 0.60 0.15 0.12 0.30 0.40 0.06 0.02

Total

1.00

2.83

2.47

3.49

Industry Analysis CPM

Just because one firm receives 3.49 and other 2.47 it does not follow that the first firm is 41% better than the second Numbers reveal relative strengths of firms but implied precision is an illusion Numbers are not magic The aim is to assimilate and evaluate information in meaningful manner so that correct decision-making may take place