External environment analysis

BY PRASAD KULKARNI

Industry
It is a group of companies offering products or

services that are close substitutes for each other- that is products or services that satisfy the same basic customer needs.

Sector
Groups of closely related industries Example

Telecommunication sector telecommunication equipment industry telecommunication service industry Market segments: These are different group of customers within a market that can be differentiated from each other on the basis of homogeneity

Industry dominant economic traits.

Market size and growth rate Scope of competitive rivalry Number of rivals Buyer needs and requirements Production capacity Pace of technological change Vertical integration Product innovation Degree of product differentiation Economies of scale Learning and experience curve effects

MICHEL PORTERS FIVE FORCES MODEL.

FORCE 1: RIVALARY AMONG COMPETING SELLERS

Equally balanced competitors Slow industry growth High fixed cost

Lack of differentiation
Large increase in manufacturing capacity High strategic stakes

High exit barriers

Rivalry increases as it becomes les costly for buyers

to switch brands. Price cut by competitors.

Force 2: Entry of new companies

Economies of scale Cost disadvantages independent of costs Product differentiation

Capital requirements.
Switching costs Access to distribution channels

Force 3: Bargaining power of suppliers.

Dominance by few suppliers and lack of substitute

products. Relative lack of performance of the buyer to the supplier group Greater concentration among supplier than among buyers. Importance of the supplier product to the buyer High differentiation by the suppliers and high switching cost for the buyer Credible threat of forward integration by suppliers.

Force 4: Bargaining power of buyers

Undifferentiated or standard suppliers Credible threat of backward integration by buyers Accurate information about the cost structure of the

suppliers Price sensitivity of the buyer Greater concentration in buyers industry than its suppliers industry and relativity

Force 5: threat of substitutes

Substitutes matter when customers are attracted to

the products of firms in other industries

Eyeglasses Sugar

and contact lens vs. laser surgery vs. artificial sweeteners vs. TV vs. Internet

Newspapers

When substitutes are stronger

There are many good substitutes that are readily available

The lower the price of substitutes

The higher the quality and

performance of substitutes
The lower the users switching costs

Strategic implications of five forces

Competitive environment is unattractive from

the standpoint of earning good profits when

Rivalry is vigorous Entry barriers are low and entry is likely Competition from substitutes is strong

Suppliers and customers have considerable bargaining power

 Competitive environment is ideal from a profit-

making standpoint when

Rivalry is moderate Entry barriers are high and no firm is likely to enter Good substitutes do not exist

Suppliers and customers are in a weak bargaining position

Understanding the industry driving forces

Internet and e-commerce opportunities Increasing globalization of industry Changes in long-term industry growth rate Changes in who buys the product and how they use it Product innovation Technological change/process innovation Marketing innovation

 Entry or exit of major firms Diffusion of technical knowledge Changes in cost and efficiency Consumer preferences shift from standardized to

differentiated products (or vice versa)

Changes in degree of uncertainty and risk Regulatory policies / government legislation Changing societal concerns, attitudes, and lifestyles