Environment & Analysis

STRATEGIC MANAGEMENT
MBA, IV Semester  Course Code: CA 541

Purbanchal University
Singa Lama
TRAINER | EDUCATOR | COUNSELOR
Teaching Faculty for MBA: Kantipur Valley College (KVC)
SQC Master Trainer & Executive: QUEST – Nepal
Chief Trainer & Executive: SCHeME – Nepal
Principal: Golden Gate English Secondary School
CONTACT:
singa_lama@yahoo.com  www.facebook.com/singa.lama
www.icernepal.blogspot.com  Twitter: @singalama | 9841-299271
Syllabus Contents for Unit II
Environment & Analysis

Part A
1. Environment Analysis –
1.1 Components of External Environment,
1.2 Models of External Environment Analysis –
PESTEL, SWOT, ETOP;
1.3 Pitfalls in Environmental Scanning
2. Industry Analysis – Industry Features, Industry
Boundaries; Industry Structure, Industry
Attractiveness
3. Competitive Analysis – Role of Competitive Forces
in Shaping Strategy; Porter’s Five Forces Model;
Competitor Analysis – Competitor’s Strategy,
Competitor’s Performance, Competitor’s Strength
and Weaknesses, Competitor’s Retaliation
Part A: 1. Environment Analysis
1.1 Components of External Environment
“Analysis is the critical starting point

of strategic thinking.”
Kenichi Ohmae
• “Things are always different--the

art is figuring out which
differences matter.” “Quote”
Laszlo Birinyi
An Example of Analysis
Why-Why Analy
sis
Part A: 1. Environment Analysis
1.1 Components of External Environment
 Competitive strategy must grow out a sophisticated understanding of the
rules of competition that determine industry attractiveness.
 Michael Porter
 When an industry with a reputation for bad economics meets a manager

with a reputation for excellence, it’s usually the industry that leaves with
its reputation intact.
 Warren Buffett
 Skate to where the puck is going, not to where the puck has been.
 Wayne Gretsky
The Components of a Company’s Macro-
Environment
MACROENVIRONMENT
The Economy
at Large
Le
gi
y Re sla
log gu tio
o la n a
chn Suppliers Substitutes tio n
Te n d
COMPANY
Rival Buyer
Firms s
So New
c Entrants
an ietal ti on s
dL V
ife alue  p ula phic
sty s IMMEDIATE INDUSTRY Po ogra
les m
AND COMPETITIVE
ENVIRONMENT
De
1. Environment Analysis
1.2 Model of External Analysis: PESTEL Analysis
PESTEL
Analysis
7
PESTEL framework for the analysis of external
environment consists of:
P = Political Factors: Government stability, political
system, institutions, philosophy
E = Economic Factors: National income trends,
interest rates, inflation, taxation, unemployment,
business cycles, economic system, policies,
globalization
S= Socio-cultural Factors: Demographics, income,
education, lifestyle, attitudes, social institutions,
social change, religion
8
T = Technological Factors: Level of technology,
technological changes, technology transfer,
research and development
E = Environmental Factors: Environment laws,
energy consumption, pollution of air, soil and
water, relationship between ecology and business
L = Legal Factors: Laws about monopoly,
intellectual property rights, business, labour,
finance, product safety, courts of law, law
administration
9
Use of PESTEL Analysis in Strategic Management
Identification of opportunities of advantage and
threats to be tackled
Formation of strategies by matching opportunities
of advantage with resources of strengths
Development of strategic options to formulate
strategies
Assessment of effectiveness of strategies to
achieve mission and objectives of the organization
Making corrections in strategies to adapt them to
environmental changes
10
1.2 Model of External Analysis: SWOT Analysis
SWOT
Analysis
11
 SWOT Analysis, evolved during the 1960s at
Stanford Research Institute, is very popular
planning technique having applications in
many areas including management.
 Strengths and Weaknesses existing within
an organisation are matched with the
opportunities and threats operating in the
environment so that an effective strategy can
be formulated.
 SWOT or WOTS-UP or TOWS
12
3 Steps of SWOT Analysis
1. Setting the objectives of the organisation or its unit
2. Identifying its strengths, weaknesses, opportunities and
threats
3. Asking four questions:
1. How do we maximize our strengths?
2. How do we minimize our weaknesses?
3. How do we capitalize on the opportunities in our external
environment?
4. How do we protect ourselves from threats in our external
environment?
5. Recommending strategies that will optimize the answers from the
questions
13
Typical SWOT Matix
WEAKNESSES:
STRENGTHS:
- Favourable location - Uncertain cash flow
- Excellent distribution network - Weak management information
system
- ISO 900 quality certification - Absence of strong USP for major
- Established R & D Centre product lines
- Good management reputation
- Low worker commitment
OPPORTUNITIES: THREATS:
- Favourable industry trends - Unfavourable political environment
- Low technology options available - Obstacle in licensing new business
- Possibility of niche target market - Uncertain competitors' intentions
- Availability of reliable business - Lack of sustainable financial
partners backing
14
KVC SWOT Analysis
Class Assignment
Vision: To set new standard in higher education!
WEAKNESSES:
STRENGTHS: - Poor management
- Sole trading/Family owned - Poor infrastructure, i.e. library,
toilets, parking, canteen, internet
- Best location - Lack of publicity
- Flexibility
- Reasonable cost - No extra activities
- Good result - Lack of value addition
- Experienced teachers - No placement
- Lack of job oriented courses/soft
skills
OPPORTUNITIES: THREATS:
- New courses BHM, MHM, BIT, B.E., - Govt's policy in private education
BSW - High competition
- Part-timer students - Technology
- University policy & monopoly
- Lack of quality students
15
Benefits
1. Simple to use
2. Low cost
3. Flexible and can be adapted to varying
situations
4. Leads to clarification of issues
5. Development of goal oriented alternatives
6. Useful as starting point for strategic analysis
16
Pitfalls of using SWOT indiscriminately
1. Simplicity of use may turn to simplistic by trivializing the reality
that may be more complex than represented in SWOT matrices
2. May result in just compiling lists rather than think about what is
really important for achieving objectives
3. Usually reflects an evaluator's position and viewpoint that can
be misinterpreted to justify a previously decided course of
action, rather than be used as a means to open new possibilities
4. Chances exist where strengths may be confused with
opportunities or weaknesses with threats
5. May encourage organizations to take a lazy course of action
looking for strengths that match with opportunities rather than
developing new strengths that could match the emerging
opportunities
17
1.2 Model of External Analysis: ETOP
ETOP
18
ETOP (Environmental Threat and
Opportunity Profile)
The Environmental factors are quite complex and it
may be difficult for strategy managers to classify them
into neat categories to interpret them as opportunities
and threats. A matrix of comparison is drawn where
one item or factor is compared with other items
after which the scores arrived at are added and
ranked for each factor and total weight age score
calculated for prioritizing each of the factors.
This is achieved by brainstorming. And finally the strategy
manger uses his judgment to place various environmental issues
in clear perspective to create the environmental threat and
opportunity profile.
Although the technique of dividing various environmental factors
into specific sectors and evaluating them as opportunities and
threats is suggested by some authors, it must be carefully noted
that each sector is not exclusive of the other.
Each of the major factors pertaining to a particular sector of
environment may be divided into sub-sectors and their effects
studied. The field force analysis goes hand in glove with ETOP, as
here also the contribution with regard to opportunities and threats
posed by the environment is also a necessary part of study.
Environment analysis results in a mass of information related
to forces in the environment. They deal with events, trends,
issues, and expectations. Structuring of environmental issues
is necessary to make them meaningfull for strategy
formulation.
ETOP(Environmental Threat and Opportunity Profile) is a
technique to structure environmental issues. ETOP involves:
Dividing the environment into different sectors. Each sectors
can be subdivided into sub sectors.
Analyzing the impact of each sector and subsector on the
organization.
Describe the impact in the form of a statement. (See fig.
below)
21
Environmental Nature of Impact of Each factor on organization
Sectors Impact (+)=Opportunity; (-) = Threats
1. Political-Legal - • Political instability and threat of terrorism

+ • Favorable legal framework for private sector
2. Economic - • High fixed cost
- • Poor occupancy due to low tourist arrival
3. Social-Cultural + • Local people welcome tourists
+ • Buddhist religion tolerant to other religious
beliefs
4. Technological + • Tourism board promoting aggressively
+ • New technology transfer through foreign
direct investment (FDI)
5. Competitive + • Low threat of new entrant due to heavy
Environment investment and poor economies of scale
+ • No substitute products
- • High bargaining power of supplier
+ • Low bargaining power of buyers
+ • Low competitive rivalry
Advantage of ETOP:
• It provides a clear of which sector and sub sectors
have favourable impact on the organization. It
helps interpret the result of environment analysis.
• The organization can assess its competitive
position.
• Appropriate strategies can be formulated to take
advantage of opportunities and counter the threat.
• SWOT analysis (Strategic weakness, opportunities
and threats.)
23
Pitfalls in
Environmental
Scanning
24
The soft underbelly elements of Environmental Scanning
1. Sometimes, strategic planners may focus excessively on the
influences in the relevant environment that they miss out on the
trends and issues in the general environment that really matter.
2. There is a danger of "Paralysis by Analysis", meaning that
environmental scanning can create such an overload of information
that may prevent timely action. Environmental scanning should not
become a number-crunching or paper-pushing routine.
3. The purpose of environmental scanning is to uncover influences
that matter for the future of the organizational strategic decision
making. This purpose should not be lost and environmental
scanning should not be used for purposes other than this. For
instance, scanning results cannot be used for political maneuvering
by strategists to favor their own view point, functional interests or
departmental aims.
25
4. The environmental scanning function should not be integrated
too closely with the operational and functional activities of the
organization. This means that it should not become a line
function, thus aligning it too closely with the interests of those
activities.
5. Similarly, environmental scanning should not be too far from the
realities of the organization, making it an impersonal, staff
function.
26

Part A
1.2 Models of External Environment Analysis –
PESTEL, SWOT, ETOP;
2. Industry Analysis – Industry Features, Industry
Boundaries; Industry Structure, Industry
Attractiveness
3. Competitive Analysis – Role of Competitive Forces
in Shaping Strategy; Porter’s Five Forces Model;
Competitor Analysis – Competitor’s Strategy,
Competitor’s Performance, Competitor’s Strength
and Weaknesses, Competitor’s Retaliation
2. Industry Analysis
• Industry
– An industry is a group of firms producing a similar
product or service, such as airlines, fitness drinks,
furniture, or electronic games.
• Industry Analysis
– Is business research that focuses on the potential
of an industry. 28
Industry analysis is analysis of the

forces which determines the
competition, and nature of
competition. Competition determines
the profitability of an industry and
profitability determines the
attractiveness of the particular
industry.
A market assessment tool designed to provide a business with an
idea of the complexity of a particular industry. Industry analysis
involves reviewing the economic, political and market factors that
influence the way the industry develops. Major factors can
include the power wielded by suppliers and buyers, the condition
of competitors, and the likelihood of new market entrants. ~
BusinessDictionary.Com
An industry analysis is also a marketing process that provides
statistics about the market potential of your business products
and services. This section of your plan needs to have specific
information about the current state of the industry, and its target
markets. An industry analysis may contain reference materials
such as spreadsheets, pie charts, and bar graphs in order to
represent the data.
30
What is Industry Analysis Important for?
Importance
 Once it is determined that a new
venture is feasible in regard to the
industry and market in which it will
Industry Analysis compete, a more in-depth analysis
is needed to learn the ins and outs
of the industry.
 The analysis helps a firm determine
if the niche market it identified
during feasibility analysis is
favorable for a new firm.
5-31
Three Key Questions
When studying an industry, an entrepreneur must answer
three questions before pursuing the idea of starting a firm.
Question 1 Question 2 Question 3
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?
5-32
How Industry and Firm-Level Factors Affect Performance
• Firm Level Factors

– Include a firm’s assets, products, culture, teamwork
among its employees, reputation, and other resources.
• Industry Level Factors
– Include threat of new entrants, rivalry among existing
firms, bargaining power of buyers, and related factors.
• Conclusion
– In various studies, researchers have found that from 8%
to 30% of the variation in firm profitability is directly
attributable to the industry in which a firm competes.
5-33
2.1 Industry Features
Identification of industry’s dominant features is very important for
analyzing a company’s industry’s and competitive environment. It
also provides an overview of the over all landscape of industry.
So basically it helps the organization to know the different kind of
strategic moves that industry members are likely to employ.
Some of the important industry’s dominant economic

features are given below.
Market size and growth rate
Market size refers to the total number of firms operating in the
industry. It is also important to know whether the industry is
growing, static or declining. It depends upon the position of
industry in the business life cycle i.e. early development, rapid
growth, early maturity, maturity, stagnation, decline.
34
Number of rivals
Organizations should also know whether the industry contains
too many small rivals or is it dominated by a few large firms.
Similarly they should also know about the various development
in the industry such as mergers and acquisitions etc.
Scope of competitive rivalry
Scope of competitive rivalry is an important factor for the
organizations to know about the level of competition. Industry
members must know about the nature of future competition.
For example if a company realizes that its future success
depends upon diversification, product development and market
expansion, then it must start planning from the very first day.
35
Buyer needs and requirements
Industry members must take into consideration the need and
taste of final buyers as well as the middlemen. So, basically
organizations have to do a lot of periodic research in order to
know the major shifts in buyers needs and requirements. They
should also know the about various factors affecting consumer
behavior.
Degree of product differentiation
Product differentiation is another important factor for analyzing
the overall industry situation. If all the products of industry are
not fully differentiated then it will increase competition among
the members of industry. In such case prices of the products
will be low and the new entrants will find it difficult to compete
with the existing firms.
36
Product innovation
Product innovation can be used as a measure to know the
dominant industry features. If the industry is characterized by
rapid product innovation and short product life cycle 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.
Pace of 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 organizations. For example Industry of mobile
phones requires rapid changes in the technology in order to
meet the changing consumer demands.
37
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 potential cost of production differences.
Economies of scale
Organizations must also know about the different economies
of scale in purchasing, manufacturing, and other activities.
They should analyze whether the companies with high scale
operations has any cost advantage or not. Any reduction in
the cost of production leads to higher competitiveness which
ultimately results higher profits.
38
2.2 Industry Boundaries
Why a Definition of Industry Boundaries is Important
• Helps executives determine arena in which

their firm competes
• Focuses attention on firm’s competitors
• Helps executives determine key factors for
success
• Gives executives another basis on which to
evaluate their firm’s goals
Sources of Difficulty in Defining
Industry Boundaries
Evolution of industries
over time creates new
opportunities and threats
Industry evolution creates Industries are becoming

industries within global in scope
industries
2.3 Industry Structure
Understanding Industry Structure | MICHAEL E . PORTER, HBS
The essence of the job of the strategist is to cope with competition. The
arena in which competition takes place is the industry in which a company
and its rivals vie for business. Each industry has a distinctive structure that
shapes the nature of competitive interaction that unfolds there.
Understanding the underlying structure of a company’s industry, now and in
the future, is a core discipline in strategy formation.
On the surface, every industry is different. Consider the global automobile
industry, the worldwide market for art masterpieces, the booming private
equity industry, and the heavily regulated health-care delivery industry in
Europe. At one level, these industries appear to have little in common.
Industries also differ in another crucial aspect: they register sharply
different levels of average profitability in the long run. For example, Exhibit
1 shows a histogram of long-run return on invested capital in the United
States for more than 400 industries. The most profitable industries
generate much higher returns than the least profitable. Equally significant
differences arise in other countries, both advanced and emerging.
42
To understand industry competition and profitability,
however, one must look beyond their differences and view
industries at a deeper level. In any industry, there are five
basic competitive forces—diagrammed in of the industry.
The forces range from intense in industries such as airlines,
textiles, and steel, where almost no company earns
attractive returns on investment, to mild in industries such
as medical supplies, soft drinks, and toiletries, where there
is room for quite high returns. Many things can affect
industry profitability in the short run—including the weather
and the business cycle—but it is industry structure
manifested in the competitive forces that sets industry
profitability over the long run.
44
Figure A Forces that Shape Competition in an Industry
To understand industry competition and profitability,
however, one must look beyond their differences and view
industries at a deeper level. In any industry, there are five
basic competitive forces—diagrammed in of the industry.
The forces range from intense in industries such as airlines,
textiles, and steel, where almost no company earns
attractive returns on investment, to mild in industries such
as medical supplies, soft drinks, and toiletries, where there
is room for quite high returns. Many things can affect
industry profitability in the short run—including the weather
and the business cycle—but it is industry structure
manifested in the competitive forces that sets industry
profitability over the long run.
46
2.4 Industry Attractiveness
Meaning
Magnitude and ease of making profit, in
comparison with the risks involved, that an
industrial sector offers. It is based on the
number of competitors, their relative
strength, width of margins, and rate of
growth in demand for its goods or services.
Is the Industry Attractive or Unattractive and Why?
Objective
Develop conclusions about whether the industry and
competitive environment is attractive or unattractive,
both near- and long-term, for earning good profits
Principle
A firm uniquely well-suited in an otherwise
unattractive industry can, under certain
circumstances, still earn unusually good profits
Things to Consider in Assessing Industry
Attractiveness
• Industry’s market size and growth potential
• Whether competitive conditions are conducive to
rising/falling industry profitability
• Will competitive forces become stronger or weaker
• Whether industry will be favorably or unfavorably
impacted by driving forces
• Potential for entry/exit of major firms
• Stability/dependability of demand
• Severity of problems facing industry
• Degree of risk and uncertainty in industry’s future
Conducting an Industry and
Competitive Situation Analysis
• Two things to keep in mind
1. Evaluating industry and competitive
conditions cannot be reduced to a
formula-like exercise--thoughtful
analysis is essential
2. Sweeping industry and competitive
analyses need to be done every 1 to 3
years

Part A
1.2 Models of External Environment Analysis – PESTEL, SWOT,
ETOP;
2. Industry Analysis – Industry Features, Industry Boundaries; Industry
Structure, Industry Attractiveness
3. Competitive Analysis – Role of Competitive Forces in Shaping
Strategy; Porter’s Five Forces Model; Competitive Analysis –
Competitor’s Strategy, Competitor’s Performance, Competitor’s
Strength and Weaknesses, Competitor’s Retaliation
Par B
4. Internal Analysis – Importance; Dynamics – Organizational
Resources, Organizational behaviour, Strengths and Weaknesses,
Synergistic Effects, Competencies, Organizational Capability,
Strategic and Competitive advantage
5. Value Chain Analuysis – Concept, Usefulness of Value Chain Analysis
6. Core Competence – Concept, Relationship between core competence
and core competitive advantage
3. Competitive Analysis
3.1 Role of Competitive Forces in Shaping Strategy
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Rivalry Among

Power of Bargaining
Competing Firms
Suppliers Power of
in Industry
Buyers
Threat of
Substitute
Products
3.2 Porter’s Five Forces
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining Rivalry Among

Power of Bargaining
Competing Firms
Suppliers Power of
in Industry
Buyers
Threat of
Substitute
Products
Michael Porter, an authority on competitive strategy, contends that a
corporation is most concerned with the intensity of competition within its
industry. The level of this intensity is determined by basic competitive forces,
as depicted in Figure 4–3. “The collective strength of these forces,” he
contends, “determines the ultimate profit potential in the industry, where
profit potential is measured in terms of long-run return on invested capital.”
In carefully scanning its industry, a corporation must assess the importance
to its success of each of six forces: threat of new entrants, rivalry among
existing firms, threat of substitute products or services, bargaining power of
buyers, bargaining power of suppliers, and relative power of other
stakeholders. The stronger each of these forces, the more limited companies
are in their ability to raise prices and earn greater profits. Although Porter
mentions only five forces, a sixth—other stakeholders—is added here to
reflect the power that governments, local communities, and other groups
from the task environment wield over industry activities
Using the model in Figure 4–3, a high force can be regarded
as a threat because it is likely to reduce profits. A low force, in
contrast, can be viewed as an opportunity because it may allow
the company to earn greater profits. In the short run, these
forces act as constraints on a company’s activities. In the long
run, however, it may be possible for a company, through its
choice of strategy, to change the strength of one or more of the
forces to the company’s advantage. For example, Dell’s early
use of the Internet to market its computers was an effective way
to negate the bargaining power of distributors in the PC
industry.
A strategist can analyze any industry by rating each competitive
force as high, medium, or low in strength. For example, the
global athletic shoe industry could be rated as follows:
Rivalry is high (Nike, Reebok, New Balance, Converse, and Adidas

are strong competitors worldwide), threat of potential entrants is low
(the industry has reached maturity/sales growth rate has slowed),
threat of substitutes is low (other shoes don’t provide support for
sports activities), bargaining power of suppliers is medium but rising
(suppliers in Asian countries are increasing in size and ability),
bargaining power of buyers is medium but increasing (prices are
falling as the low-priced shoe market has grown to be half of the U.S.
branded athletic shoe market), and threat of other stakeholders is
medium to high (government regulations and human rights concerns
are growing). Based on current trends in each of these competitive
forces, the industry’s level of competitive intensity will continue to be
high—meaning that sales increases and profit margins should
continue to be modest for the industry as a whole
1. Threat of New Entrants
New entrants to an industry typically bring to it new capacity, a
desire to gain market share, and substantial resources. They
are, therefore, threats to an established corporation. The threat
of entry depends on the presence of entry barriers and the
reaction that can be expected from existing competitors. An
entry barrier is an obstruction that makes it difficult for a
company to enter an industry. For example, no new domestic
automobile companies have been successfully established in
the United States since the 1930s because of the high capital
requirements to build production facilities and to develop a
dealer distribution network. Some of the possible
barriers to entry are:
 Economies of scale: Scale economies in the production and sale
of microprocessors, for example, gave Intel a significant cost
advantage over any new rival.
 Product differentiation: Corporations such as Procter & Gamble
and General Mills, which manufacture products such as Tide and
Cheerios, create high entry barriers through their high levels of
advertising and promotion.
 Capital requirements: The need to invest huge financial resources
in manufacturing facilities in order to produce large commercial
airplanes creates a significant barrier to entry to any competitor for
Boeing and Airbus.
 Switching costs: Once a software program such as Excel or Word
becomes established in an office, office managers are very
reluctant to switch to a new program because of the high training
costs.
 Access to distribution channels: Small entrepreneurs often have
difficulty obtaining supermarket shelf space for their goods because large
retailers charge for space on their shelves and give priority to the
established firms who can pay for the advertising needed to generate high
customer demand.
 Cost disadvantages independent of size: Once a new product earns
sufficient market share to be accepted as the standard for that type of
product, the maker has a key advantage. Microsoft’s development of the
first widely adopted operating system (MSDOS) for the IBM-type personal
computer gave it a significant competitive advantage over potential
competitors. Its introduction of Windows helped to cement that advantage
so that the Microsoft operating system is now on more than 90% of
personal computers worldwide.
 Government policy: Governments can limit entry into an industry through
licensing requirements by restricting access to raw materials, such as oil-
drilling sites in protected areas.
2. Rivalry among Existing Firms
In most industries, corporations are mutually dependent. A
competitive move by one firm can be expected to have a
noticeable effect on its competitors and thus may cause
retaliation. For example, the entry by mail order companies
such as Dell and Gateway into a PC industry previously
dominated by IBM, Apple, and Compaq increased the level of
competitive activity to such an extent that any price reduction or
new product introduction was quickly followed by similar moves
from other PC makers. The same is true of prices in the United
States airline industry. According to Porter, intense rivalry is
related to the presence of several factors, including:
 Number of competitors: When competitors are few and roughly
equal in size, such as in the auto and major home appliance
industries, they watch each other carefully to make sure that they
match any move by another firm with an equal countermove.
 Rate of industry growth: Any slowing in passenger traffic tends to set
off price wars in the airline industry because the only path to growth is
to take sales away from a competitor.
 Product or service characteristics: A product can be very unique,
with many qualities differentiating it from others of its kind or it may be
a commodity, a product whose characteristics are the same,
regardless of who sells it. For example, most people choose a gas
station based on location and pricing because they view gasoline as a
commodity.
 Amount of fixed costs: Because airlines must fly their planes on a
schedule, regardless of the number of paying passengers for any one
flight, they offer cheap standby fares whenever a plane has empty
seats.
 Capacity: If the only way a manufacturer can increase capacity is in a
large increment by building a new plant (as in the paper industry), it will
run that new plant at full capacity to keep its unit costs as low as possible
—thus producing so much that the selling price falls throughout the
industry.
 Height of exit barriers: Exit barriers keep a company from leaving an
industry. The brewing industry, for example, has a low percentage of
companies that voluntarily leave the industry because breweries are
specialized assets with few uses except for making beer.
 Diversity of rivals: Rivals that have very different ideas of how to
compete are likely to cross paths often and unknowingly challenge each
other’s position. This happens often in the retail clothing industry when a
number of retailers open outlets in the same location—thus taking sales
away from each other. This is also likely to happen in some countries or
regions when multinational corporations compete in an increasingly global
economy.
3. Threat of Substitute Products or Services
A substitute product is a product that appears to be different but can
satisfy the same need as another product. For example, e-mail is a
substitute for the fax, Nutrasweet is a substitute for sugar, the Internet is
a substitute for video stores, and bottled water is a substitute for a cola.
According to Porter, “Substitutes limit the potential returns of an industry
by placing a ceiling on the prices firms in the industry can profitably
charge.” To the extent that switching costs are low, substitutes may have
a strong effect on an industry. Tea can be considered a substitute for
coffee. If the price of coffee goes up high enough, coffee drinkers will
slowly begin switching to tea. The price of tea thus puts a price ceiling on
the price of coffee. Sometimes a difficult task, the identification of
possible substitute products or services means searching for products or
services that can perform the same function, even though they have a
different appearance and may not appear to be easily substitutable.
4. Bargaining Power of Buyers
Buyers affect an industry through their ability to force down
prices, bargain for higher quality or more services, and play
competitors against each other. A buyer or a group of buyers is
powerful if some of the following factors hold true:
 A buyer purchases a large proportion of the seller’s product or
service (for example, oil filters purchased by a major auto
maker).
 A buyer has the potential to integrate backward by producing
the product itself (for example, a newspaper chain could
make its own paper).
 Alternative suppliers are plentiful because the product is standard
or undifferentiated (for example, motorists can choose among
many gas stations).
 Changing suppliers costs very little (for example, office supplies are
easy to find).
 The purchased product represents a high percentage of a buyer’s
costs, thus providing an incentive to shop around for a lower price
(for example, gasoline purchased for resale by convenience stores
makes up half their total costs).
 A buyer earns low profits and is thus very sensitive to costs and
service differences (for example, grocery stores have very small
margins).
 The purchased product is unimportant to the final quality or price of
a buyer’s products or services and thus can be easily substituted
without affecting the final product adversely (for example, electric
wire bought for use in lamps).
5. Bargaining Power of Suppliers
Suppliers can affect an industry through their ability to raise prices or reduce
the quality of purchased goods and services. A supplier or supplier group is
powerful if some of the following factors apply:
 The supplier industry is dominated by a few companies, but it sells to
many (for example, the petroleum industry).
 Its product or service is unique and/or it has built up switching costs (for
example, word processing software).
 Substitutes are not readily available (for example, electricity).
 Suppliers are able to integrate forward and compete directly with their
present customers (for example, a microprocessor producer such as Intel
can make PCs).
 A purchasing industry buys only a small portion of the supplier group’s
goods and services and is thus unimportant to the supplier (for example,
sales of lawn mower tires are less important to the tire industry than are
sales of auto tires).
Relative Power of Other Stakeholders
A sixth force should be added to Porter’s list to include a variety of
stakeholder groups from the task environment. Some of these groups
are governments (if not explicitly included elsewhere), local
communities, creditors (if not included with suppliers), trade
associations, special-interest groups, unions (if not included with
suppliers), shareholders, and complementors. According to Andy
Grove, Chairman and past CEO of Intel, a complementor is a
company (e.g., Microsoft) or an industry whose product works well
with a firm’s (e.g., Intel’s) product and without which the product
would lose much of its value.51 An example of complementary
industries is the tire and automobile industries. Key international
stakeholders who determine many of the international trade
regulations and standards are the World Trade Organization, the
European Union, NAFTA, ASEAN, and Mercosur
The importance of these stakeholders varies by industry. For
example, environmental groups in Maine, Michigan, Oregon,
and Iowa successfully fought to pass bills outlawing disposable
bottles and cans, and thus deposits for most drink containers
are now required. This effectively raised costs across the board,
with the most impact on the marginal producers who could not
internally absorb all these costs. The traditionally strong power
of national unions in the United States’ auto and railroad
industries has effectively raised costs throughout these
industries but is of little importance in computer software.
Five-Forces Analysis
• Five-Forces Analysis is a framework for
analyzing a particular industry.
• The five forces are environmental forces that
impact on a company’s ability to compete in
a given market.
• The purpose of five-forces analysis is to
diagnose the principal competitive pressures
in a market and assess how strong and
important each one is.
3.3 Competitor Analysis
Competitor analysis in strategic management is an assessment of
the strengths and weaknesses of current and potential competitors.
This analysis provides both an offensive and defensive strategic
context to identify opportunities and threats. Profiling
coalesces/combined all of the relevant sources of competitor analysis
into one framework in the support of efficient and effective strategy
formulation, implementation, monitoring and adjustment.
Competitor analysis is an essential component of corporate
strategy. It is argued that most firms do not conduct this type of
analysis systematically enough. Instead, many enterprises operate on
what is called “informal impressions, conjectures, and intuition gained
through the tidbits of information about competitors every manager
continually receives.” As a result, traditional environmental scanning
places many firms at risk of dangerous competitive blindspots due to
a lack of robust competitor analysis.
In formulating business strategy, managers must consider the
strategies of the firm's competitors. While in highly fragmented
commodity industries the moves of any single competitor may
be less important, in concentrated industries competitor
analysis becomes a vital part of strategic planning.
Competitor analysis has two primary activities,
1) obtaining information about important competitors, and
2) using that information to predict competitor behavior.
The goal of competitor analysis is to understand:
 with which competitors to compete,
 competitors' strategies and planned actions,
 how competitors might react to a firm's actions,
 how to influence competitor behavior to the firm's own
advantage.
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
 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 Performance
The productivity of the competitors manifested in different areas of
results are the another very important issue of analysis. The sources
of Competitor’s Performance can be the financial reports, ratio
analysis, HR position, market share, trend of the growth or shrink etc.
You may:
 Read about your competitors. Look for articles or ads in the trade
press or mainstream publications. Read their marketing
literature. Check their entries in directories and phone books. If
they are an online business, ask for a trial of their service.
 If your competitor is a public company, read a copy of their
annual report.
 Go to exhibitions: At exhibitions and trade fairs check which of
your competitors are also exhibiting. Look at their stands and
promotional activities. Note how busy they are and who visits
them.
 Go online: Look at competitors' websites. Find out how they
compare to yours. Business websites often give much information
that businesses haven't traditionally revealed - from the history of
the company to biographies of the staff.
 Use a search engine to track down similar products. Find out who
else offers them and how they go about it.
 Organisations and reference sources:
 Your trade or professional association, if applicable.
 The local Chamber of Commerce.
 Directories and survey reports in any business reference library.
HEARING ABOUT YOUR COMPETITORS
 Speak to your competitors. Phone them to ask for a copy of
their brochure or get one of your staff or a friend to drop by and pick
up their marketing literature.
 You could ask for a price list or enquire what an off-the-shelf item
might cost and if there's a discount for volume.
 Phone and face-to-face contacts will also give you an idea of
the style of the company, the quality of their literature and the initial
impressions they make on customers.
 It's also likely you'll meet competitors at social and business events.
Talk to them.
 Be friendly - they're competitors not enemies. You'll get a better idea
of them - and you might need each other one day, for example in
collaborating to grow a new market for a new product.
 Listen to your customers and suppliers
 Make the most of contacts with your customers. Don't just ask how
well you're performing - ask which of your competitors they buy from
and how you compare.
 Use meetings with your suppliers to ask what their other customers
are doing. They may not tell you everything you want to know, but
it's a useful start.
C) Competitor’s Strength & Weaknesses
Knowing as much as possible about the competition provides
the Company with an understanding of its position in the
marketplace relative to an opportunity and enables the
Company to persuade the customer that it is better than the
competition. Important things to consider about the competition
include:
 solutions, products, and services,
 marketing skills,
 financial strength,
 response capability,
 resource availability.

Use of Negative Strategy
Negative strategy statements can make the Company look
better than its competitors. Design negative strategy
statements to make the customer have misgivings or fear over
choosing the competitors. A good technique that uses Negative
Strategy is Ghosting. Ghosting is finding fault with and
downplaying competitor’s strong points and emphasizing their
weaknesses.
Using negative strategy statements requires supporting
evidence and reasons for choosing the Company. Use negative
strategy statements carefully. Alerting the customer to a
specific problem with a competitor's solution requires an
explanation of how or why the Company will avoid the problem.

d) Competitor’s Retaliation
This is what intended of Competitor Analysis. Actually, this is
what a strategist want to do. There are various methods of
retaliation based on different environmental scenarios. The
following are the some to shortlist:
 Entry barriers
 Economies of Scale
 Experience Curve
 Defensive
 Offensive
 Innovative Trend Setter
 Imitative Trend Leader
 Quick Trend Follower

COMPETITOR ANALYSIS
The follow-up to Industry Analysis is
effective analysis of a firm’s Competitors
Industry
Environment
Extra
Competitive
Environment
COMPETITIVE ADVANTAGE
• Overriding objective behind Strategic Planning is
achieving Sustainable Competitive Advantage.
• Competitive Advantage refers to some aspect of

organization performed better than competitors.
– Having a Lower Cost base
– Providing a Better Product
– Doing Both at the same time
• Even ‘not for profit’ sector compete for limited

resources
WHAT IS COMPETITIVE ANALYSIS?
• Competitive Analysis
– A set of methods for getting ideas from your
competitors
• Also known as: Comparative Analysis

COMPETITOR ANALYSIS
Assumptions
What assumptions do our
competitors hold about the future Response
of industry and themselves?
What will our
Current Strategy competitors do in the
Does our current strategy support future?
changes in the competitive Where do we have a
environment? competitive
Future Objectives advantage?
How do our goals compare to our How will this change
competitors’ goals? our relationship with
our competition?
Capabilities
How do our capabilities compare
to our competitors?
COMPETITOR ANALYSIS
Future Objectives What Drives the
How do our goals competitor?
compare to our
competitors’
Where will emphasis
goals? be
placed in the future?
What is the attitude
toward risk?
COMPETITOR ANALYSIS
Future Objectives What is the competitor doing?
How do our goals What can the competitor do?
compare to our
Where Current
competitors’ goals?Strategy
will emphasis be
placed inHow
the future?
are we currently
competing?
toward risk?
Does this strategy
support changes in the
competitive structure?
COMPETITOR ANALYSIS
Future Objectives What does the competitor believe
How do our goals about itself and the industry?
compare to our
Where Current
competitors’ goals? Strategy
will emphasis be
How are we currently
competing?
toward risk? Assumptions
Does thisDostrategy
we assume the future
support will
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?
COMPETITOR ANALYSIS
Future Objectives What are the competitor’s
How do our goals capabilities?
compare to our
Where Current
will emphasis be
competing?
toward risk? Assumptions
Does thisDostrategy
we assume the future
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitorsCapabilities
hold about the
What are my competitors’
Are we operating under
strengths and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
COMPETITOR ANALYSIS
Future Objectives Response
How do our goals What will our competitors
compare to our do in the future?
Where Current
will emphasis be Where do we have a
placed in the future? competitive advantage?
competing? How will this change our
toward risk? Assumptions relationship with our
Does thisDostrategy
we assume the future competition?
supportwill
changes in the
be volatile?
competition
Whatstructure?
assumptions do our
competitorsCapabilities
hold about the
What are my competitors’
Are we operating
strengths under
and weaknesses?
a status quo?
How do our capabilities
compare to our
competitors?
3.Seven Questions
Industry and Competitive Analysis – Seven
Questions
1. Industry’s Economic Traits
2. Industry’s Competitive Forces
3. Drivers of Industry Change
4. Competitive Positions of Rivals
5. Competitive Moves of Rivals
6. Key Success Factors

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STRATEGIC MANAGEMENT

MBA, IV Semester  Course Code: CA 541