External Analysis

PROF ARUN KUMAR TRIPATHY

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 The Fundamental Question
Why are some firms more successful than others?

Industrial Organization Perspective:

Profits = f ( industry structure)
Choose “good” industries, adapt your strategy to “fit”

Resource – Based View:

Profits = f ( internal firm capabilities)
General Environment (legal, cultural, political)
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 General Environment
Environment
The ability of firms to predict trends and/ or control events in the
general environment is limited
◦ Demographic Trends- e.g. geographic distribution; income levels
◦ Socio-cultural issues- e.g. beliefs, values, norms
◦ Political/Legal issues- e.g. deregulation
◦ Technological issues- e.g. genetic engineering; nanotechnology
◦ Economic issues-e.g. unemployment levels; interest rates
◦ Global issues- specific international events; e.g. exchange rates;
BREXIT, USA-China trade war, Pandemic

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FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS

At the Core of the Macro Environment is the

Industry Environment
The national/ The natural
international environment
economy
THE INDUSTRY
ENVIRONMENT

• Suppliers Demographic
Technology structure
• Competitors
• Customers
• Complementors
• Substitutes
Government • Government Social
& Politics structure

The Macro Environment impacts the firm through its

effect on the Industry Environment
The profitability of selected Indian industries, 2010–2020
SCP Model
Industry Structure
Number of competing
firms,
Homogeneity of products,
Cost of entry and exit

Firm Conduct
Price taking
Product differentiation
Tacit collusion
Exploiting market power
Performance
Firm Level: Normal, below normal,
above-normal performance
Society: Productive and allocative
efficiency, level of employment,
progress

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 Industry Concentration
Nature of Competition HHI Index Intensity of Price
Competition

Perfect Competition Usually < 0.2 Fierce

Monopolistic Competition Usually < 0.2 Depends on the degree of

product differentiation

Oligopoly 0.2 to 0.6 Depends on inter-firm rivalry

Monopoly > 0.6 Light unless there is threat of

entry

Source: Economics of Strategy by Besanko, Dranove, Shanley and Schaefer

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 SCP: Types of Industry Structure
Type of Industry Attributes Example Firm-conduct Expected
Industry options performance

Perfect Large number of firms; no Spot Market Price taking Normal

competition differentiation; Low entry for Crude Oil
& exit barriers

Monopolistic Large number of Shampoo, Product Above normal

competition competing firms; Toothpaste, differentiation
Heterogeneous products; Automobiles
low entry & exit barriers
Oligopoly Small no of firms; costly Steel, Collusion Above normal
entry or exit breakfast
cereals
Monopoly One firm; costly entry Home mail Use market Above normal
delivery power to set
prices

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Industry Analysis
▪What are the boundaries of the industry ?
▪What is the industry structure ?
▪Who are your competitors ?
▪What are the key drivers of competition ?
▪How to respond to various threats in the competitive
arena?
▪Does the firm has capabilities to compete in that
industry ?
▪Identify Key Success Factors or Critical Success Factors

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Industry Analysis- Objectives
▪ Sources of profit in the external environment – the proximate environment is
the industry
▪ Industry analysis is relevant to both Corporate and Business level strategies
▪ Understand how the competitive structure of an industry determines its
profitability.
▪ Analyzing industry attractiveness,
▪ Applying industry analysis to forecast industry profitability
▪ Using industry analysis to develop strategy that
▪ Position the firm favorably in relation to competitive forces
◦ Influence industry structure to enhance the industry’s attractiveness
▪ Identify general sources of competitive advantage in an industry – KSF or CSF

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 Industry and Firm strategy

Industry
◦ Usually, firms with high cross elasticity of demand for their product/
service may be said to be in the same industry
◦ Industry classification – SIC; NIC Harmonized

Firm strategy
◦ To recognize & neutralize external threats
◦ To exploit environmental opportunities through organizational
strengths
◦ Avoid/ fix organizational weaknesses

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 ANALYZING INDUSTRY ATTRACTIVENESS

The Determinants of Industry Profitability

3 key influences:

1. The value of the product to customers

2. The intensity of competition

3. Relative bargaining power at different stages of the value chain

Industry Structure:
Key Factors Influencing Industry Attractiveness

Determinants of Entry Barriers ⚫ Incumbency advantages

⚫ Supply side economies of scale
Independent of Scale

Threat of New
⚫ Demand side benefits of scale
– Proprietary learning curve

Entrants
⚫ Product Differentiation
– Access to necessary inputs
⚫ Switching costs for switching to
– Proprietary low-cost product
new entrants design
⚫ Capital requirements
⚫ Restrictive Government policy
⚫ Unequal access to distribution
⚫ Expected retaliation
channels

Bargaining Power Bargaining Power

Rivalry among
of Suppliers of Buyers
Competitors

Determinants of Supplier Power Determinants of Rivalry Determinants of Buyer Price sensitivity

⚫ Supplier concentration vs. Power ⚫ Price / total
Industry Concentration ⚫ Industry concentration ⚫ Corporate stakes purchases
⚫ Differentiated inputs ⚫ Industry growth ⚫ Exit barriers Intrinsic Leverage ⚫ Buyer’s
⚫ Importance of volume to supplier ⚫ High Fixed and low – Asset Specificity ⚫ Buyer concentration vs. profitability
⚫ Switching cost for switching to marginal costs – Costs of Exit Industry concentration ⚫ Impact on quality
other suppliers/alternate inputs ⚫ High storage costs or – Legal/governmental ⚫ Volume of Buyers & performance
⚫ Credible threat of forward perishability restrictions Purchases
integration relative to threat of ⚫ Product differentiation – Strategic ⚫ Buyer switching costs
backward integration by firms in ⚫ Diversity of competitors interrelationships relative to industry’s
the industry ⚫ Excess capacity between business & switching costs
⚫ Switching costs for others ⚫ Product differentiation
switching to competitors – Emotional Barriers ⚫ Buyer
Determinants of Complementor
information/Expertise
Power
⚫ Threat of backward
⚫ Complementor concentration
integration

Substitutes
relative to industry

Threat of
⚫ Presence of Substitute
⚫ Complements influence on
products
demand
⚫ Asymmetric threats of integration Determinants of Substitution Threat
⚫ Relative Switching costs ⚫ Price to Performance ratio of substitute
⚫ Ease of unbundling ⚫ Switching costs for buyer
⚫ Rate of growth of profit
opportunity
PROF ARUN KUMAR TRIPATHY, MDI GURGAON Adapted from: Porter (2008) and Ghemawat (2001) 14
 Typical Steps in Industry Analysis

◦ Define the relevant industry – Product and Geographic scope

◦ Identify the participants and segment them into groups, if
appropriate
◦ Assess the underlying drivers of each competitive force
◦ Determine overall industry structure and test the analysis for
consistency
◦ Analyze recent and likely future changes in each force
◦ Identify aspects of industry structure that might be
influenced

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Industry Analysis - Insights
▪Possible to make good money in a tough industry- South West,
Air Asia
▪Positioning of the company- different ways to react to
competitive forces
▪Possible to profit by spotting changes in Industry structure
▪Change in entry barriers /supplier or buyer power /new substitutes
▪Particularly important when going into new business or new
geographies.
▪Companies can shape Industry structure

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 Limitations / Pitfalls of the 5 Forces Model

▪ Defining the industry too narrowly or too broadly

▪ Implicitly assumes a zero sum game
No place for collaborative relationships
▪ Role of complements?
▪ Static analysis
▪ Making lists instead of engaging in rigorous analysis
▪ Confusing cyclical or transient changes with structural changes
▪ Paying equal attention to all the forces
▪ Using the framework to declare an industry attractive or unattractive
rather than using it to guide strategic choices

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 Environmental Opportunities
Fragmented Industry: e.g. Office supplies
◦ Consolidation
◦ Discover new economies of scale e.g. a chain of stores
◦ Alter ownership structure e.g. franchise agreements
Emerging Industry: e.g. Biotechnology
◦ Newly created / recreated industries formed by technological innovation, changes in
demand, emergence of new customer needs, etc
◦ First mover advantages
◦ Technological leadership/Preemption of strategically valuable asset/ Creation of
customer switching costs

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 Environmental Opportunities
 Mature industries
 Characterized by slow total industry demand growth, slowdown in increase of production
capacity, slowdown in new products & services, overall reduction in profitability
 Product refinement
 Investment in service quality
 Process innovation: reduce manufacturing cost, streamline management, etc

 Declining industry
 Absolute decline in unit sales sustained over a period of time
 Market Leadership strategy: facilitate exit
 Niche strategy: focus on narrow segment
 Harvest strategy: long, systematic withdrawal
 Divest strategy: quick exit

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 Environmental Opportunities
 International industry
 Firms operate in multiple countries
 Global opportunities: lowest cost global location
 Transnational opportunities: centralized production of customized products
 Network industry: e.g. PC software
 Value of a product or service sold depends upon the number sold
 First mover advantage
 ‘Winner takes all’ strategy
 Hypercompetitive industry: e.g. e-commerce
 Bases of competition are in a constant evolution that is unpredictable
 Flexibility
 Proactive disruption

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 A Typical Product / Industry Life Cycle
Incubation
Growth
Decline

Diversity
Industry size (number of units) Maturity E

C Technology cycles
linked to product
cycles

A Time
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 BEYOND THE 5-FORCES

Using Business Models to Manage the Ecosystem

▪ A business model is a simplified description of a business that specifies the core logic for
creating value

▪ Business models are useful for developing strategies that can exploit the opportunities
available in complex business ecosystems

▪ The Business Model Canvas is a graphical tool for designing business models:
 Thank You

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