PowerPoint

to accompany

Chapter 3:
Analysing
the external
environment
Learning objectives

 Define the industry in which an organisation

operates
 Analyse the macro-environment
 Analyse the industry environment
 Analyse key competitors
 Identify strategic groups in an industry
 Understand how industries evolve
 Analyse public sector industries
 Identifying strategic groups within an industry

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What is environmental analysis?
 The ‘environment’ consists of those factors
outside the organisation that influence its
strategy
 Environment consists of two sections:
the macro-environment
the industry environment
 Macro-environment issues affect many
industries and impacts growth prospects
 Industry environment affects profitability and the
competitive positions of members

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The external environment

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What is an ‘industry’?

 ‘A group of organisations or business units

producing close substitutes.’ (Hubbard, 2010, p.
64)
 ‘A group of firms whose products have so many of
the same attributes that they compete for the same
buyers.’ (Thompson & Strickland, 2001, p. 77)

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What is an ‘industry’?
 The concept of ‘industry’ is a perception rather than
reality
 Industries should also be geographically defined
(who are your real competitors?)
 The breadth of the definition affects the way the
industry is analysed
 Too narrow, and possible competitors and
substitutes may be missed
 Too broad a definition may lead to too much data to
analyse

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What is an ‘industry’?

 ‘Our experience is that failure to define the

‘industry’ clearly at the start of the analysis
is a major trap from many strategic
analyses that are conducted.’

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The macro-environment

 The analysis of the macro-environment

attempts to answer two questions:
What major trends will affect industry
growth in the future?
Will this industry grow faster or slower than
average?
 This analysis is conducted at the industry
level, not the organisational level

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The macro-environment
 The macro-environment trends are divided into eight areas:
 Economic
 Political
 Technological
 Legal
 Social/cultural
 Demographic
 Green environment/sustainability
 International
 Rate each issue as positive/negative in terms of future
growth effects on the industry

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Some possible economic issues
 Gross National Product (GNP)
 Personal disposable income growth rates
 Inflation rates
 Unemployment levels
 Interest rates
 Exchange rates
 Taxation rates
 Wage rates

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Some possible political issues

 Privatisation
 Changes in legislation
 Trends in regulation
 Industry policies
 Competition policies

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Some possible technological issues

Genetic engineering Ceramics

Voice-activated Global positioning

computing systems
Superconductors Smartcards

Artificial intelligence Composite

materials
Fibre-optics
Cloning
Internet
Nanotechnology
Digital electronics
Robotics

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Some possible legal issues

 Attitudes of the courts

 Class actions
 Personal and professional liability

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Some possible social/cultural issues

 More difficult to capture

 marital and family relationships
 working arrangements
 ecological issues
 multiculturalism
 Education
 Use of technology
 Health
 Globalisation/immigration attitudes
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Some possible demographic issues

 Growth in general population may not

translate to growth in specific population for a
particular industry
 Falling birth rates increase the mean age of
the population reducing demand for products
and services aimed at children
e.g. McDonald’s pushing for the adult breakfast
market to augment their traditional (but declining)
child/youth market
 Increased average population age is
increasing demand for medical and nursing
services

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Possible green environment/sustainability
issues
 Issues forcing industries to develop environmentally
sustainable commercial practices
 Main areas of concern are:
 Carbon emissions
 Energy sourcing and energy efficiency/use
 Lack of water
 Increased salinity in agricultural areas
 Deforestation
 General climate change
General environmental damage – emissions, waste,
sourcing of non-renewables

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Using the macro-environment analysis
1. Rate important issues as either positive or negative in
terms of future growth impacts
2. Summarise the positives and negatives in order of relative
importance
3. Write down this summary, list the major reasons for your
conclusion
4. Summarising these factors:
 gives a more integrative picture of the environment
 signals what is crucial information, and
 shows up any gaps in the information available

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Gathering macro-environment data

 Sources of data for the environmental analysis

Government statistics departments (e.g. ABS) and
agencies
 Industry associations
 Market research firms
 Lobby groups
 Universities
 The internet

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Industry analysis

 The aim of the industry analysis is to

answer these questions:
 What is the current absolute and relative
profitability of the industry?
 What is the expected future profitability of
the industry?

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Profitable industries

 An industry is likely to be most profitable

when:
 entry to the industry is difficult
 there are many small suppliers whose
contribution is unimportant
 there are many small buyers
 there are few substitutes
 there are few, relatively happy competitors

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Porter’s Five Forces
 The Porter five forces analysis is used to
determine those factors that affect the profitability
of an industry
 The five ‘forces’ in Porter’s analysis are:
 Threat of new entrants
 Bargaining power of suppliers
 Bargaining power of buyers
 Substitute power
 Degree of industry rivalry

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Porter’s Five Forces Model

Threat of
New Entrants

Rivalry Among
Bargaining Power Bargaining Power
Existing
of Suppliers of Customers
Competitors

Threat of
Substitutes

Figure 3.8

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Factors affecting threat of new entrants

 Economies of scale
 Proprietary product differences
 Brand identity
 Switching costs
 Capital requirements

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Factors affecting threat of new entrants (cont.)

 Access to distribution
 Absolute cost advantages
 Government policy
 Expected retaliation

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Factors affecting power of suppliers

 Differentiation of inputs
 Switching costs of suppliers and firms
in the industry
 Presence of substitute inputs
 Supplier concentration relative to
industry concentration
 Importance of volume to suppliers

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Factors affecting power of suppliers (cont.)

 Cost relative to total purchases in the industry

 Impact of inputs on cost or differentiation
 Information about supplier’s product
 Supplier profitability
 Decision makers’ incentives
 Threat of forward integration

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Factors affecting power of buyers

 Differentiation of outputs
 Switching costs of buyers
 Presence of substitutes
 Industry concentration relative to buyer
concentration
 Importance of volume to buyers
 Cost relative to total buyer purchases

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Factors affecting power of buyers (cont.)

 Impact of outputs on buyer costs or

buyer differentiation
 Buyer information about the industry
output
 Buyer profitability
 Decision makers’ incentives
 Threats of backward integration

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Power of substitute products and services

 The products of different businesses or industries

that can satisfy similar customer needs,
 (e.g. coffee industry products substitute for soft-drink
industry products)
 Relative price/performance of substitutes
 Switching costs
 Buyer propensity to substitute

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Factors affecting rivalry within the
industry
 Industry growth rate
 High fixed costs
 Intermittent over-capacity
 Product differences
 Brand identity

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Factors affecting industry rivalry (cont.)

 Switching costs
 Informational complexity
 Concentration and balance
 Diversity of competitors
 Corporate stakes
 Exit barriers

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Summarising the Porter analysis
 Each of the five forces should be summarised in
terms of impact on industry profitability
 Evaluate the power of each force: high, average
or low
 Avoid ‘playing safe’ with a middle of the road
conclusion
 Be aware of dynamic conditions in the industry

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Drawing conclusions about industry
profitability
 If all forces are rated ‘high’, industry profit
should be low (and vice versa)
 Confirm your analysis with industry
profitability data
 Profitability varies within an industry
 Be aware of the dynamics of change in the
industry
 Which forces are changing?
 How will these changes affect future
profitability?

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Key success factors
 Key success factors (KSF) should be determined
from the industry analysis
 These are the key say 3-6 factors organisations
need to do well just to survive
 Examples
 Marketing
 Product quality
 Customer service
 Price
 Technical expertise

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Is Porter’s Five Forces Analysis useful?

 Can be a static analysis if focus only on current

positions
 Does not account for innovation and change
 Applicable to industry level but factors may not
apply at organisational level
 Hubbard suggests changes to the model to
account for these shortcomings

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Modified Porter analysis

 Historic background of industry and trends

history of industry – what drove
development to this position?
important trends influencing future
directions

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Hubbard’s modified Porter analysis

 The role of government

 The role of government varies from
country to country – may be a significant
regulator, buyer or supplier to the
industry
 Governments tend to assume greater
roles in smaller countries
 Industries may be affected by various
levels of government

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Hubbard’s modified Porter analysis
 Buyers’ buyers and suppliers’ suppliers
 Need to take into account the whole ‘value chain’
 identify who supplies our suppliers
 identify who buys from our buyers
 Extra complexity of analysis adds insight into the
industry
 Complementors
 Firms who offer complementary products or services that
add value to the industry eg insurance and motor vehicle sales
 May be important in facilitating or inhibiting future growth,
especially as consumers seek ‘packages’ and ‘experiences’
from purchase decisions

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Industry analysis and the value chain

 This extension moves the five forces

framework more towards the value chain
or business system framework
 An industry is part of a chain of business
activities

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Value Chain – Single-Industry Firm

Supplier Value Firm Value Channel Value Buyer Value

Chains Chain Chains Chains

Source: Michael E. Porter. Competitive Advantage (New York: Free Press, 1985/1998), p. 35

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Industry turbulence

 The level of turbulence is an important

factor in the industry analysis
 Ansoff’s levels of turbulence:
 Repetitive environment
 Expanding environment
 Changing environment
 Discontinuous environment
 Surpriseful environment

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 Matching turbulence, aggressiveness and
responsiveness

REPETITIVE EXPANDING CHANGING DISCONTINUOUS SURPRISEFUL

Environmental
Repetitive Slow, incremental Fast, incremental Discontinuous, Discontinuous,
Turbulence
predictable unpredictable

STABLE REACTIVE ANTICIPATORY ENTREPRENEURIAL CREATIVE

Strategic Stable based on Incremental based Incremental based Discontinuous. New Discontinuous.
Aggressiveness precedents on experience on extrapolation based on observable Novel based on
opportunities creativity
STABILITY EFFICIENCY MARKET DRIVEN ENVIRONMENTALLY ENVIRONMENT
Organisational SEEKING DRIVEN DRIVEN CREATING

Responsiveness Rejects change Adapts to change Seeks familiar Seeks related change Seeks novel
change change

CUSTODIAL PRODUCTION MARKETING STRATEGIC FLEXIBLE

Responsiveness Precedent driven Efficiency driven Market Driven Driven by the Seeks to create the
of Capability environment environment

Suppresses Adapts to change Seeks familiar Seeks new change Seeks novel
change change change
Seeks stability Seeks operating Seeks creativity
efficiency
Closed system Open system

Turbulence Level 1 2 3 4 5

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Figure 3.11 Beamish/Strategic Management/4th edition
Industry change and the industry life
cycle
 Phases of the industry life cycle
 Start-up
 Growth
 Control
 Maturity
 Shakeout
 Decline?

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Organisation size and industry life cycle

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Figure 3.12

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The diamond model of industry analysis

Government Chance
Support Firm rivalry Events

Favourable
factor Demanding
(supply) customers
conditions

Related
industries and
Chance infrastructure Government
Events Support

Figure 3.18

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Networks and industry standards
 Networks of competition rather than individual firms competing
Alliances between firms to develop competitive advantage
against other networks of competitors
 Improved access to markets, market coverage
 Advantage of complementary technology
 May speed up innovation
 Size and scale may encourage others to join, creating further
size and scale eg free information on Internet
Developing industry standards builds strong strategic
advantage
 Microsoft Windows
 Apple iPhone
 Video recording systems

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Industry analysis for the public sector

 Industry analysis is not generally applicable

to public sector organisations
 Public sector organisations generally:
 have no industry rivalry
 have little chance of new entrants or substitutes
 have ‘buyers’ with no choice
 have no clear overall goals
 therefore subject to political persuasion, varying views of what
constitutes ‘success’ and ‘performance’

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Industry analysis for the public sector

 Political persuasion can be seen as an ‘influence

system’, rather like ‘key stakeholders’ for other
organisations
 The influence system should be analysed:
 How does this influence group affect the
organisation?
 Why do they affect the organisation?
 How powerful is this influence group?
 What gives them this power?
 What factors might affect that power in the future?
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 Public Sector
Industry Analysis Voters

Lobby Groups

Government MPs

Minister

Department Managers/Staff

Funding Users

Regulatory
Bodies

Public Sector Distribution

Suppliers
Organisation Channel(s)

Complementary
Substitutes
Services

Figure 3.18

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From industry to market analysis
 Industries are not markets
 Industry: a group of organisations or business units
producing close substitutes
 Market: a group of consumers with similar needs
 Market segment: a relatively homogenous group of
customers who will respond to a marketing mix in a
similar way
 Firms primarily operate in markets and segments,
rarely operating across the whole ‘industry’

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From industry to market analysis

 Understanding customers
 Who are the key customers?
 Why do they buy the product?
 use of product
 benefits
 features
 purchase triggers

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Key market analysis questions
 What is the growth rate of the market?
 What size are the key segments?
 How diverse is the market?
 Does the market fluctuate?
 How sensitive to cost variations?
 What is a viable level of business?
 What is the buyer decision process?
 What are the pricing mechanisms?

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Analysing competitors

 Industry analysis should include a detailed

analysis of each key competitor
 Information needed about each competitor:
business and corporate strategies
key stakeholders, their commitment and
values
current position – market share and
position, financial performance
satisfaction with current industry position
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Analysing competitors (cont.)

 operating position; volume/capacity, cost structure etc.

 capabilities
 gaps between strategy and capabilities/performance
 assumptions held about the industry
 possible future changes

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Strategic groups

 Competitors following a similar strategy in a

similar product-market classification
 Competitive positioning analysis
 compare competitors on two axes
 axes should not correlate
 identify the fundamentally different
competitive approaches
 estimate mobility barriers between groups
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Strategic groups – Global automotive industry
example

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Scenario planning

 An alternative approach to environment

analysis
 More dynamic and flexible
 Several plausible alternative scenarios are
developed
 Enables firms to prepare for a variety of futures
 Useful where uncertainty is high and past data
of limited value eg high technology industries

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Scenario planning – Building blocks

Drivers
DriversofofChange
Change

Basic
BasicTrends
Trends Key
KeyUncertainties
Uncertainties

Rules
RulesofofInteraction
Interaction

Multiple
MultipleScenarios
Scenarios
Source: Schoemaker, P. J. H. (1995, Winter). Scenario planning: A tool for strategic thinking. Sloan Management Review.

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Summary

 Define the ‘industry’

 Analyse the future growth from the macro-environment
framework
 Determine future profitability from the industry analysis: Five
forces and modifications
 Consider industry turbulence, change and the industry life cycle
 Why is public sector industry analysis different?
 Understand industry versus market analysis
 Analyse key competitors and strategic groups
 Consider scenario planning where uncertainty is high

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