Appreciating Environmental

Context
• Three External Environments include:
–General
–Industry & Strategic groups
–Competitor
 External Environment:
General, Industry and Competitor

• The General Environment

– The broader society dimensions that influence an
industry and the firms within it
– Grouped into 7 dimensions OR ‘environmental
segments’ Each segment composed of elements
– GM and Chrysler filed for bankruptcy, Chrysler formed
alliance with Fiat
– No control over segments of environment
– Segment intelligence can help re-orient strategy to
mitigate influence
The External Environment
External Environment:
General, Industry and Competitor (Cont’d)

• Industry Environment
– Set of factors directly influencing
• A firm’s competitive actions/responses
• Relates to Porter’s 5 Forces – see upcoming slides
• Competitor analysis: gather and interpret competitor
information
• Competitor Environment
– Gives details about
• A firm’s direct and indirect competitors
• The competitive dynamics expected to impact a firm's efforts to
generate above-average returns
External Environment Analysis
• Opportunity
– General environment condition that, if exploited, helps a
company achieve strategic competitiveness e.g P&G
market research that male members are interested in
fragrances and skin care products- gender specific
products instead of general categories

• Threat
– General environment condition that may hinder a
company's efforts to achieve strategic competitiveness-
Polaroid missed the digital photography trend which
went bankrupt in 2001 until acquired by Petters Group
to rejuvenate the brand 2002 onwards ; went bankrupt
again in 2008 only intangible assets being used by the
acquiring company
General environment 7-segments and elements
Demographic •Population size •Ethnic mix: Social and regional groups
segment •Age structure •Income distribution
•Geographic distribution

Economic •Inflation rate •Personal saving rates

•Interest rate •Business saving rates
•Trade deficit/surplus •Gross domestic product
•Budget deficit/surplus

Political/legal •Anti-trust laws •Labor training laws

•Taxation laws •Educational philosophies and policies
Deregulation philosophies

Socio-cultural •Women in workforce •Shift in work and career preferences

•Workforce diversity •Shifts in preferences in product and service
•Attitudes about work life quality characteristics

Technological •Product innovations •Private-government supported R&D

•Application of knowledge •New communication technologies
•Use of wireless technology •Plant automation

Global •Important political events •Newly industrialized countries

•Critical global markets •Different cultural and institutional attributes
•Peace in middle east •Entry of China in WTO & guanxi

Physical •Energy consumption •Water availability as resource

environment •Sources of energy development •Environmental friendly products
•Renewable energy efforts •Global warming
•Minimize environmental footprint
Industry Environment Analysis

• Industry
– Definition: Group of firms producing products that are
close substitutes
– Because of blurring boundaries, customer groups and
their needs become the criteria of finding boundaries of
markets instead of industries
– Industry environment, in comparison to the general
environment, has more direct effect on firm’s
• Strategic competitiveness and
• Above-average returns
– Intensity of industry competition and industry’s profit
potential are a function of 5 forces (See next slide)
The Five Forces of Competition Model
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 1/5: New entrants
• Can threaten market share of existing competitors
• May bring additional production capacity
• Function of two factors
– 1: Barriers to entry
» Economies of scale in all functions: marketing, manufacturing,
purchasing and R&D- enhances firm flexibility- oracle through Sun
Microsystems, customized products can reduce entry costs, Flexible
Manufacturing System- mass customization
» Product differentiation- belief that product is unique through ads or
first mover, Ford-stronger, greener, tech advanced – loyalty
achieved-P&G, Colgate through ads and NPD
» Competitor wanting to enter provide lower prices
Entry Barrier ………………..
» Capital requirements-huge capital to enter, knowledge is also
required, acquisition maybe expensive to enter, it is high risk game
» Switching costs- one time cost incurred by buyers- fin and psychic
cost – Microsoft windows, Freq Flier Program create barriers
» Access to distribution channels- Switching costs-use price breaks and
cooperative advertising to overcome barriers
» Cost disadvantages independent of scale-proprietary technology, raw
material or location, government subsidies- deliver products directly
can overcome barrier of location
» Gov’t policy- govts. provide license, permission or subsidies- liquor,
radio, TV, banking and trucking may have control of govt.

– 2: Expected retaliation- swift and harsh reaction can hold back new
players. If has major stake or huge sunk investments the retaliation will
be vigorous- locating niches may be entry mode for new players esp
SMEs- Honda entry in bike markets
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 2/5: Bargaining power of suppliers
– By reducing quality and increasing price- exercise their
power
• They are powerful when …
– 1. Few large companies and more concentrated than the
industry to which they sell
– 2. No substitutes exists for supplier product
– 3. Industry firms not significant customer to supplier group.
– 4. Supplier’s goods are critical to buyer’s success
– 5. High switching costs due to effectiveness of supplier’s
products
– 6. Threat of forward integration
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 3/5: Bargaining power of buyers
– Want to buy at lowest price, high service, better quality
• They are powerful when …
– 1. Purchase large portion of industry’s total output
– 2. Product sales accounts for significant seller annual
revenue
– 3. Low switching costs (to other industry product)
– 4. Industry products are undifferentiated or standardized
and
– threat of backward integration
Buyer know the supplier costs and use internet to know cost
structure of suppliers
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 4/5: Threat of substitute products (products from outside
the industry)-wood, aluminum, glass as substitutes in construction
industry or Nutrasweet for sugar- put upper ceiling on prices
• Goods or services outside of given industry perform same or
similar functions at a competitive price (i.e., plastic has
replaced steel in many applications) if low switching costs
• Differentiation helps to overcome substitute threat
– 5/5: Intensity of Rivalry Among Competitors- when
position improves or threat to profitability occurs-rivalry happens
on price, service, innovation
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed costs or high storage costs
• Lack of differentiation or low switching costs
• High strategic stakes
• High exit barriers
Industry Environment Analysis (Cont’d)

• Porter’s 5 Forces
– 5/5: Intensity of Rivalry Among Competitors
• High exit barriers (Cont’d)
– 1. Specialized assets
– 2. Fixed costs of exit (i.e., labor agreements)
– 3. Strategic interrelationships (i.e., one business depends on
another)
– 4. Emotional barriers (i.e., loyalty to employees, etc.)
– 5. Government and social restrictions
These 5 forces determine the attractiveness of
industry
–
 Key environmental influences on the
Automotive parts Industry
• This industry is dependent of the automobile assembling
industry who are the main customers of Parts Industry
• Therefore the environmental factors that affect the
automobile industry will also impact the parts industry
• Of course possible to find applications of some components in
other industries
• However dominant influence is of auto companies which
include the 2-3 wheelers, passenger cars, Light and heavy
commercial vehicles
• A very brief environmental context is set here for the industry
and the firm
 General Environmental factors
• Demographic: Very large population, young people in 18-40 age group, middle
income groups- both lower and higher
• Increased GDP will increase demand
• Economic: Inflation would reduce disposable income, two-family income will help,
high interest rates and availability of finance will affect it adversely, personal savings
will help, taxation will affect one way or another: excise, VAT, Income Tax, Road
development
• Business savings will encourage new entry
• Political: FDI restrictions removed will increase competition, labor laws might
adversely affect if not made flexible
• Scio-cultural: women in job workforce diversity, attitude about quality of life,
enhance consumption,
• Technological: influence product, range R&D spending, innovation, communication
technologies and plant automation will reduce both production and transaction costs
• Global: both threats and opportunities will arise, competition will intensify, quality
and innovation would matter, government relations will affect global markets
• Physical environment: clean technology emphasis, energy consumption,
• Technological: continuously moving technologies
 Auto components Industry structure: 5-forces
• New entrants: Entry barriers: Capital intensive, technology
intensity, established customer relationship, economies of scale,
brand/ reputation (+). More capable entrants can come from
other countries especially Japan/ USA/ Europe and some extent
China
• Buyers: Large buyers, fewer in number, have hold on
consumers, better customer intimacy and knowledge, know
cost structure of component supplier (-)
• Suppliers : many and dependent on tier I suppliers, large
number, their customers powerful being close to their own
customers (+).But some may have very critical technologies (-)
• Substitutes: None unless the technology changes (+)
• Rivalry: moderate but will intensify (+)
 Summary
• Power of entrants: Low- good profitability
• Buyer power- High- low profitability
• Supplier power –low- profitability
• Substitute- low power- profitability
• Rivalry- moderate- moderate earning
• Overall: The industry is moderately profitable and thus
attractive for incumbents.
• It implies that the incumbents must commit more resources
to R&D- develop strong relationship with buyer and sellers,
integrate supply-chain with partners, forge alliances or
acquire companies or new technologies or markets, diversify
product and market scope