SM0374: Strategic Management

and Leadership
Lecture Seven
External Analysis (2): the
near environment and
market and industry
features
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 The Strategic Management
Process
External Current
Analysis Strategy

Strategic Evaluation
SWOT Key Issues
Options + Choices

Internal Current
Analysis Objectives

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 External Environment

The The Far

Near Environment
Environment –
– subject to beyond the
some organisation’
influence from s control e.g.
the failed states
Source: Adapted from
organisation, JSW, 2008, p.54
e.g. M&As
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 Industry / Market
 How do you define a market?
– By consumer needs; markets reflect consumer
demand
 How do you define an industry?
– Porter (1980): group of firms producing products or
services that are close substitutes (output)
– Kay (1993): the industry is defined by related firm
capabilities and based on supply technologies
(output/supply)

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 Industry / Market

 The simplest case:

Collection of Sellers Collection of Buyers

Goods
Industry Market
Money

Marketplace

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 The Business
 The market + industry define the business
 What business are we in?
Wine

Alcopops Whisky

Consumers

Cider Beer

Squash

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 Industry
 A group of businesses which share similar products, processes,
technologies, suppliers, customers.
 Examples:
– Tea Packing Industry: Apeejay International Tea (Typhoo),
Nestlé (Nestea), Tata (Tetley), etc.
– Automobile manufacturing: Toyota, GM, Ford, VW Group, etc.
– Diamond mining: De Beers, Rio Tinto, Alrosa, BHP Billiton, Harry Winston
Diamond
– Beer manufacturers: SAB Miller, Inbev, Heineken, Anhueser Busch, etc.
– Drinks manufacturers?
/Explore: http://www.computerwire.com/companies/lists/
http://www.statistics.gov.uk/methods_quality/sic/downloads/SIC2007explanatorynotes.pdf

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 Market

 A group of customers with a specific set of

requirements or needs
 How do you define a market?
– By consumer needs; markets reflect consumer
demand
– Examples: The Hot Drinks Market

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 Importance of Definitions &
Boundaries
 You must attempt to draw industry and market
boundaries as this helps to determine competition and
profit potential
 Too wide a definition will yield poor results because the
analysis will not give us useful information about the
environment our organisation faces
 Too narrow a definition restricts awareness of
opportunities and threats e.g. railways threatened by
airlines; bus companies running railways
 The firm must understand with whom it is competing

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 Industry and Market Analysis –
What this Involves:
 Definitions – what industry/ies, market/s?
 Market (demand/consumption)
– size, growth rate, stage in lifecycle, geographic
location, segmentation
 Industry (supply/output)
– size, main activities, key players, geographic location,
trends
 Marketplace
– Nature of competition (Oligopoly? Monopoly?
Fragmented competition?)

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 Market Segmentation

 How is the market segmented?

– Need to identify customer groups that respond
differently to other customer groups to
competitive strategies
– Divide a market into sub-markets with their
own distinct sets of customers who can be
targeted all together

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 Market Segmentation
Source: JSW, 2008, p.77

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 Marketplace
 What sort of marketplace are we in?
Industry Marketplace Market

Alcopops Goods
18-25yr
Beers
olds
Squash Money

Pure competition?
Monopolistic competition?
Oligopoly? Monopoly?

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 Analysing Industry
Attractiveness
 Industry attractiveness depends on factors or forces within the
industry and influences on those forces from the
macroenvironment
– E.g. Bargaining power of trade unions
– E.g. Entry to the industry of foreign competitors
 Before analysing industry attractiveness, we need to
understand the macroenvironment
 Industry and market are sometimes referred to as the “near
environment”
 The macroenvironment is also known as the “far environment”

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 Analysing Industry
Attractiveness

“The state of competition within an industry

depends upon five basic forces, the
collective strength of which determines the
ultimate profit potential of the industry”

Michael Porter (1980)

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 Porter’s Five Forces framework (1980)
(JSW, 2008, p.60)

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 Porter’s Five Forces framework (1980)

 Supplier Bargaining Power: Includes suppliers of raw

materials, components, labour, power, plant and
equipment, finance
 Buyer Bargaining Power: Who buys from the industry? –
general consumer or other industries/ organisations?
High buyer power means that firms in the industry are
unable to charge high prices for their products/services
 Suppliers may merge or otherwise combine to increase
their power (e.g. workers may be unionised; farmers may
form a cooperative)

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 Porter’s Five Forces framework (1980)

 Threat of New Entrants: New entrants are businesses that

enter the marketplace with the same product as the current
members of the industry

 Threat of Substitutes:
– Direct substitutes meet the same customer needs as the industry’s
product
• e.g. Eurostar vs Cross-Channel Ferries vs Air Travel
– Indirect substitutes compete for discretionary expenditure
• e.g. new car vs holiday vs home refurbishment
– NOTE: the same products offered by other members of the
industry are NOT substitutes in this sense

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 Porter’s Five Forces framework (1980)

 Intensity of Competitive Rivalry:

- Between the members of the industry seeking
to maintain or increase market share through
price competition, product features or
advertising.
- High intensity of rivalry tends to result in
competition based on low prices

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 Why Use the Five Forces Analysis
 Explain and predict the profitability of the industry
 Identify and understand the forces which have the greatest impact on
the industry
 Identify potential threats
 Identify trends in the forces
 Assess the significance to the industry of changes in the macro-
environment (for e.g. de-regulation significantly affected threat of
entry & competitive rivalry in Airline industry)
 Identify an organisation’s competitive position within the industry
 Suggest ways to improve the competitive position (e.g. vertical
integration)
 Assess the attractiveness of investing in an industry (either as a
shareholder or new entrant)

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 The Five Forces Model and
International Competitiveness
 The Five Forces model implies that industry attractiveness
can be increased by reducing the strength of the forces
 HOWEVER, Porter’s (1990) National Diamond model
holds (among other things) that the international
competitiveness of a domestic industry can be enhanced by
competitive domestic rivalry and sophisticated and
demanding home customers
Read JSW (2008) Ch. 8 (8.3)
 Success in any industry ultimately depends on the firm and
its strategies

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 External Analysis: Summary 2

 A good analysis allows the reader to see influences and

trends which may require a change in strategy
 The analysis forms part of the assessment of the match
between the organisation’s capabilities and the business
environment
 The discussion may be summarised as a set of key factors
& trends
 Opportunities and threats (OT) identified from the external
analysis should be considered in relation to the strengths
and weaknesses (SW) of the firm drawn from an internal
analysis

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 Internal
Analysis

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