% Understanding Organizational Environment “Unsuccessful managers blame failure on the obligations. Effective managers turn obligations to advantages. A speech is a chance to lobby for a cause; a meeting is a chance to reorganize @ weak department; @ visit to an important customer is @ chance (0 extract trade information.” Henry Mintzberg wo Learning Objectives After studying this chapter, you should be able to: Clarify the concept of business environment State the influence of environment on business Describe the various types of business environment Explain why and how organizational environment is unique Justify the necessity of analyzing business environment — Chapter Outline 3.1 Concept of Organizational Environment 3.2 Influence of Environment on Business 3.3 Types of Organizational Environment 3.4 Why is environmental analysis essential for organizations? 3.5 Uniqueness of Organizational Environment 3.6 Environmental Analysis: Examining the Present and Looking into the Future ee sane ge ge Scanned with CamScannerEnvironment of an ‘organization consists of its surroundings ~ ‘anythig}hat affects its ‘operations, Tavorably or unfavorably Managers are benefited in several ways when they have a deep understanding and appreciation of the impact of environmental factors on business. Managers can develop crisis plans for ‘overcoming crises that affect organization, 1Dr.MAMannan The Concept of Organizational Environment v4 Every organization, whether business or non-business, has its own environment. anizational environment is is dynamic. It is ever changing. Changes today are so int and every cha ings So man} al it is highly essential ers ati Teaders of the organization to be vigilant about_the envi anges. t ‘Consists of. itssurroundings — anything that affects its operations, favorably or | unfavorably. Environment embraces such abstract thing as ~ ‘organization’$ image and such remote visible issues as economic, conditions of the country and political situations. The environmental forces —abstracts and visibles — need a careful analysis. Systematic and adequate analysis produces information necessary for making judgments about what strategy to pursue. Managers cannot make ‘appropriate and sound strategy simply on the basis of their guesses and instincts. They must use relevant information that directly flows from the analysis of their organization's environment. (2: Influence of Environment on Business Business managers must understand the various facets of the impacts of external environment. They need to recognize that ‘external environment has many aspects that can have significant impact on the operations of a firm. They need to undertake analysis of environment on a regular basis, This is particularly important for the reason that developments/changes in the remote environment’ influence the business organizations. They also need to understand the influences of changes in the industry environment. Managers are benefited in several. ways when they have a deep understanding and appreciation of the impact of environmental factors on business: «Knowledge of environment helps mangers identify the direction to which they should proceed. They will travel along with a distinct way of changing direction, whenever necessary. Without \ an understanding of environment, managers are like a bicycle without a handlebar — no way of maneuvering while riding on a street. * \ Managers can isolate those factors, especially in the external environment, which are of specific interest to the organization. + Managers can take preparation to deal with predicted crisis in any of the factors in the environment. They can develop crisis plans for overcoming crises that affect organization. * The key to -achieving organizational effectiveness is understanding of the environment in which the firm operates its i Remote environment refers to general external environment, as af mpecific environment’ or industry environment. l, a8 apposed to ‘speci Scanned with CamScannerCHAPTER 3 Understanding Organizational Environment “a businosses. No knowledge or inadequate knowledga Is very likaly to lead managors to ineffectiveness because of ‘running on the wrong road for raaching the goals,’ ypes of Organizational Environment We can classify the organizational environment into two broad categories, Those are: : 1. Internal environment, and 2. External environment (a) General environment (b) Industry environment vA Figures 3.1 and 3.2 present a bird's eye-view of the various types sof environment in the context of an organization. An organization's An organization's ‘operations are affected by both the types of environment. ee an Therefore, it is essential for the managers to make in-depth the pos of analysis of the elements of the environments so that they can environment - develop in themselves an understanding of the intemal and internal and external situations of. the. organization. Based on their ‘external. understanding, they will be better able to establish required objectives for their organization and formulate appropriate strategies to achieve those objectives. arious types of organizational environment Scanned with CamScanner\n organization must nalyzo the factors 2 bath the internal ‘ad oxtornal ‘vironments for derstanding its resent position, veloping its bjectives for the ‘oming days and wilding the 'ratogies needed to »ove from its resent position to a sired position. Strategic Management / Dr. M A Mannan Internal environment generally consists of those elements that exist within or inside the organization such as physical resources, financial resources, human resources, information resources, technological resources, organization's goodwill, corporate culture and the like. External environment embraces all general environmental factors and an organization's ‘specific industry elated factors. The general environmental factors include those factors that are common in nature and “generally affect all organizations. Because of their general nature, an individual ‘organization alone may not be able to substantially control their influence on its business operations. General environment usually includes political, economic, sociocultural, technological, legal, environmental (natural) and demographic factors in a particular country or region. The industry environmental factors, on the other hand, are those factors in the external environinent that specifically reside in a particular industry and affect competition such as suppliers, customers, competitors and substitute products. , “ENVIRONMENT = 34° Why is environmental analy: | = GENERAL." % “INDUSTRY “= SENVIRONMENT: task of ‘ging the onsibity for forming internal ‘ronmental alysis may not similar in alt anizations. ome ganizations form leam of line anagers with evant ‘perience for 2alyzing internat’ wironment. «And many more These areas are identified from the clomonts of the internal environment that we have discussed earlier. In practical analysis, either you can collect data on the basis of each element (which might seem unwieldy) or you can identify specific areas in each element and then you can proceed for analysis of each area for identification of specific strengths and weaknesses. In fact, every area of a company that has substantial impact on the long-term survival of the company should be analyzed to determine the strengths and weaknesses of each area. As contuctng Internal Analysis: Who to Do It? The task of assigning the responsibility for performing internal environmental analysis may not be similar in ‘all organizations. Evidence shows that practices differ from organization to organization. Usually the following practices are prevalent in differént organizations: Involvement of the Planning Department: Some organizations involve the Planning Department for conducting the analysis of intemal environment. (The staffs in the planning department are expected to be proficient in such analysis. They gather information and then make analysts of the internal ieee Use of Outside Consultants: (Some organizations use independent consultants for conducting intemal analysis. The expert consultants have experience in performing such activities They can also give impartial view of the situations, which the internal staffs of the planning department or other persons may not give. Forming of Team:(Some’ organizations form a team of line managers with relevant experience. Usually such a team performs the analysis in collaboration with'the planning staffs who provide technical assistance) The underlying philosophy \ behind using team approach is that the line mangers will be better able to understand the implications of the analysis and \they will be in a better position to guide their strategic planning decisions. ng identification of Internal Strengths and Weaknesses An andlysis of the elements of the organization's internal environment provides adequate data for preparing a list of the strong points (strengths) and the weak points (weaknesses. Before proceeding for internal analysis, you need to understand clearly the Meaning of strength and weakness in the context of organizations.” is section heavily draws on Thompson and Suickland, op. cit Scanned with CamScannerfrength: Strength is what the organization does well. Anything that an organization can do excellently or effectively or efficiently is strength. It is a distinctive competence of an organization thal enables it to achieve special advantage in the marketplace. Any resource, skill or other advantage relative to competitors can be called strength. Anything can be strength if it gives the organization enhanced competitiveness. A strength can take the form of a skilVexpertise, valuable physical assets, valuable human assets, valuable intangible assets, fruitful alliances, etc. Adequate physical facilities such as land and buildings or machinery, sufficient financial resources, trained and qualified marketing people, well- managed information systems, able top leadership and good image en are some examples of intemal strengths. feakness: Weakness is discerned from the analysis of internal en nmental factors. Weakness refers to vulnerability of an organization in terms of one or more intemal factors such as physical resources, human resources etc. we can therefore say that if an organization lacks something or does something poorly, it is a weakness. Even if a condition puts the organization al a disadvantage, it is also termed as weakness. Weakness indicates 4 deficiency or limitation or constraint. Any weakness affects an organization's performance adversely. . An organization's internal weaknesses can relate to (a) deficiencies in competitively important skills; (b) a lack of competitively important physical, organizational or intangible assets, or (c) weak/missing competitive capabilities in key areas. Examples of internal weaknesses include inadequate physical and financial resources, untrained executives, strained labor-management relations, poor leadership at the top, use of old technology that hinders production and the like. A framework for internal environmental analysis is shown in Figure 4.1. This framework indicates several issues that need to be addressed while making an internal analysis. These are actually important considerations for identification of strengths and weaknesses of an organization. 4.4 Concluding Remarks This chapter describes the various pertinent issues related to internal environment of organizations. Managers are able to develop a comprehensive list of internal strengths and weaknesses from the data generated through internal analysis. When this list is combined with the list of opportunities and threats discerned from the analysis of external environment, a SWOT framework emerges. The next chapter provides an elaborate description of the external analysis. : Asstrength can take the form of a skilVexpertise, valuable physical assets, valuable human assets, valuable intangible assets, fruitful alliances, etc. Weakness is something an ‘organization lacks or does poorly or a condition that puts + the organization at a disadvantage. Scanned with CamScannerand articulated mission No clear ‘Weak leadership "Having adequale financial resources Having excellent competitive skills, for achieving competitive advantage in the market Machinery used in the production process is partly or fully obsolete | Reputation/goodwill of the company ‘Managerial people are poor in | professionalism ‘Access to economies of scale Lack of competencies among the \_ employees ‘The organization having iis own Poor track record in strategy | (proprietary) technology implementation Having cost advantages in one or more of the elements in the value chain of the organization Research and development activities are far behind the competitors, or no R&D program in the organization The firmis strong in product innovation ‘Weak market image Dynamic leadership and management Product lines are too narrow to compete effectively in the market The firm has been able to acquire a large market share Poor marketing skills Effective and efficient implementation of organizational strategies Tnadequale working capital e Figure 4.1: A sample framework for internal analysis of a company TERMS USED Internal environment Téam Consultants Internal analysis Strehgth Weakness Goodwil Culturé, Resources. Board of directors Company image ‘Owners/stockholders Scanned with CamScannerExternal Environmental Analysis “Businesses and managers are now faced with highly dynamic and ever more ‘complex operating environments."- Robert Paton. Learning Objectives After studying this chapter, you should be able to: Define external environment and explain its nature Categorize the external environment Explain the meaning of general environment Discuss how organizations can respond to the influences of external environment on business organizations Distinguish between general and industry environment = Identify differences between intemal and external environments Chapter Outline 5.1 External Environment: Meaning and Nature 5.2 The General Environmental factors 5.3 Analysis of General Environment and Identification of Opportunities and Threats 5.4 How Do Organizations Respond to External Environment? 5.5 Concluding Remarks <_< Scanned with CamScanneric Management / Dr. M A Mannan : 56 Stra Arcuena Environment: Meaning and Nature Loge rea rele The strategy- makers must Understand the challenges and complexities of both the remote environmental factors and the immodiate operating environmental factors External environment consists of an organization's external factors that affect ils businesses indirectly. The organization has no oF litle control over these factors; thal means, external environment ig generally non-controllable. However, there may be exceptions. The external environmental factors reside outside the organization, which can lead to opportunities or threats. For convenience of analysis, we can divide the exemal environment into two.graups: (a) generat environment (or remote environment), and (el industy environment (Some call t ‘immediate operating environment, ‘tas} environment or ‘specific environment’). ' General_envi isis_of those factors in the external environment that indirectly affect the busi e Mts, Thig_major factors that constitufe the general environment include litical sit lic conditions, social and cultural factors, technological advancements, jal/regul factors, natural Spvironment_and_demogranhics in-apadicular country or region. The general environment has been discussed in Section 5.2 of this chapter, The industry environment consists of those factors in the external evivfonment that ext in the Fas in which the organizations operates TS~DuSneSE—The—TMUSTyenvironqiental factors are generally more controllable by a fi than Tal efivironmental factors. Industty environment comprises those factors in the extemal environment that exist in the concerned industry of a firm in which it is operating its business. For example, Incepta Pharmaceuticals Limited is operating its business in the pharmaceutical industry. Therefore, all factors that are likely to affect the business operations of Incepta Pharmaceuticals Limited would be included in the ‘industry environment’ of the company. There are mainly five factors in the industry environment such as suppliers, buyers, ett ar itute product: pleas “5, It may be noted that some industry environmental factors such as ‘competitors and-substitute products may exist even outside the Concemed industry. For example, a leasing company may emerge a a competitor of the companies in the banking industry in terms of attracting deposits and providing loans to business houses. Regarding the industry environment, the important issue to appreciate. is that they reside in the immediate competitive situations of a firm. Also, they are very specific in the-sense that they can be easily identified, For these reasons, they are often regarded as ‘specific environment’ or ‘task environment’. Details of industry environment are presented in Chapter 6. * The strategy-makers must understand the challenges and complexities of both the general environmental factors and the industry environmental factors. They need to appreciate that the ——————— Scanned with CamScannerCHAPTER 5 External Environmental Analysis 87 general environmental factors are largely non-controllable because of their distantly located external nature. However, with concerted efforts (lor example, by trade associations such as Dhaka Chamber of Commerce or the Federation of Bangladesh Chambers of Commerce and Industry), organizations may exert some kind of influence over some of the general environmental factors. When strategists take into cognizance of both the general (remote) and industry (operating) environments, they_are likely to become more proactive in strategic planning. In the following discussions, you will find a broad description of general environment. xh The General Environmental Factors The general environment includes the distant factors in the external J. environment that are general or common in nature. Its impact on s/pEstLeD stands for the operations of the firm, its competitors and customers make its pat om analysis imperative. We can use PESTLED model for the 25vciogieai toga, identificatio alySis of the Tactors in the general environment. environmental BESTLED Mode “covey soni croneeie coetral, out technological, legal, environmental (natural) and demographic %°™9™ aspects. < GENERAL “INDUSTRY juowuodjaue Aysnpul pue jueWUos|Aue Jes0u06 uoomjoq UODEL03U BL tLs oUNBIA| ENVIRONM EN‘. ENVIRONMENT Scanned with CamScanner3overnment agencies and wessure re also exercising fluences on wsiness ‘perations of firms ‘al have political haracter. ‘Strategic Management / Dr. MA Mannan a list of the general environmental factors is given below, followed ey precise descriptions of each. Political factors Economic factors Sociocultural factors . Technological factors Legal factors Environmental (natural) factors ' Demographic factors PESTLED spit ical factors: The government of a country intervenes in the ational economy through setting policies/rules for business. In our country, we see many such policies — import policy, export policy, taxation policy, investment policy, drug policy, competition policy, consumer protection policy etc. Sometimes, the government pursues nationalization: policy for state ownership of business. Some countries; such as India, pursue state-driven mercantilism to réduce imports and increase exports. Some countries have liberalized their own economy and shifted from-centrally managed economy to’ capitalist economy or welfare economy. In Bangladesh, the successive governments are emphasizing more on privatization rather than on state ownership. As global competition has increased, the government of Bangladesh has also liberalized its trade policies to be in line with the WTO agreements." Another important issue is political stability that affects operations of business firms substantially. Even decision about investment is highly affected by political stability. We have seen in Bangladesh how political instability has in the past affected investment and trading in the country. In many other countries also, political instability or political disturbances substantially " affected businesses, such as Sri Lanka (civil war witi LTTE), Nepal (mass upsurge by the Maoist activists), Pakistan and Afghanistan (terrorist activities) and Argentina (default in international debt). In \addition, government agencies and pressure groups (special interest groups) are also exercising influences on business operations of firms that have political character. Managers must be able to understand’ the implications of the activities of these agencies and groups. Government agencies include’ different ministries, the office of the Controller of Imports and Exports, Board of Investment, National Board of Revenue, etc. Pressure groups ide Organization (WTO) was eregiat on OL January 1995 through Bangladesh is one eof the first sigtbtaries to the WTO Agreements. its fi ind other relevant issues, readers may s web site: www..vio.org, Scanned with CamScannercuarTer® include Consume’s mt WO S of Commerce ; Environmental Protedon T segrails © pressure groups put managers should have de groups. changes in the cost of " the changing role of Changes in jing, will heavily ‘izations with a Beis factors: Acomin/seanne sment is attractiveness, The performance 01 WSTES FFs, tt affected by the health of a nation's economy. SA a aan crwioneri variables are relevant in determining WSTESS SHAE the concerned wih Examples of economic factors incldde trendinthe Ere ne opulstion, (growth in Bangladesh is hovering around 6 pesCett Wt teen, years), income levels of population, inflation rate, ax vaes 5," individuals and business organizations etc. There is thus a need to analyze’ economic environment prutict “y by the business firms. Economic environment comprises 2 distines variable with which management must be concemed. The of a country can be in a situation of boom’ or recession or depression or recovery or it may be in a state of fluctuation, Managers/strategy-makers must have the ability (0 predict the state of the economy. This warrants the necessity of 'stidying the economic environment to. identify changes, trends “and their strategic implications. { Business organizations operate their businesses in markets ‘ consisting of people. These people are likely to become customers when they have purchasing power. And purchasing power depends © ‘on income, prices, savings, debt and availability of credit. Therefore, business organizations must pay attention to the income and consumption pattems of the customers. However, all the economic variables in the economy must be treated holistically for cloef envisioning of the entire economy and the market. Socio-cultural factors: Socio-cultural forces include culture, lifestyle changes, social mobility, attitudes towards technology, and people's values, opinion, beliefs etc. A society's values and Focio-eutturar attitudes form the comerstone of a sociely. They often drive the Cause mia ro, lifestyle other conditions and changes. The demand for many products — changes, sociay changes with the changes in social attitudes. mobility, attitudes towards Sotio-cultural factors differ across countries. In many countries, technology, and worker diversity is now a common phenomenon. We find in some people's values, countries the increasing life span of population, trend toward fewer Pinion, boliots children, movement of population from rural areas to urban areas, increasing rate of female education, entry of more and more women into the mainstream workforce, etc. All these have a primary effect on a country's social character and health. Therefore, it is very important for. managers of business organizations to study and predict the impact of social and cultural changes on the future of business operations in terms of meeting consumer needs and Koes Scanned with CamScanner60 Technological dimensions include information technology. the Internet, iat a global transfer of technology and so forth The legal environnidat consists of laws and regulatory framework ina “sountry. Strategie Management / Dr. MA Mannan firms must offer products in the society tha, ond to ils values and altitudes. Technological factors: Technological factors include information technology, the Internet, biotechnology, global transfer of technology and so forth. None can deny the fact that the pace of change in these technological dimensions is extremely fast, Technological changes substantially affect firm's operations in _ many ways. Advancement of industrialization in any country depends mostly on technological environment. Technology has major impacts on product development, manufacturing efficiencies, , and potential competition. The business organizations facing problems with changing technology are always in more difficulties than those organizations that have stable technologies. The effects of technological changes occur primarily through new products, processes and materials. An entire industry may be transformed or revitalized due to use of new technology. Strategy formulation is linked to. technological changes. An intelligent response to the ever-increasing technological advances should be entrepreneurial rather than reactive.” Strategic managers need to monitor developments in technology for their particular industry whén formulating strategy. Quick and thorough study of technological changes helps managers achieve higher market ‘share because of early adoption of new technology. A.firm must be aware of technological changes to avoid obsolescence and Promote innovation. It means that strategy managers of an organization must be adept in technological forecasting. Technological forecasting can protect and improve the profitability of firms in growing industries. egal factors: The legal environment consists of laws and regulatory framework in a country. There are many laws that regulate the business operations of enterprises such as the Factories Act, Industrial Relations Ordinance, the Contract Act, and the Company law, just to name a few. Business laws primarily protect companies from unfair competition, and also protect the ‘consumers from unfair business practices. Business laws also protect the society at large. The laws regarding merger, acquisitions, industry regulation, employment _ conditions, unionization, workmen's compensation arid the like affect a firm's strategy. Even globalization has caused significant repercussions on the legal environment. Thus, the business mangers must have thoraugh knowledge about the major laws that protect the business eatace consumers and the society. ‘nvironmental (Natural) factors: Strategy-makers need to analyze the trends in the natural environment of the country where it is operating its business. The most pertinent issues in the natural environment that strategy-makers should consider include the irategic management: Copeepts and Cases, op. cit. p. 21 Scanned with CamScannerCHAPTERS extemal Environmental Analysis availability of raw materials and other inputs, changes in the cost of energy, levels of environmental pollution, and the changing role of government in environmental protection. Changes in physical/natural environment, such as global warming, will heavily affect our daily lives and the functioning of our organizations with a variety of consequences. \Bemographic factors: The demographic environment _ is ‘concerned with a country's population. Specifically, it is related to population’ size, age stucture, geographic distribution, ethrig mix Bnd income distribution. With over six billion popuiation, the demographic changes are evident all, over. the world. In some Countnes there is negative population growth and in some countries couples are averaging fewer than two children. In general, average age is increasing. In many countries, rural-urban migration is rampant. These trends suggest: numerous opportunities for firms to develop products and services to meet the needs of diversified groups of people in the’ society. Strategy-makers must make an analysis of the demographic issues, especially, size and growth rate of population, age distribution, ethnic mix, educational level, household patterns, and inter-regional movements. In fine, we can say that all of the above general external environmental factors are interrelated. Therefore, strategy-makers need to analyze all of them in an interrelated fashion to understand and visualize the ‘whole of the environment. VES analysis of General Environment and Iden' cation of Opportunities and Threats On completion of the analysis of the factors in the general environment after collection of relevant information, the managers can now identify the opportunities available in the .general environment and also the potential threats that the organization might face in the future. Thus, the output of general environmental analysis is a list of general opportunities and threats. However, before embarking on the identification of opportunities ‘and threats, the managers need to develop a clear understanding ‘of the meaning of these two terminologies. Opportunity: An opportunity is a favorable condition in an organization's extemal environment. The organization may grab an opportunity for improving its growth and profitability. An opportunity arises when a firm can take advantage of conditions in its external environment to formulate and implement strategies that enable it to eam higher profits.‘ Opportunities offer important avenues for profitable growth and indicate potential for competitive advantage. Examples of opportunities include opening up of new markets in ' The world's population reached six billion in October 1999. *C.W. 1. Hilland G. R. Jones, Strategic Management, op. cit. p. 72. Scanned with CamScanner 61 The demographic environment is concerned with a country's population, An opportunity is something that an organization ‘may grab for growth’ and Profitability.62 A threat is an unfavorable condition/event in the external environment. tis essential for the strategy managers to understand the importance of environmental influences on the operations of their businesses, other countries, deregulation policy of government, reduction op laxes on imported raw materials, higher’ tax rebates on firm's income, government subsidy, increasing demand for products among customers, and so forth. As an instance, we'can cite the case of deregulation of airline industry in Bangladesh. Deregulation is a major opportunity for the private airlines such as GMG and United Airlines to serve those routes that Bangladesh Biman does not serve. However, this can be a threat to Biman. So, it is obvious that opportunity for one organization can be a strategic threat to” another organization. Threat: A threat is an unfavorable condition/event in the external , environment. A threat may cause suffering in the organization's growth or profitability. A threat arises when conditions in the external environment endanger the profitability of business. Certain factors in a firm's external environment may pose threats to its profitability. Examples. of threats include frequent advances in technology, entry of foreign competitors in the home market, smuggling of products through the border, cheap imported products, civil war in the country, unstable political situations, frequent changes of government regulations, and uncontrolled law and order situations, More details of opportunities and threats, including organization-based examples from Bangladesh, are presented in chapter 7. vif How Do Organizations Respond to External : nvironment? Environmental factors influence the businesses in many ways. The influences may be positive or negative. There are some forces in the environment that may retard the growth of a business organization. Similarly, there are some forces that may give a \ sudden boost to the growth of an organization. It is, therefore, \ essential for the strategy managers to understand the importance \of environmental influences on the operations of their businesses. ‘Based on such understanding, they can devise ways to respond to the environmental forces.” A’business organization can employ several ways to respond to its epifronment. We discuss here some common measures. Lobbying: Companies can hire strong lobbyists to bargain with regulators to change any law or to refrain them from enacting new law that’ may adversely affect business activities. Federation of Bangladesh Chambers of Commerce and Industry (FBC!) is a very influential lobbyist. FBCCI representatives often, underiake efforts to influence goverment agencies/ ministries /committees. Scanned with CamScannerCHAPTERS External Environmental Analysis = Influencing customers: Organizations can influence their customers in different ways. Manag may des a product. they 1 new scl of produit, They create new set of customers for products or they may direct lun ellorts toward taking customers away frorn compalitors, Developing strategic partnership with suppliers: One of the ways to directly influence environment is to establish a long- A person is callod lasting relationship with suppliers. Organizations can do it by a boundary signing long-term contracts with fixed prices. This would serve spanner who as a hedge against inflation. Organizations can also protect collects itself from supply-related crisis by establishing backward linkage iNoxmation fom (that is, producing their own materials). For example, a minoral —Sygonization while water firm may start producing bottles by itself or a soft- he/she is working drink/fruit-processing firm might become its own supplier of im the fot cans. Toyota and Honda, for example, have successfully used strategic supplier relationships. Similarly, Dell and EMC are strategically linked with each other. Dell is the reseller of EMC's storage products. Both the companies work together in technical design of systems and selling to Dell's customers.> / Boundary spanning: A firm may engage itself in boundary spanning for learning about what other organizations are doing. A person is called a boundary spanner who collects information from outside the organization while he/she is working in the field. Salespeople, purchasing agents, relationship manages are most suitable as boundary spanners. 5,Atrategic response: A firm may alter its strategy to deal with the environmental changes. The strategy-alteration may take any of the forms: slight change in the strategy; adopting an enlirely new strategy; or maintain status quo, which one would better meet the demands of its competitive environment pends on situations that prevail Organizational combinations: In order to enter into new inorder to enter markets or uphold prominence in the current market or for some —_in!o new markels other strategic reasons, a firm may resort to merger, acquisition, Ueno takeover or alliance. Two or more firms may combine together rommnonce i he (merge) to create a new firm, A firm may buy another firm to for some other acquire its assets. In the case of acquisition (or takeover), the strategie reasons, acquired firm may continue to operate as a subsidiary of the 2 firmmayresort acquiring firm, or the acquired (taken-over) firm may cease to [2 merger. exist and become part of the acquiring company. When two or jayalon. more firms undertake a new venture, it becomes a strategic stiance, alliance. — \ Y cent oon WONG SopeIE EMC ectend! mulubalion dollar sate alliance wil 20 ber 1¥, 2006, p. 1 AL Bawaba, LE di Scanned with CamScannera Strategic Management / Dr. MA Mannan 5.4 Concluding Remarks ‘An analysis of intemal environment generates information abou, ‘organization's internal strengths and weaknesses (SW). On other hand, an analysis of general extemal environment proviy the managers with information about general environment-relay opportunities and threats (OT). Since the analysis of indy, environment provides information. to identify the industry-relay opportunities and threats, the strategic analysis of a firm wauld, be completed unless and until the analysis of industry environm would have been undertaken, The whole gamut of SWOT ‘can » discemed only when the triple helix is combined together, that the internal environmental analysis, general environmental analy. and industry environmental analysis. The next chapter endeay, to detail out the issues related to analysis of industry environmes Chapler 7 portrays the comprehensive picture of SWOT analysis; TERMS USED Environmental analysis General environment ay Industry analysis Industry environment PESTLED Model Remote environment Specific environment SWOT analysis Value chi Scanned with CamScanner| | | Industry Analysis *You do not have to do this; survival is not compulsory.” - W. Edwards Deming cn ce sah creat Learning Objectives After studying this chapter, you should be able to: * Define the term ‘industry’ + Explain the industry environment + Discuss the importance of understanding industry environment = State the various elements of industry environment + Stale the significance of understanding industry environment +. Explain how competition analysis in an industry can be conducted + Explain the factors that need to be considered while conducting industry analysis Chapter Outline 6.1 Concept of industry 6.2Industry environment 6.3 Elements of industry environment 6.4 Importance of industry analysis Scanned with CamScannerTie stratey-makers of firm need to be concerned with the impact of the industry structure on the firm's stratege. We can define indusiry asa group of firms eofeving products or services that are close \ substitutes for each other. 6.5 Analysis of competition in an industry __ 6.6Why do managers widely usc Porter's Five Forces Model 6.7 Analysis of industry 6.8 Industry analysis plan 6.9 Industry-Related Opportunities and Threats 6.10 Concluding Remarks : A business firm's strategy is affected by the structural characteristics of the industry. It is thus considered essential for a firm to make an elaborate analysis of the industry in which the firm operates its business. Based on Michael Porter's research results, an industry structure consists of suppliers, buyers, direct competitors, new entrants and substitutes. The strategy-makers of a firm need to be concemed with the impact of the industry structure on the firm's strategy. Once the external environmental analysis has been completed, they should embark upon industry analysis. Industry analysis helps them have clear information about what is happening in the industry in which their companies are operating their’businesses. Since industry contains competition, its analysis brings to light the complexities of the competition and the ‘consequent challenges facing the industry. This chapter discusses the elements of industry environment, how competition in the industry can be analyzed, and also how the ‘industry analysis’ as a whole foverall industry analysis) can be undertaken. \ es of Industry In general, we can define industry as a group of firms offering similar products or services. The products’ satisfy the same basic consumer needs. According to Thompson and Strickland, an industry is a group of firms whose products’ have so many of the same attributes that they compete for the same buyers. Byars, Rue and Zahra defined industry as a.group of companies that offer products, goods or services that satisfy similar customer needs.” For example, there are 257 pharmaceutical firms (active 194)° in \ Bangladesh registered with the Drug Administration Authority. ' These firms compete with each other‘on.pharmaceutical products. The pharmaceutical firms that produce similar products, say, paracetamol tablets, satisfy the same basic customer needs as pain killer. Therefore, these 229 firms constitute the pharmaceutical lucts include both tangible products like soap or pen and intangible products-(i. s) such as bank's services ar telecom services of the mobilé operators. For the purpoic ofthis book, we would use the term “product” {6 mean the both. *1Lis not that casy to provide a clear definition of industry. “The boundaries of an fizzy, and ofien permeable, Where is the boundary between nent, publishing, computing? Is Sony in competition with News Corporation?” See Fitzroy and Hulbert, op cit, p. 77. The Daily Prothom Alo, July 7, 2012, p. 1. Scanned with CamScannerCHAPTER 6 I industry of Bangladesh. Pharmaceutical industry in Bangladesh is conspicuous by 16% annual growth and market size of Taka 30 million (2007) employing around 75,000 skilled and unskilled persons and producing around 97 percent of tolal demand Similarly, 4,825 garment factories of different categories® in the country are operating businesses in the garments industry (second largest in the world). Other examples of industry are jute industry, lextiles industry, sugar industry, chemicals industry, software ~ industry, etc. Another example is the coffee shop industry of the USA. The coffee shop industry includes 20,000 stores with combined annual revenue of about $11 billion. Major companies include Starbucks, Dunkin’s Donuts, Caribou, Coffee Bean and Tea Leaf, and Diedrich (Gloria Jean's). The top 50 companies have over 70 percent of industry sales. : Jitiie Industry Environment The industry environment is really the competitive environment of 2 An organization business organization. Industry environment substantially affects a has greater firm's business operations, because it is the ‘immediate’ external camirol over the environment of the firm, which is also known as ‘immediate imu” operating environment’. Every firm operates its’ business in an factorr ham the dustry and therefore its activities are directly affected by any . change in the industry environment. Changes in the general environment can have direct impact on any of the factors in the industry environment. An organization has. greater control over the industry environmental factors than the general environmental factors. One point is to becnoted that although the industry environment affects all the firms in the industry, in reality, all firms are not affected equally. 1.8.3 Elements of Industry Environment As already said, several factors constitute industry environment such as suppliers, customers, competitors (existing and potential), Several factors new entrants and substitute products (Figure 6.1). You will have detailed ideas about these factors from the following discussions. Suppliers: Suppliers are sources of resources such as raw materials, components, equipment, financial support, services, and emer office supplies. In order to ensure long-term survival and growth of Pewiellioes a company, it ig essential to develop a dependable relationship between a business-irm and its suppliers. In relation to its the author expresses deep gratitude to the authors of the article. Jaderstanding the vulnerability of readymade garmets 'y of Bangladesh in the light of Porter's five forces model, BUBT Journal, vol. 3. 2010. pp. 24-41. Scanned with CamScannerA competitor profile may include such variables as market ‘share, product ine, effectiveness of sales distribution, « price competitiveness, advertising and ‘promotion \ effectiveness, : Jocation and age of facility, production \ capacity, raw ‘material costs, financial position, ele. Strategic Management / Dr. M A Mannan compotitive position with suppliers, a company should address thy following questions. Ate suppliers’ prices competitive? Do suppliers offer attractiyg quantity discounts? How costly are their shipping charges? ‘Are vendors compelitive in terms of production standards? ‘Are suppliers’ abilities, reputation, and services competitive? ‘Are suppliers reciprocally dependent on the firm? SUPPLIERS CUSTOMERS Elements | | COMPETITORS NEW ENTRANTS SUBSTITUTE PRODUCTS Figure 6.1: Elements of industry environment Customers: Strategy managers must understand the composition of the company's customers. With this end in view, they need to develop an exhaustive customer profile of both the present and potential customers. Managers will be in a better position to Pragmatically plan the firm's strategic operations, anticipate changes in the size of the markets and anticipate demand pattems: While constructing a customer profile, managers need to use information regarding geographic location ‘of customers, demographic characteristics of buyers, psychographic issues and buyer behavior. Competitors: A firm needs to analyze the competitive intensity in \ the industry. It needs to understand the competitive position in the industry in’ order to improve its chance of designing winning strategies. Many companies develop a ‘competitor profile’ to more accurately forecast its short-and-long-term growth and profit potentials. A competitor profile may include such variables as market share, product line, effectiveness of sales distribution, price competitiveness, advertising and promotion effectiveness, location and age of facility, production capacity, raw material costs, financial “John A. Pearce and Richard B. Robinson, Strategic Management (Homewood, Il Scanned with CamScannerCHAPTER position, ele. The major competitors in the pharmaceutical industry in Bangladesh include Square, Beximco, Aventis. GlaxoSmithKline, Opsonin, ACME, Eskayef, Drug International, ACI, Renata, Incepla, Novartis, Ibn Sina, Jayson and Aristopharma. New Entrants: The new entrants are the upcoming competitors of the firm. They are potential competitors because when they enter into the industry with the similar types of products, the competitive intensity increases. In Bangladesh, for example, the new entrants in the pharmaceutical industry are Popular Pharmaceuticals Ltd., Radiant Pharmaceuticals Ltd., Novo Healthcare Pharmaceuticals Ltd., and Social Marketing Pharmacéuticals Ltd. Substitute Products: The producers of substitute products are indirect competitors. The substitute products serve the same categories of customers. They can meet the similar needs of customers, and therefore, emerge as threats. For example, when detergent powder is capable of meeting customer needs in a much better way or even in the same way as the laundry soap does, detergent powder becomes strong indirect competitor of laundry soap. _p@importance of Industry Analysis Industry is the ‘container’ of competition. The strategy-makers must understand the competitive intensity in the industry. The competitive intensity influences a company's business operations tremendously. Thus, it is absolutely essential for a company to review the competitive intensity and fit its strategy to its industry a, elle ‘No organizations can expect good strategy-making without a détailed analysis of industry environment. That is why, it is widely recognized that good strategy-making should be preceded by good industry and competitive analysis. Industry analysis provides necessary information about the industry's situations. From this analysis, managers can obtain information regarding many industry-related issues such as the following: + Economic features of the industry like market size, number of customers and sellers, technology, nature of standardization of product, market growth potential, prospect of making profit etc. Strength of competition and competitive pressures. ‘* Major driving forces in the industry that cause pressures for change. + Financial and competitive positions of the competitors in the marketplace. * Strategies undertaken by the competitors. Industry's key success ‘factors such as design in garments industry. + Allractiveness of the industry in terms of growth prospect, degree of uncertainty in the future. Good strategy- ‘making should be preceded by good industry and competitive analysis. Industry analysis provides necessary information about the industry's situations, The most widely used model for an industry's competition analysis is Michael Porter's Five Forces Model, ‘Managers can use this model to analyze the competitive environment in the industry in which their company is ‘operating its business. Scanned with CamScannerPotential competitors create threats to existing companies (incumbent companies) because i they enter they can ‘make competition tougher through taking away market share from the existing companies. With those data, managers can achieve several purposes: Identifying and selecting the company's arena by defining ii, industry and served markels. Identifying business opportunities and uncovering niche markets, 2 3. Providing a benchmark for evaluating the company relalive to the competitors and, based on it, developing skills and capabilities necessary for success. . ‘Shortening the company's response-lime to competitors’ moves. * 5. Restricting or preempting competitors’ moves. 6 Encouraging organizalional development through frequent interactions among the executives during the analysis. Helping the company lo gain a competitive advantage through identifying any area where the company holds a significant advantage over its rivals. Enhancing organizational learning by exposing managers to the ideas and actions of their competitors. : Providing invaluable insights into the industry and competition, which help managers identify appropriate strategy and implement shrategy successfully. i. <5 Analysis of Competition in Industry Managers in a firm can use various models Tor analyzing the industry environment. However, the most widely used model for an industry's competition analysis is Michael Porter's Five Forces Model. Managers can use this model to analyze the competitive environment in the industry in which their company is operating its business. The Five Forces Model provides a framework to identify industry-related opportunities and threats. We discuss this model here in details. Michael Porter's Five Forces Model of Competition Porter has developed a framework that managers can use to analyze competitive forcés in the industry's environment. It helps them identify the industry-related opportunities and threats \, confronting their company. \A look at the Five Forces Model that appears in Figure 6.1° would enable you to have a broad view of the elements of the model. You will find that there are five factors or forces that shape competition in.an industry. These are: (i) threat of new entrants; (ji) bargaining Harvard University Press, ¢ Management (Boston: Competition, (Cambridge, Ms "JK Bain, Barriers to New Uill-and G.-R. Jones, Strateg 1956. Quoted in C. W. Houghton Miffin Company, 2000), § Michael Porter, “Mow Competitive Forces Shape Strategy,” Harvard Business Review (March-April, 1979), - Scanned with CamScannerCHAPTER 6 Industry Analysis 74 power of suppliers; (ili) bargaining power of buyers; (iv) threat of substitute products; and (v) rivalry among the existing firms. Michael E. Porter ‘Threat of new entrants Bargaining Bargaining power of Rivalry among the” 4__ power of suppliers > — «existing firms: buyers oo es ‘Threat of substitute products Figure 6.1: Michael E. Porter's Five Forces Model We provide here a discussion on the impact that the individual forces in the industry can have on a firm within the industry. Scanned with CamScanneryogic Mav 3 Strategl a 4, Throat of New Entrants Threat of new entrants refers to the risk of new entry by potentia, competitors. In the marketplace some competilors are already operating their businesses. They are called existing competitors, Some other upcoming competitors are not now operating business in the industry but they can enter into the industry if they have the capability and desire to enter. They are potential competitors, Bangladesh Telephone and Telegraph Board (BITB) was once considered a potential competitor in the cellular phone industry. In fact, BTTB (subsequently renamed as BTCL) entered into the industry with its mobile phones in April 2005. Potential competitors create threats to existing companies ‘Barriers to enty' are (incumbent companies) because if they enter they can make created by pebsohanes Lapel competition tougher through taking away market share from the vary costly for he existing companies. Thus, existing companies discourage potential compoitors fo adopt. competitors from entering into the industry by creating barriers to Such barriers may entry. ‘Barriers to entry’ are created by undertaking some be rend loyalty, measures.that are very costly for the competitors to adopt. Such uoes barriers may be. strong brand loyalty, absolute cost advantage, ‘i sizable economies of scale, high capital requirements, difficulties of economies of scale, e 4 building distribution network of distributors and retailers, restrictive tariffs, international trade restrictions, and government regulations.> On the other hand, if the risk of entry by potential competitors is low, the existing companies can raise prices and earn higher profits. When entry barriers are low, it is easy for potential competitors to enter the industry. Despite entry barriers, many entrants enter the industry with appealing products. The strategy-makers need to identify the entrants, monitor their strategies and tactics,.undertake counter-strategy, and deal with the emerging issues building on the firm's existing resources and capabilities. 2. Bargaining Power of Suppliers ‘A company has to procure various types of ‘supplies’ from the suppliers such as raw materials, components, parts and other ‘Suppliers have very materials necessary for producing a product. When dependency of ite or no bargaining the customers (buyer-firms) is high, the bargaining power of pore Ee sen, Suppliers is enhanced. Powerful suppliers can raise prices of gre availoble rom \ Materials. As a result, powerful suppliers are a threat to the companies who have to buy at that price. If suppliers are weak, different parties. \ Their power \\company may be in an advantageous position and can demand increases if the high quality at_a lower price from the suppliers. In the paper cupplyofthe industry in Bangladesh, suppliers are very few and they are: very sapihatsis fimited strong in bargaining prices. This has created a threat for the are such that they publishing industry. However, this threat has been to some extent are inevitable forthe diluted due to imported paper. Suppliers have very-little or no company, "See J. i. Bain, Barriers to New Competition ress, 1956), C.W.L. Hill and GR. Jones, Sir IL, Crafting anal Executing Strategy (New Mittin 2000); and ‘Thompson Delhi: Tata MeGraw-llill, 2010). Scanned with CamScannerCHAPTER 6 Industry Analysis bargaining power if the materials they sell arc available from different parties, Their power increases if the ‘supply of the materials is limited or if the materials are such that they are inevitable for the company (buyer). For example, in the PC market Intel is the most powerful because of its unique position in producing microprocessor (Pentium). According to Michael Porter, suppliers are most powerful." * When the product that they sell has few substitutes and is important to. the company. » * When the company’s industry is not an important customer of the suppliers. As a result, the suppliers do not need to depend on the companies in the industry. Therefore, they don't find any good reason to reduce price or even to improve quality. ‘* When it is costly for a company to switch from one supplier to another. In such cases, the company depends on its suppliers and cannot play them off against each other. * When the suppliers have the environment/opportunity to give threat to the companies in the industry that they would directly compete with the companies through developing forward linkage in the industry. * * When buying companies have little opportunity to establish backward linkage to. produce their own raw materials as a means to reduce prices of inputs. The bargaining power of suppliers is weaker under the following circumstances in the industry: When substitute products acceptable to the buyers are easily available. + When huge quantity of products are available in the market. + When buyers can buy from alternative suppliers at a low cost. When buyer-firms have the capacity to integrate backward into the business of the supplier and thus can satisfy the customer's own requirements. * When the customers have ample opportunities to develop strategic alliance with other suppliers, and thus can have win-win gain. * When continued large purchases on the part of the customers is important for the suppliers. ‘+ The customers can buy the same products from many suppliers at the same price. * Adopicd from Charles W. L. Hill and Gareth R. Jones, Strategic Management (Boston, ~ MA: Houghton Miftlin Company, 2000. p. 82). 73 Buyer's bargaining ‘power becomes high when suppliers have to depend on therm for some reasons. On the other hand, their bargaining power is weak when suppliers/sellers are capable to raise prices. Scanned with CamScannerBuyer's bargaining ‘power is weak when -uppliers/sellers ‘are capable to raise prices. E-maitis a substitute forthe ‘overnight delivery of documents by the courier service companies, \ Janagement/Dr.M A Mannan Strategic Management en SSR AAAs 3. Bargaining Power of Buyers Buyers of products may be ultimate consumers or oven 4, intermediaries such as dealers, wholesalers and retailers. Buy,’ bargaining power becomes high when suppliers have to depend them for some reasons. On the other hand, their bargaining px is weak when suppliers/sellers are capable to raise prices. Whethe, buyer-seller relationships represent a weak or strong competti, force depends on whether buyers have sufficient bargaining pov. to influence the terms and conditions of sale in their favor, and th, extent of seller-buyer strategic partnerships in the industry." According to Porter, buyer's bargaining power is highest when, + The supply industry is composed of many small companies ang the buyers are few in number as well as they are large. + Buyers'purchase in large quantities. ‘+ The supply industry depends on the buyers for a large percentage of its total orders. + Buyers can switch orders between supply companies at a low cox, + It is economically feasible for the buyers to purchase the inpuy from several companies at once, + Buyers can use the threat to supply their own needs through, vertical integration (backward linkage) as a device for forcing down prices. > Buyer's bargaining power is generally weaker — + When buyer depends on the seller because of the fact that the brand reputation of the séller is very important to the buyer. + When there is high demand for the seller's products in the market and as a result, a ‘sellers’ market’ prevails in the industry. ‘+ When cost of procuring products from alternative sources is very high. + When buyer purchases a particular product from the seller in smal quantity or does not purchase frequently. 4. Threat of Substitute Products A company needs to consider the competitive pressures from substitute products. The substitute products may come from either \ the same industry or from other industries. For example, cotton producers are in direct competition with the producers of polyester fabrics. Newspapers compete against television in providing latest news. E-mail is a substitute for the overnight delivery of documents by the courier service companies. Coffee is a substitute of tea Bottled water is a substitute of juice and soft drinks. Plastic bottles are substitutes of aluminum cans for beverages. Traditional film cameras are fighting hard against their substitute-enemy — the digital cameras. ee " A. A. Thompson anid A. J. Stickland, Strategic Management (Boston: McGraw-Hill Irwin, 2001). ree Maneremes (asi Scanned with CamScannercuaP ER 6 Industry Analysis If the buyers view the subslitute products as ‘good substitutes’, compelilive pressure automatically emerges from the actions of the companies producing substitute products. For example, “Lasik operation (laser surgery) of eyes has created a strong competitive pressure on the produces of eye-glasses and contact lenses. Similar is the situation between VCRs/video tapes and DVD players, and between landline telephones and mobile phones. The major factors that determine the strength of the competition from substitutes are (a) attractiveness of the prices of substitutes; (b) buyers’ satisfaction with the substitutes in terms of quality and other features; and (c) the easiness to switch-to substitutes. When the substitutes are available at cheaper prices, the producers of the normal product are in a high competitive pressure to reduce prices. When substitute products are available, customers begin to compare prices, quality etc. with the normal products. Similarly, when switching costs from the normal product to substitute products are low (and also not inconvenient), buyers become more prone to the substitutes. Thompson et al. have indicated three signs that point to a strong «competition from substitutes. These are: (a) sales of substitutes are growing faster than sales of the industry; (b) producers of substitutes are moving to add new capacity; and (c) profits of the producers of substitutes are on the rise. Existence of substitute products in the industry poses a threat to a company. Thus, the company's profit is likely to depress due to cutting down prices. If a company has few substitutes, it has the opportunity to raise prices and thereby increase profits. 5. Rivalry Among the Existing Firms ‘A very important force in the Porter's Model is the extent of rivalry among the established firms in the industry. In an environment of weak rivalry (competition), a firm can-raise prices and make higher profits. When competition is strong, the industry may face severe price-war in which firms compete against each other on the basis of price cuts. If there is a severe competition among the firms in the industry, profitability decreases substantially. Thompson and Sircklang regard this force of rvaly as the strongest of the five forces.’ Inter-company rivalry or competition stems from several factors, as identified by Porter in his famous book Competitive Strategy. These are as follows:"? + Competition increases as the number of competitors increases. * Competition is usually stronger when demand for the product is growing slowly. cl 1, Porter, Competitive: Steatege’ Techniques for Analysing Industrie rns (New Yok’ Have Pres, 1980) Acompany needs to Consider the compelitve pressures from substitute ‘products. When competition is strong, the industry ‘may face severe ‘price-war in which firms compete against each other . Con the basis of pric j 4 Scanned with CamScannerment / Dr. MA Mannan 76 ‘© Competition is more intense when industry conditions encourage Application of compolitors to cut prices. Porter's Five + Competition is stronger when customers’ costs lo switch brands arg Forces Model in low. the Garments + Competition is stronger when one or, more competitors are Industry in dissatisfied with their market position and undertake other measures Bangladesh: See to win the battle for market share. : Annex 5. + Competition tends to be more intense when it costs more to get out ofa business than to stay in the industry. ¢ ‘* Competition becomes more volatile when competitors are diverse in their objectives, strategies resources, etc. , Competition increases when powerful companies from outside the industry acquire the weak companies in the industry and taunch aggressive campaigns to make the acquired companies profitable, 6-6 Why Do Managers Widely Use Five Forces Model? Tmemaje reason \ Managers can use this model to systematically diagnose the principal competitive pressures in a market. With this model they of his technique is i that itis easy to can assess the strength of each of the competitive forces. They can wnderstand and, further understand how important each of these forces is. The soo poe major reason behind the wide use of this technique is that it is easy ae to understand and apply in practice when mangers analyze anole competion. petition. Mangers find it comfortable to analyze the competitive prescures associated with each force in’ the model. They can Clearly determine whether the pressures of the five compelitive forces exert any strong or weak influence in the market place. Based on their understanding of the interplay of these forces, they can strategically think about the right type of strategy for their company. Michael Porter's model has several management implications: 1. It reveals most important strategic clues in an industrys ‘competitive environment. These are strengths of each of the five forces, nature of the competitive pressures of each force, and the overall structure of competition in the industry. 2. Profit margins for all competing firms become thin if the suppliers and buyers have considerable bargaining leverage, A strong competitive competition among: sellers is strong, low entry barriers allow ee eine ured companies to enter easily into the industry, and competition since i depresses from substitutes is strong. The opposite happens when the profits. A weak competitive forces are not collectively strong. competitive force 3. Porter argues that the stronger each of these forces is, the more Folate lad limited is the ability of established companies to raise prices and CT ig eam greater profits. A strong competitive force can be regarded earn greater profs. as a threat since it depresses profits. A weak competitive force can be viewed as an opportunity, for it allows a company to eam greater profits. The strength of the five forces may change through time as industry conditions change. The manager's task is to study how changes in the five forces give rise to new opportunities and threats. His/her next task is to formulate ~! Scanned with CamScannerCHAPTER 61 appropriale strategic responses. Manager's strategy-making task becomes casier when he/she can gauye the competitive insights from the analysis of the five forces. The information from the analysis of five forces helps managers formulate winning strategy that can ensure the company a sustainable competitive advantage. Porter's Model has major drawbacks as a tool for competition analysis. It can be used for analyzing only the degree of competition in the industry. It cannot explore such factors as the influential economic factors in thé industry that are relevant to managerial strategy-making. It also fails to. identify the driving forces — major causes of changing industry conditions. This model is not very suitable to assess the competitive position of rivals and their likely strategic moves, and overall industry attractiveness. These drawbacks can be overcome by using Thompson and Strickland's ‘Seven Forces Model of Industry Analysis.’ 6.7 Analysis of Industry Michael Porter's Five Forces Model focuses only on the competitive forces surrounding buyers, suppliers, established companies, potential competitors and substitute products. This model excludes many other industry-related factors that substantially provide inputs for identification of industry's environmental opportunities and threats. To overcome this shortcoming of Porter's Model, Thompson and Strickland have developed a model for the overall analysis of an industry, including competition within the industry. The model for industry and competitive analysis proposed by Thompson and Strickland has not only been able to overcome the drawbacks of Porter's Model, it also seems to be comprehensive. It touches on all the relevant issues in an industry that need to be analyzed for assessing the overall industry situations, including the degree of competition in the industry. This model is based on seven forces. It provides a ‘comprehensive treatment for the analysis of the issues in an industry. It focuses on dominant economic characteristics of an industry, sources of competitive pressures, strengths of the competitive forces in the industry, driving forces, market position of the competitors, strategic moves (actions) undertaken by competitors, the key success factors in the industry, and the overall attractiveness of the industry. The seven forces of the Thompson and Strickland Model are presented in the box.:'’ An analysis of these factors reveals competitive structure of the industry. Let's discuss the factors one by one. The information generated through the analysis of these factors would build understanding of a firm's surrounding "3 his scetion draws on ‘Thompson and Strickland, op.cit, pp. 74-113. Thompson ‘and Strickland have developed a model for the overall analysis of an industry, including competition within the industry. An industry's économie features are important because their implications for strategy making are greal. i Scanned with CamScanner