CHAPTER TWO

ANALYSIS OF
STRATEGIC
ENVIRONMENT

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 Analytical Tools of External
Environmental Analysis
SCANNING
• Through scanning firms identifying early signals of
environmental changes and trends.
MONITORING
 Detecting meaning through ongoing observations of
environmental changes & trends among those spotted by
scanning.
FORECASTING
 Developing projections of anticipated outcomes based on
monitored changes & trends.

ASSESSING
 Determining the timing & importance of environmental changes
& trends for firms’ strategies & their management.
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External Environmental Analysis

The external environmental

analysis consists of:
 The general/macro
environment
 The industry environment

 The competitor analysis

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External Environmental
…Cont’d

4
The General
Environment
(PESTE –
Analysis)

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 The General Environment
 Analysis of the general environment
is
focused on its future impacts on firm’s performance.

 In this respect, the awareness & understanding of an

increasingly turbulent, complex & global general
environment is critical.

 The general environment influences the firm’s strategic

options & the decisions made in light of this.

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 The General Envir (Cont…)
A scan of the external general environment in which the firm
operates can be expressed in terms of the following factors:
 Political
 Economic
 Social
 Technological

 The acronym PEST (or sometimes rearranged as "STEP") is

used to describe a framework for the analysis of these
external general environmental factors.

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Political Factors: cont’d …
Some key Political (Gov’al & legal) variables
 Tax laws
 Environmental protection laws
 Level of government subsidies
 Antitrust legislation
 Terrorist activities
 Import/Export regulations
 Fiscal & monetary policies
 Size of Government budget
 Local, state & national elections

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 Economic Factors: cont’d …
Some key economic variables:
 Availability of credit
 Level of disposable income
 Interest rates
 Inflation rates
 Unemployment trends
 Consumption patterns
 Stock market trends
 Import/Export factors
 Demand shifts
 Price fluctuations
 Fiscal policies
 Tax rates 9
 Social Factors: cont’d …
Some key socio-cultural variables
 Changing work values
 Ethical standards
 Growth rate of population
 Life expectancies
 Rate of family formation
 Consumer activism
 Geographic shifts in population
 Attitudes towards business
 Average level of education
 Attitudes towards leisure time

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Technological Factors: cont’d
…
Some key technological variables
 automation

 technology incentives

 rate of technological change

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Ecological Factors

Light,

Temperature,

Soil,

Water

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2. The Industry Environment

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 Analysis of the industry
Definition
An industry is group of firms
a
producing that are close
products
 Firms that influence one another.
Substitutes.
Analysis of the industry environment is focused
on the factors & conditions influencing the firm’s
profitability in the industry.

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Definition cont’d …
It refers to the analysis of:
Industry trends as a whole;
Competition within the industry;
Technologies employed;
What it takes to succeed – the key success
factors (KSF);
Comparing the firm, its products, its systems, its
technology etc., with other firms in the industry.

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Nature And Degree Of Competition

The nature and degree of

competition in an industry hinge on
five forces:
1. The threat of new entrants
2. The bargaining power of suppliers
3. The bargaining power of buyers
4. The threat from substitute products
5. Rivalry (competition) among existing firms

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Porter’s Five-force Model

Chapter Four ABERA D. 30

Porter’s five forces model

is an analysis tool that uses five industry forces to determine the intensity
of competition in an industry and its profitability level.

Five forces model was created by Harvard Business School economist Michael
Porter in 1979 as a framework to understand how five key competitive forces are
affecting an industry and for developing organization’s strategy.
These forces determine an industry structure and
the level of competition in that industry.

The stronger competitive forces in the industry are

the less profitable it is.

An industry with low barriers to enter, having few

buyers and suppliers but many substitute products
and competitors will be seen as very competitive
and thus, not so attractive due to its low
profitability.
It is every strategist’s job to evaluate company’s
competitive position in the industry and to identify what
strengths or weakness can be exploited to strengthen
that position.

The tool is very useful in formulating firm’s strategy as

it reveals how powerful each of the five key forces is in
a particular industry.
• Threat of Entry
This force determines how easy (or not) it is to enter a
particular industry.
There are six major sources of
barriers to entry:
1. Economies of scale
2. Product differentiation
3. Capital requirements
4. Cost disadvantages
5. Access to distribution channels
6. Government policy

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 Threat of Entry cont’d …
Economies of scale:
• refers to cost advantages experienced by companies as they grow and become
more efficient.
• An economy of scale is realized as a company increases in size and is able to
spread out the cost of production over a larger number of units of a good.
 Deter entry by forcing the aspirant either to come in on
large scale or accept a cost disadvantage.
 Threat of new entrants is high when Economies of scale can be easily
achieved.
Product differentiation:
 Factors fostering brand identification are being first in the
industry, advertising, customer service, and product
differences.
 Threat of new entrants is high when Products are nearly identical.

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 Threat of Entry cont’d …
Capital requirements:
The need to invest large financial resources in order to
compete creates a barrier to entry.
• Threat of new entrants is high when Low amount of capital is
required to enter a market.

Cost disadvantages independent of scale: when a

company has advantages that cannot be replicated by the competition.
These advantages can stem from the effects of:
• the learning curve (the rate of a person's progress in gaining experience
or new skills), and proprietary technology (tool, or system that belongs
exclusively to an enterprise),
• access to the best raw material sources,
• assets purchased at pre-inflation prices,
• government subsidies, favorable location, and
• official rights (patents)
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 Threat of Entry cont’d …

Access to distribution channels:

Affects new entrants since the new product
must displace others via price breaks,
promotions, and intense selling efforts.

When there are limited wholesale or retail

channels and the existing competitors
occupied them, entry into the industry will
be tougher.

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 Threat of Entry cont’d …

Government policy:
The government can limit or even foreclose entry
to industries with such controls as license
requirements and limits on access to raw
materials.

The government also can play a major indirect

role by effecting entry barriers through controls
such as air and water pollution standards and
safety regulations.

Threatof new entrants is high when there is no

government regulation.
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Threat of Entry cont’d …
Expected Retaliation/Hit back
Existing firms might respond in different ways
when new comers enter in to the market.
Responses by existing competitors may depend
on a firm’s present stake in the industry and
available business options

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 The Bargaining Power of Suppliers
Strong bargaining power allows suppliers to sell
higher priced or low quality raw materials to their buyers.

This directly affects the buying firms’ profits because it has to

pay more for materials.
 Supplier power increases when:
 Suppliers are large and few in number
 Suitable substitute products are not available
 Suppliers’ goods are critical to buyers’ marketplace
success
 Suppliers’ products create high switching costs
 Suppliers pose a threat to integrate forward into buyers’ industry

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The Bargaining Power Buyers
 Buyers have the power to demand lower price or higher product quality
from industry producers when their bargaining power is strong.
 Lower price means lower revenues for the producer, while higher
quality products usually raise production costs.
 Both scenarios result in lower profits for producers.

 Buyer power increases when:

• Buyers are large and few in number
• Buyers purchase a large portion of an industry’s total output
• Buyers’ purchases are a significant portion
of a supplier’s annual revenues
• Buyers can switch to another product
without incurring high switching costs
• Buyers pose threat to integrate backward
into the sellers’ industry.

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 Threat of Substitute Products

 The threat of substitute products increases when:

 Buyers face few switching costs

 The substitute product’s price is lower

 Substitute product’s quality and performance

are equal to or greater than the existing
product.

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Rivalry Among Competing Firms

This force is the major determinant on how competitive and

profitable an industry is.

Industry rivalry increases when:

 There are numerous or equally
balanced competitors
 Industry growth slows or declines
 There are high fixed costs or high storage costs
 There is a lack of differentiation opportunities or
low switching costs
 When the strategic stakes are high
 When high exit barriers prevent
competitors from leaving the industry
 Low customer loyalty
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Interpreting Industry Analyses
Competitor
Analysis
Competitor Analysis /Four Corner
Analysis/
The competitor environment is the
final part of the external
environment requiring .
Competitor analysis focuses on each
company against which a firm directly
competes.
Analysis of competitors is focused
on predictingthe dynamics of
competitors' actions, responses
intentions &

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 Competitor Analysis cont’d

…
Competing firms are keenly
interested in understanding each
other’s objectives, strategies,
assumptions and capabilities.

Furthermore, intense rivalry creates a

strong need to understand competitors.

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 Competitor Analysis cont’d

…
In a competitor analysis, the firm
seeks to understand:
 What drives the competitor, as shown by its future
objectives.
 What the competitor is doing and can do, as revealed
by its current strategy.
 What the competitor believes about its own firm and
the industry, as shown by its assumptions.
 What the competitor’s capabilities are, as shown by
its strengths and weaknesses.

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Competitor analysis components

Chapter Four ABERA D. 54

 Competitor Analysis cont’d

…
Competitor intelligence is used to
get data and information about competing
firms.

Competitor intelligence is the set of data and

information the firm gathers to better understand
and better anticipate competitor’s objectives,
strategies, assumptions and capabilities.

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 Competitor Analysis cont’d

…
Information about these
dimensions helps different the
prepare anticipated
firm toresponse
an
profile for each competitor.

Thus, the result of an effective

competitor analysis helps a firm to
understand, interpret and predict its
competitors’ actions and responses.

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 Strategic Groups
Definition
A group of firms in an industry following the same
or a similar strategy along the same strategic
dimensions
 Internal competition between strategic group
firms is greater than between firms outside
that strategic group
 There is more heterogeneity in the
performance of firms within strategic groups

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 Strategic Groups cont’d …
Strategic dimensions
• Extent of technological
leadership
• Product quality
• Pricing policies
• Distribution channels
• Customer service

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Thank You!