evaluating a company’s external environment jennifer i. malabrigo october 24, 2011 future minds...

Evaluating a Company’s Evaluating a Company’s External EnvironmentExternal Environment

Jennifer I. MalabrigoJennifer I. Malabrigo

October 24, 2011October 24, 2011

Future MindsFuture MindsHow the digital age is changing our minds, why How the digital age is changing our minds, why

this matters, and what we can do about itthis matters, and what we can do about itRichard WatsonRichard Watson

IntroductionIntroduction A company’s environment consists of both A company’s environment consists of both

external and internal factors. external and internal factors. The external business environment refers to the

range of factors that can influence the operation and performance of a business. The business has limited control over these factors. The external business environment includes such things as laws, regulations, social and cultural influences and changes in economic conditions

Environment must be scanned so as to determine Environment must be scanned so as to determine development and forecasts of factors that will development and forecasts of factors that will influence organizational success.influence organizational success.

External Environmental External Environmental AnalysisAnalysis

A continuous process which includesA continuous process which includes Scanning: Identifying early signals of

environmental changes and trends

Monitoring: Detecting meaning through ongoing observations of environmental changes and trends

Forecasting: Developing projections of anticipated outcomes based on monitored changes and trends

Assessing: Determining the timing and importance of environmental changes and trends for firms’ strategies and their management

External Analysis External Analysis StagesStages

Macro-environment

Micro-environment

Competitor analysis

Market analysis

Company’s Macro-Company’s Macro-environmentenvironment

Relates to the larger forces having an Relates to the larger forces having an impact on society as a whole.impact on society as a whole.

A company has little influence on these A company has little influence on these forces and therefore can only adapt its forces and therefore can only adapt its marketing mix to account for the marketing mix to account for the resulting opportunities and threatsresulting opportunities and threats..

Major forces of the Major forces of the macro-environmentmacro-environment

Demographic ForcesDemographic Forces

Trends in the physical characteristics Trends in the physical characteristics of population such as:of population such as:

Changing age structure Changing age structure Changing family structureChanging family structure Geographic shifts in populationGeographic shifts in population Higher education level & more Higher education level & more

white collar job holderswhite collar job holders Increasing globalization of citiesIncreasing globalization of cities


Economic ForcesEconomic Forces

Economic Conditions includes the impact Economic Conditions includes the impact of economic factors like Interest rates, of economic factors like Interest rates, inflation, changes in disposable income inflation, changes in disposable income and the stage of general business cycle and the stage of general business cycle e.g when consumer’s incomes fall their e.g when consumer’s incomes fall their confidence about job security declines, confidence about job security declines, they will postpone purchasing any thing they will postpone purchasing any thing that is not necessary that is not necessary


Natural Environment Natural Environment ForcesForces

Natural trends include those natural Natural trends include those natural resources used in production or those resources used in production or those affected by marketing activitiesaffected by marketing activities

Raw material shortagesRaw material shortages Increase in energy cost Increase in energy cost Increase pollution levelsIncrease pollution levels Increase in Governmental intervention in Increase in Governmental intervention in

natural resource management natural resource management


Technological ForcesTechnological Forces

Changes in technology that affect the Changes in technology that affect the workplace, and the products and workplace, and the products and services consumers expect.services consumers expect. e.g., Information technologies, e.g., Information technologies,

entertainment technologies, product entertainment technologies, product technologiestechnologies..


Socio-cultural ForcesSocio-cultural Forces

Attitudes of society towards work, Attitudes of society towards work, careers, products, services and careers, products, services and consumer activism.consumer activism. e.g., concern for quality of life, birth e.g., concern for quality of life, birth

rates, woman in the work force, health rates, woman in the work force, health consciousness, respect for intellectual consciousness, respect for intellectual property, desire for “green retailingproperty, desire for “green retailing””


Political/Legal ForcesPolitical/Legal Forces

Tax laws, minimum wages, Tax laws, minimum wages, environmental laws, labor laws, environmental laws, labor laws, consumer protection, product liability, consumer protection, product liability, etc.etc.


International EnvironmentInternational EnvironmentParticularly important for the industries directly Particularly important for the industries directly

depending on imports or exports and import-competing depending on imports or exports and import-competing industriesindustries

Recession, economic boom, liberalizationRecession, economic boom, liberalizationMajor international developments have their spread Major international developments have their spread

effects on domestic business.effects on domestic business.E.g. Oil price hikes increased the cost of production E.g. Oil price hikes increased the cost of production

and the prices of certain products such as fertilizers , and the prices of certain products such as fertilizers , synthetic fibres. So usually, the demand for natural synthetic fibres. So usually, the demand for natural fibres and manures increased.fibres and manures increased.

Also demand for automobiles that economise energy Also demand for automobiles that economise energy consumption got increased.consumption got increased.


Company’s Micro-Company’s Micro-environmentenvironment

This is the operating environment or industry sector in which the firm competes. It addresses a range of issues such as suppliers, customers, competitive intensity, threat of new entry and of substitute products arising

Major forces of the Major forces of the micro-environmentmicro-environment

What Forces Are atWhat Forces Are atWork to Change Industry Conditions?Work to Change Industry Conditions?

Industries change because Industries change because forcesforces are are drivingdriving industry industry participants to alter their participants to alter their actionsactions

Driving forcesDriving forces are theare the major underlying causesmajor underlying causes of changing industry and of changing industry and competitive conditionscompetitive conditions

Industry CompetitionIndustry Competition

Different industries can sustain different Different industries can sustain different levels of profitability; partly due to the levels of profitability; partly due to the difference in industry structuredifference in industry structure

Porter’s Model of Competition, Porter’s Model of Competition, commonly known as Porter’s Five Forces commonly known as Porter’s Five Forces provides a framework for analyzing the provides a framework for analyzing the influence of the forces on the industry to influence of the forces on the industry to determine the industry’s profitability determine the industry’s profitability and competitivenessand competitiveness

Porter’s Five ForcesPorter’s Five Forces

The threat of entry of new The threat of entry of new competitors (new entrants)competitors (new entrants)

The threat of substitutesThe threat of substitutes The bargaining power of buyersThe bargaining power of buyers The bargaining power of suppliersThe bargaining power of suppliers The degree of rivalry between existing The degree of rivalry between existing

competitorscompetitors

Potential New EntrantsPotential New Entrants

Firms enter when industries are Firms enter when industries are attractive, unless they find attractive, unless they find themselves at an immediate themselves at an immediate disadvantage relative to incumbents.disadvantage relative to incumbents.

Firms can create “barriers to enter” Firms can create “barriers to enter” Barriers of entry are desirable for Barriers of entry are desirable for

entrenched firmsentrenched firms

Barriers to EntryBarriers to Entry

Absolute cost Absolute cost advantages advantages

Proprietary learning Proprietary learning curve curve

Access to inputs Access to inputs Government policy Government policy Economies of scaleEconomies of scale

Capital requirements Capital requirements Brand identity Brand identity Switching costsSwitching costs Access to distribution Access to distribution

Expected retaliation Expected retaliation Proprietary products Proprietary products

(Source: Michael Porter, “On Competition”)

Threats of SubstitutesThreats of Substitutes

Buyer willingness to substitute Buyer willingness to substitute Relative price performance of Relative price performance of

substitutes substitutes

Switching costsSwitching costs


Buyer PowerBuyer Power

Bargaining Bargaining leverage leverage

Buyer volume Buyer volume Buyer Buyer

information information Brand identity Brand identity Price sensitivity Price sensitivity

Threat of backward Threat of backward integration integration

Product Product differentiation differentiation

Buyer concentration Buyer concentration vs. industry vs. industry

Substitutes available Substitutes available Buyers' incentives Buyers' incentives


Supplier PowerSupplier Power Supplier Supplier

concentration concentration Importance of Importance of

volume to supplier volume to supplier Differentiation of Differentiation of

inputs inputs Impact of inputs on Impact of inputs on

cost or cost or differentiation differentiation

Switching costs of Switching costs of firms in the industry firms in the industry

Presence of Presence of substitute inputs substitute inputs

Threat of forward Threat of forward integration integration

Cost relative to total Cost relative to total purchases in purchases in industry industry


Degree of RivalryDegree of Rivalry

Industry growthIndustry growth Industry concentration ratio Industry concentration ratio

Fixed costs/Value added Fixed costs/Value added Product differentiation Product differentiation Buyers' incentivesBuyers' incentives Exit barriers Exit barriers (Source: Michael Porter, “On Competition”)

Strategic implications of the Five Strategic implications of the Five Competitive ForcesCompetitive Forces

Competitive environment Competitive environment isisunattractive from the unattractive from the standpoint of earning good standpoint of earning good profits when:profits when:

Rivalry is vigorousRivalry is vigorous Entry barriers are lowEntry barriers are low

and entry is likelyand entry is likely Competition from Competition from

substitutes is strongsubstitutes is strong

Suppliers and customers Suppliers and customers have considerable have considerable bargaining powerbargaining power

Competitive environment Competitive environment is ideal from a profit- is ideal from a profit-making standpoint when:making standpoint when:

Rivalry is moderateRivalry is moderate Entry barriers are highEntry barriers are high

and no firm is likely to and no firm is likely to enter enter

Good substitutes do Good substitutes do not existnot exist

Suppliers and Suppliers and customers are in a customers are in a weak bargaining weak bargaining positionposition

The Competitor AnalysisThe Competitor Analysis

Competitor AnalysisCompetitor Analysis

It seeks to understand the rival offers from It seeks to understand the rival offers from other firms seeking to serve the same other firms seeking to serve the same customers and to out manoeuvre their customers and to out manoeuvre their managers with our innovation and managers with our innovation and competitive moves. competitive moves.

Competitive AnalysisCompetitive Analysis Who are your competitors?Who are your competitors? Do you know about your close competitors’ Do you know about your close competitors’

strengths and weaknesses?strengths and weaknesses? How detail should we analyze the competition?How detail should we analyze the competition?

Use a systematic approach Use a systematic approach

Analysis competition at various levels Important Analysis competition at various levels Important in concentrated industries (few, large share in concentrated industries (few, large share competitors)competitors)

BenefitsBenefits forecast future actions, predict reactionsforecast future actions, predict reactions can we influence rivals’ behavior?can we influence rivals’ behavior?

Levels of Competition Levels of Competition Generic competition—e.g. Honda against Silver Generic competition—e.g. Honda against Silver

Sea Cruise for the same consumer dollarsSea Cruise for the same consumer dollars Form competition—e.g. Toyota against Form competition—e.g. Toyota against

manufacturers of other vehicles that provide the manufacturers of other vehicles that provide the same service such as Yamaha (motorcycle)same service such as Yamaha (motorcycle)

Industry competition—e.g. Honda against Industry competition—e.g. Honda against Mercedes, Lexus etc who make the same Mercedes, Lexus etc who make the same products or class of products (different prices)products or class of products (different prices)

Brand competition—e.g. Honda against Toyota, Brand competition—e.g. Honda against Toyota, Nissan etc. who offer similar products and Nissan etc. who offer similar products and service to the same customers at similar prices service to the same customers at similar prices

Common Types of Driving Common Types of Driving ForcesForces

Changes in long-term industry growth rateChanges in long-term industry growth rate Changes in who buys the product and how they use itChanges in who buys the product and how they use it Product innovationProduct innovation Technological change/process innovationTechnological change/process innovation Marketing innovationMarketing innovation Entry or exit of major firmsEntry or exit of major firms Diffusion of technical knowledgeDiffusion of technical knowledge Increasing globalization of industryIncreasing globalization of industry Changes in cost and efficiencyChanges in cost and efficiency Market shift from standardized to differentiated products (or Market shift from standardized to differentiated products (or

vice versa)vice versa) New regulatory policies and/or government legislationNew regulatory policies and/or government legislation Changing societal concerns, attitudes, and lifestylesChanging societal concerns, attitudes, and lifestyles Changes in degree of uncertainty and riskChanges in degree of uncertainty and risk

Firms in Firms in same strategic groupsame strategic group have two or more have two or more competitive characteristicscompetitive characteristics in common in common

Have comparable product line breadthHave comparable product line breadth

Sell in same price/quality rangeSell in same price/quality range

Emphasize same distribution channelsEmphasize same distribution channels

Use same product attributes to appealUse same product attributes to appealto similar types of buyersto similar types of buyers

Use identical technological approachesUse identical technological approaches

Offer buyers similar servicesOffer buyers similar services

Cover same geographic areasCover same geographic areas

Strategic Group MappingStrategic Group Mapping

The Market AnalysisThe Market Analysis

Market AnalysisMarket Analysis

It seeks to evaluate the current needs of today’s customers and the emerging needs of tomorrow’s customers so new products can be anticipated. These will be different in different market segments

. .

2-34

The Industry Life Cycle The Industry Life Cycle

Identification of Key Success Identification of Key Success Factors?Factors?

KSFs are product attributes, KSFs are product attributes, competencies, competitive competencies, competitive capabilities, and market capabilities, and market achievements with the greatest direct achievements with the greatest direct bearing on profitabilitybearing on profitability

The Components of a Company’s Macro-The Components of a Company’s Macro-EnvironmentEnvironment

Involves assessing whether the industry and Involves assessing whether the industry and competitive environment presents a company with an competitive environment presents a company with an attractiveattractive or or unattractiveunattractive opportunity opportunity for earning good profitsfor earning good profits

Factors to consider:Factors to consider: Industry growth potentialIndustry growth potential Whether competitive forces are growing stronger/weakerWhether competitive forces are growing stronger/weaker Whether driving forces will favorable/unfavorably impact Whether driving forces will favorable/unfavorably impact

industry profitabilityindustry profitability Degree of risk and uncertainty in industry’s futureDegree of risk and uncertainty in industry’s future Whether the industry confronts severe problemsWhether the industry confronts severe problems Firm’s competitive position in industry vis-à-vis rivalsFirm’s competitive position in industry vis-à-vis rivals Firm’s potential to capitalize on industry opportunities or the Firm’s potential to capitalize on industry opportunities or the

vulnerabilities of weaker rivalsvulnerabilities of weaker rivals Whether a firm has sufficient competitive strength toWhether a firm has sufficient competitive strength to

defend against unattractive industry factdefend against unattractive industry factorsors

Factors to Consider in Assessing Factors to Consider in Assessing Industry AttractivenessIndustry Attractiveness

Core Concept: AssessingCore Concept: AssessingIndustry AttractivenessIndustry Attractiveness

The degree to which an industry

is attractive or unattractive is

not the same for all industry

participants

or potential entrants.

The opportunities an industry

presents depend partly on a

company’s ability to capture

them.3-38

An Interview with Michael E. Porter, An Interview with Michael E. Porter, Professor, Harvard University. Porter's five Professor, Harvard University. Porter's five competitive forces is the basis for much of competitive forces is the basis for much of modern business strategy. Understand the modern business strategy. Understand the framework and how to put it into practiceframework and how to put it into practice

End of my presentationEnd of my presentation

Thank you and God bless us Thank you and God bless us all!all!

evaluating a company’s external environment jennifer i. malabrigo october 24, 2011 future minds...

Documents

companys environment

external business environment

management slide

technological forces

demographic forces trends

larger forces

major forces

richard watson slide