Analyzing the environment
Objectives
 To analyze the 5-forces
 To evaluate the 5-forces model
 To investigate the application of environmental
scanning and scenario planning
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Demographic
Political/ Legal
Economic
Industry environment
threat of new entrants
Power of Suppliers
Power of Buyers
Product Substitute
Socio cultural
Intensity of Rivalry
Technological
Global
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1. What environmental factors are affecting the
organization?
2. Which of these are the most important at the present
time? In the next few years?
Political/ Legal
● Monopolies legislation
● Environmental protection laws
● Taxation policy
● Foreign trade regulations
● Employment law
● Government stability
Economic factors
● Business cycles
● GNP trends
● Interest rates
● Money supply
● Inflation
● Unemployment
● Disposable income
● Energy resources and cost
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1. What environmental factors are affecting the
organization?
2. Which of these are the most important at the present
time? In the next few years?
Socio-cultural factors
● Population demographics
● Income distribution
● Social mobility
● Lifestyle changes
● Attitudes to work and leisure
● Consumerism
● Levels of education
Technological
● Government spending on research
● Government and industry focus on
technological effort
● New discoveries/ development
● Speed of technology
● Rates of obsolescence
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Key questions to ask regarding the external environment
1. What are the industry’s dominant economic traits?
2. What competitive forces are at work in the industry and
how strong are they?
3. What are the drivers of change in the industry and what
impact will they have?
4. Which companies are in the strongest/ weakest positions?
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Key questions to ask regarding the external environment …
5. Who is likely to make what competitive move next?
6. What key factors will determine competitive success or
failure?
7. How attractive is the industry in terms of its prospects for
above-average profitability?
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Michael Porters’s Five Forces Model Analysis
Bargaining
Power of
Suppliers
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•
•
•
Threat of Forward Integration
Can Influence Price/ Volume
Few Suppliers
High Switching costs
Competitive
Rivalry
Threat of Substitute
Products
•
•
•
•
Easy Access
Low Price
Better Quality
Replacement
Phenomenon
•
•
•
•
•
•
•
•
•
Bargaining
Power of
Buyers
Backward Integration
Few Buyers
Excess Supply
Influence Price/ Volume
High Switching Costs
Threat of New Entrants
Price War
Quality Diff
Features
Customer
Service
•
•
•
•
Govt. Regulation
Capital Intensive
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Cost Disadvantages
Technology Barriers
Rivalry among competing sellers
• Usually the most powerful of the five forces
• Check which weapons of competitive rivalry are most
actively used by rivals in jockeying for position
• Price
• Quality
• Performance features offered
• Customer service
• Warranties/ guarantees
• Advertising/ promotions
• Dealer networks
• Product innovation
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What causes rivalry to be stronger?
• Lots of firms, more equal in size and capability
• Slow market growth
• Industry conditions tempt some firms to go on the offensive
to boost volume and market share
• Customers have low costs in switching brands
• One or more firms initiates moves to bolster their standing at
expense of rivals
• A successful strategic move carries a big payoff
• Costs more to get out of business than to stay in
• Firms have diverse strategies, corporate priorities, resources,
and countries of origin
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The Industry is Highly competitive if the following
conditions prevail
• High Threat of Substitutes
e. g.
• Low Entry Barriers
• Video Rentals
• High Bargaining Power of Buyers
• Telecom
• Intense Competitive Rivalry
The Industry is less competitive if the Following
Conditions Prevail
e. g.
• Low Threat of Substitutes
• Bio Pharma
• High Entry Barriers
• Bio Fertilizers
• Low Bargaining Power of Buyers
• Moderate Competitive Rivalry
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Implications: Future Strategy
Absurd to stop abruptly after analyzing
The external environment using the 5 force model
• Develop strong alliance with buyers/ suppliers
• Achieve cost efficiency
• Adopt superior technology
• Competitive pricing
• Deliver value to customer
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Environmental scanning
Monitoring and interpreting sweep of
• Social
• Political
• Economic
• Ecological
• Technological events
To spot budding trends that could eventually impact industry
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Environmental scanning …
Its purpose is to
Raise consciousness of managers about potential
developments that could
 Have an important impact on industry conditions
 Pose new opportunities and threats
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Competitor Analysis Framework
Response
Future Objectives
• How do our goals
compare with our
competitors goals?
Current Strategy
• How are we currently
competing?
• Does this strategy
support changes in the
competitive structure
Capabilities
• What are our strengths &
weaknesses?
• How do we rate
compared to our
competitors?
• What will our
competitors do in the
Future?
• Where do we held an
advantage over our
competitors?
• How will this change our
relationship with our
competitors?
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Identifying industry key success factors
• Answers to three questions pinpoint KSFs
• On what basis do customers choose between competing
brands of sellers?
• What must a seller do to be competitively successful –
what resources and competitive capabilities does it need?
• What does it take for sellers to achieve a sustainable
competitive advantage?
• KSFs consist of the 3-5 really major determinants of financial
and competitive success in an industry
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Example: KSFs for the brewery industry
• Utilization of brewing capacity – to keep manufacturing
costs low
• Strong network of wholesale distributors – to gain access
to retail outlets
• Clever advertising – to induce beer drinkers to buy a
particular brand
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Example: KSFs for the aluminum industry
• Locating plants close to end-use customer – to keep costs
of shipping empty cans low
• Ability to market plant output within economical
shipping distances
• Locating plants closer to bauxite reserves
• Captive power plants
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