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The External Environment: Opportunities,
Threats, Industry Competition, Competitive
Dynamics and Competitor Analysis
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External Audit
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To assure victory, alwayscarefully survey the field
before battle.Sun Tzu
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3General
Environment
Economic
Technological
The External Environment
IndustryEnvironment
Competitor
Environment
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PEST
PESTELSTEEPA
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General Environment
Demographic Environmental Analysis
Population
Age
Geographic distribution
Ethnicity
Income
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Economic Environmental Analysis
General Environment
GDP
Inflation Interest
Trade deficits and surpluses
BOP
Personal savings rate Financial environment
Economic infrastructure
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General Environment
Political and Legal Environmental Analysis
Legal Systems
Monopolies
Taxes
Competition
Personnel and Labour Welfare & Development Legal platforms and structuredevelopments
thereof
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General Environment
Technological Environmental Analysis
R&Dexpenditure, infrastructure and availability
Innovations
Applications of knowledge
Focus of private and government-supported R&D
expenditures
New communication technologies
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General Environment
Global Environmental Analysis
Political events
Global markets
NIC
BEMs Trade Barriers and international institutions
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Industry Environment
A set of factors that directly influences acompany and its competitive actions and
responses Interaction among these factors determine
an industrys profit potential
Threat of new entrants Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
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Porters Five Forces Model
Identify current and potential consumers and
determine which firms serve them
Conduct competitive analysis
Recognize that suppliers and buyers can
become competitors
Recognize that producers of potentialsubstitutes may become competitors
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Bargaining Power of Buyers
Five Forces Model
Five Forces
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Threat of New Entrants
Barriers to entry
Bring additional capacity
Increase process efficiency
Internet marketing
Firm entry is function of two factors
Barriers to entry
Retaliation
High barrier increase return of existing players
Exceptions
Ryan Air
Made Aer Lingus bankrupt
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Economies of scale
Outcome of incremental efficiency
Airtel mobile telephone/landline/Internet/Dish TV
New entrants dilemma
Small scale entry puts them at a cost disadvantage- they can not
derive economies of scale
If they make a large entryinvite retaliation by being large and
visible
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Product differentiation
L'Oral, Revlon, Estee Lauder, Levi jeans
Customer loyalty
Capital requirements
Boeing or Airbus, oil refinery
Switching costs
If high, no entryOperating systems/softwares on Windows/Mac If low, easier entryBisleri/Acquafina, Sugar Free
Access to distribution channelsCoke/UL
Government policy- New banks, new private universities
Expected retaliation Honda entry to US with small model to avoid Harley Davidson
retaliation
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Bargaining Power of Suppliers
A supplier group is powerful when
it is dominated by a few large companies
satisfactory substitute products are not available to industryfirms
industry firms are not a significant customer for the supplier
group
suppliers goods are critical to buyers marketplace success effectiveness of suppliers products has created high
switching costs
suppliers are a credible threat to integrate forward into the
buyers industry
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Bargaining Power of Buyers
Buyers (customers) are powerful when
they purchase a large portion of an industrys total
output the sales of the product being purchased account for a
significant portion of the sellers annual revenues
they could easily switch to another product
the industrys products are undifferentiated orstandardized, and buyers pose a credible threat if they
were to integrate backward into the sellers industry
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Threat of Substitute Products
Product substitutes are strong threat when
customers face few switching costs
substitute products price is lower
substitute products quality and performance
capabilities are equal to or greater than those of thecompeting product
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Intensity of Rivalry Intensity of rivalry is stronger when competitors are numerous and/or equally balanced
Desktop at home
experience slow industry growth
have high fixed costs and/or high storage cost lack differentiation or low switching costs
Commodities
Petrol
Cement
have high exit barriers Airline industry/ Steel industry
Jetlite, Go Air, Kingfisher, Spice, Indigo
high strategic stakes
Japanese automobiles in US as it is the largest market
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High Exit Barriers
Common exit barriers include specialized assets (assets with values linked to a
particular business or location)
Heart Lung Machine, MRI fixed costs of exit such as labor agreements
strategic interrelationships (relationships of mutual
dependence between one business and other parts of a
companys operation, such as shared facilities and accessto financial markets)
emotional barriers (career concerns, loyalty to employees,
etc.)
government and social restrictions
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Complementors
Good roads for high speed carsAvailability of inexpensive fuel for SUV/biggervehicles
Continues electricity for deep freezercomplementing purchase of milk weekly
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Strategic Groups
Strategic group: a group of firms in an industry following the
same or similar strategy along the same strategic dimensions
Strategic dimensions in luxury hotel are
Swimming pool, atleast two restaurants, Gym, Room service, High prices,High level of comfort, Wifi
Taj, Marriott, ITC, Sheraton, Intercontinental
Competition within strategic groups will be intense than
between groups or a firm outside that strategic group
Sheraton competing with Fortune
Ginger competing with Intercontinental/Ibis competing with Marriot
The strategy followed by a strategic group differs from
strategies being implemented by other companies in the
industry
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Competitor Environment
Competitor intelligence is the ethical gathering of
needed information and data about competitorsobjectives, strategies, assumptions, and capabilities
Airbus and Boeing
Embraer, Cessna and Lear Jet
Collection of information along four dimensions helpsfirms prepare anticipated response profile
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What drives the competitor as shown by its future
objectives
What the competitor is doing and can do as revealed byits current strategy
What the competitor believes about itself and the
industry, as shown by its assumptions
What the competitor may be able to do as shown by itscapabilities
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Competitor Analysis
Future Objectives:Future objectives
How do our goals compare with
our competitors goals? Gulf Stream/Embraer for
personal jets/Boeing and Air
bus for mass transportation
Where will the emphasis beplaced in the future?
Cargo or Human
What is the attitude toward risk?
Risk averse or risk taker
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Competitor Analysis
Current strategy
Current Strategy:
How are we currently
competing? Between Airbus and Boeing-
on fuel consumption or
speed or capacity or price
Does this strategy supportchanges in the competitive
structure?
Future objectives
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Competitor Analysis
Assumptions
Assumptions:
Do we assume the future will
be volatile? Are we operating under a
status quo?
What assumptions do our
competitors hold about theindustry and themselves?
Current strategy
Future objectives
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Competitor Analysis
Capabilities
Capabilities:
What are our strengths and
weaknesses? How do we rate compared to
our competitors?
Assumptions
Current strategy
Future objectives
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Competitor Analysis
Response
Response: What will our competitors do in
the future?
Where do we hold an
advantage over ourcompetitors?
How will this change our
relationship with our
competitors?
Capabilities
Assumptions
Current strategy
Future objectives
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Creating EFE Matrix
Allows strategists to summarize and evaluate STEEPAinformation. Can be developed in 5 steps
1. Include total of 10-20 factors, both from opportunities & threats
2. Assign each factor a weight from 0 (absolutely unimportant) to 1 (very important). Sum
should be 13. Assign a rating from 1 to 4 to each factor to indicate how effectively firms current
strategies respond to the factor where,
4=response is superior, 3=response is above average, 2=response is average,
1=response is poor
Weights in #2 are industry based, ratings at #3 are company based
4. Multiply each factors weight by its rating to determine weighted score
5. Sum the weighted score for each variable
EFE Matrix Mobile Phone Nokia
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EFE Matrix Mobile Phone-Nokia
Key External Factors Weight RatingWeighted
Score
OPPORTUNITIES
Global mobile phone market to grow 20% in 2014, compared to 12% in
2013 0.10 3 0.3Cost of Mobile phone components to decrease by 10% in 2014 0.05 3 0.15Growth in young population in BRIC 0.10 2 0.2China opened its market 0.10
3
0.3
Average incomes rising in India-DINKs 0.10 3 0.3THREATS
Intense rivalry in industry 0.10 2 0.2Financial Melt Down in General especially in Greece & Ireland 0.20 4 0.8Birth rate declining in Europe 0.05 1 0.05Medical advice against mobile phone use 0.05 1 0.05Disruptive Technologies (Higher R&D Expenses) 0.05 2 0.1China and India started selling cheaper models 0.10 2 0.2TOTAL 1 2.65
IFE Sony TV (2014)
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IFESony TV (2014)
Key Internal Factors Weight RatingWtd
Score
STRENGTHS
Several executive with world-class skills and leadership experience 0.05 4 0.2
Continuous decline in operating costs and cost of goods sold 0.05 3 0.15
Well-known brand name 0.05 3 0.15
Consumer Reports (Sept 13) recommended SONY as #1 0.1 4 0.4
As a direct seller, Sony holds high brand recognition 0.05 3 0.15
Sony diversifying into TV productsSet Top box/Serials/Movies 0.1 3 0.3
Good relationship with its suppliers 0.05 4 0.2
Economies of scale, the 3rdlargest TV maker in the world 0.05 4 0.2
Sony World retails stores excellent 0.05 3 0.15
WEAKNESSES
High operating expense (22% of revenue vs 10% for LG) 0.05 3 0.15
12% budget for R&D vs LGs 18% of revenue 0.1 1 0.1
Low return on assets ratio 0.05 1 0.05
No niche market 0.05 2 0.1
Shortage of cash due to expansion 0.1 2 0.2
Limited number of stores 0.05 2 0.1
Weak performance in Asian market 0.05 2 0.1
TOTAL 1.00 2.70
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Competitive Profile Matrix (CPM)
Identifies firms major
competitors and their
strengths and weaknesses in
relation to a specific firms
strategic position
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Value Assignment for CPM
Major Strength 4
Minor Strength 3
Minor Weakness 2
Major Weakness 1
Absolutely Arbitrary
Lenovo Apple Dell
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CSFs Wt Rating Wtd
Score
Rating Wtd
Score
Rating Wtd
Score
Market Share 0.15 3 0.45 2 0.30 4 0.60
Inventory System 0.08 2 0.16 2 0.16 4 0.32
Fin. Position 0.10 2 0.20 3 0.30 3 0.30
Product Quality 0.08 3 0.24 4 0.32 3 0.24
Cons. Loyalty 0.02 3 0.06 3 0.06 4 0.08
Sales Distribution 0.10 3 0.30 2 0.20 3 0.30
Global Expansion 0.15 3 0.45 2 0.30 4 0.60
Org. Structure 0.05 3 0.15 3 0.15 3 0.15
Prod. Capacity 0.04 3 0.12 3 0.12 3 0.12
E-commerce 0.10 3 0.30 3 0.30 3 0.30
Customer Service 0.10 3 0.30 2 0.20 4 0.40
Price competitive 0.02 4 0.08 1 0.02 3 0.06
Mgt. experience 0.01 2 0.02 4 0.04 2 0.02
Total 1.00 2.83 2.47 3.49
Industry Analysis CPM
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Industry Analysis CPM
Just because one firm receives 3.49and other 2.47
it does not follow that the first firm is 41%betterthan the second
Numbers reveal relative strengths of firms but
implied precision is an illusion
Numbers are not magic
The aim is to assimilate and evaluate information in
meaningful manner so that correct decision-making
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