Chapter-II External Analysis: The
identificatio11n of industry
opportunities and threats
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Content
• Defining an industry
• Porter’s five forces model
• Strategic groups within industries
• Industry life cycle analysis
• Limitations of models for industry
analysis
• The macro environment
• Global and national environment
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From
From Environmental
Environmental Analysis
Analysis
to
to Industry
Industry Analysis
Analysis
The national/ The natural
international environment
economy THE INDUSTRY
ENVIRONMENT
Demographic
Technology • Suppliers structure
• Competitors
• Customers
Government Social structure
& Politics
•The Industry Environment lies at the core of the Macro Environment.
•The Macro Environment impacts the firm through its effect on the Industry
Environment.
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Market segments
• Market segments are distinct groups of
customers within a market that can be
differentiated from each other on the basis
of their distinct attributes and specific
demands.
• Ex. Car industry
• Do industry boundaries change over time?
Why?
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The PESTEL Framework
• It describes the factors of surrounding
environment affecting the organization.
[Link] factors
• Government Stability
• Taxation policy
• Foreign trade Regulation
• Social Welfare Policy
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2. Economic Factors
• Business Cycle
• GNP trends
• Interest Rates
• Money supply
• Inflation
• Unemployment
• Disposable income
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3. Sociocultural Factors
• Population Demographics
• Income distribution
• Social Mobility
• Lifestyle changes
• Attitudes to work and leisure
• Consumerism
• Levels of education
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[Link] Factors
• Government Spending on research
• Govt. and industry focus on technological
effort
• New discoveries/Development
• Speed of technology Transfer
• Rates of obsolescence
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[Link] factors
• Environmental Protection laws
• Waste Disposal
• Energy Consumption
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6. Legal factors
• Monopolies Legislation
• Employment law
• Health and Safety
• Product Safety
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Porter’s Five Forces frame work
• It gives idea about the sources of competition.
• However It must be used at the SBU and not
at the level of whole organization.
• The five forces are not independent but
dependent on each other.
• Connection between the five forces and their
drivers should be taken in to the consideration
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[Link] Threat of entry
The new entrant have to overcome
barriers like
• Economies of scale
• The capital requirement
• Access to Distribution network
• Experience and expected Retaliation
• Legislation or govt. Action
• Differentiation
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[Link] of Substitute
• It reduces demand for particular class of
the product as the customer switch to the
alternatives.
• Threat of substitution is high when:
1. Good substitutes are already available in
the market or growing rapidly.
2. Substitutes are attractively priced.
3. Substitutes have better performance.
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[Link] users have low switching cost.
5. End users are more comfortable with
substitutes.
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[Link] power of buyer
It is high in the situation where
• Volume of the purchase is high
• The supplying industry comprises large
number of small operators.
• Alternative source of supplier
• Material cost is high percentage of total
cost.
• The cost of Switching supplier is low.
• Threat of backward integration by buyer.
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[Link] Power
It is high in the situation where
• There is concentration of supplier
• Switching cost from one supplier to
another is high
• The brand of the supplier is powerful
• Threat of forward integration by supplier
• Customer fragmentation.
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[Link] rivalry
• It is seen between the organizations with the
similar product and services aimed at the same
customer group.
• The factors affecting are
• The extent to which competitors are balance
• Market growth rate
• High fixed cost in the industry (high capital
Requirement)
• Differentiation
• High Exit barriers
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6th force: complementary product
• Do complementary product affect demand
of particular product or service? How?
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Strategic groups
• These are organizations within an
industry that have similar characteristics
to each other but are quite different from
the those in other strategic groups.
• Ex. Pharmaceuticals co. in India
• It may be formed on the basis of market
segments, quality, technology, customer
service, pricing policy, marketing policy
etc.
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