External Environment Analysis: Chapter 3 Presentation for Business

This presentation, prepared by Assoc. Prof. Dr. Lê Thái Phong, Dean of the Faculty of Business Administration at Foreign Trade University, provides a comprehensive overview of external environment analysis. It covers key concepts such as macro environments (political, economic, sociocultural, and technological factors), industry environments (including the Five Forces model), competitor intelligence, strategic groups, and industry life cycles. The presentation also explores various models and frameworks for analyzing the external environment, offering valuable insights into how these factors impact business strategy and decision-making. The content is organized with clear learning objectives, diagrams, and examples to facilitate understanding of complex business concepts. This presentation is a valuable resource for students studying business administration and strategic management, offering a practical guide to analyzing the external environment and its implications for business success.

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Chapter 3
External Environment Analysis
Assoc Prof. Dr. Lê Thái Phong
Dean, Faculty of Business Administration
Foreign Trade University
E: [e-mail]
T: 0975.055.299
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Learning objectives
1. Macro environments
2. Industry environments
3. Competitor intelligence
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2-3
THE
MACRO-ENVIRONMENT
THE
INDUSTRY
External and Internal Analysis
THE
COMPANY
STRATEGIC GROUPS
INDUSTRY STAGE of DEVELOPMENT
5 FORCES MODEL (Plus 1)
• Rivalry
• Barriers to entry
• Suppliers
• Buyers
• Substitutes
• Complementors
EXTERNAL
Macroeconomics
Economic
Political & Legal
Technology
Socio-cultural
Demographic
EXTERNAL
COMPANY STAGE of DEVELOPMENT
VALUE CREATION
• Efficiency
• Innovation
• Customer Responsiveness
• Quality
INTERNAL
STRENGTHS and
WEAKNESSES
OPPORTUNITIES
and THREATS
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Environment analysis
• Macro environment analysis
• Industry environment analysis
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Macro environment
• Driving economic, political/legal, and
technological conditions and changes ->
creating both opportunities and threats
• PEST = ...............
• Political
• Economic
• Sociocultural
• Technological
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Political
• influencing the nature of
competition -> creating
opportunities and threats
• Political system: stable – unstable
• Political risks
• De/regulation
• Competition law
• Labour law
• Tax system
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Economic
• affecting how difficult or easy to be unsuccessful
and profitable any time
• Economic system
• GDP growth rate
• GDP per capita
• Inflation
• Interest rate
• Exchange rate
• Trade deficit or surplus
• Budget deficit or surplus
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sociocultural
• Environment concern
• Workforce diversity
• Work-life quality view
• Shift in product/quality preferences
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Technological
• Including the institutions and activities
involved with creating new knowledge and
translating that knowledge into new outputs,
products, processes, and materials.
• R&D expenditure
• Product innovation
• Knowledge resources
• Process innovation
• New communication technologies
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The world now
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Industry environment
• A group of companies offering products
and/or services that are close substitutes
• For example:
• The boundary might change:
– Customers and technology
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Computer manufacturing sector
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Industry analysis
• The set of factors that directly influences a
firm, it’s competitive actions & competitive
responses:
– Can be strong or weak
– Can be changed if conditions change
– Weak force => opportunity => profit
– Strong force => threat => reduce profit
The stronger the force, the more limited to sell
products with high price and earning high profit.
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Industry analysis: models
• .....................
• .....................
• .....................
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• Industry Profitability
• The industry’s rate of return on invested capital
relative to its cost of capital
• An industry’s profitability results from
interaction among:
• Suppliers
• Buyers
• Competitive rivalry among organisations
currently in the industry
• Product substitutes
• Potential entrants to the industry
Michael Porter
The Five Forces Model
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5 forces (+1)
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Threat of new entrants
• Link with Entry barriers: Minimum cost that
enterprise has to spend when entering any
industry
• Depend on:
– ..............................
– Brand loyalty
– Capital investment requirements
– ...............................
– Absolute cost advantages (cheaper fund, learning curve, control inputs)
– Government policy
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Threat of new entrants: low, when:
• Small numbers of potential competitors
• Current competitors struggle to gain profit
• The prospect of industry is risky
• The growth of industry is slow & standstill
• Competitors react violently (retaliation)
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2-20
* Dominated by a few firms.
* Buyer is not an important customer.
* Suppliers’ product is an important input.
* Suppliers’ products are differentiated.
Suppliers are likely to be powerful if:
* Suppliers’ products: high switching costs.
* Supplier poses threat of forward integration.
Suppliers exert power in
the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers can
squeeze industry
profitability if firms are
unable to recover cost
increases
Suppliers’ products have few substitutes.*
Bargaining Power of Suppliers
*
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2-21
* Playing firms off of
each other
Buyers compete
with supplying
industry by:
* Bargaining down prices
* Forcing higher quality
Buyer groups are likely to be powerful if:
* Many small sellers and few large buyers.
* Buyers purchase in large quantities.
* A single buyer is a large customer to a firm.
* Buyers can switch suppliers at low cost.
* Buyers purchase from multiple sellers
at once.
* Buyers can easily vertically integrate to
compete with suppliers.
* Buyer has full information
Bargaining Power of Buyers
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Threat of substitutes
• Replaced products and services of other
industries that can satisfy the same needs of
customers
• Product with similar function limits the price
that firm can charge
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2-23
Products
with similar
function limit
the prices
firms can
charge
* Products with improving price /
performance tradeoffs relative to
present industry products
Keys to evaluating substitute products:
For Example:
Electronic security systems in place of
security guards
Fax machines or e-mailed
attachments in place of
overnight mail delivery
Threat of Substitute Products
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Rivalry among competitors
• Competition between companies within an
industry in order to take other competitors’
market share.
• Reduced rivalry means greater profitability
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Rivalry among competitors
• Intense rivalry often plays out in:
– Jockeying for strategic position
– Using price competition
– Staging advertising battles
– Increasing consumer warranties or service
– Making new product introductions
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Rivalry among competitors
• Occurs when a firm is pressured or sees an
opportunity:
– Price competition often leaves entire industry
worse off
– Advertising battles may increase total industry
demand, but may be costly to smaller competitors
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Rivalry among competitors
• Rivalry among competitors Industry’s
competitive structure.
– Competitive structure
– Demand (growth or decline) conditions in industry.
– Height of industry exit barriers.
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Rivalry among competitors
• Competitive structure: .......................... index
Continuum of
Industry Structures
Fragmented
Many firms,
no dominant
firm
Few firms,
shared dominance
(oligopoly)
Consolidated
Few, even one
firm or one
dominant firm
(monopoly)
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* Specialized assets
Height of industry exit barriersare economic, strategic and
emotional factors which cause companies to remain in
an industry even when future profitability is
questionable.
Fixed cost of exit (e.g., labour agreements)* Strategic interrelationships*
Emotional barriers*
Government and social restrictions*
Rivalry Among Existing Competitors
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2-30
Complementors
•Complementors:
– Companies whose products are sold with another
company’s products.
– Increased supply of a complementary product
accordingly increases demand for the primary
product.
•Example:
– Faster CPU chips fuel sales
of personal computers.
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Practice
• Using 5 Forces Model to analyse industry
environment of your firm
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Industry analysis: models
• ..........................
• ..........................
• ..........................
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2-33
Strategic Groups Within Industries
• The concept of strategic groups
– Within an industry, a competitor grouping using similar
strategies that differ from other industry groups.
•Cluster of firms that share similar strategies
Ø - Breadth of product and geographic scope
Ø - Price/quality policies
Ø - Degree of vertical integration
Ø - Type of distribution system
Ø - Customer service
Ø - Extent of technological leadership
•
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• An example: The Restaurant Industry
• Fast Food
• Café Quality
• Fine Dining
Strategic Groups
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Strategic group
•Implications of strategic groups
– The closest industry competitors are those in the group.
• Internal competition between strategic group firms is greater than
between firms outside that strategic group.
– The various industry groups are differentially and
competitively advantaged and positioned.
– Mobility barriers inhibit the movement of competitors from
one strategic group to another.
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Industry Life Cycle Stages
• The industry life cycle = the stages of
introduction, growth, maturity, and decline that
typically occur over the life of an industry.
– Introduction
– Growth
– Maturity
– Decline
• Generic strategies, value-creating activities, &
overall objectives all vary over the course of an
industry life cycle5-37
When considering a strategy form, an
industry’s life cycle should be taken into account
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Industry Life Cycle Stages
5-38
Regeneration
Time horizon varies depending on industry dynamics
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Strategies in the Introduction Stage
• The introduction stage is when:
• Products are unfamiliar to consumers
• Market segments are not well-defined
• Product features are not clearly specified
• Competition tends to be limited
• Perfecting product design
• Slow growth
• High prices
• Undeveloped distribution
• Education of customers
• No/low profits
• Extreme uncertainty
• Limited competition
5-39
PC: 1970s
Wifi: 1980s
Dot.com: 1990s
Nano: 2000s
Now?
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Strategies in the Introduction Stage
• Strategies:
– Develop a product and get users to try it
– Generate exposure so the product becomes
“standard”
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The Growth Stage
• The growth stage is:
• Characterized by strong increases in sales
• 1st time demand growing
• Cash intensive; growth takes cash
• When firms can build brand recognition
• Competition not intense, but growing; new
entrants attracted by growth
• Economies of scale and customer loyalty not yet
fully developed
5-41
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Strategies in the Growth Stage
• Strategies:
– Create branded differentiated products
– Stimulate selective demand
– Provide financial resources to support value-chain
activities
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The Maturity Stage
• The maturity stage is when:
– Aggregate industry demand slows
• Market totally saturated
• Demand stabilizes at demographic growth levels; mainly
replacement demand
– Market becomes saturated, few new adopters
– Direct competition becomes predominant
– Marginal competitors begin to exit
• Weak companies have failed or been acquired
– Economies of scale, brand loyalty, profit margins at
their peaks
– Barriers to entry increase
– Oligopoly/concentration often emerges
5-43
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Strategies in the Maturity Stage
• Strategies:
– Create efficient manufacturing operations
– Lower costs as customers become price-sensitive
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Strategies in the Decline Stage
• The decline stage is when:
• Industry sales and profits begin to fall
• Growth goes negative
• Declining profit margins
• Industry consolidation occurs
• Competitive rivalry increases; struggle for big
share of declining market
• Price competition increases
• Excess capacity
• Price competition
5-45
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Strategies in the Decline Stage
• Strategies:
– Maintaining the product position
– Harvesting profits & reducing costs
– Exiting the market
– Consolidating or acquiring surviving firms
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Competitor analysis
Competitor analysis uses competitor intelligence as a
tool. Competitor intelligence is the ethical gathering of
needed information and data about competitors’
objectives, strategies, assumptions, & capabilities.
• 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 itself and
the industry, as shown by its assumptions,
• What the the competitor may be able to do, as
shown by its capabilities.
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Competitor Analysis
Future Objectives:
• How do our goals compare
with our competitors’ goals?
• Where will the emphasis be
placed in the future?
• What is the attitude toward
risk?
Future objectives
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2-49
Competitor Analysis
Current strategy
Current Strategy:
Future objectives
• How are we currently
competing?
• Does this strategy support
changes in the competitive
structure?
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2-50
Competitor Analysis
Assumptions
Current strategy
Assumptions:
• Do we assume the future will
be volatile?
• Are we operating under a
status quo?
• What assumptions do our
competitors hold about the
industry and themselves?
Future objectives
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2-51
Competitor Analysis
Capabilities
Capabilities:
• What are our strengths and
weaknesses?
• How do we rate compared to
our competitors?
Current strategy
Future objectives
Assumptions
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2-52
Competitor Analysis
Response
Response:
• What will our competitors do
in the future?
• Where do we hold an advan-
tage over our competitors?
• How will this change our
relationship with our
competitors?
Future objectives
Current strategy
Assumptions
Capabilities
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Results of external analysis
OPPORTUNITIES THREATS
Opportunity 1 Threat 1
Opportunity 2 Threat 2
Opportunity 3 Threat 3
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Thank you very much!
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