CREATING THE ENVIRONMENTALLY

AWARE ORGANIZATION

Adapted from Exhibit 2.1 Inputs to Forecasting

SWOT ANALYSIS
Managers need to analyze
The general environment
The firm’s industry and competitive
environment
SWOT analysis
Strengths
Weaknesses
Opportunities
Threats
Basic technique for analyzing firm and
industry conditions
 THE GENERAL
ENVIRONMENT

General General environmental trends and

Environment events
Little ability to predict them
Even less ability to control them
Can vary across industries

Demographic
Sociocultural
Political/Legal
Technological
Economic
Global
 DEMOGRAPHIC SEGMENT

Aging population
Rising affluence
General
Environment Changes in ethnic composition
Geographic distribution of
population
Greater disparities in income
levels
Demographic
Sociocultural
Political/Legal
Technological
Economic
Global
 SOCIOCULTURAL
SEGMENT
More women in the workforce
Increase in temporary workers
General Greater concern for fitness
Environment Greater concern for
environment
Postponement of family
formation
Demographic
Sociocultural
Political/Legal
Technological
Economic
Global
 POLITICAL/LEGAL
SEGMENT

Tort reform
General Americans with Disabilities Act (ADA)
Environment Repeal of Glass-Steagall Act in 1999
Deregulation of utility and other
industries
Increases in federally mandated
minimum wages
Demographic Taxation at local, state, federal levels
Sociocultural Legislation on corporate governance
Political/Legal
Technological reforms (Sarbanes-Oxley Act)
Economic
Global
 TECHNOLOGICAL
SEGMENT

Genetic engineering
Emergence of Internet technology
General
Computer-aided design/computer-aided
Environment
manufacturing systems (CAD/CAM)
Research in synthetic and exotic
materials
Pollution/global warming
Demographic Miniaturization of computing
Sociocultural technologies
Political/Legal Wireless communication
Technological Nanotechnology
Economic
Global
 ECONOMIC SEGMENT

General Interest rates

Environmen Unemployment
t
Consumer Price index
Trends in GDP
Changes in stock market
valuations
Demographic
Sociocultural
Political/Legal
Technological
Economic
Global
 GLOBAL SEGMENT
Increasing global trade
Currency exchange rates
Emergence of the Indian
General and Chinese economies
Environment Trade agreements among
regional blocs (NAFTA, EU,
ASEAN)
Creation of WTO
(decreasing tariffs/free trade
Demographic
in services)
Sociocultural
Political/Legal
Technological
Economic
Global
Industry
Industry Analysis:
Analysis: the
the Fundamentals
Fundamentals

 The objectives of industry analysis

 From environmental analysis to industry analysis
 Porter’s Five Forces Framework
 Applying industry analysis
 Industry & market boundaries

1
The
The Objectives
Objectives of
of Industry
Industry Analysis
Analysis

 To understand how industry structure drives competition,

which determines the level of industry profitability.

 To assess industry attractiveness

 To use evidence on changes in industry structure to

forecast future profitability

 To formulate strategies to change industry structure to

improve industry profitability

2
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
Socialstructure
structure
& Politics

•The Industry Environment lies at the core of the Macro Environment.

•TheMacro Environment impacts the firm through its effect on the Industry
Environment.
3
 Profitability
Profitability of
of US
US Industries
Industries
(selected
(selectedindustries
industriesonly)
only)
Median return on equity (%), 1999-2007

HIGH PROFITABILITY LOW PROFITABILITY

Household & Personal Products 26.0 Motor Vehicles & Parts 9.3
Pharmaceuticals 21.0 Insurance Life & Health 9.1
Petroleum 20.1 Forest & Paper Products 7.3
Tobacco 21.6 Food Production 6.5
Food Consumer Products 19.5 Semiconductors & Electronic 6.2
Components
Securities and Investment Banking 18.4 Network & Communications 5.9
Equipment
Beverages 17.2 Telecommunications 5.8
Medical Products & Equipment 17.2 Entertainment 2.7
Scientific & Photographic Equip. 15.6 Airlines (12.6)

Commercial Banks 14.8

Computer Software 14.0
Aerospace & Defense 13.9
 The
The Determinants
Determinants ofof Industry
Industry
Profitability
Profitability

3 key influences:
1. The value of the product to customers

2. The intensity of competition

3. Relative bargaining power at different

levels within the value chain.

5
 The
The Spectrum
Spectrum of
of Industry
Industry Structures
Structures

Perfect
Oligopoly Duopoly Monopoly
Competition

Concentration Many firms A few firms Two firms One firm

Entry and Exit No barriers Significant barriers High barriers

Barriers

Product Homogeneous
Differentiation Potential for product differentiation
Product

Perfect
Information Imperfect availability of information
Information flow

6
Porter’s
Porter’s Five
Five Forces
Forces of
of Competition
Competition
Framework
Framework

SUPPLIERS
Bargaining power of suppliers

INDUSTRY
COMPETITORS

POTENTIAL Threat of Threat of

SUBSTITUTES
ENTRANTS
new entrants substitutes
Rivalry among
existing firms

Bargaining power of buyers

BUYERS

7
 The
The Structural
Structural Determinants
Determinants of
of
Competition
Competition
SUPPLIER POWER
• Buyers’ price sensitivity
• Relative bargaining
power (see Buyer Power
for details)

THREAT OF ENTRY INDUSTRY RIVALRY SUBSTITUTE

•Capital requirements •Concentration COMPETITION
•Economies of scale •Diversity of
•Absolute cost advantage competitors
• Buyers’ propensity
•Product differentiation
to substitute
•Product differentiation
• Relative prices &
•Access to distribution •Excess capacity &
channels exit barriers performance of
•Cost conditions
substitutes
•Legal/ regulatory barriers
•Retaliation

8
 Threat
Threat of
of Substitutes
Substitutes

Extent of competitive pressure from producers of

substitutes depends upon:

 Buyers’ propensity to substitute

 The price-performance characteristics of substitutes.

9
 Threat
Threat of
of New
New Entrants
Entrants

Eentrants'’ threat to industry profitability

depends upon the height of barriers to entry. The
principal sources of barriers to entry are:

 Capital requirements
 Economies of scale
 Absolute cost advantage
 Product differentiation
 Access to channels of distribution
 Legal and regulatory barriers
 Retaliation

10
 Bargaining
Bargaining Power
Power of
of Buyers
Buyers

Buyer’s price sensitivity Relative bargaining power

• Cost of purchases as % • Size and concentration of
of buyer’s total costs. buyers relative to
• How differentiated is the sellers.
purchased item? • Buyer’s information .
• How intense is • Ability to backward
competition between integrate.
buyers?
• How important is the
item to quality of the Note: analysis of supplier
buyers’ own output? power is symmetric

11
 Rivalry
Rivalry Between
Between Established
Established
Competitors
Competitors

The extent to which industry profitability is depressed by

aggressive price competition depends upon:
 Concentration (number and size distribution of
firms)
 Diversity of competitors (differences in goals, cost
structure, etc.)
 Product differentiation
 Excess capacity and exit barriers
 Cost conditions
 Extent of scale economies
 Ratio of fixed to variable costs

12
 Profitability
Profitability and
and Market
Market Growth
Growth
ROI (%)
30

25

20

15

10

0
Return
Return onon sales
sales Return
Return onon investment
investment Cash
Cash flow/Investment
flow/ Investment
-5
Less than -5% -5% to 0-5% to 00 to 5%
< -5% 0 to 5% 5%
5% toto 10%
10% > 10% Over 10%

ANNUAL RATE OF GROWTH OF MARKET DEMAND

 Supplier
Supplier Power:
Power:
The
The Impact
Impact of
of Unionization
Unionization on
on Profitability
Profitability

25

20
Profitability (%)

15
ROI (%)
10 ROS (%)

0
0% 1%-35% 36%-60% 61%-75% over 75%

Percentage of employees unionized

 Applying
Applying Five-Forces
Five-Forces Analysis
Analysis

Forecasting Industry Profitability

• If we can forecast changes in industry structure we can
predict likely impact on competition and profitability.

Strategic Positioning
• Once we know which structural features of the
industry support profitability and which depress
profitability, we can choose a favorable positioning
within the industry.
Strategies to Improve Industry Profitability
• Which of the structural variables that are depressing
profitability can we change by individual or collective
strategies?

15
 Drawing
Drawing Industry
Industry Boundaries:
Boundaries:
What
What is
is the
the Relevant
Relevant Market?
Market?
 What industry is Jaguar Ltd. in:
 The Motor Vehicle industry (SIC 371)
 The Automobile industry (SIC 3712)
 The luxury car industry?
 Is its industry global, regional (Europe) or national (UK)?

16
 THE VALUE NET

Adapted from Exhibit 2.7 The Value Net

THE WORLD AUTOMOBILE INDUSTRY:
STRATEGIC GROUPS

Adapted from Exhibit 2.9 The World Automobile Industry: Strategic Groups
SUMMARY:
SUMMARY: What
What Have
Have We
We Learned?
Learned?
Forecasting Industry Profitability
 Past profitability a poor indicator of future profitability.
 If we can forecast changes in industry structure we can predict
likely impact on competition and profitability.

Strategies to Improve Industry Profitability

• What structural variables are depressing profitability?
• Which can be changed by individual or collective strategies?

21