Topic 2 – Industry and

Environmental Analysis

Identifying Opportunities
and Threats

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The Strategic Planning Process
Feedback

External
Analysis:
Opportunities and Design and
Threats Implement
Existing Business Model

Organisation
Structure
Strategies:
Functional, Design and
Mission, Vision, SWOT – Business, Governance Implement
Values, and
Strategic Choice Global, and and Ethics Organisation
Goals
Corporate- Culture
Level
Design and
Implement
Internal Analysis: Organisation
Strengths and Controls
Weaknesses

Strategic Formulation Strategic Implementation

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The External Business Environment

• Politics
The Macro- • Economics
• Social
environment • Technological etc.
• Products and/or services
Industry (or • Development stage
External
• Concentration
Sector) • Value network
• Market Segments
Markets and • Scope of activities
• Resource commitment
Competitors • Critical success factors

The • Resources
• Capabilities Internal
Organisation • Competencies

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Markets, demand and the
Industry Lifecycle

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Market Segments
Type of Factor Consumer Markets (B2C) Industrial/ Organisational
Markets (B2B)
Characteristics of Age, gender, ethnicity Industry
People/ Income Location
Organisations Family size Size
Life-cycle stage Technology
Lifestyle etc Profitability
Management etc.
Purchase/use Size of purchase Application
situation Brand Loyalty Importance of purchase
Purpose of use Volume
Purchasing behaviour Frequency of purchase
Importance of Purchase Purchasing procedure
Choice criteria Choice criteria
Users’ needs and Product similarity Performance requirements
preferences for Price preference Assistance form suppliers
product Brand preference Desired features/benefits/value
characteristics Desired features Quality
Quality Service requirements

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Demand over Time - Stages in the Industry Life
Cycle

— Industries do not always

follow the pattern of the
industry life-cycle model
— Time span of the stages
vary from industry to
industry
— Punctuated equilibrium -
Long periods of
equilibrium are punctuated
by periods of rapid change

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Growth in Demand and Capacity

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Limitations of Lifecycle Models for Industry
Analysis
— Life-cycle issues
• Industries do not always follow the pattern of the industry life-
cycle model
• Time span of the stages vary from industry to industry
— Innovation
• Punctuated equilibrium - Long periods of equilibrium are
punctuated by periods of rapid change
• Because competitive forces and strategic group models are
static, they cannot capture periods of rapid change in the industry
environment when value is migrating
— Company differences
• Over-emphasise importance of industry structure as a
determinant of company performance
• Under-emphasise importance of variations among companies
within a strategic group

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Punctuated Equilibrium and Competitive
Structure

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Industry or Sector

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Defining an Industry

— Industry:
• Group of companies offering
products or services that are
close substitutes for each
other
• A group of firms making a similar
type of product or employing a
similar set of value-adding
processes or resources
— Sector: Group of closely
related industries
— Market segments - Distinct
groups of customers within a
market that can be
differentiated on the basis of
their:
• Individual attributes
• Specific demands

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The Industries Involved in the T-Shirt Value
Chain

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 The Global Coffee Value Network

Valkila, J, Haaparanta, P, & Niemi, N 2010, 'Empowering Coffee Traders? The Coffee Value Chain from Nicaraguan Fair Trade
Farmers to Finnish Consumers', Journal Of Business Ethics, 97, 2, pp. 257-270, Business Source Complete, EBSCOhost, viewed
18 September 2017

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 In 1999, MSCI and S&P Global developed the Global
Industry Classification Standard (GICS), seeking to offer an
efficient investment tool to capture the breadth, depth and
evolution of industry sectors. GICS is a four-tiered,
hierarchical industry classification system.

https://www.msci.com/gics
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 ALSTYNE, M, PARKER, G, & CHOUDARY, S 2016, 'Pipelines, Platforms, and the New Rules of
Strategy', Harvard Business Review, 94, 4, pp. 54-62, Business Source Complete, EBSCOhost,
viewed 8 September 2016.

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 Porter’s 5 Forces + Complements

Hill, C., Jones, G. & Schilling, M. (2015) Strategic Management; Theory & Cases: an integrated approach, 11e, Stamford, Cengage

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17 SCHOOL
Threat of Substitutes

Threat of Substitutes

• Buyer propensity to substitute

• Relative prices and performance
of substitutes

Examples:
• Internal Combustion Engined Cars Versus Electric Vehicles
• Car Ownership versus Car Sharing
• Cars vs Public Transportation
• Electric bikes versus Scooters

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Competitive Rivalry

Rivalry Between Existing Firms

• Industry demand
• Industry competitive Structure
• Number of competitors –
fragmented of consolidated
industry
• Diversity of competitors
• Product differentiation
• Excess capacity and Exit barriers
• Investment in assets with no
alternative use
• High fixed costs of exit
• Emotional attachment
• Dependence on the industry
• Cost conditions (Fixed/Var. Costs)

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Threat of Entry By Potential Competitors

Threat of Entry

• Capital requirements
• Brand Loyalty
• Customer Switching Costs
• Economies of scale
• Absolute cost advantage
• Product differentiation
• Access to distribution channels
• Governmental and legal barriers
• Retaliation by established firms

The greater the costs potential competitors must

bear to enter an industry, the greater the barriers
to entry, and the weaker this competitive force.

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 Bargaining Power of Buyers

Bargaining Power of Buyers

• Price sensitivity:
a) Cost of product relative to
total costs
b) Product differentiation
c) Competition between buyers
• Bargaining power:
a) Size & concentration of
buyers relative to producers
b) Buyer’s volume
c) Buyers’ switching costs
d) Buyer’s information
An industry’s buyers may be the individual e) Buyer’s ability to multi-source
customers who consume its products (end-
f) Buyer’s ability to backwards
users) or the companies that distribute an
industry’s products to end-users, such as integration
retailers and wholesalers.

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Bargaining Power of Suppliers
Suppliers are Most Powerful When
• The product that suppliers sell has few
substitutes and is vital to the companies in
an industry.
• The profitability of suppliers is not
significantly affected by the purchases of
companies in a particular industry
• Companies in an industry would
experience significant switching costs if
they moved to the product of a different
supplier
• Suppliers can threaten to enter their
customers’ industry and use their inputs to
produce products that would compete
directly with those of companies already in
the industry.
• Companies in the industry cannot
threaten to enter their suppliers industry

The organisations that provide inputs into the industry, such as materials,
services, and labour (which may be individuals, organisations such as labour
unions, or companies that supply contract labour).

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 Power of Complement Providers

Power of Complement
Providers
• Strong complementors -
Provide an increased
opportunity for creating
value
• Weak complementors -
Slow industry growth and
limit profitability
Complementors are companies that sell
products that add value to (complement) the
products of companies in an industry
because, when used together, the use of
the combined products better satisfies
customer demands.

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Strategic Groups

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Strategic Groups Within Industries

Product positioning is
determined by the:
—Product quality, distribution
channels and market
segments served
—Technological leadership
and customer service
—Pricing and advertising
policy
—Promotions offered

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Strategic Groups in the Commercial Aerospace
Industry
Airbus 380
up to 853
seats

Bombardier C
Series – 150
seats, 6,000km

Boeing
Dreamliner
~15,000km

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Implications of Strategic Groups

—Since all companies in a

strategic group pursue a
similar strategy:
• Customers view them as direct
substitutes for each other
• Immediate threat to a company
are rivals within its own strategic
group
—Different strategic groups
have different relationships to
each of the competitive forces

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Mobility Barriers

—Within-industry factors that

inhibit the movement of
companies between strategic
groups
—Managers must:
• Determine if it is cost-effective to
overcome mobility barriers
• Realise that companies in other
strategic groups become their
competitors if they overcome
mobility barriers

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The Macro-Environment

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The PESTLE Framework

—Political Environmental scanning is the

—Economic acquisition and use of information
about events, trends, and
—Social relationships in an organisation's
external environment, the
—Technological knowledge of which would assist
management in planning the
—Legal organisation's future course of action.

—Environmental

Mckinsey – 4 Major Trends

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Macroeconomic Forces

Growth rate of
Interest rates
the economy

Currency Inflation or
exchange rates deflation rates

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 Global and Technological Forces

—Global Forces e.g. falling barriers

to international trade have enabled
companies to expand into new
geographic markets
—Technological Forces -
technological change can:
• Make products obsolete
• Enable relocation of work
• Create a host of new product
possibilities
• Impact the height of the barrier to entry
and reshape industry structure

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Demographic, Social, and Political Forces

—Demographic forces -
Outcomes of changes in the
characteristics of a
population
—Social forces - Way in
which changing social
morals and values affect an
industry
—Political and legal forces -
Outcomes of changes in
laws and regulations, tariffs,
trade agreements
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Starbucks

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Your Task

—Using the information in the case study and your own

general knowledge, analyse the specialty coffee café
industry using Porter’s Five Forces and PESTEL
Analysis.
—What are the key success factors in this industry?

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Industry Rivalry

Factors Analysis

Industry demand

Number of competitors –
fragmented of consolidated
industry
Diversity of competitors

Product differentiation
Excess capacity and Exit barriers
• Investment in assets with no
alternative use
• High fixed costs of exit
• Emotional attachment
• Dependence on the industry
Cost conditions (Fixed/Var. Costs)

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Threat of Entry

Factors Analysis

Capital requirements

Brand Loyalty
Customer Switching
Costs
Economies of scale
Absolute cost advantage

Product differentiation

Access to distribution
channels
Governmental and legal
barriers
Retaliation by
established firms

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Bargaining Power Of Buyers - the pressure consumers can exert on
businesses to get them to provide higher quality products, better
customer service, and lower prices.
Factors Analysis

Cost of product relative

to total expenses.

Product differentiation

Competition between
buyers

Size & concentration of

buyers relative to
producers

Buyer’s volume

Buyers’ switching costs

Buyer’s information

Buyer’s ability to multi-

source

Buyer’s ability to
backwards integration

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Bargaining Power Of Suppliers

Factors Analysis

Cost of product relative

to total cost.

Product differentiation

Competition between
suppliers

Size & concentration of

suppliers relative to
Producers

Buyer’s volume

Buyers’ switching costs

Supplier’s ability to
forwards integrate

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Threat of Substitutes

Factors Analysis

Buyer propensity to
substitute

Relative prices of
substitutes

Relative performance of
substitutes

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The Role of Complements – products/services that add value to
(complement) the products of companies in an industry because, when
used together, the use of the combined products better satisfies
customer demands.

Factors Analysis

Importance of
complements
Availability of
complements
Price and performance
of complements
Who appropriates the
value

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 Macro Environmental Analysis is Typically
Country Specific – This is For the UK
Analysis
Political

Economic

Sociological

Technological

Environmental

Legal

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Simulation

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Before We Meet Next

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Next Steps – By Next Week

—Simulation
—Strategy Research (PESTEL analysis) – be
prepared to summarise your findings to the class
—Read the Toyota Case Study
—4 hours work as a minimum.

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