Chapter Two

The Environment
Dr. Jashim U. Ahmed

Industry Analysis:
Defining an Industry

Industry

A group of companies offering products or services that are close

substitutes for each other and that satisfy the same basic customer needs

Industry boundaries may change as customer needs evolve and

technology changes

Sector

A group of closely related industries

Market Segments

Distinct groups of customers within an industry

Can be differentiated from each other with distinct attributes and specific
demands

Industry analysis begins by focusing on the

overall industry before considering market
segment or sector-level issues

The Computer Sector: Industries

and Market Segments

External Analysis
The purpose of external analysis is to identify the
strategic opportunities and threats in the
organizations operating environment that will affect
how it pursues its mission.
External Analysis requires an assessment of:

Industry environment in which company operates

Competitive structure of industry

Competitive position of the company
Competitiveness and position of major rivals

The country or national environments in which company competes

The wider socioeconomic or macro-environment that may affect the

company and its industry

PESTLE

PESTLE Analysis
Political Factors
Political Ideologies

Controls on merger & acquisition

activity
Social and security policies
Monopolies legislation
Taxation policy
Government stability and policy
Civil unrest
Others?

PESTLE Analysis
Economic Factors
The Challenge of a Global Economy

Monetary policy
GNP trends
Inflation rates
Employment (wage rates)
Disposable income
Budget deficits
Others?

PESTLE Analysis
Socio-Cultural Factors
Demographics

Social mobility/Diversity
Lifestyle preferences
New consumerism
Levels of education
Women in the workforce
Attitudes about the QWL
Social values
Others?

PESTLE Analysis
Technological Factors

Speed of technology transfer

New discoveries and innovations
Effects of new Technology on
business structure in the country
ICT or IT
Product Life Cycles (PLC)
Focus of private & government
supported R & D expenditures
Others?

PESTLE Analysis
Legal Factors

Specific laws
Employment laws
Trade unions policies
Labor training laws
Taxation laws
International trade agreements, i.e.
GATT, WTO, SAFTA, NAFTA etc.
Other legislation?

PESTLE Analysis

Environmental/Ethical/Ecological
Climate issues
Environmental protection issues
Human Rights issues
Pollution
Recycling and environmental
friendly issues
Hazard prevention
Green environmental issues
Others?

Porters Five Forces Model

Source: M. E. Porter, 1985.

Competitive Advantage, p. 5

Strategic Groups Within Industries

Strategic Groups are groups of companies that follow a
business model similar to other companies within their
strategic group but are different from that of other
companies in other strategic groups.
The basic differences between business models in
different strategic groups can be captured by a
relatively small number of strategic factors.

Implications of Strategic Groups

1. The closest competitors are within the same Strategic Group and
may be viewed by customers as substitutes for each other.
2. Each Strategic Group can have different competitive forces and
may face a different set of opportunities and threats.

Mobility Barriers factors within an industry that inhibit the movement

of companies between strategic groups
Include barriers to enter another group or exit existing group

Strategic Groups in the

Pharmaceutical Industry

Industry Life Cycle Analysis

ILC is a useful tool for analyzing the effects of an industrys
evolution on competitive forces. Using the industry life cycle model,
we can identify five industry environments, each linked to a distinct
stage of an industry's evolution:
1. Embryonic industry just beginning to develop

2.

Rivalry based on perfecting products, educating customers,

and opening up distribution channels.

Growth first-time demand takes-off with new customers

Low rivalry as focus is on keeping up with high industry
growth.

3.

Shakeout demand approaches saturation, replacements

Rivalry intensifies with emergence of excess productive
capacity.

4.

Mature market totally saturated with low to no growth

Industry consolidation based on market share, driving down
price.

5.

Decline industry growth becomes negative

Rivalry further intensifies based on rate of decline and exit
barriers.

Stages in the Industry Life Cycle

Strength and nature of five forces change as industry evolves

Limitations of Models for

Industry Analysis

Life Cycle Issues

Innovation and Change

Industry cycles do not always follow the life cycle generalization.

In rapid growth situations embryonic stage is sometimes skipped.
Industry growth revitalized through innovation or social change.
The time span of the stages can vary from industry to industry.
Punctuated Equilibrium occurs when an industrys long term stable structure is
punctuated with periods of rapid change by innovation.
Hypercompetitive industries are characterized by permanent and ongoing
innovation and competitive change.

Company Differences

There can be significant variances in the profit rates of individual companies within
an industry.
In addition to industry attractiveness, company resources and capabilities are also
important determinants of its profitability.

Models provide useful ways of thinking about competition

within an industry but be aware of their limitations.

The Role of the Macro-environment

Changes in the
forces in the macroenvironment can
directly impact:
The Five Forces
Relative Strengths
Industry
Attractiveness

Competitive Analysis
The

behavior of Competitors limits its

ability to pursue its Objectives,

Changes

within the market offer threats

and opportunities to which the org. must
respond,

The

structure of the sector in which the

organization operates largely determines
its Ability to make Profits.
Courtesy of The University of Reading

The Five Forces Analysis: Key

Questions & Implications
What

are the key forces at work in the

competitive environment?
Are there underlying forces driving
competitive forces?
Will competitive forces changes?
What are the strengths and weaknesses
of competitors in relation to the competitive
forces?
Can competitive strategy influence
competitive forces (e.g. by building barriers
to entry or reducing competitive rivalry)?

Assignment: Brothers Furniture Ltd.

The Brothers Furniture Ltd has established in 1985. It has only three
branches in Gulshan, Uttara and Baridhara. The furniture
company employed over 150 full-time employees with its annual
turn over US $ 70, 000. The company manufactures wooden
furniture and machine made wooden door, doorframe, stair rail,
molding bit, wooden floor, kitchen cabinet etc. The Brothers
Furniture Ltd has technical skills and experiences that have been
praised in different international trade fairs in home and abroad.
As a result sophisticated machines and technologies have been
introduced in their Shahjadpur, Gulshan factory to cope with the
demands of the customers. Nonetheless, in recent years the
company is facing huge competition from other branded and nonbranded furniture retailers. On basis on this general information
get under the skin of the Brothers Furniture by competing this
industry structure analysis (using M. E. Porters Five Forces) with
your best assumption!
Source: brothersbd.com

Brothers Furniture Ltd Rating: Low/Medium/High

Threat of New Entrants

Bargaining Power of Suppliers
Rivalry against existing Competitors
Bargaining Power of Buyers
Threat of Substitute Products

Please take 10 minutes to agree this

analysis amongst your team - show
comments and ratings against all 5
areas.

Thank you