Environmental Analysis

2. Environmental Analysis Environmental Scanning The process by which organizations monitor their opportunities and threats affecting their business is known as environmental scanning Environmental scanning refers to possession and utilization of information about occasions, patterns, trends, and relationships within an organization’s internal and external environment. It helps the managers to decide the future path of the organization. Scanning must identify the threats and opportunities existing in the environment. While strategy formulation, an organization must take advantage of the opportunities and minimize the threats. A threat for one organization may be an opportunity for another

3. Environmental scanning External analysis Internal analysis Macro environment Micro environment PEST analysis Five force analysis

4. Tools for Analyzing the Environment – PESTL Analysis

5. SWOT ANALYSIS (Internal Scanning) • Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. • The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection.

8. Porter’s Five Forces Model • The five forces framework developed by Michael Porter is the most widely known tool for analysing the competitive environment, which helps in explaining how forces in the competitive environment shape strategies and affect performance. The frame work as shown in Figure suggests that there are competitive forces other than direct rivals which shape up the competitive environment. These competitive forces are as follows: • 1) The rivalry among competitors in the industry • 2) The potential entrants • 3) The substitute products • 4) The bargaining power of suppliers • 5) The bargaining power of buyers • However, these five forces are not independent of each other. Pressures from one direction can trigger off changes in another which is capable of shifting sources of competition.

9. PORTER’s FIVE FORCES MODEL Potential entrants Threat of new entrants Industry competitors Rivalry among existing firms Bargaining power of suppliers Suppliers Buyers Bargaining power of buyers Threat of substitutes Substitute products

11. Structural reasons why … … some industries were profitable *Established cost advantages *Product differentiation * Economies of scale

12. Structural reasons … … all represented barriers to entry in certain industries, thus allowing those industries to be more profitable than others.

13. Porters Five Forces … *Threat of Entry *Bargaining Power of Suppliers *Bargaining Power of Buyers *Development of SubstituteProducts or Services *Rivalry among Competitors

14. Barriers to Entry… … large capital requirements or the need to gain economies of scale quickly. … strong customer loyalty or strong brand preferences. … lack of adequate distribution channels or access to raw materials.

15. Power of Suppliers … … high when *A small number of dominant, highly concentrated suppliers exists. *Few good substitute raw materials or suppliers are available. *The cost of switching raw materials or suppliers is high.

16. Power of Buyers … … high when *Customers are large or buy in volume . *The products being purchased are standard or undifferentiated making it easy to switch to other suppliers. • Customers’ purchases represent a major portion of the sellers’ total revenue. • Backward integration

17. Substitute products… … competitive strength high when *The relative price of substitute products declines . *Consumers’ switching costs decline.

18. Rivalry among competitors … intensity increases as *The number of competitors increases *Demand for the industry’s products declines or industry growth slows. * Fixed costs or barriers to leaving the industry are high.

19. Key Points: • Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more general situations. • It works by looking at the strength of five important forces that affect competition: • Supplier Power: The power of suppliers to drive up the prices of your inputs. • Buyer Power: The power of your customers to drive down your prices. • Competitive Rivalry: The strength of competition in the industry. • The Threat of Substitution: The extent to which different products and services can be used in place of your own. • The Threat of New Entry: The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down).

20. Summary… As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive.

21. Porter’s five force model

22. Coca-cola • Traditional competition: • Prices of Pepsi, local brands • Market share • Promotional actions of competition • New entrants: • New “look-a-like” manufacturers • Substitute products: • Fashionable new drinks, milk drinks, coffee...

23. Coca-cola • Suppliers: • Price and availability of ingredients on world market • Buyers/consumers: • High as a result of intense competition both among branded and unbranded products. • Combined purchase power of shops, bars, supermarkets

24. Competitor analysis is necessary for formulating right strategies and determining the right positioning for the firm in the industry. Competitor analysis seeks to find answers to certain basic questions such as: (i) Who are the competitors of the firm? (ii) What are the strategies of the competitors? (iii) What are their future goals ? (iv) What drives the competitor? (v) Where is the competitor vulnerable? (vi) How are the competitors likely to respond to the strategies of others?

25. Porter has suggested a framework for competitor analysis, consisting of four diagnostic components, viz., future goals, current strategy, assumptions and capabilities. As Porter observes, its goals, assumptions, and current strategy will influence the likelihood, timing, nature, and intensity of competitor’s reactions. Itsstrengths and weaknesses will determine its ability to initiate or react to strategic moves and to deal with environmental or industry events that occur.

26. COMPETITOR RESPONSE PROFILE Answers to critical questions such as: What moves or developments will provoke the competitor and how is the competitor likely to respond or retaliate? The competitor response profile seeks to predict the competitor's offensive moves and defensive capabilities. • Future Goals • Current Strategy • Capabilities

27. VALUE CHAIN Value is the amount which buyers are willing to pay for what a firm provides them. The total revenue reflects the value. Creating value for buyers that exceeds the cost of activities are the physically and technologically distinct activities a firm performs. • Primary activities include: (i) inbound logistics (activities associated with receiving, storing anddisseminating inputs to products); (ii) operations (processing activities); (iii) marketing and sales; and (iv) services. • Support activities include: (i) procurement (purchasing of inputs); (ii) technology development; (iii) human resource management; (iv) firm infrastructure (includes general management, planning, finance, accounting, legal and government affairs and quality management).

28. BENEFITS OF STRUCTURAL ANALYSIS The purpose of the structural analysis is to diagnose the competitive forces and to identify the strengths and weakness of the firm vis-à-vis the industry, to help formulate an effective competitive strategy that "takes offensive or defensive action in order to create a defendable position against the five competitive forces".

29. COMPETITIVE ADVANTAGE AND HOW IT IS OBTAINED • Competitive Advantage • What sets an organization apart -- competitive edge • Controlling or having something others do not have • Doing something better than other organizations • Doing something other organizations cannot do • Competitive strategies are designed to exploit an organization’s competitive advantage • Implies there are other competitors also trying to develop competitive advantage & attract customers

30. Understanding the Competitive Environment • What is competition? • When organizations battle for some desired object or outcome • Customers • Market share • Survey rankings • Needed resources

31. Competitive Advantage & Competitive Strategy • What is competitive strategy? • Consists of business approaches to • Attract customers by fulfilling their expectations • Withstand competitive pressures • Strengthen market position • Exploits competitive advantage by • finding ways to use resources & capabilities to set firm apart from competitors

32. PORTER’S GENERIC COMPETITIVE STRATEGIES • Competitive advantage come from one of two sources: • Having the lowest cost in the industry • Possessing a product or offering a service that is perceived as unique in the industry • Another important factor is the scope of the product-market (broad or narrow) • Mix of these factors provide basis for • Cost leadership strategy (low-cost strategy) • Differentiation strategy • Focus strategy

33. PORTER’S GENERIC COMPETITIVE STRATEGIES Competitive Advantage Low Cost Differentiation Broad Cost Leadership Differentiation Market Scope Focus (Differentiation) Focus (Low Cost) Narrow

34. Cost Leadership Strategy • Objective: • Gain sustainable competitive advantage over competitors, using low-cost (not price) • Produce for broad customer base • Basic Theme (Keys to Success): • Low-cost relative to competitors • Low cost implies OVERALL LOW COST • Not just low manufacturing or production cost • Product quality cannot be ignored

35. Differentiation Strategy • Objective • Offering products/services perceived as unique over the brands of rivals in an industry • Keys to Success • Offer products/services that create value to customers • Offer products/services not easily matched or easily copied by rivals • Not spending more to differentiate the firm’s products or service than the price premium that can be charged

36. Differentiation Themes • Superior service -- FedEx, Ritz-Carlton • More for your money -- McDonald’s, Wal-Mart • Engineering design and performance -- Mercedes • Prestige -- Rolex • Quality manufacture -- Honda , Toyota • Top-of-the-line image -- Ralph Lauren, Chanel

37. Focus Strategy • Firm pursues either a cost leadership or differentiation strategy but in a narrow customer group of segment • Concentrates on serving specific market niche • Geographical area • Type of customer -- specific group of customers • Specific & specialized product line

38. Focus Strategy • Objective • Serve the niche customers better than competitors • Keys to Success • Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs • Develop unique capabilities to serve needs of target buyer segment

39. Focus Approaches • Approach 1: Cost Advantage • Achieve lower cost than rivals in serving the specific or narrow segment • Approach 2: Differentiation Advantage • Offer customers in niche market something unique in that market • Product features • Product innovations • Product quality • Customer responsiveness

40. Examples of Focus Strategy • Focus Low-cost • Ikea: Young furniture buyers who want style at low cost (price sensitive and low service customer groups) • Southwest Airlines: Short-haul, point-to-point service between midsize cities & secondary airports in large cities (low pricing & low service) • Focus Differentiation • Rolex: Serve highest end of wristwatch market (premium pricing & image) • Rolls-Royce: Serving luxurious end of automobile market (premium pricing & image)

41. Global Competiveness Index • The World Economic Forum has ranked 139 economies in its 2010-2011 Global Competitiveness Report. • In overall competitiveness India scores a passable 51st place. It ranks notably ahead of Latin America’s powerhouse Brazil (58) and way ahead of its neighbors Pakistan (123), Sri Lanka (62) and Bangladesh (107), but behind China (27). • Switzerland tops the chart and USA is on 4th position due to economic instability from 2007-10

42. Delhi tops 2010 ranking of India's most competitive city • Chennai cornered the second position in the list ahead of Mumbai , which dropped to third place from second position last year. Chennai's ranking improved on the back of good performance under all the sub-indices used to benchmark the cities, particularly its educated workforce and logistics infrastructure, while Mumbai's fall was primarily due to the worsening state of its physical infrastructure. Bengaluru is at fourth place in the list, followed by Kolkata, Hyderabad , Ahmedabad, Pune, Nagpur and Jaipur. • Ahmedabad and Pune have emerged as the most competitive tier-two cities in India.

43. Thank You