External Analysis
Nelson Phillips
Professor of Strategy and Organizational Behaviour
Why are some industries more profitable than
others over long periods of time?
The Objectives of Industry
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
• To identify Key Success Factors
From Environmental Analysis
to Industry Analysis
The national/
international
economy
The natural
environment
THE INDUSTRY
ENVIRONMENT
Technology
Government
& Politics
• Suppliers
• Competitors
• Customers
Demographic
structure
Social
Social structure
structure
•The Industry Environment lies at the core of the Macro Environment.
•The Macro Environment impacts the firm through its effect on the Industry
Environment.
The Determinants of Industry
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.
Porter’s Five Forces of
Competition Framework
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
Threat of
POTENTIAL
ENTRANTS
Threat of
SUBSTITUTES
new
entrants
Rivalry among
existing firms
substitutes
Bargaining power of buyers
BUYERS
The Threat of Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
• Buyers’ propensity to substitute
• The price-performance characteristics of substitutes.
The Threat of Entry
• Entrants’ 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
Bargaining Power of Buyers
Buyer’s price sensitivity
• Cost of purchases as %
of buyer’s total costs.
• How differentiated is the
purchased item?
• How intense is
competition between
buyers?
• How important is the
item to quality of the
buyers’ own output?
Relative bargaining power
• Size and concentration of
buyers relative to
sellers.
• Buyer’s information .
• Ability to backward
integrate.
Note: analysis of supplier
power is symmetric
Rivalry Between Established
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
The Structural Determinants
of Competition
BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
THREAT OF ENTRY
•Capital requirements
•Economies of scale
•Absolute cost advantage
•Product differentiation
•Access to distribution
channels
•Legal/ regulatory barriers
•Retaliation
INDUSTRY RIVALRY
•Concentration
•Diversity of
competitors
•Product differentiation
•Excess capacity &
exit barriers
•Cost conditions
BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
SUBSTITUTE
COMPETITION
• Buyers’ propensity
to substitute
• Relative prices &
performance of
substitutes
SWOT Exercise
Work in groups from the same business area
within Veolia, analyse the industry
conditions facing that business. Make
sure to write down your thoughts.
PESTLE analysis
• PESTLE is an analytical tool which
considers external factors and helps you to
think about their impacts
PESTLE Analysis
• Is a useful tool for understanding the “big picture” of
the environment in which you are operating
• By understanding your environment, you can take
advantage of the opportunities and minimize the
threats.
• This provides the context within which more detailed
planning can take place to take full advantage of the
opportunities that present themselves.
The factors in PESTLE analysis
• P – Political
– The current and potential influences from political pressures
• E - Economic
– The local, national and world economic impact
• S - Sociological
– The ways in which changes in society affect the project
• T - Technological
– How new and emerging technology affects our project / organization
• L - Legal
– How local, national and global legislation affects the project
• E - Environmental
– Local, national and global environmental issues
PESTLE
• Political:
–
–
–
–
–
–
–
Government type and stability
Freedom of the press, rule of law and levels of bureaucracy and corruption
Regulation and de-regulation trends
Social and employment legislation
Tax policy, and trade and tariff controls
Environmental and consumer-protection legislation
Likely changes in the political environment
• Economic:
–
–
–
–
–
–
–
–
Stage of a business cycle
Current and projected economic growth, inflation and interest rates
Unemployment and supply of labor
Labor costs
Levels of disposable income and income distribution
Impact of globalization
Likely impact of technological or other changes on the economy
Likely changes in the economic environment
PESTLE
• Sociological:
–
–
–
–
–
Cultural aspects, health consciousness, population growth rate, age distribution,
Organizational culture, attitudes to work, management style, staff attitudes
Education, occupations, earning capacity, living standards
Ethical issues, diversity, immigration/emigration, ethnic/religious factors
Media views, law changes affecting social factors, trends, advertisements,
publicity
– Demographics: age, gender, race, family size
• Technological:
– Maturity of technology, competing technological developments, research funding,
technology legislation, new discoveries
– Information technology, internet, global and local communications
– Technology access, licensing, patents, potential innovation, replacement
technology/solutions, inventions, research, intellectual property issues, advances
in manufacturing
– Transportation, energy uses/sources/fuels, associated/dependent technologies,
rates of obsolescence, waste removal/recycling
PESTLE
• Legal:
–
–
–
–
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current home market legislation, future legislation
European/international legislation
regulatory bodies and processes
environmental regulations, employment law, consumer protection
industry-specific regulations, competitive regulations
• Environmental:
–
–
–
–
Ecological
environmental issues, environmental regulations
customer values, market values, stakeholder/ investor values
management style, staff attitudes, organizational culture, staff engagement
SWOT Exercise
Work in groups from the same business area
within Veolia perform a PESTLE for that
business. Make sure to write down your
thoughts.
What is SWOT Analysis?
A technique that enables a group or
individual to move from everyday problems
and traditional strategies to a fresh
perspective.
SWOT is an acronym for:
S – Strengths
Internal Environment
W – Weaknesses
O – Opportunities
External Environment
T – Threats
Strength
Any existing or potential resources or capability
within the organisation that provides a competitive
advantage in the market.
Example:
• Strong distribution network
• Intense Staff commitment and loyalty
• Strong support from funders
Weakness
Any existing or potential force which could serve
as a barrier to maintaining or achieving a
competitive advantage in the market.
Example:
• Lack of a clear organizational strategy
• Lack of training opportunities for using a new
software
Opportunity
Any existing or potential force in the external
environment that, if properly leveraged, could
provide a competitive advantage.
Example:
• Organisation’s geographic location
• New technology
Threat
Any existing or potential force in the external
environment that could erode a competitive
advantage.
Example:
• A new entrant
• A recession, rising interest rates, or tight credit lines
Aim of SWOT Analysis
1. Take advantage of strengths and
opportunities.
2. Minimise weaknesses and eliminate threats
How to do SWOT Analysis?
Step 1
Analyse Internal
& External
Environment
Step 2
Perform SWOT
Analysis
Step 3
Prepare
Action Plans
A SWOT analysis is useful only when action
plans and strategies are developed from the
results
SWOT Exercise
Work in groups from the same business area
within Veolia.
1. Combine the industry analysis you
performed earlier with the results of your
PESTLE and construct a SWOT diagram
for your business
2. Be prepared to present back to the group