MANAGEMENT POLICY AND STRATEGY
SESSION - III (A)
Environmental Analysis
Prof. Sushil
Department of Management Studies
Indian Institute of Technology, Delhi
INDIA
Email: sushil@dms.iitd.ernet.in
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ENVIRONMENTAL ANALYSIS
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Assess the Nature of Environment
Audit Environmental Influences
Identify Key Competitive Forces-Structural Analysis
Identify Strategic Position
Identify Key Opportunities and Threats
– Strategic Position
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Nature of Environment
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How Uncertain?
What are the Relations?
Diversity
Complexity
Inter-connected
Dynamism
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AUDITING ENVIRONMENT INFLUENCES
 Financial Policy
• Capital Markets
• Economic Forecasting
•
Economic Factors and Restructuring
 Demographic Forecasting
• Environmental Sensing
•
Socio-Cultural, Ecology
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AUDITING ENVIRONMENT INFLUENCES
Contd…..
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R&D Policy
Technology
Labour Policy and I.R.
Labour Market
Marketing Policy
Competition
Lobbying
Government
Purchasing Policy
Supplies
Resource
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The Firm’s External Environment
Remote Environment (Global and Domestic)
• Economic
• Social
• Political
• Technological
• Ecological
Industry Environment (Global and Domestic)
• Entry barriers
• Buyer power
• Supplier power
• Substitute availability
• Competitive rivalry
Operating Environment (Global and Domestic)
• Competitors
• Customers
• Creditors
• Labor
• Suppliers
THE FIRM
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Political Factors
• Define legal and regulatory parameters within which
firms must operate
• Types of factors
– Fair-trade decisions
– Antitrust laws
– Tax programs
– Minimum wage legislation
– Pollution and pricing policies
– Administrative jawboning
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Economic Factors
• Concern nature and direction of economy in which a firm
operates
• Types of factors
– General availability of credit
– Level of disposable income
– Propensity of people to spend
– Prime interest rates
– Inflation rates
– Trends in growth of gross national product
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Social Factors
• Include beliefs, values, opinions, and lifestyles of
people
• Recent social trends
– Entry of large numbers of women into labor
market
– Accelerating interest of consumers and
employees in quality-of-life issues
– Shift in age distribution of population
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Technological Factors
• Focus on technological changes affecting industry
• Types of changes
– New products
– Improvements in existing products
– Manufacturing and marketing techniques
• Role of technological forecasting
– Foresees advancements and estimating their
impact
– Alerts managers to impending challenges and
promising opportunities
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Ecological Factors
• Involve relationships among human beings and other
living things and air, soil, and water
• Current concerns
– Global warming
– Loss of habitat and bio-diversity
– Air, water, and land pollution
• Responsibilities of firms
– Eliminating toxic by-products of current
manufacturing processes
– Cleaning up prior environmental damage
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Factors Used to Assess the International
Environment
• Economic Environment
• Level of economic development
• Population
• GNP
• Per capita income
• Literacy level
• Social infrastructure
• Natural resources
• Climate
• Membership in economic blocs
• Monetary and fiscal policies
• Wage and salary levels
• Nature of competition
• Currency convertibility
• Inflation and interest rates
• Taxation system
• Political System
• Form of government
• Political ideology
• Stability of government
• Strength of opposition parties
• Social unrest
• Political strife and insurgency
• Governmental attitude towards
foreign firms
• Foreign policy
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Factors Used to Assess the International
Environment
Legal Environment
Cultural Environment
• Legal tradition
• Effectiveness of legal system
• Customs, norms, values,
beliefs
• Treaties with foreign nations
• Language
• Patent trademark laws
• Attitudes
• Laws affecting business firms
• Motivations
• Social institutions
• Status symbols
• Religious beliefs
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Forces Driving Industry Competition
Potential
entrants
Threat of
new entrants
Bargaining
power
of suppliers
Industry
competitors
Suppliers
Bargaining
power
of buyers
Buyers
Rivalry Among
Existing Firms
Threat of substitute
products or
services
Prof.Sushil\IITD\Session-III(A)
Substitutes
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Competitive Force: Threat of Entry
• Seriousness of threat depends on
– Barriers to entry
– Reaction of existing firms
• Barriers to entry
– Economies of scale
– Product differentiation
– Capital requirements
– Cost disadvantages independent of size
– Access to distribution channels
– Government policy
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Competitive Force: Suppliers
• A supplier group is powerful if:
– It is dominated by a few companies and is more concentrate
than industry it sells to
– Its product is unique, or differentiated, or has built up
switching costs
– It is not obliged to contend with other products for sale to
industry
– It poses a threat of integrating forward into industry’s
business
– Industry is not an important customer of supplier group
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Competitive Force: Buyers
• A buyer group is powerful if:
– It is concentrated or purchases in large volumes
– Products purchased from industry form a component of its
product, representing a significant fraction of its cost
– It earns low profits, creating incentives to lower its purchasin
costs
– Industry’s product is unimportant to quality of buyers’
products or services
– Industry’s product does not save buyer money
– Buyers pose credible threat of integrating backward
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Competitive Force: Substitute Products
• Relevance of substitutes
– By placing a ceiling on prices charged, they limit profit
potential of an industry
• Substitutes deserving the most attention are those
– Subject to trends improving their price-performance trade-o
with the industry’s product
– Produced by industries earning high profits
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Competitive Force: Rivalry Among Existing
Competitors
• Usually the most powerful of the forces
• Weapons of competitive rivalry
– Price
– Quality
– Product introduction
– Customer service
– Advertising
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What Causes Rivalry to be Intense?
• Numerous competitors or they are roughly equal in size
and power
• Slow growth in industry
• Product lacks differentiation or switching costs
• High fixed costs or perishable product
• Capacity normally augmented in large increments
• High exit barriers
• Rivals are diverse in strategies, origins, and
“personalities”
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Industry and Competitive Analysis
1. What are the boundaries of the
industry?
Questions
involved in
designing
viable
strategies
2. What is the structure of the
industry?
3. Which firms are our competitors
4. What are the major determinants
of competition?
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Sources of Difficulty in Defining Industry
Boundaries
Evolution of industries
over time creates new
opportunities and threats
Industry evolution creates
industries within
industries
Industries are
becoming global in
scope
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Characteristics of Industry Structure
• Structural attributes - Enduring characteristics giving an
industry its distinctive character
• Variations among industries involves examining
– Concentration - Extent to which industry sales are
dominated by only a few firms
– Economies of scale - Savings firms within an industry
achieve due to increased volume
– Product differentiation - Extent to which customers
perceive products of firms in industry as different
– Barriers to entry - Obstacles a firm must overcome to
enter an industry
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Objectives of Competitive Analysis
Identify current and
potential competitors
Identify
potential
moves
by
competitors
Help firm devise
effective competitive
strategies
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Analysis of Operating Environment Involves . . .
• Assessing firm’s competitive position via development of
competitor profiles
• Developing a profile of firm’s present and prospective
customers
• Assessing firm’s relationships with suppliers
• Assessing firm’s relationships with creditors
• Assessing nature of labor market, i.e. availability of
human resources
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Criteria Used in Constructing Competitor
Profiles
1. Market share
2. Breadth of product line
3. Effectiveness of sales
distribution
4. Proprietary and keyaccount advantages
5. Price competitiveness
6. Advertising/promotional
effectiveness
7. Location and age of facility
8. Capacity and productivity
9. Experience
10. Raw materials costs
11. Financial position
12. Relative product quality
13. R&D advantages/position
14. Caliber of personnel
15. General image
16. Customer profile
17. Patents and copyrights
18. Union relations
19. Technological position
20. Community reputation
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Competitor Profile
Weight
Rating +
Weighted
Score
Market Share
0.30
4
1.20
Price Competitiveness
0.20
3
0.60
Facilities location
0.20
5
1.00
Raw materials costs
0.10
3
0.30
Caliber of personnel
0.20
1
0.20
Key Success Factors
1.00 *
3.30
* Total of weights must always equal 1.00.
+ Rating scale suggested is as follows: very strong competitive position = 5
points; strong = 4; average = 3; weak
= 2; very weak = 1.
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Objectives of Customer Profiles
• Improves ability of managers to
– Plan strategic operations
– Anticipate changes in size of markets
– Reallocate resources to support forecasted shifts in deman
patterns
• Two approaches to market segmentation
– Traditional segmentation approach
– Industrial market segmentation
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Major Segmentation Variables:
Consumer Markets
Geographic Variables
Psychographic Variables
• Region
• Social class
• County size
• Lifestyle
• City of SMSA size
• Personality
• Density
• Climate
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Major Segmentation Variables: Consumer
Markets (concluded)
Demographic Variables
• Age
• Sex
• Family size
• Family life cycle
• Income
• Occupation
• Education
• Religion
• Race
• Nationality
Behavioral Variables
• Occasions
• Benefits
• User status
• Usage rate
• Loyalty status
• Readiness stage
• Attitude toward product
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Major Segmentation Variables:
Markets
Industrial
Demographic Variables
Operating Variables
• Industry
• Technology
• Company size
• User-nonuser status
• Location
• Customer capabilities
Purchasing Approaches
• Purchasing-function organization
• Power structure
• Nature of existing relationships
• General purchase policies
• Purchasing criteria
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Major Segmentation Variables:
Markets (concluded)
Industrial
Situational Factors
Perfect Characteristics
• Urgency
• Buyer-seller similarity
• Specific application
• Attitudes toward risk
• Size of order
• Loyalty
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External Factor Analysis Summary (EFAS): Maytag as
Example
External Factors
Opportunities
 Economic integration of European
Community
 Demographics favour quality
appliances
 Economic development of Asia
 Opening of Eastern Europe
 Trend to “Super Stores”
Threats
 Increasing government regulations
 Strong U.S. competition
 Whirlpool and Electrolux strong
globally
 New Product advances
 Japanese appliance companies
Total Scores
Weight
Rating
Weighted
Score
Comments
.20
4
.80
Acquisition of Hoover
.10
5
.50
Maytag quality
.05
.05
.10
1
2
2
.05
.10
.20
Low Maytag presence
Will take time
Maytag weak in this channel
.10
.10
.15
4
4
3
.40
.40
.45
Well positioned
Well positioned
Hoover weak globally
.05
.10
1
2
.05
.20
Questionable
Only Asian presence in
Australia
1.00
3.15
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