External Analysis Flashcards
Market
A market is a place where buying and selling takes place
Industry:
An industry consists of suppliers who produce similar goods and services e.g. airline industry, an automobile industry, a construction industry, an insurance industry
Segment
Within an industry, there may be different segments i.e. separately-identifiable part of a larger industry e.g.
automobile industry can be divided into segments for the assembly of automobiles and the manufacture of parts.
insurance industry has several sectors, including general insurance, and life assurance.
Porter’s Five Generic Types of Industries:
Fragmented
Small firms to small portions of market e.g Dry Cleaners; Hairdressers
Emerging
Just starting to develop e.g Space travel
Mature
Latter stages of lifecycle e.g Car manufacturers
Declining
Less firms, less sales e.g Coal mining
Global
Worldwide marketplace e.g Professional footballers
Convergence:
This is where 2 or more industries come together and serve the same marketplace. When industries
emerge, some new markets appear and some old may disappear.
two types of emergence:
- Demand - led Convergence
Customers bring the industries together. - Supply - led Convergence
Suppliers bring the industries together
Bargaining Power of
Customers
- Small number of customers
- They make high volume purchases
- Products they are buying are undifferentiated
- Alternative sources of supply are available (substitute or switching)
Bargaining Power of
Supplier
Suppliers have high power if:
•Small number of suppliers
• Good substitutes are not available.
•Suppliers are not dependent on the buyer for a lot of their sales
•Suppliers have differentiated their products
•It is costly to switch suppliers
Rivalry between
Competitors
Rivalry is intense if:
•Slow industry growth
•High fixed costs (plants, machinery, outlets)
•Undifferentiated products
•A large number of competitors
•Customer can easily switch to competitor.
•No customer loyalty.
•High exit barriers (what you lose if you leave the business)
•Small changes in market share have a big pay-off
Threat of new Entrants
Barriers That Block New Entrants •Economies of scale •Large capital requirements •Product differentiation/Brand •High switching cost •Limited access to distribution channels •Some government policies and regulations •Other advantages that are hard to duplicate such as patents, great locations, subsidies, partnerships, etc.
Threat of Substitute/
Indirect Competitors
- Existence of Close substitutes
- Price of substitute
- Performance of substitutes
- Cost of switching to substitutes
Stages of Product Life Cycle (PLC
- Product development
- Introduction
- Growth
- Maturity
- Decline
- Withdrawal
Strategies change with change in stage of PLC.
Product Development
R&D costs
Capital expenditure decisions
Introduction
Sales
Low
Cost
High per cost per customer
Profit
Negative
Customers
Innovators
Competitors
Few
Examples of Costs Manufacturing costs Operating costs including marketing and advertisement costs Set up and expansion of distribution channels
Growth
Sales >rapidly rising Cost >average cost per customer Profit >rising Customers>early adopters Competitors > growing Examples of Costs >>cost of increasing capacity,increased cost of working capital
maturirty
Sales
Peak sales
Cost
Low cost per customer
Profit
High profit
Customers
Middle majority
Competitors
Stable number beginning to
decline
Examples of Costs Maintenance and operating costs Marketing and product enhancement costs to extend maturity
Decline
Sales Declining sales
Cost Low cost per customer
Profit Declining profit
Customers laggards
Competitors Declining number
Examples of Costs Maintenance and operating costs Costs to keep sales
Withdrawal:
Asset decommissioning costs
Possible restructuring costs
Remaining warranties to be supported
Strategic Group:
A strategic group means companies within same industry that have similar business models or
similar combinations of strategies.
Strategies of all companies in strategic group will be similar. Therefore, all entities in the same
strategic group are considered as single competitor
Strategic Space:
A strategic space is the gap in the market which is not currently filled by any strategic group.
An entity may decide on a strategy of filling the empty space by offering a product with the
characteristics that are needed to fill the gap
(refer diagram in notes)
Use of Strategic Group Analysis:
Identify the strategies used by companies in other strategic groups.
Helps identify who the most direct competitors are and on what basis they compete.
Discover untapped opportunities in the industry by revealing the gaps (i.e. disclose areas where there is limited or no competition)
Market Segmentation
Market segmentation is dividing a market into smaller group of buyers who have different needs,characteristics or behavior and might require different products.
Market segment is a group of buyers who have similar needs
Methods of segmenting the market:
There are various ways to segment the market i.e.
- Age (teenage, young, married, retired etc.)
- Geographical area
- Income level.
- Consumers or Retailers
- Quality/Performance
Product differentiation:
Product differentiation is a strategy used by businesses to highlight the unique features and
benefits of its product or service to separate it from competitors
Basis of Product differentiation:
Price Design Quality Features Distribution channels
BCG Matrix
This matrix is used to evaluate a company’s Products in terms of market growth rate and relative share of company.
After evaluation, company decides strategy for each type of product.
Evaluation of Products:
Products are evaluated on the basis of:
Market Growth Rate (10% is the benchmark. More than 10% is High Growth Rate. Less than
10% is Low Growth Rate)
Market Share (Biggest Competitor is the benchmark. Higher share than biggest competitor
is High market share. Lower than biggest competitor is Low market share)
dog
features
Products with low market growth and a low
market share.
These products do not have any future.
Strategy
Divest Strategy:
1. Companies should dispose, or re-position
these products.
2. Company can also continue if these products cover their costs or support other products
Question marks
Features
Products with high market growth but a low
market share.
These products require a lot of cash
Build Strategy:
Companies should invest in or discard these “question marks,” depending on their chances of becoming stars.
Stars
Products with high market growth and a high
market share
Hold Strategy:
Companies should significantly invest in these “stars” as they have high future potential.
Cash Cows
Products with low market growth but a high
market share.
These are established, successful products
which need less investment.
Harvest Strategy:
Companies should milk these “cash cows” for cash to reinvest in other products.
Weaknesses in BCG Matrix Model:
- Measurement of growth rate:
Difficult to decide what should be “high or low growth rate” and “high or low market share”. - Careful interpretation required.
Model should be interpreted carefully e.g. a slight decrease in growth from 10.1% to 9.9%
may result in significant decrease in advertisement/marketing expenditure. - Other factors involved in market competitiveness.
Strong competitiveness in market does not only base on market share. Some products may
have small shares but strong competitiveness e.g. Porsche, Apple. - Dog products may also be profitable.
Products with low growth/low share may also be profitable for company due to low cost. - Difficult to define market.
It may be difficult to define market e.g.
a. Difficult to define geographical area of competition.
b. Difficult to identify products involved in competition.
ANALYZING OPPORTUNITIES AND THREATS
PESTEL analysis is a tool used to identify the macro (external) forces affecting an organisation.
Once these factors are identified, SWOT analysis is used to assess whether these factors are Strength, Weaknesses, Opportunities and Threats.
(We will discuss only opportunities and threats in this chapter)
PESTEL Analysis:
PESTEL analysis represents analysis of 06 types of factors which affect a business i.e.
- Political Factors
- Economic Factors
- Social Factors
- Technological Factors
- Environmental Factors
- Legal Factors
Political Factors
Type of Govt.
Stability of Govt.
Govt. Policies i.e. privatization or nationalization, taxes or subsidies, ease of doing
business
Economic Factors
National economic factors: Economic Growth Interest Rates and Tax rates Availability of Credit Inflation Rates Foreign Exchange Rates Consumer income, debt and spending Govt. Subsidy Unemployment rate International economic factors: Extent of protectionist measures Comparative rates of growth, inflation, wages and taxation The freedom of capital movement Exchange rates Economic agreement
Social Factors
Demographic change
Changing values and lifestyle
Changing pattern of work and leisure
Technological Factors
Change in production techniques
Inventions
Environmental Factors
i.e. sustainability
Impact of business on climate.
recycling procedures
carbon emission.
waste disposal
Legal Factors
Laws applicable on organization.
Health and safety legislation
Employment laws
SWOT Analysis:
SWOT Analysis is the analysis of :
S (Strength) i.e. internal strong points in resources of the entity which can be exploited by
entity to gain competitive advantage over competitors.
W (Weakness) i.e. internal weak points in resources of the entity which create risk for
entity’s future.
O (Opportunity) i.e. external strong points in environment which can be exploited by entity
to gain competitive advantage over competitors.
T (Threats) i.e. external weak points in environment which create risk for entity’s future.
= Suggested Approach for SWOT Analysis
If you are given a case study in exam which requires you to identify Strength, Weaknesses, Opportunities or
Threats:
1. Identify relevant factors using PESTEL Analysis.
2. Using different models (e.g. Porter’s Five Forces model, Product Lifecycle model, BCG Matrix), classify these
factors between S, W, O or T.
