External Analysis

Question 1

The Function of Structural (competitive) Forces:

Answer 1

Profitability and strategy are not only affected by internal resources but also by structural forces that shape the industry.

Question 2

SWOT External Analysis:

Answer 2

Question 3

The External Environment: PESTEL

Answer 3

The PESTEL model groups the factors in the firm’s general environment into six segments:

• Political
• Economic
• Sociocultural
• Technological
• Ecological
• Legal

Framework to scan, monitor, and evaluate the important external factors and trends that might impinge upon a firm.

Question 4

Components of an External Environment:

Answer 4

• Competitor Environment (Apple versus Samsung)
• Industry Environment (Many players in consumer goods industry)
• General Environment (Macro forces such as, political, economic, sociocultural, technological)

Question 5

Wal-Mart: Opportunities & Threats

Answer 5

How can Wal-Mart utilise these opportunities? How to respond to these threats? Is it possible for Wal-Mart to turn threats into opportunities? (do industry analysis to find out)

Question 6

Industry =

Answer 6

Group of firms producing products or services that are perceived by customers as meeting the same needs

Question 7

Industry analysis =

Answer 7

Tool for understanding how profits are distributed among participants

Question 8

Purpose of Industry Analysis:

Answer 8

Helps a company understand how its industry structure influences profits.

• By conducting an industry analysis, managers are able to;
  
  • Identify opportunities and threats.
  • Decide whether to enter or exit a market.
  • Position their firms to succeed in an industry.
  • Assess the effect of a major change.

Question 9

6 Steps in Analysing an Industry:

Answer 9

1. Define the industry
   
   • ​​In what industry does our company compete?
2. Identify the players
   
   • Who are the players that influences our company’s profitability?​​
3. Analyse the players
   
   • ​How can we evaluate the relative strengths of the forces influencing profitability?​
4. Test the analyses
   
   • ​​​How can we make sure that our analysis is correct?
5. Respond to the industry environment
   
   • How can we develop a way to deal with the industry environment?​​
6. Change​​​
   
   • How can we exploit change in the industry and even act to shape the industry?

Question 10

Industry analysis: The Five Forces Framework:

Answer 10

Question 11

Fundamentals of the Five Forces Model:

Answer 11

• To explain and predict a firm’s performance, competition must be viewed more broadly, by including: buyers, suppliers, potential new entry of other firms, and the threat of substitutes.
• The profit potential of an industry is neither random nor entirely determined by industry-specific factors. Rather, it is a function of the five forces that shape competition.

Question 12

The structural determinants of the five forces of competition

Answer 12

Five Forces Framework helps to explain why profitability varies by industry. It implies that while the less- profitable industries are subject to powerful forces that make it difficult for industry participants to appropriate profits, such forces are muted in the more profitable industries.

Question 13

The threat of new entrants:

Answer 13

The risk that potential competitors will enter the industry

If barriers to entry are high, a potential newcomer will pose less threats.

Major Sources of Barriers to Entry:

• Economies of scale
• Product differentiation
• Capital requirements
• Unequal access to distribution channels
• Government policies (e.g. licences)

Question 14

Factors Affecting the Threat of New Entrants into an Industry:

Answer 14

Question 15

The Bargaining Power of Suppliers:

Answer 15

Pressures that industry suppliers can exert on an industry’s profit potential.

A supplier group is likely to have more bargaining power if:

• It is dominated by a few companies.
• Its product is unique or differentiated, which leads to a higher switching cost.
• The industry is not an important customer.

While powerful suppliers can force higher prices, suppliers that cannot influence price may demonstrate power through their ability to reduce supply substantially

Question 16

Factors Affecting the Bargaining Power of Suppliers:

Answer 16

Question 17

The Bargaining Power of Buyers:

(Buyers = all customers of a specific industry (individuals, firms etc.))

Answer 17

Pressure an industry’s customers can put on the producer’s margins in the industry by demanding a lower price or higher product quality

A buyer group is likely to have more bargaining power if:

• It is concentrated and purchases in large volume.
• The products it purchases from the industry are standard or undifferentiated.
• It earns low profits, which create great incentive to lower its purchasing costs.

Aldi purchases products in large volume which increases its bargaining power with suppliers.

theindustry’sproductisunimportantto the quality of the buyers’ products.

Question 18

Factors Affecting the Bargaining Power of Buyers:

Answer 18

Question 19

The Threat of Substitutes:

Answer 19

“One product is a substitute for another if a price increase in one increases the quantity demanded of the other” Substitutes compete for industry profits, but from outside the industry. Videoconferencing competes for profits with business-class air travel.

Threats of substitute products will be higher if:

• The substitute is easily accessible. (“closeness”)
• It provides a better performance/price ratio

The greatest threats of substitution come from products or services that offer additional benefits or better quality at a lower cost

Question 20

Rivalry among Existing Competitors:

Answer 20

Rivalry generates competition and threatens the profitability of all firms in the industry

A rivalry among existing competitors will be higher if:

• Product lacks differentiation
• Exit barriers are high
• Industry growth is slow
• Fixed costs are high

Question 21

Extending the Analysis to Address Cooperation and Complements:

Answer 21

Sometimes a business will cooperate with customers or other businesses in order to grow a market. Rather than competing for the largest slice of the pie, they work together to make the pie bigger.

Complements = products that are typically consumed together, like computers and operating system software—provide an incentive to cooperate.

Question 22

How do the five forces influence profitability?

Answer 22

Profitability is influenced by willingness to pay, the price, and the cost

• Powerful buyers can use their negotiating strength to force industry prices down. They may also demand that industry rivals increase the value of the products they sell, which will increase their costs.
• Powerful suppliers will be able to charge higher prices, increasing the industry’s costs and reducing its profits.

Question 23

An Application of Industry Analysis (Walmart)

Answer 23

Underlying questions:

1. Where are the most attractive opportunities to increase the company’s profit?
2. What are the potential threats to existing profits and how should Walmart counter them?

Question 24

Walmart Industry Analysis - Define:

Which industry does Walmart operate in?

Answer 24

It is important to look at from customers’ perspectives!

Do customers see Walmart as equivalent to a local supermarket?

Question 25

Walmart Industry Analysis - Identify:

Answer 25

Identify the players

Question 26

Walmart Industry Analysis - Analyse:

Answer 26

Analyse the Players’ Influence on Profitability

Question 27

Walmart Industry Analysis - Test:

Answer 27

Test the analysis by comparing the predictions with observed levels of profitability:

Question 28

Walmart Industry Analysis - Respond:

Answer 28

Develop a Way to Deal with the Industry Environment

Question 29

Walmart Industry Analysis - Change:

Answer 29

Exploit Industry Change