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 INDUSTRY

ENVIRONMENT

• Suppliers• Competitors• Customers

Social structure

The national/ international

economy

Technology

Government& Politics

The natural environment

Demographic structure

Social 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.

SUPPLIERS

POTENTIAL

ENTRANTSSUBSTITUTES

BUYERS

INDUSTRY

COMPETITORS

Rivalry among

existing firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes

Porter’s Five Forces of Competition Framework

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 Relative bargaining power

• 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?

• Size and concentration of

buyers relative to

sellers. • Buyer’s information . • Ability to backward

integrate.

Note: analysis of supplierpower 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

THREAT OF ENTRY• Capital requirements• Economies of scale• Absolute cost advantage• Product differentiation• Access to distribution channels• Legal/ regulatory barriers• Retaliation

SUBSTITUTE

COMPETITION• Buyers’

propensity

to substitute• Relative prices &

performance of

substitutes

BUYER POWER• Buyers’ price

sensitivity • Relative bargaining

power

INDUSTRY RIVALRY• Concentration• Diversity of competitors• Product

differentiation• Excess capacity & exit barriers• Cost conditions

BUYER POWER• Buyers’ price

sensitivity • Relative bargaining

power

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

• 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

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:– 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.

S – Strengths

W – Weaknesses

O – Opportunities

T – Threats

SWOT is an acronym for:

Internal Environment

External Environment

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

A SWOT analysis is useful only when action plans and strategies are developed from the results

How to do SWOT Analysis?

Prepare Action Plans

Analyse Internal & External

Environment

Perform SWOT Analysis

Step 1 Step 2 Step 3

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