Description
It explains key aspects of PESTEL analysis. What Kinds of Competitive Forces Are Industry Members Facing. It also explains the five forces the company is facing.
External Analysis:
Environmental Opportunities &
Threats
What Is Situation Analysis?
?
Two considerations
? Company’s
external or macro-environment
• Industry and competitive conditions
? Company’s
internal or micro-environment
• Competencies, capabilities, resource strengths and weaknesses, and competitiveness
The Components of a Company’s Macro-Environment
Macroenvironment – PESTEL
Macroenvironment – PESTEL
Political
• Government stability • Taxation policy • Foreign trade regulations • Social welfare policies • • • • • • •
Economic
Business cycles GNP trends Interest rates Money supply Inflation Unemployment Disposable income
Macroenvironment – PESTEL
Sociocultural
• Population demographics • Income distribution • Social mobility • Lifestyle changes • Attitudes to work and leisure • Consumerism • Levels of education
Technological
• Government spending on research • Government and industry focus on technological effort • New discoveries /developments • Speed of technology transfer • Rates of obsolescence
Macroenvironment – PESTEL
Environmental
• Environmental protection laws • Waste disposal • Energy consumption • • • •
Legal
Competition law Employment law Health and safety Product safety
Key Aspects of PESTEL Analysis
? ? ?
Not just a list of influences Need to understand key drivers of change Drivers of change have differential impact on industries, markets, and organisations Focus is on future impact of environmental factors Combined effect of some of the factors likely to be most important
? ?
Q #1: What are the Industry’s Dominant Economic Traits?
?
Market size and growth rate ? Scope of competitive rivalry ? Number of rivals ? Buyer needs and requirements ? Production capacity ? Pace of technological change ? Vertical integration ? Product innovation ? Degree of product differentiation ? Economies of scale ? Learning and experience curve effects
Learning/Experience Effects
?
Learning/experience effects exist when a company’s unit costs decline as its cumulative production volume increases because of
? ?
Accumulating production know-how Growing mastery of the technology
?
The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume
Q #2: What Kinds of Competitive Forces Are Industry Members Facing?
?
Objectives are to identify
?
Main sources of competitive forces
Strength of these forces
? ?
Key analytical tool
?
Five Forces Model of Competition
The Five Forces Model
1. Potential Competitors
?
New entrants into an industry threaten incumbent companies.
?
Barriers to entry:
? ? ? ? ?
Brand loyalty Absolute cost advantages Economies of scale Switching costs Government regulation
?
Entry barriers reduce the threat of new and additional competition.
2. Rivalry Among Established Companies
?
The intensity of competitive rivalry in an industry arises from:
? Industry’s ? Demand
competitive structure.
(growth or decline) conditions in
industry.
? Height
of industry exit barriers.
3. The Bargaining Power of Buyers
?
Buyers are most powerful when:
? ?
There are many small sellers and few large buyers. Buyers purchase in large quantities.
?
? ? ?
A single buyer is a large customer to a firm.
Buyers can switch suppliers at low cost. Buyers purchase from multiple sellers at once. Buyers can easily vertically integrate to compete with suppliers.
4. The Bargaining Power of Suppliers
?
Suppliers have bargaining power when:
?
Their products have few substitutes and are important to buyers.
?
The buyer’s industry is not an important customer to the supplier.
Differentiation makes it costly for buyers to switch suppliers. Suppliers can vertically integrate forward to compete with buyers and buyers can’t integrate backward to supply their own needs.
?
?
5. Substitute Products
?
The competitive threat of substitute products increases as they come closer to serving similar customer needs.
1. Rivalry Among Competing Sellers
? ?
Usually the strongest of the five forces Key factor in determining strength of rivalry
? How
aggressively are rivals using various weapons of competition to improve their market positions and performance?
?
Competitive rivalry is a combative contest involving
? Offensive ? Defensive
actions countermoves
What Are the Typical Weapons for Competing?
? ?
Vigorous price competition More or different performance features Better product performance Higher quality Stronger brand image and appeal
? ? ? ?
Bigger/better dealer network Low interest rate financing Higher levels of advertising Stronger product innovation capabilities Better customer service Stronger capabilities to provide buyers with custommade products
? ? ?
? ?
?
Wider selection of models and styles
What Causes Rivalry to be Stronger?
?
Competitors engage in frequent and aggressive launches of new offensives to gain sales and market share ? Slow market growth ? Number of rivals increases and rivals are of equal size and competitive capability ? Buyer costs to switch brands are low ? Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume ? A successful strategic move carries a big payoff ? Strong rivals outside the industry acquire weak firms in the industry and use their resources to transform the new firms into major market contenders
What Causes Rivalry to be Weaker?
?
Industry rivals move only infrequently or in a nonaggressive manner to draw sales from rivals
Rapid market growth Products of rivals are strongly differentiated and customer loyalty is high
? ?
?
?
Buyer costs to switch brands are high
There are fewer than 5 rivals or there are numerous rivals so any one firm’s actions has minimal impact on rivals’ business
2. Competitive Force of Potential Entry
?
Seriousness of threat depends on
?
Size of pool of entry candidates and available resources Barriers to entry
? ? ?
Reaction of existing firms
Evaluating threat of entry involves assessing
?
How formidable entry barriers are for each type of potential entrant and Attractiveness of growth and profit prospects
?
Common Barriers to Entry
? ?
Sizable economies of scale Cost and resource disadvantages independent of size Brand preferences and customer loyalty
?
?
Capital requirements and/or other specialized resource requirements
Access to distribution channels Regulatory policies Tariffs and international trade restrictions
? ? ?
When Is the Threat of Entry Stronger?
? ? ? ?
There’s a sizable pool of entry candidates Entry barriers are low Industry growth is rapid and profit potential is high Incumbents are unwilling or unable to contest a newcomer’s entry efforts When existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence
?
When Is the Threat of Entry Weaker?
?
There’s only a small pool of entry candidates
?
?
Entry barriers are high
Existing competitors are struggling to earn good profits Industry’s outlook is risky Industry growth is slow or stagnant
? ?
3. Competitive Force of Substitute Products
Concept
Substitutes matter when customers are attracted to the products of firms in other industries
Examples
? Eyeglasses ? Sugar
and contact lens vs. laser surgery vs. artificial sweeteners vs. TV vs. Internet
? Newspapers
How to Tell Whether Substitute Products Are a Strong Force
?
Whether substitutes are readily available and attractively priced
?
Whether buyers view substitutes as being comparable or better
?
How much it costs end users to switch to substitutes
When Is the Competition From Substitutes Stronger?
?
There are many good substitutes that are readily available The lower the price of substitutes The higher the quality and performance of substitutes
?
?
?
The lower the user’s switching costs
4. When Is the Bargaining Power of Suppliers Stronger?
?
Industry members incur high costs in switching their purchases to alternative suppliers Needed inputs are in short supply Supplier provides a differentiated input that enhances the quality of performance of sellers’ products or is a valuable part of sellers’ production process There are only a few suppliers of a specific input Some suppliers threaten to integrate forward
? ?
? ?
When Is the Bargaining Power of Suppliers Weaker?
? ? ? ? ?
Item being supplied is a commodity Seller switching costs to alternative suppliers are low Good substitutes exist or new ones emerge Surge in availability of supplies occurs Industry members account for a big fraction of suppliers’ total sales Industry members threaten to integrate backward Seller collaboration with selected suppliers provides
? ?
Competitive Pressures: Collaboration Between Sellers and Suppliers
?
Sellers are forging strategic partnerships with select suppliers to
? Reduce ? Speed
inventory and logistics costs
availability of next-generation components quality of parts being supplied out cost savings for both parties
? Enhance ? Squeeze ?
Competitive advantage potential may accrue to sellers doing the best job of managing supply-chain relationships
5. When Is the Bargaining Power of Buyers Stronger?
?
Buyer switching costs to competing brands or substitutes are low ? Buyers are large and can demand concessions ? Large-volume purchases by buyers are important to sellers ? Buyer demand is weak or declining ? Only a few buyers exists ? Identity of buyer adds prestige to seller’s list of customers ? Quantity and quality of information available to buyers improves ? Buyers have ability to postpone purchases until later ? Buyers threaten to integrate backward
When Is the Bargaining Power of Buyers Weaker?
?
Buyers purchase item infrequently or in small quantities Buyer switching costs to competing brands are high Surge in buyer demand creates a “sellers’ market” Seller’s brand reputation is important to buyer A specific seller’s product delivers quality or performance that is very important to buyer Buyer collaboration with selected sellers provides attractive win-win opportunities
? ? ? ?
?
Competitive Pressures: Collaboration Between Sellers and Buyers
?
Partnerships are an increasingly important competitive element in business-to-business relationships
Collaboration may result in mutual benefits regarding
? ? ? ?
?
Just-in-time deliveries Order processing Electronic invoice payments Data sharing
?
Competitive advantage potential may accrue to sellers doing the best job of managing seller-buyer partnerships
Strategic Implications of the Five Competitive Forces
?
Competitive environment is unattractive from the standpoint of earning good profits when
? Rivalry ? Entry
is vigorous
barriers are low and entry is likely from substitutes is strong
? Competition ? Suppliers
and customers have considerable bargaining power
Strategic Implications of the Five Competitive Forces
?
Competitive environment is ideal from a profit-making standpoint when
? Rivalry ? Entry ? Good
is moderate
barriers are high and no firm is likely to enter substitutes do not exist and customers are in a weak bargaining
? Suppliers
position
Coping With the Five Competitive Forces
?
Objective is to craft a strategy to
? Insulate
firm from competitive pressures
? Initiate
actions to produce sustainable competitive advantage firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines the business model for the industry
? Allow
doc_147290170.ppt
It explains key aspects of PESTEL analysis. What Kinds of Competitive Forces Are Industry Members Facing. It also explains the five forces the company is facing.
External Analysis:
Environmental Opportunities &
Threats
What Is Situation Analysis?
?
Two considerations
? Company’s
external or macro-environment
• Industry and competitive conditions
? Company’s
internal or micro-environment
• Competencies, capabilities, resource strengths and weaknesses, and competitiveness
The Components of a Company’s Macro-Environment
Macroenvironment – PESTEL
Macroenvironment – PESTEL
Political
• Government stability • Taxation policy • Foreign trade regulations • Social welfare policies • • • • • • •
Economic
Business cycles GNP trends Interest rates Money supply Inflation Unemployment Disposable income
Macroenvironment – PESTEL
Sociocultural
• Population demographics • Income distribution • Social mobility • Lifestyle changes • Attitudes to work and leisure • Consumerism • Levels of education
Technological
• Government spending on research • Government and industry focus on technological effort • New discoveries /developments • Speed of technology transfer • Rates of obsolescence
Macroenvironment – PESTEL
Environmental
• Environmental protection laws • Waste disposal • Energy consumption • • • •
Legal
Competition law Employment law Health and safety Product safety
Key Aspects of PESTEL Analysis
? ? ?
Not just a list of influences Need to understand key drivers of change Drivers of change have differential impact on industries, markets, and organisations Focus is on future impact of environmental factors Combined effect of some of the factors likely to be most important
? ?
Q #1: What are the Industry’s Dominant Economic Traits?
?
Market size and growth rate ? Scope of competitive rivalry ? Number of rivals ? Buyer needs and requirements ? Production capacity ? Pace of technological change ? Vertical integration ? Product innovation ? Degree of product differentiation ? Economies of scale ? Learning and experience curve effects
Learning/Experience Effects
?
Learning/experience effects exist when a company’s unit costs decline as its cumulative production volume increases because of
? ?
Accumulating production know-how Growing mastery of the technology
?
The bigger the learning or experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume
Q #2: What Kinds of Competitive Forces Are Industry Members Facing?
?
Objectives are to identify
?
Main sources of competitive forces
Strength of these forces
? ?
Key analytical tool
?
Five Forces Model of Competition
The Five Forces Model
1. Potential Competitors
?
New entrants into an industry threaten incumbent companies.
?
Barriers to entry:
? ? ? ? ?
Brand loyalty Absolute cost advantages Economies of scale Switching costs Government regulation
?
Entry barriers reduce the threat of new and additional competition.
2. Rivalry Among Established Companies
?
The intensity of competitive rivalry in an industry arises from:
? Industry’s ? Demand
competitive structure.
(growth or decline) conditions in
industry.
? Height
of industry exit barriers.
3. The Bargaining Power of Buyers
?
Buyers are most powerful when:
? ?
There are many small sellers and few large buyers. Buyers purchase in large quantities.
?
? ? ?
A single buyer is a large customer to a firm.
Buyers can switch suppliers at low cost. Buyers purchase from multiple sellers at once. Buyers can easily vertically integrate to compete with suppliers.
4. The Bargaining Power of Suppliers
?
Suppliers have bargaining power when:
?
Their products have few substitutes and are important to buyers.
?
The buyer’s industry is not an important customer to the supplier.
Differentiation makes it costly for buyers to switch suppliers. Suppliers can vertically integrate forward to compete with buyers and buyers can’t integrate backward to supply their own needs.
?
?
5. Substitute Products
?
The competitive threat of substitute products increases as they come closer to serving similar customer needs.
1. Rivalry Among Competing Sellers
? ?
Usually the strongest of the five forces Key factor in determining strength of rivalry
? How
aggressively are rivals using various weapons of competition to improve their market positions and performance?
?
Competitive rivalry is a combative contest involving
? Offensive ? Defensive
actions countermoves
What Are the Typical Weapons for Competing?
? ?
Vigorous price competition More or different performance features Better product performance Higher quality Stronger brand image and appeal
? ? ? ?
Bigger/better dealer network Low interest rate financing Higher levels of advertising Stronger product innovation capabilities Better customer service Stronger capabilities to provide buyers with custommade products
? ? ?
? ?
?
Wider selection of models and styles
What Causes Rivalry to be Stronger?
?
Competitors engage in frequent and aggressive launches of new offensives to gain sales and market share ? Slow market growth ? Number of rivals increases and rivals are of equal size and competitive capability ? Buyer costs to switch brands are low ? Industry conditions tempt rivals to use price cuts or other competitive weapons to boost volume ? A successful strategic move carries a big payoff ? Strong rivals outside the industry acquire weak firms in the industry and use their resources to transform the new firms into major market contenders
What Causes Rivalry to be Weaker?
?
Industry rivals move only infrequently or in a nonaggressive manner to draw sales from rivals
Rapid market growth Products of rivals are strongly differentiated and customer loyalty is high
? ?
?
?
Buyer costs to switch brands are high
There are fewer than 5 rivals or there are numerous rivals so any one firm’s actions has minimal impact on rivals’ business
2. Competitive Force of Potential Entry
?
Seriousness of threat depends on
?
Size of pool of entry candidates and available resources Barriers to entry
? ? ?
Reaction of existing firms
Evaluating threat of entry involves assessing
?
How formidable entry barriers are for each type of potential entrant and Attractiveness of growth and profit prospects
?
Common Barriers to Entry
? ?
Sizable economies of scale Cost and resource disadvantages independent of size Brand preferences and customer loyalty
?
?
Capital requirements and/or other specialized resource requirements
Access to distribution channels Regulatory policies Tariffs and international trade restrictions
? ? ?
When Is the Threat of Entry Stronger?
? ? ? ?
There’s a sizable pool of entry candidates Entry barriers are low Industry growth is rapid and profit potential is high Incumbents are unwilling or unable to contest a newcomer’s entry efforts When existing industry members have a strong incentive to expand into new geographic areas or new product segments where they currently do not have a market presence
?
When Is the Threat of Entry Weaker?
?
There’s only a small pool of entry candidates
?
?
Entry barriers are high
Existing competitors are struggling to earn good profits Industry’s outlook is risky Industry growth is slow or stagnant
? ?
3. Competitive Force of Substitute Products
Concept
Substitutes matter when customers are attracted to the products of firms in other industries
Examples
? Eyeglasses ? Sugar
and contact lens vs. laser surgery vs. artificial sweeteners vs. TV vs. Internet
? Newspapers
How to Tell Whether Substitute Products Are a Strong Force
?
Whether substitutes are readily available and attractively priced
?
Whether buyers view substitutes as being comparable or better
?
How much it costs end users to switch to substitutes
When Is the Competition From Substitutes Stronger?
?
There are many good substitutes that are readily available The lower the price of substitutes The higher the quality and performance of substitutes
?
?
?
The lower the user’s switching costs
4. When Is the Bargaining Power of Suppliers Stronger?
?
Industry members incur high costs in switching their purchases to alternative suppliers Needed inputs are in short supply Supplier provides a differentiated input that enhances the quality of performance of sellers’ products or is a valuable part of sellers’ production process There are only a few suppliers of a specific input Some suppliers threaten to integrate forward
? ?
? ?
When Is the Bargaining Power of Suppliers Weaker?
? ? ? ? ?
Item being supplied is a commodity Seller switching costs to alternative suppliers are low Good substitutes exist or new ones emerge Surge in availability of supplies occurs Industry members account for a big fraction of suppliers’ total sales Industry members threaten to integrate backward Seller collaboration with selected suppliers provides
? ?
Competitive Pressures: Collaboration Between Sellers and Suppliers
?
Sellers are forging strategic partnerships with select suppliers to
? Reduce ? Speed
inventory and logistics costs
availability of next-generation components quality of parts being supplied out cost savings for both parties
? Enhance ? Squeeze ?
Competitive advantage potential may accrue to sellers doing the best job of managing supply-chain relationships
5. When Is the Bargaining Power of Buyers Stronger?
?
Buyer switching costs to competing brands or substitutes are low ? Buyers are large and can demand concessions ? Large-volume purchases by buyers are important to sellers ? Buyer demand is weak or declining ? Only a few buyers exists ? Identity of buyer adds prestige to seller’s list of customers ? Quantity and quality of information available to buyers improves ? Buyers have ability to postpone purchases until later ? Buyers threaten to integrate backward
When Is the Bargaining Power of Buyers Weaker?
?
Buyers purchase item infrequently or in small quantities Buyer switching costs to competing brands are high Surge in buyer demand creates a “sellers’ market” Seller’s brand reputation is important to buyer A specific seller’s product delivers quality or performance that is very important to buyer Buyer collaboration with selected sellers provides attractive win-win opportunities
? ? ? ?
?
Competitive Pressures: Collaboration Between Sellers and Buyers
?
Partnerships are an increasingly important competitive element in business-to-business relationships
Collaboration may result in mutual benefits regarding
? ? ? ?
?
Just-in-time deliveries Order processing Electronic invoice payments Data sharing
?
Competitive advantage potential may accrue to sellers doing the best job of managing seller-buyer partnerships
Strategic Implications of the Five Competitive Forces
?
Competitive environment is unattractive from the standpoint of earning good profits when
? Rivalry ? Entry
is vigorous
barriers are low and entry is likely from substitutes is strong
? Competition ? Suppliers
and customers have considerable bargaining power
Strategic Implications of the Five Competitive Forces
?
Competitive environment is ideal from a profit-making standpoint when
? Rivalry ? Entry ? Good
is moderate
barriers are high and no firm is likely to enter substitutes do not exist and customers are in a weak bargaining
? Suppliers
position
Coping With the Five Competitive Forces
?
Objective is to craft a strategy to
? Insulate
firm from competitive pressures
? Initiate
actions to produce sustainable competitive advantage firm to be the industry’s “mover and shaker” with the “most powerful” strategy that defines the business model for the industry
? Allow
doc_147290170.ppt