4 – External Assessment

Introduction

In an era of rapid growth, rapid change, and cutthroat competition, it is difficult for businesses to develop a strategic agenda for dealing with and growing despite these competing currents.

A company must understand how the above currents work in its industry and how they affect the company in its particular situation. Analysts use a very useful tool for this: external analysis.

External evaluation is the process through which a company finds opportunities that could benefit it and hazards that it should avoid. It entails monitoring, evaluating, and disseminating information from the external and internal environments to key individuals within the organisation.

4.1 Environmental Concept

The environment means the surroundings, external objects, influences, or circumstances under which someone or something exists. Any organization’s environment is “the sum of all conditions, events, and influences that surround and affect it.” Davis, K., The Challenge of Business, McGraw Hill, New York, 1975, p. 43.

The environment refers to all external forces that affect a business’s functioning. Jauch and Gluecke have defined the environment as “the environment includes factors outside the firm that can lead to opportunities or a threat to the firm. Although there are numerous aspects, the most relevant sectors are socioeconomic, technological, supplier, competitor, and government.”

The recent changes in tariff rates have altered the Indian toy business, with Chinese products dominating the market. A slight shift in the Reserve Bank of India’s monetary policy can cause interest rates in the market to rise or fall. A small change in the government’s fiscal policy can shift the entire demand curve to the right or left.

Hindustan Lever Limited (HLL) used the new takeover and merger codes to acquire brands such as Kissan from the UB group, TOMCO (Tata Oil Mills Company) and Lakme from Tata, and Modern Foods from the government, among many other small takeovers and mergers.

The new business moguls in India are those who foresaw changes in the environment and reacted accordingly. Some of them are Azim Premji of Wipro, Narayana Murthy of Infosys, Subhash Goyal of ZEE, the Ambanis of Reliance, L.N. Mittal of Mittal Steel, and Sunil Mittal of Bharti Telecom.

Even a small businessman who wants to open a small shop as a general merchant in his town must research the environment before deciding where to open his shop, what products to sell, and which brands to stock.

The relationship between a business and its surroundings is not a one-way street. The business has an equal impact on the external environment and can change it. For example, powerful business lobbyists aggressively try to change government policies.

The business environment encompasses not only the economic environment but also the social and political environments. Politically, after the Congress administration seized power at the centre in May 2004 with the support of the CPI, the entire disinvestment process took a U-turn. Similarly, in today’s India, a new sociological order has created a market for fast foods, packaged foods, multiplexes, designer names, Valentine’s Day gifts and presents, and gymnasiums and clubs, among other things.

As a result, it is self-evident that corporate success depends on a deeper understanding of the environment. A successful organisation does not look at the environment on an ad hoc basis but rather establishes a system to analyse the environment continually to defend the organisation from potential threats and capitalize on opportunities. Sometimes, an improved and timely understanding of the environment might even turn a threat into an opportunity.

The Value of the Business Environment

1) The environment is complex:

The environment is made up of various causes, events, circumstances, and impacts. These interact to produce new sets of influences.

2) It is dynamic:

The environment is, by definition, ever-changing. The various influences acting on it give it dynamism and cause it to change shape and character regularly.

3) The environment is multifaceted:

The same environmental trend can have different effects on different industries. GATS, for example, is an opportunity for some companies but a threat to others.

4) It has a far-reaching impact:

The environment has a far-reaching impact on organisations. An organization’s growth and profitability are significantly dependent on its environment.

5) Its impact on different firms in the same industry varies:

A change in the environment may have different implications for firms in the same industry. In India’s pharmaceutical industry, for example, the impact of the new IPR (Intellectual Property Rights) law will be different for research-based pharmacy giants like Ranbaxy and Dr. Reddy’s Lab and smaller pharmacy enterprises.

6) It may be both an opportunity and a threat to expansion:

Changes in the general environment frequently provide opportunities for product and market expansion. Example: Liberalization in 1991 created many opportunities for corporations, and HLL utilised the advantage to purchase companies like Lakme, TOMCO, KISSAN, etc. Environmental changes often pose a serious threat to the entire industry. Like liberalisation, new entrants in the form of multinational corporations (MNCs) pose a danger to Indian enterprises.

7) Changes in the environment can modify the competitive scenario:

General environmental changes can alter a sector’s boundaries and change the nature of its competition. This has been the situation with liberalisation in the telecom sector in India. Every other year since deregulation, new competitors have emerged, old foes have become pals, and mergers and acquisitions have followed each new legislation.

8) Developments can be difficult to forecast with any degree of accuracy at times:

Macroeconomic developments such as interest rate fluctuations, inflation rates, and exchange rate fluctuations are extremely difficult to forecast over the medium and long term. On the other hand, some trends, such as demographics and income levels, are quite simple to predict.

4.2 Porter’s Five Force Analysis

In 1979, the Harvard Business Review released the paper “How Competitive Forces Shape Strategy” by Harvard Professor Michael Porter. It sparked a revolution in the realm of strategy. “Porter’s five forces” have shaped a generation of academic research and business practice in the decades since. This unit investigates how to do competitive analysis using Porter’s five forces model.

4.2.1 The Five Influencing Factors

Essentially, the strategist’s job is to understand and deal with competition. Conversely, managers define competition too narrowly, as if it only occurs among today’s direct competitors. Profit competition, however, extends beyond established industry rivals. It also includes four additional competitive forces: customers, suppliers, potential entrants, and substitutes.

Michael E. Porter’s Five Forces model has been the most widely utilised analytical technique for assessing the competitive environment. According to this concept, the level of rivalry in an industry is determined by five basic forces. These five forces are as follows:

1. The risk of fresh entries

2. The level of rivalry among industry competitors.

3. Buyer bargaining power

4. Supplier bargaining power

5. The threat of substitute goods and services.

Each element impacts a company’s capacity to compete in a specific market. Together, they work to estimate the earning potential of a specific industry.

Porter contends that the greater the strength of each of these forces, the more limited the ability of established companies to raise prices and earn higher profits.

With Porter’s paradigm, a strong competitive force might be dangerous because it depresses profitability. A weak competing force might be considered an opportunity because it permits a corporation to benefit more. As industry conditions change, the strength of the five forces may shift. For example, nearly no company generates excellent returns on investment in industries such as airlines, textiles, and hotels, where these dynamics are powerful. Many corporations profit from medications and toiletries, where these forces are benign.

4.2.2 Competition-Shaping Forces

The five forces are configured differently in each industry. In the market for commercial aircraft, for example, heated rivalry among current competitors (i.e., Airbus and Boeing) and buyer bargaining power are strong. In contrast, the threat of entry, the danger of substitutes, and supplier strength are more benign. As a result, the most powerful competitive force or forces determine an industry’s profitability and become the most important to strategy formulation.

1. The Threat of New Entrants:

The threat of new entrants is the first of Porter’s Five Forces model. New entrants bring new capacity and, in many cases, substantial resources to an industry looking to gain market share. Established companies in a sector frequently strive to prevent new competitors from entering the industry to maintain their market share and revenues. When large new entrants diversify from other markets into the industry, they can use their existing capabilities and cash flows to shake up the competition. Pepsi did this when it entered the bottled water business; Microsoft did it when it started offering internet browsers; and Apple did it when it entered the music distribution business. As a result, the prospect of new entrants limits an industry’s profit potential. When the threat is high, incumbent businesses lower their prices or increase their investment to prevent new competitors. The danger of entrance into a market is determined by entry barriers (i.e., elements that make it difficult for new entrants to enter the business) and retaliation by entrenched competitors. When entry barriers are low, and newcomers anticipate little punishment, the danger of entrance is great, and industry earnings are moderate. The threat of entry, rather than whether or not entry occurs, keeps profitability low.

2. Barriers to entry:

The advantages that incumbent enterprises have over new entrants determine entry barriers. There are seven significant sources to consider:

a. Economies of scale:

These are cost advantages associated with big volumes of manufacturing that reduce a company’s cost structure. As the manufacturing volume grows, the cost of the product per unit decreases. This hinders large-scale new entrants from entering. If the new entrant decides to enter on a large scale to gain economies of scale, it must accept the substantial risks of a large investment. Another risk is that increased product supply will drive down prices, prompting retaliation from established companies. For these reasons, the threat of new entrants is reduced when established companies have economies of scale. In the microprocessor industry, for example, existing companies such as Intel benefit from economies of scale in research, chip fabrication, and consumer marketing.

b. Product differentiation:

Brand loyalty refers to a buyer’s preference for a company’s differentiated products. Strong brand loyalty makes it harder for new entrants to grab market share away from established enterprises. It reduces the threat of entry because it is too expensive for them to break down well-established customer preferences.

c. Capital requirements:

The requirement to invest large sums of money to compete can deter new entrants. Capital may be required not only for physical assets but also to extend consumer credit, construct inventories, and cover startup costs. The barrier is particularly great if the capital is required for unrecoverable expenditure, such as up-front advertising or research and development. While large corporations have the financial resources to enter almost any industry, the capital requirements in some fields limit the pool of potential entrants. It is vital not to overestimate the extent to which capital needs alone inhibit entrance; if industry returns are favourable and expected to stay so, and if capital markets are efficient, investors will give the sums required by new entrants. For example, funding is available in the airline business to purchase expensive aircraft due to their resale value, so there have been several new carriers in every region.

d. Switching costs:

Switching costs are the one-time costs a customer must bear to switch from one product to another. When switching costs are high, customers can be tied up in the present offering, even if new entrants offer a better product. As a result, the higher the switching costs, the higher the barrier to entry. Enterprise Resource Planning (ERP) software is an example of a product with very high switching costs. Once a company has adopted SAP’s ERP system, the expense of transferring to a new provider is exorbitant.

e. Access to distribution channels:

The new entrants need to secure a distribution channel for the product, which can create a barrier to entry. The established companies have already tied up with distribution channels. For example, a new food item may have to displace others from the supermarket shelf via price breaks, promotions, intense selling efforts, or other means. The more limited the wholesale or retail channels are, the more challenging the entry into an industry will be. Sometimes, if the barrier is so high, a new entrant must build its distribution channels as Timex did in the watch market in the 1950s.

f. Cost disadvantages regardless of size:

Some existing businesses may benefit from factors other than size or economies of scale. These are generated from the following:

Proprietary technology

Preferential access to raw material sources

Government subsidies

Advantageous geographical locations

Well-established brand identities

Cumulative experience

These advantages may not be available to new entrants.

g. Government policies:

Historically, government rules have been a significant barrier to entry into numerous businesses. With controls such as licence requirements and restrictions on raw material access, the government can limit or even prohibit entry into industries. The Indian government’s liberalisation policy, which included price deregulation, delicensing, and decontrol, allowed many new entrepreneurs to enter the market.

Consequently, the strategist must be aware of the inventive ways newcomers may circumvent obvious barriers.

Expected Retaliation:

New entrants’ perceptions of how existing companies will react will impact their decision to enter or exit an industry. If the reaction is forceful and persistent enough, the profit potential in the industry can fall below the cost of capital for all players. Existing businesses frequently use public statements to send signals to new entrants about their commitment to defending market share.

New entrants are likely to fear expected retaliation if:

– Existing companies have previously responded vigorously to new entrants

– Existing companies possess substantial resources to fight back

– Existing companies seem likely to cut prices to protect their market share

– Industry growth is slow, so newcomers can gain volume only by taking the market share from existing companies.

Any company considering entering a new industry should analyse entry barriers and expected retaliation. The challenge is to find ways to surmount the entry barriers without nullifying the industry’s profitability.

2. Competitors’ Rivalry Intensity:

The intensity of rivalry among established companies within an industry is the second factor in Porter’s Five Forces model. Rivalry denotes the competitive conflict of companies in an industry to obtain market share. Firms employ price reductions, advertising campaigns, new product introductions, and enhanced customer service or warranties. Intense rivalry lowers prices and raises costs. It drains profits from an industry. Thus, intense rivalry among established companies constitutes a strong threat to profitability. Alternatively, if competition is less intense, companies may be able to raise prices or reduce advertising spending, resulting in higher levels of industry profits.

The intensity of rivalry is most significant under the following conditions:

a) Numerous competitors or equally powerful competitors:

When there are many competitors in an industry, or when the competitors are roughly of equal size and power, rivalry is more intense. Any move made by one corporation is met with an equal countermove. Competitors find it challenging to avoid poaching business in such situations.

b) Sluggish industry growth:

Slow industry development drives rivalry into war because the only growth path is to take sales away from a competitor.

c) High fixed but low marginal costs:

This puts intense pressure on competitors to cut prices below average costs, even close to marginal costs, to steal customers. Example: Many paper and aluminium businesses suffer from this problem, significantly if demand is not growing.

d) Lack of differentiation or switching costs:

When rivals’ products or services are nearly identical, and there are few switching costs, competitors are encouraged to cut prices to win new customers. Years of airline price battles reflect these dynamics in that business.

e) Capacity augmentation in large increments:

If the only way for a manufacturer to increase capacity is in large increments, such as by building a new plant, that new plant will be run at full capacity to keep unit costs low. Such capacity additions can disrupt the supply/demand balance and cause the selling prices to fall throughout the industry.

f) High exit barriers:

Exit barriers prohibit a company from quitting the industry. Exit barriers can be economic, strategic or emotional considerations that keep organisations competing even when generating low or negative investment returns. If exit barriers are significant, enterprises become caught up in a non-profitable industry when general demand is flat or diminishing. Excess capacity remains in use, and the profitability of healthy competitors suffers as the sick ones hang on.

3. Buyer bargaining power:

Buyer bargaining power is the third of Porter’s five competitive forces. The bargaining power of buyers refers to the ability to bargain down prices charged by firms in the industry or drive up the firm’s costs by demanding better product quality and service. Influential buyers can squeeze profits out of an industry by forcing lower prices and raising costs. As a result, influential buyers should be seen as a threat. Alternatively, if buyers have little bargaining power, the firm can raise prices, reduce costs on quality and services, and increase profits. Buyers are influential if they have more bargaining power than the firms in the industry, and they use their clout primarily to press for price reductions. Buyers, according to Porter, are most powerful when the following conditions exist:

There aren’t many buyers: If there are few buyers or each one makes bulk purchases, they have more bargaining power. Large buyers are particularly influential in communications equipment, off-shore drilling, and bulk chemicals. High fixed costs and low marginal costs pressure rivals to fill capacity through discounts.

The products are standard or undifferentiated: If the products purchased from the firm are standard or undifferentiated, the buyers can easily find alternative sources of supplies. Then buyers can play one company against the other, as in commodity grain markets.

The buyer has low switching costs: Switching costs bind the buyer to a specific firm. If switching costs are low, buyers can easily switch from one firm’s product to another.

The buyer generates low profits: If the buyer is pressured to lower its purchase costs, it is price-sensitive and bargains more.

Buyer’s product quality: Buyers are more price-sensitive if the industry’s products don’t significantly alter the quality of the buyer’s product.

Most of the above buyer power sources can be attributed to consumers and industrial and commercial buyers. With one important exception, the same factors determine retailers’ purchasing power. When they influence consumers, retailers can have enormous bargaining power over manufacturers. Purchase decisions in audio components, jewellery, appliances, recreational items, and so on are examples.

4. Supplier bargaining power:

Supplier negotiating power is the fourth force in Porter’s Five Forces model. Suppliers supply raw materials, components, equipment, machinery, and associated products. Powerful suppliers raising prices, lowering quality or services, or shifting costs to other industry participants increase profits. Powerful suppliers drain profits from an industry, making them a threat. For example, by raising operating system prices, Microsoft has contributed to the erosion of profitability among PC manufacturers. PC manufacturers, who are fiercely competing for customers, have limited leeway to raise their prices accordingly.

Under the following conditions, a supplier’s bargaining power will be high:

Few suppliers: An industry is called concentrated when a few companies dominate the supplier group and is more concentrated than the enterprises to whom it sells. The suppliers can then set their prices, quality standards, and terms.

Distinct product: When suppliers offer unique or differentiated items or switching costs have been built up, the firm’s options to play one supplier against the other are limited. Pharmaceutical companies, for example, that offer patented drugs with distinct medical benefits, have more clout with hospitals, drug buyers, and so on.

Dependence of supplier group on the firm: Suppliers are prone to exert control when they sell to multiple firms, and the firm does not represent a significant fraction of its sales. In other words, the supplier group’s revenue is not heavily reliant on the industry. Suppliers who serve many sectors will not hesitate to maximise revenues from each one. However, suppliers will wish to defend the industry through reasonable pricing if a single sector accounts for a significant share of a supplier group’s volume or profit.

Importance of the firm’s product: When the product is an important input to the firm’s business or when such inputs are important to the success of a firm’s manufacturing process or product quality, suppliers have high bargaining power.

Threat of forward integration: When the supplier poses a credible threat of integrating forward, this checks against the firm’s ability to improve the terms by which it purchases.

Lack of substitutes: The power of even large, powerful suppliers can be checked if they compete with substitutes. However, suppliers can wield influence if they are not forced to compete with substitutes because they are not readily available.

5. The threat of substitute goods and services:

The threat of alternative products is the fifth force in Porter’s Five Forces paradigm. A substitute performs the same function as an industry’s product. Using video conferences allows for the avoidance of travel. Aluminium can be replaced with plastic. E-mail is a substitute for mail. All firms within an industry compete with industries producing substitute products. For example, companies in the coffee industry compete indirectly with those in the tea and soft drink industries because all these satisfy the same client demand for refreshments.

Close substitutes pose a significant competitive threat because they limit the price companies in one industry can charge for their product. If coffee prices rise too much compared to the price of tea or soft drinks, coffee drinkers may switch to those alternatives. Thus, according to Porter, “Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge.”. The price of tea, for example, sets a limit on the price of coffee. Substitutes can significantly impact an industry’s profitability when switching costs are minimal.

The more appealing alternative items’ price/performance ratio, the more likely they impact an industry’s earnings. In other words, when the threat of substitutes is high, the industry’s profitability suffers. If an industry does not deter replacements through product performance, marketing, pricing, or other means, it will suffer in terms of profitability and growth potential under the following conditions:

It offers an attractive price and performance. However, the greater the relative worth of the substitute, the lower the industry’s profit potential. For example, long-distance telephone service providers suffered with the arrival of Internet-based phone services.

The buyer’s switching costs to the substitutes are low: Switching from a proprietary, branded drug to a generic drug, for example, usually involves minimal switching costs.

Strategists should be particularly vigilant to changes in other areas that may provide enticing replacements. For example, advancements in plastic materials prompted automobile manufacturers to replace steel in many automobile components with plastic.

4.3 Market Research

Each company operates inside an “industry,” a group that generates competing goods or services. Thus, an industry is a set of businesses that produce similar goods or services. By similar items, we mean those that clients believe are alternatives to one another.

The textile sector includes companies that manufacture and sell textiles, such as Reliance Textiles, Raymond, and S. Kumars.

Similarly, companies manufacturing PCs, such as Apple, Compaq, AT&T, and IBM, are part of the microcomputer industry.

Despite certain distinctions amongst rivals, each industry has its own “rules of warfare” covering problems such as product quality, pricing, and distribution. This is especially evident in businesses, with many companies selling standardised goods and services. As a result, before deciding how to compete successfully, strategic managers must first grasp the industry structure in which their organisations participate. As a result, industry analysis is a vital element in a firm’s strategic analysis.

Ideally, each firm would operate in a single, well-defined industry. However, many organisations compete in industries, and strategic managers in similar firms may have different perspectives on the industrial landscape. Furthermore, the introduction of the Internet has fundamentally altered how business is conducted. As a result, when considering internet competition, the industry definition and analysis process can be very difficult.

The primary goal of industry analysis is to evaluate a company’s strengths and shortcomings in comparison to those of its industry competitors. It attempts to illustrate the structural realities of a specific sector and the degree of rivalry within that industry. An organisation can use industry analysis to determine whether or not the chosen field is appealing and to examine its position within the industry.

4.3.1 Industry Analysis Framework

Two critical components are covered in industry analysis:

1. Industry context

2. Competitive context

The following topics will be discussed in the preceding analysis:

-Analysis of the Industry

-Industry characteristics

-Industry divisions

-The industry environment;

-The industry structure;

-The industry performance; and

-The industry practises

-The industry’s appeal

-Future Industry Prospects

-Analysis of Competitors

The competitive analysis primarily covers two issues:

1. Who are our main competitors?

2. What factors influence industry competition?

4.3.2 Industry Research

Industry Characteristics:

Industries vary greatly. As a result, studying a company’s industry begins with defining the industry’s major economic traits and developing a picture of the industry landscape. The primary economic elements of an industry include factors such as:

Overall size

Market growth rate

Geographic limits of the market

Number and size of competitors

The pace of technological progress

Product innovations, and so on.

Understanding an industry’s characteristics enhances understanding of the strategic movements that managers should apply. For example, in businesses where one product advances after another, a constant product innovation strategy becomes a requirement for survival.

For example, consider video games, computers, and medications.

Sector Boundaries:

No two companies in the same industry are the same. Firms within the same industry may differ in a variety of ways, including:

Market breadth

Product/service quality

Geographic distribution

Level of vertical integration

Profit motives.

Industry Setting:

Industries are classified into two types based on their environment:

Fragmented Industries:

A fragmented industry is made up of a large number of small or medium-sized businesses, none of which can set industry prices. Many fragmented industries are characterised by low entry barriers and hard-to-distie commodity-type items.

Consolidated Industries:

In a consolidated industry, a limited number of large enterprises (an oligopoly) or, in extreme cases, only one company dominates (a monopoly). These businesses can set industry prices. In concentrated industries, one company’s competitive actions or moves directly impact its rivals’ market share and, hence, their profitability. When one company lowers its prices, competitors follow suit. Rivalry grows as companies compete to undercut each other’s pricing or provide customers with more product value, lowering industry earnings. As a result, there is a hazardous competitive spiral.

According to Michael Porter, industries are classified as follows:

1. Emerging industries: Emerging industries are in the beginning or growing stages of their life cycle.

2. Mature industries: Mature industries have reached the end of their life cycle.

3. Industries in decline: These are those in the process of transitioning from maturity to decline.

4. Global industries: Global industries have manufacturing and marketing operations in multiple nations.

Throughout the industry’s life cycle, competition varies.

Industry Structure:

Determining an industry’s boundaries is inadequate without grasping its structural characteristics. The permanent traits that give an industry its specific character are structural attributes.

The structure of the industry is made up of four components:

-Concentration: This refers to the extent to which a few firms dominate industry sales. The intensity of competition decreases with time in a highly concentrated industry (one in which a few competitors dominate sales). High concentration is a barrier to entering an industry, allowing enterprises to hold huge market shares and gain significant economies of scale.

Economies of scale are an important predictor of industry competition. Because of their reduced per-unit cost of production, firms that benefit from economies of scale can charge cheaper prices than their competitors. They can also erect entry barriers by temporarily or permanently lowering prices to discourage new firms from entering the field.

-Product difference: True perceived differentiation frequently increases the competitiveness among existing competitors.

-Entrance barriers: Entry barriers are the obstacles that a firm must overcome to enter an industry, and competition from new entrants is mostly determined by entry barriers.

The industry’s attractiveness:

The following elements influence the appeal of an industry:

Profitability

Growth Prospects

Industry barriers, etc.

Generally, if an industry’s profit possibilities are above average, it is deemed attractive; if its profit prospects are below average, the industry is called unattractive. If the sector and competitive scenario are deemed appealing, corporations would use sales expansion tactics and invest in additional facilities to strengthen their long-term competitive position. Corporations may choose to invest cautiously and seek strategies to protect their profitability if a sector is deemed unappealing. Substantial corporations may consider diversification into more appealing businesses. Weak companies may contemplate merging with competitors to increase market share and profitability.

Industry performance:

This necessitates a review of data about:

Production

Sales

Profitability

Technological improvements, and so on.

Industry practises:

Industry practices refer to what most industry players do regarding products, pricing, advertising, distribution, and so on. This component addresses the following issues:

Product policy

Pricing policy

Promotion policy

Distribution policy

R&d policy

Competitive strategies.

Industry’s prospects:

The future outlook of an industry can be predicted based on elements such as:

Product and service innovation

Consumer choice trends

Emerging changes in regulatory mechanisms

The industry’s product life cycle

Rate of growth, and so on.

4.4 Competitive Evaluation

A variety of forces determine the level of competitiveness in a business. To develop a strategy for dealing with these factors and growing despite them, a company must first understand:

How do these forces function in an industry?

How do they affect the firm in its current situation?

Coping with competition is at the heart of strategy formulation. Intense industry competitiveness is neither a coincidence nor a bad omen. Its foundation is based on the underlying economics. There are two economic theories: monopoly theory and perfect competition theory. These are the two opposites of industry competition. In a monopolistic situation, a single corporation is protected by barriers to entry and has an opportunity to usurp all the revenues earned in the industry.

In a “perfectly competitive” industry, competition is fierce and entry is simple. Of fact, this type of industry structure has the worst long-term profitability prospects. However, the higher the collective weakness of the forces, the larger the chance for improved profit performance.

“Each industry’s attractiveness or profitability potential is a direct product of the interconnections of numerous environmental conditions that influence the character of competition,” according to Porter.

Competitive forces include buyers, suppliers, new entrants, and replacement items. These forces shape the condition of competition in an industry. The combined strength of these influences defines an industry’s ultimate earning potential. It can range from intense in some industries to light in others.

Whatever their cumulative power, the corporate strategist’s purpose is to position his or her firm in the industry where it can best protect itself against these forces or influence them in its favour. The strategist must go behind the surface to identify and understand the fundamental sources of competition.

Knowledge of these underlying sources of competition aids in the following ways:

-Laying the framework for a strategic agenda.

-To showcase the company’s competitive strengths and disadvantages.

-To enliven the company’s industry positioning.

-To identify the areas where strategic adjustments will have the most impact and

-To highlight the most important sources as opportunities or threats. Understanding these sources will also aid in selecting potential areas for diversification.

Because the most powerful competitive factors determine an industry’s profitability, competitive analysis is critical in strategy design.

4.5 Environmental Examination

Environmental analysis, also known as scanning, is the process of monitoring events and evaluating patterns in the external environment to identify current and future opportunities and dangers that may impact the firm’s capacity to achieve its objectives. Strategists must examine various external environment components, identify “Key Players” within those domains, and be acutely aware of risks and opportunities. Managers can make judgments based on such an analysis about whether to react to, ignore, try to influence, or anticipate future opportunities and risks revealed.

The primary goal of environmental scanning is to determine the optimal “fit” between the firm and its environment so that managers may develop strategies to capitalise on opportunities while avoiding or mitigating the impact of risks.

4.5.1 Environmental Analysis Characteristics

The environmental analysis technique is quite similar to radar functions in a changing environment. Three significant aspects of the environmental analysis process may be deduced from this analogy (Ian Wilson).

1. Exercise on a Whole:

Environmental analysis is a holistic endeavour that must include a comprehensive picture of the environment rather than a piecemeal examination of patterns. It is a method of viewing the forest rather than the trees.

2. Constant Activity:

The analysis of the environment should be a continuous process rather than a one-time event. Strategists must continue to track shifts in the broad pattern of trends and conduct thorough investigations to monitor significant developments closely.

3. Process of Exploration:

Environmental analysis is a process of discovery. Much of the process is dedicated to exploring uncharted territory and the dimensions of possible futures. The emphasis must be on systematically speculating about different outcomes, calculating probability, challenging assumptions, and deriving logical conclusions.

4.5.2 Environmental Scanning Methodologies

So far, we’ve explored the components of the macro and operating environments and how they might become a threat or an opportunity. As a corporate strategist, one must identify the impact of these external forces on the firm’s decision-making and behaviour.

Environmental analysis is divided into two stages: information gathering and evaluation. For environmental analysis, Glueck and Jauch cite the following sources:

Verbal and written communication: Generally, verbal knowledge is gained through direct conversation with people, attendance at meetings, seminars, and so on, or through the media. Written or documentary information includes both published and unpublished content.

Searching and scanning: This entails researching to gather the necessary information.

Spying: Although it is not considered ethical, spying to learn about a competitor’s business is frequent.

Forecasting entails predicting future trends and changes in the environment. Numerous forecasting approaches exist. Corporate planners or consultants can handle forecasting.

Firms use various methods to achieve the aforementioned goals based on their individual needs in terms of quality, relevance, cost, and so on.

Some of the approaches that are commonly utilised for environmental analysis are:

The PESTEL analysis

The SWOT analysis

ETOP

QUEST

The EFE Matrix

CPM

Forecasting Methodologies

-Time series analysis

-Judgmental forecasting

-Expert opinion

-Delphi’s technique

-Multiple scenarios

-Statistical modelling

-Cross-impact analysis

-Brainstorming

-Demand/hazard forecasting

The following strategies are briefly discussed:

1) The PESTEL Analysis:

PESTEL Analysis is a checklist for analysing the environment’s political, economic, socio-cultural, technical, environmental, and legal components.

When performing a PESTEL analysis, it is preferable to have three or four well-thought-out items supported by evidence rather than a long list. Even though the components in a PESTEL analysis are based on previous events and experience, the analysis can be used to foresee the future.

Although the past is history and strategic management is concerned with future action, the best evidence for the future may come from what happened in the past. In any case, it’s worth attempting to grasp this concealed assumption. For example, when Warner Brothers committed hundreds of millions of dollars to the first Harry Porter picture, they assumed the fantasy film business would stay appealing worldwide. Even though it is challenging to forecast, a structured PESTEL analysis could have produced the same result.

Some strategists may argue that forecasting is pointless because the future is unpredictable. If this were true, strategic management would not play such an important role in organisations today. Although it is acknowledged that the future cannot be controlled, organisations can anticipate it to prevent strategic surprises and be prepared to address environmental changes.

2) SWOT (Strengths, Weaknesses, Opportunities and Threats)

3) ETOP:

ETOP Environmental Threats and Opportunities Profile (ETOP) summarises environmental concerns and their potential influence on the organisation. ETOP is usually prepared in the following manner.

Inventive+ paraphrase: There is a list of the various characteristics of the general and relevant environmental components. For example, the economic environment can be further subdivided into the economic growth rate, inflation rate, fiscal policy, etc.

Evaluate the influence of each factor: At this stage, the impact of each component is carefully evaluated and expressed as a qualitative (high, medium, or low) or quantitative factor (1, 2, 3). It should be noted that not all of the detected environmental factors will have the same level of influence. The influence is classified as either positive or negative.

Get a bird’s-eye view: In the last stage, each aspect’s influence and importance are merged to summarise the entire picture.

As shown above, even though the price is high, the firm can capitalise on rising income levels, customer loyalty to the firm’s products, and buyer demand for distinctive products. However, this would be contingent on the firm’s acquisition of cutting-edge technology, which is costly. Thus, creating an ETOP offers strategists a clear image of which environmental aspects benefit the organisation and which are unfavourable or detrimental. An ETOP can assist a company in determining where it stands in terms of its environment, which helps develop appropriate strategies.

Environmental Threat and Opportunity Profile (ETOP)

ETOP Alternative Framework

4) EFE Matrix

The External Factor Evaluation Matrix (EFE Matrix), like ETOP, assists in summarising and evaluating the many components of the external environment. The EFE Matrix is created in five steps:

Make a list of 10 to 20 significant opportunities and dangers.

Give each factor a weight ranging from 0.0 (not important) to 1.0. (most important). The higher the weight, the more essential the component is to the company’s current and future performance.

Rate each component as follows: 1 (bad), 2 (average), 3 (above average), 4 (excellent) (superior). The ranking reflects how well the firm’s tactics adapt to that specific element.

To calculate a weighted score, multiply each factor’s weight by its rating.

Finally, sum the individual weighted scores for all external elements to get the organization’s total weighted score.

The total weighted score reveals how well a specific company adapts to current and predicted environmental variables. The maximum possible total weighted score is 4.0, while the lowest possible value is 1.0. The overall average is 2.5. A score of 4.0 shows that an organisation is responding to existing opportunities and risks outstandingly. In the preceding example, a total weighted score of 2.6 indicates that the company is above average in responding to environmental factors.

5) QUEST

QUEST (Quick Environment Scanning Technique) is a four-step process for environmental study that employs scenario-building.

The four steps are as follows:

1. Managers make observations regarding key environmental events and patterns.

2. They speculate on various issues likely to impact the firm’s future.

3. A report is generated that summarises the difficulties and their ramifications for the firm, as well as two to three possibilities.

4. Strategists review the report and scenarios and identify viable options based on their findings.

As a result, QUEST aids in generating viable alternative options for management consideration.

6) Matrix of Competitive Profiles (CPM)

This is a competitor analysis, and it focuses on each company with whom a company competes directly. It aids in identifying the strengths and weaknesses of the firm’s primary competitors about the firm. The Critical Success Factors (CSFs) are generally compared. Other aspects that can be compared include product line breadth, sales, distribution, production capacity and efficiency, technological advantages, etc. A competitor profile matrix can be created using the format described in Table.

The weighted ratings for the firm and the top competitors are calculated and compared to provide a competitive profile.

 7) Forecasting Techniques

Macro environmental and industry scanning and analysis are only slightly helpful in revealing present conditions. Such a study must foresee future patterns and changes to be truly valuable. Forecasting is a method of predicting future events likely to impact the organisation significantly. It is a strategy in which managers attempt to forecast future characteristics of the environment to assist managers in making strategic decisions. Many methodologies are applied to forecast future events. Among the most important are:

a. Time series analysis:

Extrapolation is the most commonly used method of predicting. Extrapolation is simply the extension of current trends into the future. It is based on the idea that the world is generally constant and evolves slowly through time. They try to project a succession of historical events into the future. Because time series analysis projects previous trends into the future, its validity depends on comparing past trends and future conditions.

b. Judgemental forecasting:

This is a forecasting technique in which employees, customers, suppliers, and other sources of knowledge about future trends are used. For example, sales reps may be asked to anticipate sales growth in specific product categories based on their client interactions. Customers, suppliers, or trade groups may be mailed survey instruments to gain their opinions on specific trends.

c. Expert opinion:

This is a non-quantitative strategy in which specialists in a specific field seek to foresee possible future developments. Knowledgeable individuals are chosen and asked to rate the importance and likelihood of certain future occurrences. This projection is based on a knowledgeable person’s capacity to construct probable future developments based on the interaction of key components. One such technique is the Delphi technique.

d. Delphi Technique:

This forecasting technique obtains the opinion of experts in the relevant field regarding the likelihood of the occurrence of specified events. The experts’ responses are collated, and a summary is delivered to each expert. This process is repeated until there is agreement on a forecast for a specific event.

e. Statistical modelling:

This is a quantitative tool for identifying causal elements that connect two or more time series. It employs various equations, including regression analysis and other econometric tools. Statistical modelling is based on historical data, particularly valuable for understanding historical trends. The forecast’s accuracy deteriorates as relationship patterns change.

f. Cross-impact Analysis:

Using this method, researchers examine and identify significant trends impacting all other trends. The question is posed: “If event A occurs, what effect would it have on all other trends?” The outcomes are used to construct “domino chains,” with one event triggering others.

g. Brainstorming:

Brainstorming is a technique used by a group of 6 to 10 people to produce a variety of options. The main ground rule is to propose ideas without first assessing them cognitively. There is no room for criticism. Ideas tend to build on preceding ideas until they achieve a consensus. This is a beautiful method for coming up with new ideas.

h. Demand/Hazard forecasting:

Researchers identify important occurrences that will significantly impact the organisation. Each event is graded based on its convergence with many significant societal trends and its appeal to a certain public segment; the higher the event’s convergence and appeal, the more likely it will occur.