Prof.Sushil\IITD\Session-III(A)1 MANAGEMENT POLICY AND STRATEGY SESSION - III (A) Environmental Analysis Prof. Sushil Department of Management Studies

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Prof.Sushil\IITD\Session-III(A) 1

MANAGEMENT POLICY AND STRATEGY

SESSION - III (A)

Environmental Analysis

Prof. SushilDepartment of Management StudiesIndian Institute of Technology, Delhi

INDIAEmail: [email protected]


ENVIRONMENTAL ANALYSIS

Assess the Nature of Environment• Audit Environmental Influences Identify Key Competitive Forces-Structural

Analysis• Identify Strategic Position• Identify Key Opportunities and Threats

– Strategic Position


Nature of Environment

• How Uncertain?• What are the Relations?• Diversity • Complexity• Inter-connected Dynamism


AUDITING ENVIRONMENT INFLUENCES

Financial Policy• Capital Markets• Economic Forecasting• Economic Factors and Restructuring

Demographic Forecasting• Environmental Sensing• Socio-Cultural, Ecology


AUDITING ENVIRONMENT INFLUENCES

Contd….. R&D Policy• Technology• Labour Policy and I.R.• Labour Market• Marketing Policy• Competition Lobbying• Government Purchasing Policy• Supplies• Resource


The Firm’s External Environment Remote Environment (Global and Domestic)

Industry Environment (Global and Domestic)

Operating Environment (Global and Domestic)

• Economic • Social

• Political • Technological

• Ecological

• Entry barriers • Supplier power

• Buyer power • Substitute availability

• Competitive rivalry

• Competitors• Creditors

• Customers • Labor

• Suppliers

THE FIRMTHE FIRM


Political Factors

• Define legal and regulatory parameters within which firms must operate

• Types of factors

– Fair-trade decisions

– Antitrust laws

– Tax programs

– Minimum wage legislation

– Pollution and pricing policies

– Administrative jawboning


Economic Factors

• Concern nature and direction of economy in which a firm operates

• Types of factors

– General availability of credit

– Level of disposable income

– Propensity of people to spend

– Prime interest rates

– Inflation rates

– Trends in growth of gross national product


Social Factors

• Include beliefs, values, opinions, and lifestyles of people

• Recent social trends

– Entry of large numbers of women into labor market

– Accelerating interest of consumers and employees in quality-of-life issues

– Shift in age distribution of population


Technological Factors

• Focus on technological changes affecting industry

• Types of changes

– New products

– Improvements in existing products

– Manufacturing and marketing techniques

• Role of technological forecasting

– Foresees advancements and estimating their impact

– Alerts managers to impending challenges and promising opportunities


Ecological Factors

• Involve relationships among human beings and other living things and air, soil, and water

• Current concerns– Global warming– Loss of habitat and bio-diversity– Air, water, and land pollution

• Responsibilities of firms– Eliminating toxic by-products of current

manufacturing processes– Cleaning up prior environmental damage


Factors Used to Assess the International Environment

•Economic Environment•Level of economic development•Population•GNP•Per capita income•Literacy level•Social infrastructure•Natural resources•Climate•Membership in economic blocs•Monetary and fiscal policies•Wage and salary levels•Nature of competition•Currency convertibility•Inflation and interest rates•Taxation system

•Political System•Form of government•Political ideology•Stability of government•Strength of opposition parties

•Social unrest•Political strife and insurgency

•Governmental attitude towards foreign firms

•Foreign policy


Factors Used to Assess the International Environment

Legal Environment

•Legal tradition

•Effectiveness of legal system

•Treaties with foreign nations

•Patent trademark laws

•Laws affecting business firms

Cultural Environment

•Customs, norms, values, beliefs

•Language

•Attitudes

•Motivations

•Social institutions

•Status symbols

•Religious beliefs


Forces Driving Industry Competition

Potential entrants

Threat of new

entrants

Suppliers

Bargaining power

of suppliers

Buyers

Bargaining power

of buyers

Substitutes

Threat of substitute

products or services

Industry competitors

Rivalry AmongExisting Firms


Competitive Force: Threat of Entry

• Seriousness of threat depends on– Barriers to entry– Reaction of existing firms

• Barriers to entry– Economies of scale– Product differentiation– Capital requirements– Cost disadvantages independent of size– Access to distribution channels– Government policy


Competitive Force: Suppliers

• A supplier group is powerful if:– It is dominated by a few companies and is more

concentrated than industry it sells to– Its product is unique, or differentiated, or has built up

switching costs– It is not obliged to contend with other products for

sale to industry– It poses a threat of integrating forward into industry’s

business– Industry is not an important customer of supplier

group


Competitive Force: Buyers

• A buyer group is powerful if:– It is concentrated or purchases in large volumes– Products purchased from industry form a component

of its product, representing a significant fraction of its cost

– It earns low profits, creating incentives to lower its purchasing costs

– Industry’s product is unimportant to quality of buyers’ products or services

– Industry’s product does not save buyer money– Buyers pose credible threat of integrating backward


Competitive Force: Substitute Products

• Relevance of substitutes

– By placing a ceiling on prices charged, they limit profit potential of an industry

• Substitutes deserving the most attention are those

– Subject to trends improving their price-performance trade-off with the industry’s product

– Produced by industries earning high profits


Competitive Force: Rivalry Among Existing Competitors

• Usually the most powerful of the forces

• Weapons of competitive rivalry

– Price

– Quality

– Product introduction

– Customer service

– Advertising


What Causes Rivalry to be Intense?

• Numerous competitors or they are roughly equal in size and power

• Slow growth in industry

• Product lacks differentiation or switching costs

• High fixed costs or perishable product

• Capacity normally augmented in large increments

• High exit barriers

• Rivals are diverse in strategies, origins, and “personalities”


1. What are the boundaries of the industry?

2. What is the structure of the industry?

3. Which firms are our competitors

4. What are the major determinants of competition?

Questions involved

in designing

viable strategies

Industry and Competitive Analysis


Sources of Difficulty in Defining Industry Boundaries

Industry evolution creates industries within industries

Evolution of industries over time

creates new opportunities and

threats

Industries are becoming global

in scope


Characteristics of Industry Structure

• Structural attributes - Enduring characteristics giving an industry its distinctive character

• Variations among industries involves examining– Concentration - Extent to which industry sales

are dominated by only a few firms– Economies of scale - Savings firms within an

industry achieve due to increased volume– Product differentiation - Extent to which

customers perceive products of firms in industry as different

– Barriers to entry - Obstacles a firm must overcome to enter an industry


Objectives of Competitive Analysis

Identify potential moves

by competitors

Identify current and potential competitors

Help firm devise effective

competitive strategies


Analysis of Operating Environment Involves . . .

• Assessing firm’s competitive position via development of competitor profiles

• Developing a profile of firm’s present and prospective customers

• Assessing firm’s relationships with suppliers

• Assessing firm’s relationships with creditors

• Assessing nature of labor market, i.e. availability of human resources


1. Market share 2. Breadth of product line 3. Effectiveness of sales

distribution 4. Proprietary and key-

account advantages 5. Price competitiveness 6.

Advertising/promotional effectiveness

7. Location and age of facility

8. Capacity and productivity

9. Experience10. Raw materials costs

11. Financial position

12. Relative product quality

13. R&D advantages/position

14. Caliber of personnel

15. General image

16. Customer profile

17. Patents and copyrights

18. Union relations

19. Technological position

20. Community reputation

Criteria Used in Constructing Competitor Profiles


Market Share

Price Competitiveness

Facilities location

Raw materials costs

Caliber of personnel

0.30 4 1.20

0.20 3 0.60

0.20 5 1.00

0.10 3 0.30

0.20 1 0.20

1.00 * 3.30

Key Success Factors Weight Rating + Weighted Score

* Total of weights must always equal 1.00.+ Rating scale suggested is as follows: very strong competitive position = 5 points; strong = 4; average = 3; weak = 2; very weak = 1.

Competitor Profile


Objectives of Customer Profiles

• Improves ability of managers to

– Plan strategic operations

– Anticipate changes in size of markets

– Reallocate resources to support forecasted shifts in demand patterns

• Two approaches to market segmentation

– Traditional segmentation approach

– Industrial market segmentation


Geographic Variables

•Region

•County size

•City of SMSA size

•Density

•Climate

Psychographic Variables

•Social class

•Lifestyle

•Personality

Major Segmentation Variables: Consumer Markets


Demographic Variables

•Age•Sex•Family size•Family life cycle•Income•Occupation•Education•Religion•Race•Nationality

Behavioral Variables

•Occasions

•Benefits

•User status

•Usage rate

•Loyalty status

•Readiness stage

•Attitude toward product

Major Segmentation Variables: Consumer Markets (concluded)


Major Segmentation Variables: Industrial Markets

Demographic Variables

•Industry

•Company size

•Location

Operating Variables

•Technology

•User-nonuser status

•Customer capabilities

Purchasing Approaches•Purchasing-function organization•Power structure•Nature of existing relationships•General purchase policies•Purchasing criteria


Major Segmentation Variables: Industrial Markets (concluded)

Situational Factors

•Urgency

•Specific application

•Size of order

Perfect Characteristics

•Buyer-seller similarity

•Attitudes toward risk

•Loyalty


External Factor Analysis Summary (EFAS): Maytag as ExampleExternal Factors Weight Rating Weighted

ScoreComments

Opportunities Economic integration of European

Community.20 4 .80 Acquisition of Hoover

Demographics favour qualityappliances

.10 5 .50 Maytag quality

Economic development of Asia .05 1 .05 Low Maytag presence Opening of Eastern Europe .05 2 .10 Will take time Trend to “Super Stores” .10 2 .20 Maytag weak in this channel

Threats Increasing government regulations .10 4 .40 Well positioned Strong U.S. competition .10 4 .40 Well positioned Whirlpool and Electrolux strong

globally.15 3 .45 Hoover weak globally

New Product advances .05 1 .05 Questionable Japanese appliance companies .10 2 .20 Only Asian presence in

AustraliaTotal Scores 1.00 3.15

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Prof.Sushil\IITD\Session-III(A)1 MANAGEMENT POLICY AND STRATEGY SESSION - III (A) Environmental Analysis Prof. Sushil Department of Management Studies