IntroductionThe purpose of this assignment is to apply the tools of external analysis to an industry. Choose an industry in which there are publicly traded companies. This is necessary to ensure that you will find information to complete the assignment. You may not choose the automobile industry, which we have discussed in class.First, you will identify the relevant industry in what may be a broadly defined industry. Then, for your chosen industry you will conduct an analysis of Porter’s competitive forces and identify relevant factors in the macro environment that influence performance in this industry. Last, summarize your findings in a summary of environmental opportunities and threats.Presentation ContentIdentify the relevant industry on which your analysis will focus.Identify major competitors in the same peer group within the industry.Discuss factors in the macro environment (PESTEL analysis), identifying whether each factor creates opportunities or threats within the industry.Using Porter’s framework, identify the competitive forces operating in this embryonic industry. Describe whether each force creates opportunities or threats within the industry.Integrate the information from your analysis to answer the following:Identify and explain the top two firms in the industry.Identify and explain the bottom one or two firms in the industry.Justify your answers in (a) and (b) with profitability and valuation ratio comparisons among the competitors you identified in Question 2.Presentation Style Requirements Create a 15-20 slide PowerPoint presentation, which must include answers to all assigned questions.Use a minimum font size of 24 and no more than five bullets per slide.Include a list of references at the end of the presentation.The topic is Telecommunications, use the PDF in the attachment for the data, Also provide Notes for each point.
industry_life_cycle_analysis.pptx
external_analysis.pptx
cfraequityresearch_telecommunications_jan_11_2019.pdf
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MGMT 4813
Strategic Management
External Analysis:
Industry Life Cycle
Sharon D. James, PhD, CFA
Demand
Industry Life Cycle Analysis
Embryonic
Growth
Shakeout
Time
Maturity
Decline
Why Does Industry Life Cycle Matter?
• Opportunities and threats change as an industry
progresses through the stages of the industry life
cycle.
• Competitive forces (i.e., threat of entry, industry rivalry, threat
of substitutes, etc.) become more or less intense as an
industry progresses towards maturity versus the growth stage.
• Firms must adapt strategies in each stage to increase and
sustain competitive advantages.
Embryonic Industries
• An embryonic industry refers to an industry just
beginning to develop.
• Examples are personal computers in the 1970s, wireless
communication in the 1980s, and internet retailing in the
1990s.
• Growth at this stage is slow.
• Rivalry is based not so much on price as on educating
customers, opening up distribution channels, and
perfecting the design of the product.
• Such rivalry can be intense.
Growth Industries
• In a growth industry, first-time demand is expanding
rapidly.
•
Prices fall because experience and economies of scale have
been attained, and distribution channels developed.
•
The importance of control over technological knowledge as a
barrier to entry has diminished.
•
New entrants can be absorbed into an industry without a
marked increase in the intensity of rivalry.
•
Profitability growth rates in high double-digits
Strategies in Embryonic and
Growth Industries
• Limited customer demand for products of an
embryonic industry is due to:
• limited performance and poor quality of the first products.
• customer unfamiliarity with the product.
• poorly developed distribution channels.
• lack of complementary products.
• high production costs because of small volumes of
production.
6
Strategies in Embryonic and
Growth Industries
• Industry enters the growth stage when a mass market
starts to develop for its products.
• Mass market: One in which large numbers of
customers enter the market.
• Occurs when:
• Product value increases, due to ongoing technological
progress and development of complementary products.
• Production cost decreases, resulting in low prices and
high demand.
7
Industry Shakeout
• Industry shakeout – Explosive growth cannot be
maintained indefinitely.
• In the shakeout stage, rivalry becomes intense.
• maturing growth in profitability due to slowing demand
• Lower threat of entry – higher barriers to entry – more
difficult for new firms to enter given slower growth
• Decreasing supplier power, increasing buyer power
• Profitability growth continues but at a slower rate
Mature Industries
• The market is totally saturated, demand is limited to
replacement demand, and growth is low or zero.
• In the mature stage, barriers to entry increase, and the
threat of entry from potential competitors decreases.
• Highly intense rivalry
• Focus on cost minimization and brand loyalty
• Trend toward consolidation/oligopoly markets
• Profitability growth rate slows to single digits but remains
stable
Strategies to Deter Entry in Mature Industries
Product Proliferation Strategy
• Catering to the needs of all market segments to deter entry by competitors.
Limit Price Strategy
• Charging a price that is lower than that required to maximize profits in the
short run.
• Is above the cost structure of potential entrants.
Strategic Commitments
• Investments that signal an incumbent’s long-term commitment to a market or
a segment of the market.
10
Strategies to Manage Rivalry in
Mature Industries
Price signaling
• Companies increase or decrease product prices to:
• Convey their intentions to other companies
• Influence the price of an industry’s products
Price leadership
• When one company assumes the responsibility for determining the pricing
strategy that maximizes industry profitability
Non-price competition
• Use of product differentiation strategies to deter potential entrants and manage
rivalry within an industry
11
Strategies to Manage Rivalry in
Mature Industries
Market penetration
• Occurs when a company concentrates on expanding market share in its existing
product markets
Product development
• Creation of new or improved products to replace existing products
Market development
• When a company searches for new market segments to increase the sale of its
existing products
Product proliferation
• Large companies in an industry have a product in each market segment.
12
Capacity Control in Mature Industries
• Firms devise strategies to control or benefit from
capacity expansion programs.
• Each firm individually must try to preempt its rivals.
• Factors causing excess capacity.
•
•
•
•
New technologies that produce more than the old ones.
New entrants in an industry.
Economic recession that causes global overcapacity.
High growth of and demand in an industry that triggers rapid
expansion.
13
Declining Industries
• Falling demand leads to the emergence of excess
capacity.
• Firms in this category cut prices, thus sparking a price
war.
• Greater technological substitution in high-tech industries
• Firms restructure to reduce costs given excess capacity
• The greater the exit barriers, the harder it is for firms to
reduce capacity (e.g., airline industry and steel industry).
• Greater industry rivalry and lower profitability.
• Profitability growth rate is negative
Strategies in Declining Industries
15
Choosing a Strategy in
Declining Industries
• Leadership strategy: When a company develops
strategies to become the dominant player in a
declining industry.
• Niche strategy: When a company focuses on
pockets of demand that are declining more slowly
than the industry as a whole to maintain profitability.
16
Choosing a Strategy in
Declining Industries
• Harvest strategy: When a company reduces to
a minimum the assets it employs in a business
to reduce its cost structure and extract maximum
profits from its investment.
• Divestment strategy: When a company decides
to exit an industry by selling off its business
assets to another company.
17
18
Mastering Strategic Management, v2.0
• Dave Ketchen & Jeremy Short
©FlatWorld 2018
PUBLISHED BY:
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AGREEMENT AVAILABLE HERE.
NO PART OF THIS WORK MAY BE USED, MODIFIED, OR REPRODUCED IN ANY FORM BY ANY MEANS EXCEPT
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CHAPTER 3
Evaluating the External
Environment
©FlatWorld 2018
Chapter Agenda
After this lecture, you should be able to understand and articulate answers to
the following questions:
1. What is the general environment and why is it important to organizations?
2. What are the features of Porter’s five forces industry analysis?
3. What are strategic groups and how are they useful to evaluating the
environment?
©FlatWorld 2018
The Relationship Between an Organization and Its
Environment
Learning Objectives
1. Define the environment in the context of business.
2. Understand how an organization and its environment affect each other.
3. Learn the difference between the general environment and the industry.
©FlatWorld 2018
The Relationship Between an Organization and Its
External Environment
• For an organization, the environment consists of the set of external
conditions and forces that have the potential to influence the organization.
• The general environment (also called the macroenvironment) includes overall trends
and events in society such as social trends, technological trends, demographics, and
economic conditions.
• The industry (also called the competitive environment) consists of organizations that
collectively compete with one another by providing similar goods, services, or both.
• Every action that an organization takes creates some degree of changes in the
world around it.
©FlatWorld 2018
Why Does the Environment Matter?
• The environment provides resources that an organization needs in order to
create goods and services.
• The environment is a source of opportunities and threats for an organization.
• Opportunities are events and trends that create chances to improve an organization’s
performance level.
• Threats are events and trends that may undermine an organization’s performance.
• Executives must realize that virtually any environmental trend or event is likely to
create opportunities for some organizations and threats for others.
• The environment shapes the various strategic decisions that executives make
as they attempt to lead their organizations to success.
©FlatWorld 2018
Evaluating the General Environment
Learning Objectives
1. Explain how PESTEL analysis is useful to organizations.
2. Be able to offer an example of each of the elements of the general
environment.
©FlatWorld 2018
Evaluating the General Environment
• An organization’s environment includes factors that it can readily affect as well as
factors that largely lay beyond its influence.
• PESTEL analysis is one important tool that executives can rely upon to organize
factors within the general environment and identify how these factors influence
industries and the companies within them.
• The political segment centers on the role of governments in shaping business.
• The economic segment centers on the economic conditions within which organizations
operate.
• The social segment consists of factors including trends in demographics such as population
size, age, and ethnic mix, as well as cultural trends such as attitudes toward obesity and
activism.
• The technological segment centers on improvements in products and services that are
provided by science.
• The environmental segment involves the physical conditions within which organizations
operate.
• The legal segment centers on how the courts influence business activity.
©FlatWorld 2018
© Thinkstock
PESTEL Analysis
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Small Business Spotlight: Briggins, Bringing the
Clothing Store to You
• Today’s busy and fast-paced lifestyles leave many
people with little time for shopping, a trend that
creates major opportunities for savvy small
business owners.
• Australians Daniel Breese and Matthew Higgins
have created Briggins, a mobile business suit and
tailoring business, after recognizing they and their
former corporate coworkers wanted to be sharply
dressed but had little time to shop for new suits.
• They quit their jobs, outfitted a van, and started
selling suits, a mobile business model with lower
overhead than competitors.
• Now they are looking to build their brand through
franchising across Australia.
©FlatWorld 2018
Evaluating the Industry
Learning Objectives
1. Identify the relevant industry as the focus of industry analysis.
• Define an organinzation’s primary industry and use as the focus of the analysis
• Identify how you know what is the relevant industry to study.
2. Explain how five forces analysis is useful to organizations.
3. Be able to offer an example of each of the five forces.
©FlatWorld 2018
How Do You Know What is the Relevant Industry?
• Very important to distinguish between a sector, industry, and peer
(strategic) group
• Sector – Group of closely related industries
• Nonalcoholic beverages industry in the consumer discretionary sector
• Personal computer industry is in the information technology sector
• Industry – Group of firms offering products or services that perform similar
functions or offer different approaches to meeting customer needs (broad
definition)
• Coca-Cola and PepsiCo operate in the nonalcoholic beverages industry
• Dell, Hewlett-Packard, Lenovo, and Apple operate in the personal computer (or
computer hardware) industry
©FlatWorld 2018
What is an Industry?
• Peer (Strategic) Group – Subset of firms within an industry with very
similar demand, supply, and operating characteristics; an industry segment
offering products or services that meet the same customer needs
• Integrated oil & natural gas firms comprise a peer group/ segment within the
oil & natural gas industry
• BP, Chevron, ExxonMobil, and Royal Dutch Shell are direct competitors
• Specialty home goods retailers comprise a peer group within the Retail trade
industry
• Home Depot, Lowes, Ace Hardware are direct competitors
©FlatWorld 2018
What is an Industry? In Practice
• Industry definition is in the eye of the beholder and depends on research focus of the
strategic analyst
• To identify major competitors/rivals within a competitive environment, focus
analysis on the lowest common denominator (industry segment)
• Allows for a more precise analysis of industry opportunities and threats, profitability
growth opportunities
• Too broad an industry definition may result in emphasis on some inaccurate factors
in the macro environment or competitive forces that shape industry profitability
• Example: Wal-Mart, Kroger, and Amazon all operate within the Retail Trade
industry
• But these three firms compete directly within the general merchandise industry
segment and in the grocery segment
• The broad Retail Trade industry includes all types of retailers.
©FlatWorld 2018
What is an Industry? In Practice
• Industry experts tend to follow Standard & Poor’s (S&P) sector and industry
definitions
• S&P Sectors (See NetAdvantage database of Industry Surveys, available through AState Library)
•
•
•
•
•
•
•
•
•
•
©FlatWorld 2018
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Research Round-Up: The Importance of Strategic
(Peer) Groups for Comparing Organizations
• A study of 1,165 companies found that strategic/peer group membership is as
important, if not more important, than industry membership in regard to
measures associated with company profitability and survival.
• Company differences, peer group membership, and industry influences all
play a part in determining the performance of a company, and wise managers
must consider each factor when planning and executing a company’s strategy.
©FlatWorld 2018
Evaluating the Industry
• Introduced by Professor Michael Porter of the Harvard Business School, five
forces analysis is perhaps the most popular analytical tool in the business
world.
• The purpose of five forces analysis is to identify how much profit potential
exists in an industry.
• Five forces analysis considers the interactions among the competitors in an
industry, potential new entrants to the industry, substitutes for the industry’s
offerings, suppliers to the industry, and the industry’s buyers.
• If none of these five forces work to undermine profits in the industry, then the
profit potential is very strong.
• If all of the forces work to undermine profits, then the profit potential is very
weak.
• Once executives determine how much profit potential exists in an industry, they
can then decide what strategic moves to make in order to be successful.
©FlatWorld 2018
Five Forces Analysis
©FlatWorld 2018
© Shutterstock
Rivalry Among Competitors
• The competitors in an industry are companies that produce very similar
products or services.
• Competitors use a variety of moves such as advertising, new offerings, and price cuts to
try to out maneuver each other in order to retain existing buyers and attract new ones.
• Because competitors seek to serve the same general set of buyers, rivalry can become
very intense.
• Rivalry tends to be fierce, for example, to the extent that the growth rate of demand for
the industry’s offerings is low, fixed costs in the industry are high, competitors are not
differentiated from each other, and exit barriers (factors that make it difficult for a
company to stop competing in an industry) in the industry are high.
©FlatWorld 2018
Other Factors: New Entrants, Substitutes, and
Suppliers
• Potential new entrants to an industry are companies that do not currently
compete in the industry but may in the future.
• New entrants can be startup companies created by entrepreneurs, foreign companies that
decide to enter a new geographic area, supplier companies that choose to enter their
customers’ business, or buyer companies that choose to enter their suppliers’ business.
• Substitutes are offerings that differ from the goods and services provided by
the competitors in an industry, but that fill similar needs to what the industry
offers.
• Suppliers provide inputs that the companies in an industry need in order to
create the goods and services that they in turn sell to their buyers.
• If suppliers have greater leverage over the competitors than the competitors have over
the suppliers, then suppliers can increase their prices over time.
• If suppliers have less leverage over the competitors than the competitors have over the
suppliers, then suppliers may be forced to lower their prices over time.
©FlatWorld 2018
The Power of Suppliers to an Industry
• Suppliers tend to be powerful to the extent that the suppliers’ industry is
dominated by a few companies, if it is more concentrated than the industry
that it supplies, and/or if there is no effective substitute for what the supplier
group provides.
• These circumstances restrict industry competitors’ ability to shop around for better prices
and put suppliers in a position of strength.
• Supplier power is also stronger to the extent that industry members rely heavily on
suppliers to be profitable, industry members face high costs when changing suppliers,
and suppliers’ products are differentiated.
• Suppliers possess power to the extent that they have the ability to become a new entrant
to the industry if they wish. This is a strategy called forward vertical integration.
©FlatWorld 2018
The Power of an Industry’s Buyers
• Buyers purchase the goods and services that the companies in an
industry produce.
• If buyers have greater leverage over the competitors than the competitors
have over the buyers, then the competitors may be forced to lower their
prices over time.
• If buyers have less leverage over the competitors than the competitors have
over the buyers, then competitors can raise their prices and enjoy greater
profits.
• Buyers possess power to the extent that they have the ability to become a
new entrant to the industry if they wish. This is a strategy called backward
vertical integration.
© Thinkstock
©FlatWorld 2018
Outliers
• In Outliers, journalist Malcolm Gladwell explores factors that make people
exceptional-that is, able to reach a level of fortune and success that is beyond
normal understanding of achievement.
• He contends that success is not solely the result of one’s intelligence,
ambition, hustle, and hard work, but also is influenced by societal variables
such as family, culture, and life circumstances that are beyond one’s control.
• Outliers relates to the long-standing debate surrounding the impact of
individual effort versus environmental influence on life outcomes.
• Much like how Outliers demonstrates that no one individual is solely
responsible for his or her success, companies similarly cannot prosper
without the support of their environment.
©FlatWorld 2018
Strategy at the Movies: Flash of Genius
• As depicted in the 2008 movie Flash of Genius, Kearns wanted to
manufacture wipers and sell them to Detroit automakers.
• Rather than buying the wipers from Kearns, Ford replicated the design.
• Kearns spent years trying to hold the company accountable for infringing on
his patent.
• Kearns’s battle with Ford illustr …
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