Strategic Management

Chapter 4 – The Industry Environment Analysis

The Industry Environment

This is the external environment closest to the organiza�on itself. It is the business/industry
environment in which your organiza�on operates. It includes your customers/clients, suppliers
and partners. It also includes compe�tors, those organiza�ons that compete for your customers
or offer alterna�ve approaches to your services.

Differences among the Three External Environment Layers

Layers of the External Forces or Variables Exis�ng in Objec�ves of the Environmental

Environment the Environment Analysis
Physical Environment Physical resources, climate To determine sustainability issues
and wildlife that will reduce the impact of
physical or natural resources on a
business.
Societal Environment Sociocultural, technological, To determine the strategic forces
economic, environmental that can influence the growth,
and poli�cal forces. future, and direc�on of a company
or an industry.
Industry Environment Customers, suppliers, To determine the level of
creditors, employees, the compe��on and the forces that
government, and drive compe��on in the industry
compe�tors. for a business to posi�on itself
accordingly.

The different players in the industry environment:

1. Customers
These are the most important players in the business environment. They are the users,
consumers, or buyers of the products or services of the business.

2. Suppliers
Suppliers refer to persons or companies that provide the required materials, parts, or
services to the business.
 3. Creditors
Creditors refer to banks, financial ins�tu�ons, and financial intermediaries engaged in
lending money to a borrower, usually for a fee in the form of interest. Creditors usually
provide much-needed funds by extending credit to a company.

4. Employees
They are the workers of a company who are highly responsible for the produc�on of
goods and delivery of services to the customers.

5. Government
The government refers to the system or ins�tu�on that handles the affairs of a par�cular
country.

6. Competitors
They are the forces exis�ng in the industry environment that produce, sell, or render
products and services that are similar to those of a company.

Industry Environment Analysis

The industry environment analysis is the scanning of various forces that drive compe��on. It
involves knowing where a company is at the present and where it wants to be in the future.

The steps to conduct an industry environment analysis are the following,

1. Define the industry and the boundaries of the company.

2. Gather informa�on about the relevant economic features of the industry.
3. Iden�fy compe�tors and evaluate the compe��ve forces.
4. Evaluate the patern and impact of compe��on.
5. Posi�on the en�re company in the industry.

Define the Industry and the boundaries of a company

Five stages in the evolution of an industry:
1. Embryonic Industry
2. Growth Industry
3. Shakeout Industry
4. Mature Industry
5. Decline Industry
Gather Informa�on about the Relevant Economic Features of the Industry
Gathering relevant economic features of the industry must include:
1. Market size and growth rate
2. Posi�on in the industry life cycle
3. Number of rivals or compe�tors
4. Buyers’ needs and requirements
5. Produc�on capacity
6. Pace of technological change
7. Product innova�on
8. Scope of compe��ve rivalry
9. Economies of scale

Iden�fy Compe�tors and Evaluate the Compe��ve Forces

Five Forces of Competition are the following,

THREATS OF NEW
ENTRANTS

BARGAINING RIVALRY AMONG BARGAINING

POWER OF COMPETING COMPANIES POWER OF BUYERS
SUPPLIES

THREATS OF SUBSTITUTE
PRODUCTS

FIVE FORCES COMPETITION MODEL

These compe�ng forces are considered barriers to compe��on. Their threats to an industry, in
general, and to a company, in par�cular, can either be high or low depending on the levels of
the barriers.
Rivalry among Compe�ng Companies
The intensity of rivalry among existing companies in an industry is determined by the following
factors:
1. Number of compe�ng companies
2. Rate of industry growth
3. Characteris�cs of the products or services
4. Amount of fixed cost
5. Increasing capacity
6. Diversity of rivals
A company may consider the following strategic moves to outperform rivals, attract more
buyers, and improve business performance:
1. Offer lower or discounted prices.
2. Provide different product features and performances.
3. Improve product quality.
4. Build a stronger brand name, appeal, and image.
5. Offer a low financing interest rate and easy credit access.
6. Engage in more adver�sing and promo�on schemes.
7. Provide wider product models, styles, and atributes.
8. Create beter dealer networks and distribu�on channels.

Threats of New Entrants

New Entrants refer to the new compe�tors joining an industry.
The intensity of the threats will be affected by the presence of the following barriers:
1. Strict government policy
2. Substan�al capital requirements
3. Economies of Scale
4. High cost of product differen�a�on
5. High switching cost
6. Difficulty in accessing distribu�on channels

Bargaining Power Buyers

A buyer has a strong and magnified bargaining power in an industry. The threat to its
bargaining power is strong if the following factors exist:
1. The buyer has the poten�al for backward integra�on.
2. The cost of switching suppliers is minimal.
 3. The buyer purchases a large por�on of a seller’s product or services.
4. There are several suppliers available in the market.
5. The product represents a high percentage of the buyer’s cost.
The buyer has the bargaining power if it has the capacity to assume the role of the suppliers.

Threats of Subs�tute Products

A substitute product can pose great threats in an industry environment if the following factors
are present:
1. The price of a subs�tute product is substan�ally lower.
2. The preferences and tastes of customers easily change.
3. The quality of subs�tute products drama�cally improves.
4. The switching cost is low.
5. Product differen�a�on is hardly no�ceable.

Bargaining Power of Suppliers

The intensity of the threat to the bargaining power of suppliers is strong if the following factors
hold true:
1. The product or service is unique.
2. The switching cost is very high.
3. The suppliers in an industry are few, but the sales volume is high.
4. Subs�tute products are not readily available in the market.
5. The supplier is capable of forward integra�on.
Suppliers have the ability to influence an industry in several instances such as increasing the
prices of the goods and services or lowering their quality. However, they have lesser influence if
they do not have the ability to integrate forward.
Forward Integration refers to the ability to assume the func�on of a distributor.

Evaluate the Patern and Impact of Compe��on

The different forces of competition define the types of rivalry among competing companies in
the industry. It can be categorized as follows:
1. Cuthroat rivalry
Unhealthy compe��on in which the closest compe�tors or rivals engage in long price
wars. Two or more compe�tors are using unfair pricing and other promo�onal tac�cs to
destroy or undermine their opponents.
 2. Fierce or strong rivalry
Compe�tors are strongly batling for a higher market share. They are trying to steal
profit and market share from one another.

3. Moderate or normal rivalry

In this rivalry, industry members earn acceptable profit levels while engaging in a healthy
and lively compe��on.
4. Weak rivalry
This rivalry exists when most companies in an industry are rela�vely well-sa�sfied with
their sales growth and market shares.

Posi�on the En�re Company in the Industry

Posi�oning an en�re company involves the evalua�on and design of a strategic posi�on. It is the
process of determining the place of a company in an industry. It encompasses posi�oning a
product or brand in the market, adop�ng mixed strategies, defining the final direc�on of
whether to become a market leader or not and making strategic decisions on some important
issues such as the following:
1. Entering the interna�onal market
2. Merging with other companies
3. Selling the business partly or wholly
4. Buying other businesses whether related or not
5. Dropping or adding product lines
6. Closing other segments or units