ADVANCED BUSINESS ANALYSIS

Chapter 2 - The environment and competitive forces

Prof.univ.dr. Ion ANGHEL, FRICS, REV, MAA

Chapter 2The environment and competitive forces

1. Introduction 2. The PESTEL Model3. Porter’s five forces model 4. Porter’s diamond5.Convergence in industries• The Influence of Strategic Groups• The use of collaboration6. Quantitative techniques

Introduction

2. The PESTEL model (1/7)

Looks at the macro-environment considering:• Political :• Taxation, government stability, foreign trade

regulation• Libia vs Elvetia

• Economic :• Interest rates, inflation, business cycles,

unemployment, disposal income, energy availability, cost of resources

• Social :• Population, demographic, social mobility, attitude to

work and leisure, level of education, consumerism

2. The PESTEL model (2/7)

• Technological– Government spending on research, new discoveries,

speed of technological transfer, rate of obsolescence.• Example: direct selling vs internet sales and the future mall

• Environmental– The way in which the organization can produce its goods

or services with minimum environmental damage

• Legal– Influences such as taxation, employment law, monopoly

legislation and environmental protection lawsThe model should allow a business to asses the growth prospects for the industry

2. The PESTEL model (3/7)

Example PESTEL model for a newspaper:

• Discussions in the classroom

2. The PESTEL model (3/7)

Example PESTEL model for a newspaper:

• Political influences:• Tax on newspapers, • A Romanian case “Sa traiti domnule general”

• Economic :• Exchange rate (raw material import/paper)• Recession = advantage for cheap tabloids and disadvantage for

expensive broadsheets suffer

• Social :• Peoples wants more up-to-date information /internet

advantage• Social mobility = opportunity for different language version

2. The PESTEL model (4/7)

• Technological– Alternative source of information/ enterteinment: Internet,

mobile phone and television– E-readers are becoming more popular = opportunity for

newspapers to provide daily downloadable content

• Environmental– Buyers might abandon newspapers in favor of carbon neutral

news via modern technologies

• Legal– Limits on what can be published, difficulties in differentiation

2. The PESTEL model (5/7)

CONCLUSIONS

• The poor growth prospective for newspapers.

• There is more likely to decline than to grow.

• Need for a plan ahead for new products and new markets and perhaps focus on new technologies (news via e-readers)

• Test your understanding 1/ supermarket business

2. The PESTEL model (6/7)

Test your understanding 1/ supermarket business• Political influences:• Planning policy on large out of town sites, Competition

policy

• Economic :• Unemployment, interest rate, taxation

• Social :• Changes in population size, changes in consumer taste• Obor vs Baneasa Mall (the rent/ sqm, sales/sqm)

2. The PESTEL model (7/7)

• Technological– Internet ordering, sophisticated Just in Time systems, food

packaging technology

• Environmental– Use of land for building, sustainable resources, packaging,

animal welfare

• Legal– Health and safety regulation, consumer legislation, inclusion

of additive in food, packaging regulations

3. Porter’s five forces model (1/10)

• Porter look at the structure of industries and consider

the industry attractiveness

• how easy it would be to make above average profit

PORTER’S FIVE FORCES MODEL

3. Porter’s five forces model (3/10)

1.Threat of new entrants– will bring extra capacity and intensify the competition– Depends on the barriers to entry• Economies of scale:

– where unit cost decline significantly as volume increase, such the new entrants will not be able to start on o comparable basis cost;

• Product differentiation: – where established firms have good brand image and

customer loyalty; the cost of overcoming could be prohibitive;• Capital requirements:

– some industries requires a heavy initial investment (steel, rail transport etc);

3. Porter’s five forces model (4/10)

–barriers to entry (cont.)• Switching cost: – Cost in moving from one supplier to another (mobile

telephony vs electricity supplier);• Access to distribution channels : –Quail eggs producer vs Retail network ;

• Cost advantage of existing producers : – Patents, special knowledge, favorable access to

suppliers, subsidies from the government;• Regulation : – Governments or professional bodies might supervise

and limit new entrants;

3. Porter’s five forces model (5/10)

2.Threat of substitute products– Rail travel/ bus travel/ private car– Who stolen my piece of cheese (Appraisal Journal)– “Classic Retail” / TV shopping / internet shopping

“Substitutes limit the potential return … by placing a ceiling on the price which firms in the industry can profitably charge”

3. Porter’s five forces model (6/10)

3.Bergaing power of customers– Powerful customers can force cuts and /or quality

improvements;– The power depends of couple of factors:• A buyer’s purchases = high proportion of the supplier’s

total business (Ex: Mase Plastice Craiova = Daewoo) • The quality of purchases is unimportant or delivery

timing is irrelevant and prices will be forced down;• A buyer makes a low profit;• There are other similar options from other suppliers;

3. Porter’s five forces model (7/10)

4.Bergaing power of suppliers– The switching cost and availability of substitutes

(pilots vs British Airways) ;– The presence of one ore two dominant suppliers

(Intel vs PC producer, Windows vs PC producers);– The extent to which products offered have a

uniqueness of brand, technical performance or design not available elsewhere;

3. Porter’s five forces model (8/10)

5.Competition/ Rivalry – Number of relative strength of competitors (perfect

competition and monopoly);– Rate of growth. Where the market is expanding,

competition is low;– Dimension of fixed cost;– Exit barriers increasing competition and reducing

profits;

3. Porter’s five forces model (9/11)

Illustration : a garden maintenance company;

• Discussions in the classroom

3. Porter’s five forces model (10/11)

• Illustration : a garden maintenance company;– Threat of entry:• Is High; only modest amounts of capital and know how are

needed. There are no regulations, hard to differentiate.

– Threat of substitute products:• Is low, except for customers who choose to look after their

own gardens

– Bargaining power of customer• Is Low : there will be many small customers so individual

bargaining power will be low. Quality is not a vital component of the service

3. Porter’s five forces model (11/11)

–Bargaining power of suppliers• Is Low : the supplies needed are widely

available;

–Competitive rivalry• Is High: the business is very easy to get into.

There are negligible switching cost;

4. Porter’s diamond (1/6)

Porter questions ?• Why does a nation become the base for successful

international competitors in an industry ? – Germany is famous for car manufacture, Japan for

consumer electronics, Switzerland for watches …

• Why is one country often the home of so many industry’s world leaders ?

• The answers: national competitive advantage, • four main factors in the form a diamond

Porter’s diamond (2/6)

4.Porter’s diamond (3/6)

A. Factor conditions– Physical resources (land, minerals, weather etc)– Capital– Human resources: skills, motivation– Knowledge that can be used effectively– Infrastructure

Countries with factor disadvantage were forced to innovate (Japan example)

4.Porter’s diamond (4/6)

B. Demand Conditions– There must be a strong home market demand for

the product or services (Coca Cola vs. India)

C. Relating and supporting industries– The success of Swedish pulp and paper industry is

due to a network of related industries: packaging, chemicals, wood-processing, conveyor systems

4.Porter’s diamond (5/6)

D. Firm strategy, structure and Rivalry– The importance of ownership structure;– Unquoted companies may have shorter time horizons

to operate in because their financial performance is a subject to much less scrutiny than quoted companies;

– They may also have different “return on capital” requirements;

Classroom exampleApply Porter’s diamond to US PC computer industry

4.Porter’s diamond (6/6)

Classroom example– Apply Porter’s diamond to US PC computer industry

A. Factor conditions– Large population of well trained engineers

B. Demand Conditions– Large population (individ.and firms) who need or wants PCs

C. Relating and supporting industries– Many component manufacturers close by; large and well-

endowed universities

D. Firm strategy, structure and rivalry– An entrepreneurial economy allowed many startups and the

best survive the intense rivalry

5.Convergence in industries (1/3)

Analysis is becoming more complicated in the real world as industry converge with another– A decade ago we considered separately analysis

for industries like as: mobile phone industry, the mp3 industry, the camera industry, gaming console industry

– Today these industries converge (Apple I-Phone)– A greater level of substitutes than they have in the

past

5.Convergence in industries (2/3)

• Supply led = producers try to see connections between separate industries or sectors– Supermarkets & gas stations offering retail banking

• Market led = buyers see or want connections between separate industries or sectors– Customers in a book store wanting to browse CD s

and DVD s

5.Convergence in industries (3/3)

• Convergence in substitutes = one technology can replace another– mobile phones and lanline phones

• Convergence in complements = two technologies work together – Panasonic (electronics) + Leica (lens)= digital camera

The Influence of Strategic Groups (1/2)

• Strategic Groups– Organizations within an industry with similar

characteristics, following similar strategies or competing on similar bases;

– Is a concept to help understanding the competition structure into an industry.

– What strategic groups might exists in the morning newspapers ?

The Influence of Strategic Groups (2/2)

• The tabloids: – Relatively cheap– Lot of pictures– Not much serious reporting

• So called Broadsheets: – More expensive– Large amount of reporting and editorial

• The free paper: – Small, a lot of advertisements, No heavy editorials– Enough reading to entertain you on the journey to work

The use of collaboration

• Buyer pressure:– Can be reduce by forming close alliance with customers

(Alliance doctors/ patients)

• Suppliers pressure:– Supermarkets work together with suppliers to manage

inventories (Mega Image and wharehouse Popesti-Leordeni

• Threat of new entrants:– Collaboration between actual competitors (collaboration in

marketing and research)

• Substitute products:– Collaboration between actual competitors (lobby)

6. Quantitative techniques (1/4)

Linear regression and time series analysis• Linear regression :

Y (dependent variable) = a + b X (independent variable)

– A simply statistical tool used to model the dependence of a variable (ex. Profit) and explanatory variables (ex. Volume)

– Can be used to make forecasts whenever a linear relationship is assumed between two variables and historical data is available for analysis

6. Quantitative techniques (2/4)

• Correlation:– Perfectly correlated– Partly correlated– Uncorrelated

• The correlation coefficient:– R =1: perfect positive (> 0,8 strong positive)– R=-1: perfect negative (< -0,8 strong negative)– R = 0: no correlation

6. Quantitative techniques (3/4)

• Coefficient of determination: ( r2 )– Measures how good is estimated regression

equation– The higher the coefficient the higher the confidence

• Example: factory overhead is a function of machine-hours with r2 = 0,8:– 80% from the factory overheads is explained by the

machine – hours and the remaining 20% is because of other factors

6. Quantitative techniques (4/4)

• Time series analysis– Forecasting methods are based on analysis of

historical data – The assumption that the past patterns in data can

be used in forecasting– Components• Average• Trend• Seasonal influence

7. Environmental opportunities and threats

• Opportunities: favorable conditions that usually arise from the nature of changes in the external environment .– Provide the organization the potential to offer

new development existing products or services• Ex: Ikea and profit from real estate

7. Environmental opportunities and threats

• Threats: opposite of opportunities and also arise from the nature of changes in the external evolution.– Unfavorable changes in legislation;– Introduction of new product by a competitor;– action of a pressure group (ex.:Rosia Montana)

Homework

Case study 78. Network Management Systems50 marks

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