External Analysis

Question 1

Market

Answer 1

A market is a place where buying and selling takes place

Question 2

Industry:

Answer 2

An industry consists of suppliers who produce similar goods and services e.g. airline industry, an automobile industry, a construction industry, an insurance industry

Question 3

Segment

Answer 3

Within an industry, there may be different segments i.e. separately-identifiable part of a larger industry e.g.
 automobile industry can be divided into segments for the assembly of automobiles and the manufacture of parts.
 insurance industry has several sectors, including general insurance, and life assurance.

Question 4

Porter’s Five Generic Types of Industries:

Answer 4

Fragmented
Small firms to small portions of market e.g Dry Cleaners; Hairdressers

Emerging
Just starting to develop e.g Space travel

Mature
Latter stages of lifecycle e.g Car manufacturers

Declining
Less firms, less sales e.g Coal mining

Global
Worldwide marketplace e.g Professional footballers

Question 5

Convergence:

Answer 5

This is where 2 or more industries come together and serve the same marketplace. When industries
emerge, some new markets appear and some old may disappear.

Question 6

two types of emergence:

Answer 6

1. Demand - led Convergence
   Customers bring the industries together.
2. Supply - led Convergence
   Suppliers bring the industries together

Question 7

Bargaining Power of

Customers

Answer 7

• Small number of customers
• They make high volume purchases
• Products they are buying are undifferentiated
• Alternative sources of supply are available (substitute or switching)

Question 8

Bargaining Power of

Supplier

Answer 8

Suppliers have high power if:
•Small number of suppliers
• Good substitutes are not available.
•Suppliers are not dependent on the buyer for a lot of their sales
•Suppliers have differentiated their products
•It is costly to switch suppliers

Question 9

Rivalry between

Competitors

Answer 9

Rivalry is intense if:
•Slow industry growth
•High fixed costs (plants, machinery, outlets)
•Undifferentiated products
•A large number of competitors
•Customer can easily switch to competitor.
•No customer loyalty.
•High exit barriers (what you lose if you leave the business)
•Small changes in market share have a big pay-off

Question 10

Threat of new Entrants

Answer 10

Barriers That Block New Entrants
•Economies of scale
•Large capital requirements
•Product differentiation/Brand
•High switching cost
•Limited access to distribution channels
•Some government policies and regulations
•Other advantages that are hard to duplicate such as patents, great locations,
subsidies, partnerships, etc.

Question 11

Threat of Substitute/

Indirect Competitors

Answer 11

• Existence of Close substitutes
• Price of substitute
• Performance of substitutes
• Cost of switching to substitutes

Question 12

Stages of Product Life Cycle (PLC

Answer 12

1. Product development
2. Introduction
3. Growth
4. Maturity
5. Decline
6. Withdrawal
   Strategies change with change in stage of PLC.

Question 13

Product Development

Answer 13

 R&D costs

 Capital expenditure decisions

Question 14

Introduction

Answer 14

Sales
Low

Cost
High per cost per customer

Profit
Negative

Customers
Innovators

Competitors
Few

Examples of
Costs
 Manufacturing costs
 Operating costs
including marketing
and advertisement
costs
 Set up and expansion
of distribution
channels

Question 15

Growth

Answer 15

Sales >rapidly rising 
Cost >average cost per customer
Profit >rising
Customers>early adopters
Competitors > growing
Examples of
Costs >>cost of increasing capacity,increased cost of working capital

Question 16

maturirty

Answer 16

Sales
Peak sales

Cost
Low cost per customer

Profit
High profit

Customers
Middle majority

Competitors
Stable number beginning to
decline

Examples of
Costs
 Maintenance and
operating costs
 Marketing and product
enhancement costs to
extend maturity

Question 17

Decline

Answer 17

Sales Declining sales

Cost Low cost per customer

Profit Declining profit

Customers laggards

Competitors Declining number

Examples of
Costs
 Maintenance and
operating costs
 Costs to keep sales

Question 18

Withdrawal:

Answer 18

 Asset decommissioning costs
 Possible restructuring costs
 Remaining warranties to be supported

Question 19

Strategic Group:

Answer 19

A strategic group means companies within same industry that have similar business models or
similar combinations of strategies.
Strategies of all companies in strategic group will be similar. Therefore, all entities in the same
strategic group are considered as single competitor

Question 20

Strategic Space:

Answer 20

A strategic space is the gap in the market which is not currently filled by any strategic group.
An entity may decide on a strategy of filling the empty space by offering a product with the
characteristics that are needed to fill the gap
(refer diagram in notes)

Question 21

Use of Strategic Group Analysis:

Answer 21

 Identify the strategies used by companies in other strategic groups.
 Helps identify who the most direct competitors are and on what basis they compete.
 Discover untapped opportunities in the industry by revealing the gaps (i.e. disclose areas where there is limited or no competition)

Question 22

Market Segmentation

Answer 22

Market segmentation is dividing a market into smaller group of buyers who have different needs,characteristics or behavior and might require different products.
Market segment is a group of buyers who have similar needs

Question 23

Methods of segmenting the market:

Answer 23

There are various ways to segment the market i.e.

1. Age (teenage, young, married, retired etc.)
2. Geographical area
3. Income level.
4. Consumers or Retailers
5. Quality/Performance

Question 24

Product differentiation:

Answer 24

Product differentiation is a strategy used by businesses to highlight the unique features and
benefits of its product or service to separate it from competitors

Question 25

Basis of Product differentiation:

Answer 25

```  Price  Design  Quality  Features  Distribution channels ```

Question 26

BCG Matrix

Answer 26

This matrix is used to evaluate a company’s Products in terms of market growth rate and relative share of company. After evaluation, company decides strategy for each type of product.

Question 27

Evaluation of Products:

Answer 27

Products are evaluated on the basis of:  Market Growth Rate (10% is the benchmark. More than 10% is High Growth Rate. Less than 10% is Low Growth Rate)  Market Share (Biggest Competitor is the benchmark. Higher share than biggest competitor is High market share. Lower than biggest competitor is Low market share)

Question 28

dog

Answer 28

features Products with low market growth and a low market share. These products do not have any future. Strategy Divest Strategy: 1. Companies should dispose, or re-position these products. 2. Company can also continue if these products cover their costs or support other products

Question 29

Question marks

Answer 29

Features Products with high market growth but a low market share. These products require a lot of cash Build Strategy: Companies should invest in or discard these “question marks,” depending on their chances of becoming stars.

Question 30

Stars

Answer 30

Products with high market growth and a high market share Hold Strategy: Companies should significantly invest in these “stars” as they have high future potential.

Question 31

Cash Cows

Answer 31

Products with low market growth but a high market share. These are established, successful products which need less investment. Harvest Strategy: Companies should milk these “cash cows” for cash to reinvest in other products.

Question 32

Weaknesses in BCG Matrix Model:

Answer 32

1. Measurement of growth rate: Difficult to decide what should be “high or low growth rate” and “high or low market share”. 2. Careful interpretation required. Model should be interpreted carefully e.g. a slight decrease in growth from 10.1% to 9.9% may result in significant decrease in advertisement/marketing expenditure. 3. Other factors involved in market competitiveness. Strong competitiveness in market does not only base on market share. Some products may have small shares but strong competitiveness e.g. Porsche, Apple. 4. Dog products may also be profitable. Products with low growth/low share may also be profitable for company due to low cost. 5. Difficult to define market. It may be difficult to define market e.g. a. Difficult to define geographical area of competition. b. Difficult to identify products involved in competition.

Question 33

ANALYZING OPPORTUNITIES AND THREATS

Answer 33

PESTEL analysis is a tool used to identify the macro (external) forces affecting an organisation. Once these factors are identified, SWOT analysis is used to assess whether these factors are Strength, Weaknesses, Opportunities and Threats. (We will discuss only opportunities and threats in this chapter)

Question 34

PESTEL Analysis:

Answer 34

PESTEL analysis represents analysis of 06 types of factors which affect a business i.e. 1. Political Factors 2. Economic Factors 3. Social Factors 4. Technological Factors 5. Environmental Factors 6. Legal Factors

Question 35

Political Factors

Answer 35

Type of Govt.  Stability of Govt.  Govt. Policies i.e. privatization or nationalization, taxes or subsidies, ease of doing business

Question 36

Economic Factors

Answer 36

``` National economic factors:  Economic Growth  Interest Rates and Tax rates  Availability of Credit  Inflation Rates  Foreign Exchange Rates  Consumer income, debt and spending  Govt. Subsidy  Unemployment rate International economic factors:  Extent of protectionist measures  Comparative rates of growth, inflation, wages and taxation  The freedom of capital movement  Exchange rates  Economic agreement ```

Question 37

Social Factors

Answer 37

 Demographic change  Changing values and lifestyle  Changing pattern of work and leisure

Question 38

Technological Factors

Answer 38

 Change in production techniques |  Inventions

Question 39

Environmental Factors | i.e. sustainability

Answer 39

 Impact of business on climate.  recycling procedures  carbon emission.  waste disposal

Question 40

Legal Factors

Answer 40

 Laws applicable on organization.  Health and safety legislation  Employment laws

Question 41

SWOT Analysis:

Answer 41

SWOT Analysis is the analysis of :  S (Strength) i.e. internal strong points in resources of the entity which can be exploited by entity to gain competitive advantage over competitors.  W (Weakness) i.e. internal weak points in resources of the entity which create risk for entity’s future.  O (Opportunity) i.e. external strong points in environment which can be exploited by entity to gain competitive advantage over competitors.  T (Threats) i.e. external weak points in environment which create risk for entity’s future.

Question 42

= Suggested Approach for SWOT Analysis

Answer 42

If you are given a case study in exam which requires you to identify Strength, Weaknesses, Opportunities or Threats: 1. Identify relevant factors using PESTEL Analysis. 2. Using different models (e.g. Porter’s Five Forces model, Product Lifecycle model, BCG Matrix), classify these factors between S, W, O or T.