Nelson Phillips Professor of Strategy and Organizational Behaviour External Analysis Nelson Phillips Professor of Strategy and Organizational Behaviour

Why are some industries more profitable than others over long periods of time?

The Objectives of Industry Analysis To understand how industry structure drives competition, which determines the level of industry profitability. To assess industry attractiveness To use evidence on changes in industry structure to forecast future profitability To formulate strategies to change industry structure to improve industry profitability To identify Key Success Factors

From Environmental Analysis to Industry Analysis The natural environment The national/ international economy THE INDUSTRY ENVIRONMENT Suppliers Competitors Customers Demographic structure Technology Government & Politics Social structure Social structure The Industry Environment lies at the core of the Macro Environment. The Macro Environment impacts the firm through its effect on the Industry Environment.

The Determinants of Industry Profitability 3 key influences: The value of the product to customers The intensity of competition Relative bargaining power at different levels within the value chain.

Porter’s Five Forces of Competition Framework SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS Threat of substitutes Threat of new entrants POTENTIAL ENTRANTS SUBSTITUTES Rivalry among existing firms Bargaining power of buyers BUYERS 7

The Threat of Substitutes Extent of competitive pressure from producers of substitutes depends upon: Buyers’ propensity to substitute The price-performance characteristics of substitutes.

The Threat of Entry Entrants’ threat to industry profitability depends upon the height of barriers to entry. The principal sources of barriers to entry are: Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to channels of distribution Legal and regulatory barriers Retaliation

Bargaining Power of Buyers Buyer’s price sensitivity Relative bargaining power Cost of purchases as % of buyer’s total costs. How differentiated is the purchased item? How intense is competition between buyers? How important is the item to quality of the buyers’ own output? Size and concentration of buyers relative to sellers. Buyer’s information . Ability to backward integrate. Note: analysis of supplier power is symmetric

Rivalry Between Established Competitors The extent to which industry profitability is depressed by aggressive price competition depends upon: Concentration (number and size distribution of firms) Diversity of competitors (differences in goals, cost structure, etc.) Product differentiation Excess capacity and exit barriers Cost conditions Extent of scale economies Ratio of fixed to variable costs

The Structural Determinants of Competition BUYER POWER Buyers’ price sensitivity Relative bargaining power THREAT OF ENTRY Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to distribution channels Legal/ regulatory barriers Retaliation INDUSTRY RIVALRY Concentration Diversity of competitors Product differentiation Excess capacity & exit barriers Cost conditions SUBSTITUTE COMPETITION Buyers’ propensity to substitute Relative prices & performance of substitutes BUYER POWER Buyers’ price sensitivity Relative bargaining power

SWOT Exercise Work in groups from the same business area within Veolia, analyse the industry conditions facing that business. Make sure to write down your thoughts.

PESTLE analysis PESTLE is an analytical tool which considers external factors and helps you to think about their impacts 

PESTLE Analysis Is a useful tool for understanding the “big picture” of the environment in which you are operating By understanding your environment, you can take advantage of the opportunities and minimize the threats.   This provides the context within which more detailed planning can take place to take full advantage of the opportunities that present themselves.

The factors in PESTLE analysis P – Political The current and potential influences from political pressures E - Economic The local, national and world economic impact S - Sociological The ways in which changes in society affect the project T - Technological How new and emerging technology affects our project / organization L - Legal How local, national and global legislation affects the project E - Environmental Local, national and global environmental issues The factors in a PESTLE analysis are: Political Environmental Social Technological Legal Economic

PESTLE Political: Economic: Government type and stability Freedom of the press, rule of law and levels of bureaucracy and corruption Regulation and de-regulation trends Social and employment legislation Tax policy, and trade and tariff controls Environmental and consumer-protection legislation Likely changes in the political environment Economic: Stage of a business cycle Current and projected economic growth, inflation and interest rates Unemployment and supply of labor Labor costs Levels of disposable income and income distribution Impact of globalization Likely impact of technological or other changes on the economy Likely changes in the economic environment Here we have examples - the list can change depending on the project or focal problem (We should not read out every items on this list, the participants can take a better look at it themselves, because we will focus on our case study)

PESTLE Sociological: Technological: Cultural aspects, health consciousness, population growth rate, age distribution, Organizational culture, attitudes to work, management style, staff attitudes Education, occupations, earning capacity, living standards Ethical issues, diversity, immigration/emigration, ethnic/religious factors Media views, law changes affecting social factors, trends, advertisements, publicity Demographics: age, gender, race, family size Technological: Maturity of technology, competing technological developments, research funding, technology legislation, new discoveries Information technology, internet, global and local communications Technology access, licensing, patents, potential innovation, replacement technology/solutions, inventions, research, intellectual property issues, advances in manufacturing Transportation, energy uses/sources/fuels, associated/dependent technologies, rates of obsolescence, waste removal/recycling

PESTLE Legal: Environmental: current home market legislation, future legislation European/international legislation regulatory bodies and processes environmental regulations, employment law, consumer protection industry-specific regulations, competitive regulations Environmental: Ecological environmental issues, environmental regulations customer values, market values, stakeholder/ investor values management style, staff attitudes, organizational culture, staff engagement

SWOT Exercise Work in groups from the same business area within Veolia perform a PESTLE for that business. Make sure to write down your thoughts.

What is SWOT Analysis? A technique that enables a group or individual to move from everyday problems and traditional strategies to a fresh perspective.

SWOT is an acronym for: S – Strengths W – Weaknesses O – Opportunities T – Threats Internal Environment External Environment

Strength Any existing or potential resources or capability within the organisation that provides a competitive advantage in the market. Example: Strong distribution network Intense Staff commitment and loyalty Strong support from funders

Weakness Any existing or potential force which could serve as a barrier to maintaining or achieving a competitive advantage in the market. Example: Lack of a clear organizational strategy Lack of training opportunities for using a new software

Opportunity Any existing or potential force in the external environment that, if properly leveraged, could provide a competitive advantage. Example: Organisation’s geographic location New technology

Threat Any existing or potential force in the external environment that could erode a competitive advantage. Example: A new entrant A recession, rising interest rates, or tight credit lines

Aim of SWOT Analysis Take advantage of strengths and opportunities. Minimise weaknesses and eliminate threats

Analyse Internal & External Environment How to do SWOT Analysis? Step 1 Step 2 Step 3 Perform SWOT Analysis Prepare Action Plans Analyse Internal & External Environment A SWOT analysis is useful only when action plans and strategies are developed from the results

SWOT Exercise Work in groups from the same business area within Veolia. Combine the industry analysis you performed earlier with the results of your PESTLE and construct a SWOT diagram for your business Be prepared to present back to the group