Analysis of Industry Environments

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ANALYSIS OF INDUSTRY ENVIRONMENTS

Successful positioning or business definition requires that managers thoroughly understand the dynamics of their industries, the trends in their firms’ external environments, and the basic economics of their firms’ markets. They must in short know how to analyse their industries. They can then effectively define and position their firms to compete with sustained advantage. The most noteworthy characteristic of industry environments is the variability. Some industries are highly competitive and therefore not very profitable on the average. Less competitive industry environments on the other hand permit firms to enjoy high profitability on the average. While mature industries would most likely experience low, negligible or even negative growth rates, emerging industries would enjoy high growth rates.

What is needed then are models or tools for assessing the relative attractiveness of industries. These will then enable managers to strategise both in terms of choosing which industries to enter or avoid in case their firms are considering significant investment. Managers can also decide preemptive or corrective action in industries that their firms are already in. Here presented are two widely used frame works for analysing industries. The SWOT Analysis and the Five Forces Model are both well known and have enjoyed widespread application in the business world.

SWOT ANALYSIS SWOT Analysis is derived from Strengths Weaknesses Opportunities and Threats. Strengths and weaknesses reflect the internal positives and negatives respectively of a firm. Opportunities and Threats are the positives and negatives reflected in the firm’s external environment. SWOT Analysis is done in two stages. First managers thoroughly evaluate their firm’s positives and negatives in their internal and external environments. In the next stage use the evaluation to position their firm appropriately in the competive space. This is accomplished by placing the firm in one of the four quadrants of the SWOT matrix shown in the exhibit titled The Strengths, Weaknesses, Opportunities, and Threats Matrix. If SWOT Analysis reveals that a firm has several internal strengths and few internal weaknesses, many environmental opportunities and few threats, the firm would be placed in the upper right quadrant of the SWOT matrix. Likewise a firm with many intenal weaknesses and many environmental threats would be placed in the lower left hand quadrant of the matrix. If the firms managers determine that it has both considerable internal strengths as well as many external opportunities then SWOT suggests that the firm should grow through merger and acquisitions or internal development of new business opportunities. Firms that have internal weaknesses but see significant opportunities can integrate vertically, enter into joint ventures or unrelated diversification.

The advantages of SWOT lies in its simplicity and straight forwardness. It helps managements to think in a constructive way about their business environments both internal and external. However it also has some drawbacks. Firstly it is subjective depending totally on the perceptions of insiders. Personal biases are likely to play a significant part in the assessment. Consequently there is likely to be a greater chance of disagreement and lack of consensus between the firms decision makers. For instance a firm’s R& D head might view this function as a strength whereas his colleague in the manufacturing having experienced numerous problems with products coming out of that function could very legitimately see it as an area of weakness. Another drawback of SWOT is that its use is likely to yield few clear cut recommendations. One can envisage hardly any firm which is characterised by only positives. Therefore most firms cannot be easily slotted in one of the four quadrants of the matrix but would...
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