BA-2-08 (2)

Business Strategy/Policy 2008/9Business Strategy/Policy 2008/9Topic 2Topic 2 : The Environment, and : The Environment, and

Competitive ForcesCompetitive Forces

Strategic Planning : an OverviewStrategic Planning : an Overview (adapted from Johnson, Scholes(adapted from Johnson, Scholes, & Whittington, 2008, & Whittington, 2008))

Strategic Position

Strategy in Action

Strategic choices

Stakeholderexpectations & purposes

Business Level

Strategies

CorporateLevel

Strategies

Int. Strategies

Organising

Resourcing

ManagingChangeInteraction creates

potential for:• Environment-led ‘fit’ or

Resource-led ‘stretch’• Competitive Advantage

Culture

Processes Practice

Innovation

Evaluation

Ext. Environment:PESTEL

Porter’s ‘diamond’/ 5 ForcesConvergence

Strategic Group AnalysisLife Cycle Analysis

Market SegmentationSWOT (0T)

Internal environment:

Resource audit Strategic Capability

Value Chain/NetworksMarketing ‘Mix’

BenchmarkingCSF’s

SWOT (SW)

STAGE 1

STAGE 3STAGE 2

We are here!

The External Environment of The External Environment of Organisations Organisations

In this Topic (In this Topic (Topic 2Topic 2) and in ) and in Topic 3Topic 3 we we will consider how to approach the issue of will consider how to approach the issue of analysing the external environment of analysing the external environment of organisations in detail organisations in detail from a strategic from a strategic management and planning perspectivemanagement and planning perspective

This will involve using the environmental This will involve using the environmental scanning analysis tool introduced in scanning analysis tool introduced in Topic 1Topic 1

It will be recalled in this regard that It will be recalled in this regard that environmental scanning is a strategic environmental scanning is a strategic activityactivity in organisations and should be in organisations and should be treated as such by managementtreated as such by management

Analysing the External Analysing the External EnvironmentEnvironment

The External Environment

Macro-Environment

• PESTEL• Porter’s

Diamond• Key drivers• Scenarios

Industry/Sector/Task

• Porter’s 5 Forces • Convergence

Competitors/Markets

• Product Life Cycle

• Strategic Groups

• Market segmentation

SWOT Analysis (OT only)

The Macro-EnvironmentThe Macro-Environment

PESTEL

Scenarios

Key drivers

Analysing the Macro-Environment Analysing the Macro-Environment (PESTEL Analysis)(PESTEL Analysis)

The Organisation

Legal Factors•Competition law•Employment law•Health & Safety•Product safety

Political Factors•Govt. stability•Tax policy

•Foreign trade regs•Social welfare policy

Economic Factors•Business cycles•GNP trends•Interest rates•Money supply•Inflation

•Unemployment•Disposable incomes

Environmental Factors

•Env. protection•Waste disposal

•Energy consumption

Sociocultural Factors•Population demographics•Income distribution•Social mobility•Lifestyle changes

•Attitudes to work & leisure•Consumerism

•Levels of education

Technological Factors•Govt. spending on R&D•Govt./Industry focus of technology•New discoveries/developments•Speed of technology transfer•Rates of obsolescence

PESTEL in Practice:PESTEL in Practice:

• PESTEL is a planning tool to enable Analysts/Planners to scan the external environment of organisations

logically and comprehensively so as to ensure that all the key factors affecting the organisation’s environment

now and into the future are identified and analysed

• The objective is to make sure nothing important is overlooked,

thereby avoiding future unpleasant surprises for the organisation

• It does not matter under which category a factor is listed as long as the factor is identified and considered

in the first place

• The technique is especially helpful in identifying potential opportunities and threats in an organisation’s environment, which can then be analysed further using

other analysis tools/techniques

Porter’s Diamond:Porter’s Diamond:

The relative importance of PESTEL factors and The relative importance of PESTEL factors and their impact on the competitive environment their impact on the competitive environment varies from country to countryvaries from country to country

In this respect, Porter suggests that there In this respect, Porter suggests that there are inherent reasons why some countries are are inherent reasons why some countries are more competitive than others, and why some more competitive than others, and why some industries in countries are more competitive industries in countries are more competitive than othersthan others

His ‘Diamond’ Model helps explain this and, His ‘Diamond’ Model helps explain this and, thus, adds to our strategic understanding of thus, adds to our strategic understanding of how the macro-environment affects the how the macro-environment affects the competitive environmentcompetitive environment

Porter’s Diamond: The Determinants Porter’s Diamond: The Determinants of National Advantageof National Advantage

Factor Conditions

Firm Strategy, Structure, and

Rivalry

DemandConditions

Related andSupportingIndustries

What Are Key Drivers for What Are Key Drivers for Change?Change?

Key drivers for changeKey drivers for change are are environmental factors that environmental factors that are likely to have a high are likely to have a high impact on the success or impact on the success or

failure of strategyfailure of strategy

What is a Scenario?What is a Scenario?

ScenariosScenarios are detailed and are detailed and plausible views of how the plausible views of how the business environment of an business environment of an

organisation might develop in organisation might develop in the future based on key drivers the future based on key drivers for change about which there is for change about which there is

a high level of uncertaintya high level of uncertainty

Industries and SectorsIndustries and Sectors

Competitive forces

Competitive cycles

Industry life cycle

Sources of Competition: Porter’s 5 Forces Sources of Competition: Porter’s 5 Forces FrameworkFramework

Michael Porter’s Five Forces Analytical Framework helps identify the Michael Porter’s Five Forces Analytical Framework helps identify the sources of competition in an industry or sectorsources of competition in an industry or sector

It was originally developed as a way of assessing the attractiveness It was originally developed as a way of assessing the attractiveness (essentially profit potential) of different industries(essentially profit potential) of different industries

Although developed for businesses, it is of value to Although developed for businesses, it is of value to all types of all types of organisations organisations

NB: it must only be used at the level of strategic business units NB: it must only be used at the level of strategic business units (SBU’s), not at the level of the entire organisation.(SBU’s), not at the level of the entire organisation. This is because This is because organisations are diverse in their operations and marketsorganisations are diverse in their operations and markets

The 5 forces are not independent of each other. Understanding the The 5 forces are not independent of each other. Understanding the connections between the forces and their drivers in the macro-connections between the forces and their drivers in the macro-environment is essentialenvironment is essential

Competitive behaviour can be as concerned with disrupting these forces Competitive behaviour can be as concerned with disrupting these forces as accommodating them, depending on the specific circumstances involvedas accommodating them, depending on the specific circumstances involved

It is important to use the framework for more than simply listing the It is important to use the framework for more than simply listing the forces influencing an SBUforces influencing an SBU e.g. what are the key drivers in the macro-e.g. what are the key drivers in the macro-environment behind the forces?; are some industries more attractive than environment behind the forces?; are some industries more attractive than others?; are the forces likely to change, and how?; how do particular others?; are the forces likely to change, and how?; how do particular competitors stand in relation to the forces?; what can managers do to competitors stand in relation to the forces?; what can managers do to influenceinfluence the forces facing an SBU? the forces facing an SBU? Such questions are of major Such questions are of major significance for competitive strategy significance for competitive strategy

SUPPLIERS BUYERS

SUBSTITUTES

POTENTIAL ENTRANTS

INDUSTRY COMPETITORS

Rivalry among existing firms

Bargaining powerof suppliers

Threat of substitute

products orservices

Bargaining power of buyers

Threat of new entrants

Porter’s Porter’s ‘‘Five ForcesFive Forces’’ Framework Framework

Porter’s Porter’s ‘‘Five ForcesFive Forces’’ FrameworkFramework

1.1. Barriers to Entry Barriers to Entry are factors that need to be are factors that need to be overcome by new entrants if they are to compete overcome by new entrants if they are to compete successfullysuccessfully

2. 2. SubstitutionSubstitution reduces demand for a particular reduces demand for a particular ‘class’ of products as customers switch to the ‘class’ of products as customers switch to the alternativesalternatives

3. 3. Competitive rivalsCompetitive rivals are organisations with similar are organisations with similar products and services aimed at the products and services aimed at the samesame customer customer groupgroup

4. & 5. 4. & 5. Buyer and Supplier PowerBuyer and Supplier Power can be considered can be considered together as they have similar effects on the together as they have similar effects on the strategic freedom of the organisation, affecting strategic freedom of the organisation, affecting its margins and financial attractivenessits margins and financial attractiveness

The Threat of Entry: Barriers The Threat of Entry: Barriers to Entryto Entry

Scale and experience

Access to supply and distribution channels

Expected retaliation

Legislation or government action

Differentiation

Why Are Substitutes a Threat?Why Are Substitutes a Threat?

SubstitutesSubstitutes can reduce demand can reduce demand for a particular class of for a particular class of products as customers switch products as customers switch to alternatives.to alternatives.• Price/performance ratioPrice/performance ratio• Extra-industry effectsExtra-industry effects

The Power of BuyersThe Power of Buyers

Are buyers concentrated?

What are the costs of switching?

Does backward vertical integration exist?

The Power of SuppliersThe Power of Suppliers

Are suppliers concentrated?

What are the costs of switching?

Does forward vertical integration exist?

Degree of Competitive RivalryDegree of Competitive Rivalry

Competitor balanceCompetitor balance Industry growth rateIndustry growth rate High fixed costsHigh fixed costs High exit barriersHigh exit barriers Low differentiationLow differentiation

Managerial ImplicationsManagerial Implications

Which industries should we Which industries should we enter or leave?enter or leave?

What influence can we exert?What influence can we exert? How are competitors differently How are competitors differently affected?affected?

Other Issues in a Other Issues in a Five Forces AnalysisFive Forces Analysis

Define the ‘right’ industryDefine the ‘right’ industry Determine whether industries Determine whether industries are convergingare converging

Identify complementary productsIdentify complementary products

ConvergenceConvergence An An industryindustry is a group of firms selling the same is a group of firms selling the same

principal product, principal product, oror products which are close products which are close substitutes for each other. (A substitutes for each other. (A sectorsector extends the extends the industry concept into the public services arena)industry concept into the public services arena)

However, the boundaries of an industry can change through However, the boundaries of an industry can change through convergence of previously separate industriesconvergence of previously separate industries

Convergence occurs when previously separate industries Convergence occurs when previously separate industries begin to overlap in terms of activities, technologies, begin to overlap in terms of activities, technologies, products, and customersproducts, and customers

The best of example of convergence in modern times is The best of example of convergence in modern times is probably that of the ‘probably that of the ‘Information SectorInformation Sector’ created by the ’ created by the convergence of the previously separate convergence of the previously separate telecommunications, computing, and entertainment telecommunications, computing, and entertainment industries. This convergence was caused by the rapid industries. This convergence was caused by the rapid development of digital information and communications development of digital information and communications technologies best exemplified, perhaps, by today’s technologies best exemplified, perhaps, by today’s generation of cellular telephones. This convergence has generation of cellular telephones. This convergence has led directly to modern society being referred to as the led directly to modern society being referred to as the ‘Information Society’ (see later slides)‘Information Society’ (see later slides)

Competitors and MarketsCompetitors and Markets

Strategic groups

Strategic customers

Market segments

Strategic Group AnalysisStrategic Group Analysis

Strategic groups are organisations within an Strategic groups are organisations within an industry that have similar strategic industry that have similar strategic characteristics, follow similar strategies, or characteristics, follow similar strategies, or compete on similar basescompete on similar bases

It is useful to consider the extent to which It is useful to consider the extent to which organisations organisations differdiffer in such terms in such terms

The concept helps us understand who are the most The concept helps us understand who are the most direct competitors of a particular organisation in direct competitors of a particular organisation in an industryan industry

It facilitates consideration of how an organisation It facilitates consideration of how an organisation could could movemove from one group to another in an industry from one group to another in an industry

It also identifies potential opportunities and It also identifies potential opportunities and threats to an organisationthreats to an organisation

Steps in Strategic Group Steps in Strategic Group AnalysisAnalysis

1.1. Select appropriate axes.Select appropriate axes. These will be These will be differentdifferent for each industry. The axes for each industry. The axes should should notnot be related to each other and be related to each other and should distinguish between companies in should distinguish between companies in the industrythe industry

2.2. Plot companiesPlot companies

3.3. InterpretInterpret the the resultsresults of this plotting of this plotting

4.4. Identify groups and strategicIdentify groups and strategic (sometimes (sometimes also called ‘white’) also called ‘white’) spacesspaces. Strategic . Strategic spaces are gaps not covered in the map spaces are gaps not covered in the map and may suggest market opportunitiesand may suggest market opportunities

5.5. ExplainExplain why these groups seem to exist why these groups seem to exist

Characteristics for Characteristics for Identifying Strategic GroupsIdentifying Strategic Groups

Scope of activitiesScope of activities Extent of product Extent of product diversitydiversity

Extent of Extent of geographic coveragegeographic coverage

Number of segments Number of segments servedserved

Distribution Distribution channelschannels

Resource commitmentResource commitment Extent of brandingExtent of branding Marketing effortMarketing effort Extent of vertical Extent of vertical integrationintegration

Product qualityProduct quality Technological Technological leadershipleadership

Organisational sizeOrganisational size

Benefits of Identifying Benefits of Identifying Strategic GroupsStrategic Groups

Better understanding of competition

Better analysis of strategic opportunities

Better analysis of barriers to mobility

Example: Strategic Group Analysis in the Example: Strategic Group Analysis in the Consulting IndustryConsulting Industry

While it is possible to group consultancies according to While it is possible to group consultancies according to any number of factors (such as size, ownership structure, any number of factors (such as size, ownership structure, market segmentation etc.), McGee et al. (2000) usefully do market segmentation etc.), McGee et al. (2000) usefully do so on two linked (and mapped) criteria:so on two linked (and mapped) criteria:

– Service/Industry focus, andService/Industry focus, and– Responsiveness Responsiveness

Focus in this context refers to the degree of Focus in this context refers to the degree of specialisation in a particular area versus the offering of specialisation in a particular area versus the offering of an integrated, ‘end-to-end’ service to a wide variety of an integrated, ‘end-to-end’ service to a wide variety of clients from different industries clients from different industries

Responsiveness refers to Responsiveness refers to bothboth how quickly a firm can move how quickly a firm can move from analysis to execution from analysis to execution andand how swiftly it has adapted how swiftly it has adapted to environmental change to environmental change

The results of their industry mapping exercise (circa The results of their industry mapping exercise (circa April 2000) is shown in the next slide April 2000) is shown in the next slide

Strategic Groups in the Consultancy Strategic Groups in the Consultancy Industry Industry ((20002000))

Service/IndustryFocus

Responsiveness

BROAD

NARROW

SLOW FAST

StrategyHouses

NicheFirms

Vendors

E-Firms

‘Big 5’

SIGiants

‘StrategicSpace’

Competition over Competition over TimeTime: the Life : the Life Cycle ModelCycle Model

The competitive advantage enjoyed by an organisation can be The competitive advantage enjoyed by an organisation can be eroded over time because of changes in the five forces. eroded over time because of changes in the five forces. Furthermore, competitors may manage to overcome Furthermore, competitors may manage to overcome negativenegative forcesforces

This process of erosion can be speeded up by changes in the This process of erosion can be speeded up by changes in the macro-environment such as those resulting from increasing macro-environment such as those resulting from increasing globalisation, technological development, and liberalisation globalisation, technological development, and liberalisation of/de-regulation in particular markets (e.g. of/de-regulation in particular markets (e.g. telecommunications, water, power, transport etc.)telecommunications, water, power, transport etc.)

Organisations are then forced to respond to such erosion in Organisations are then forced to respond to such erosion in order to re-gain the lost advantage, giving rise to aorder to re-gain the lost advantage, giving rise to a cycle of cycle of competition/competitive advantage (see next slide)competition/competitive advantage (see next slide)

Product life cycle analysisProduct life cycle analysis is used to plot the progress of a is used to plot the progress of a productproduct over its life span. The model can be used to predict over its life span. The model can be used to predict how how some ofsome of the five forces may change over time the five forces may change over time

The model can show between 4 and 6 stages in the life cycleThe model can show between 4 and 6 stages in the life cycle

It is important not to confuse the product life cycle with the It is important not to confuse the product life cycle with the industry life-cycle industry life-cycle

Cycles of CompetitionCycles of Competition

A A GenericGeneric Product Life Cycle Product Life Cycle (4 Stages)(4 Stages)

Sales

TimeIntroduction Growth Maturity Decline

The Industry Life CycleThe Industry Life Cycle

What is a Market Segment?What is a Market Segment?

AA market segmentmarket segment is a group is a group of customers who have of customers who have similar needs that are similar needs that are different from customer different from customer

needs in other parts of the needs in other parts of the marketmarket

Market SegmentationMarket Segmentation

Market segmentation is the division of a Market segmentation is the division of a market into homogeneous groups of market into homogeneous groups of potential customers who may be treated potential customers who may be treated similarly for marketing purposessimilarly for marketing purposes

Each customer group will have somewhat Each customer group will have somewhat different needs which can be met by different needs which can be met by offering each group, or market segment, a offering each group, or market segment, a somewhat different ‘marketing mix’ (i.e somewhat different ‘marketing mix’ (i.e the 4 P’s – see the 4 P’s – see Topic 3Topic 3))

Research shows that segmentation leads to Research shows that segmentation leads to better marketing analysis, customer better marketing analysis, customer satisfaction, and higher salessatisfaction, and higher sales

Some Bases of Some Bases of Market SegmentationMarket Segmentation

Managerial Issues in Managerial Issues in Market SegmentationMarket Segmentation

How do customer needs vary by How do customer needs vary by market?market?

What is the relative market What is the relative market share within market segments?share within market segments?

How can market segments be How can market segments be identified and ‘serviced’?identified and ‘serviced’?

Types of Market Types of Market OpportunitiesOpportunities

In substituteindustries

In other strategicgroups

In targetingbuyers

For complementaryproducts

In new market segments

Over time

Key Debate: How Much Does Key Debate: How Much Does Industry Matter? (1)Industry Matter? (1)

There is a debate over whether There is a debate over whether strategy making should be strategy making should be externally or internally externally or internally orientedoriented

Porter’s work suggests that Porter’s work suggests that industry factors influence industry factors influence profitability more than firm-profitability more than firm-specific factorsspecific factors

But, this varies by industryBut, this varies by industry

Key Debate: How Much Does Key Debate: How Much Does Industry Matter? (2)Industry Matter? (2)

Key Debate: How Much Does Key Debate: How Much Does Industry Matter? (3)Industry Matter? (3)

Porter & McGahan’s study, for Porter & McGahan’s study, for example, suggests that some example, suggests that some industries influence member industries influence member firms’ profitabilities more firms’ profitabilities more than othersthan others

Why might some industries have Why might some industries have a larger influence on their a larger influence on their members’ profitability than members’ profitability than others?others?

SWOT (OT)SWOT (OT) Potential Environmental Potential Environmental

Opportunities e.g.Opportunities e.g.– Expand core business?Expand core business?– Widen product range?Widen product range?– Extend cost/differentiation Extend cost/differentiation

advantage?advantage?– Diversify into new Diversify into new

business(es)?business(es)?– Expand into foreign markets?Expand into foreign markets?– Apply R & D skills in new Apply R & D skills in new

areas?areas?– Enter new related businesses?Enter new related businesses?– Vertically integrate forward?Vertically integrate forward?– Vertically integrate Vertically integrate

backward?backward?– Enlarge corporate portfolio?Enlarge corporate portfolio?– Overcome barriers to entry?Overcome barriers to entry?– Reduce rivalry among Reduce rivalry among

competitors?competitors?– Make new profitable Make new profitable

acquisitions?acquisitions?– Apply brand name capital in Apply brand name capital in

new areas?new areas?– Seek fast market growth?Seek fast market growth?

Potential Environmental Threats Potential Environmental Threats e.g.e.g.– Attacks on core business(es)?Attacks on core business(es)?– Increase in domestic Increase in domestic

competition?competition?– Increase in foreign competition?Increase in foreign competition?– Change in consumer tastes?Change in consumer tastes?– Fall in barriers to entry?Fall in barriers to entry?– Rise in new or substitute Rise in new or substitute

products?products?– Increase in industry rivalry?Increase in industry rivalry?– New forms of industry New forms of industry

competition?competition?– Potential for take-over?Potential for take-over?– Existence of corporate raiders?Existence of corporate raiders?– Increase in regional Increase in regional

competition?competition?– Changes in demographic factors?Changes in demographic factors?– Changes in economic factors?Changes in economic factors?– Downturn in economy?Downturn in economy?– Rising labour costs?Rising labour costs?– Slower market growth? Slower market growth?