MA in Management Strategic Analysis Module Analysing the External Environment

A. INTROD !TION TO SESSION

For many companies in the UK and the United States the period 1950 to 1970 seems in retrospect to have been one of almost uninterrupted straight-line gro th in a relatively stable environment! "n such a situation managers loo# effective and perhaps they are effective if they $do the same thing over and over again and appoint successors in their o n image%! &hen in the 1970s a big change too# place! $'oing the same thing% became almost a recipe for corporate disaster! &he reason for this as simple! "nstead of being routine and fairly predictable( the business environment had become increasingly volatile) according to many managers the pace of change had accelerated *or so they thought+! &his process has continued into the 1990s( and at the same time many managers ould claim that the comple,ity of the environment they face has also increased! &his Session discusses the nature of the e,ternal environment and e,amines some of tools and frame or#s used to assess the impact of e,ternal conditions upon the strategies of organisations!

"our O#$ectives -y the end of this session you should be able to.
/ppreciate the nature of the e,ternal environment and its implications! Understand the process of environmental analysis as a critical element of strategic management! /pply some of the #ey tools and frame or#s available to help evaluate the strategic implications of conditions and changes in the e,ternal environment!

%.

T&E NAT RE AND IM'(I!ATIONS O) T&E E*TERNA( EN+IRONMENT

0hat do e mean by the e,ternal environment1 -roadly( the e,ternal environment comprises those factors and trends outside the organisation that might have an influence upon an organisation and its future! 2any e,ternal factors can have an effect upon an organisation - from changes in government legislation *e!g! the ending of 'uty Free sales to travellers ithin 3urope+( to the entry of ne competition into a mar#et *e!g! the opening of a ne supermar#et near to an e,isting shopping centre+! Some environmental changes might affect all or many organisations( hilst others may be limited to only one or t o!

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&he com,lexity of the e,ternal environment faced by different organisations is li#ely to vary greatly! / global corporation ill face many influences( some changing from country to country( such as consumer legislation( hilst others li#e technological changes are intrinsically more international! "n contrast( the influences faced by a village shop are li#ely to more limited in range and variety( such as the number of local customers and their buying habits( though perhaps no less critical to the future of the business! /rguably( it is a clich4 to say that in today5s orld even the pace of change is changing( but for most organisations the dynamic nature of their e,ternal environment is not invalidated by this statement( ho ever hac#neyed! For e,ample( the emergence of the "nternet is affecting organisations from large to small( and in the public sector as ell as those in industry and commerce( ith ne developments 6uic#ly diffusing across the globe leading to changes in mar#et structures and business practices!

The Need to Monitor the External Environment

2onitoring and evaluating the e,ternal environment is an important issue for organisations because changes in the e,ternal environment imply the need to ensure that strategies can meet ne circumstances! &his may seem a statement of the obvious( yet it is fre6uently the case that. 7ther ise ably managed organisations are fre6uently ta#en by surprise by events hat may seem to the observer to have been 6uite predictable! 2anagers are prone to describe their failures as due to bad luc# and their successes as due to good management!

&hese points illustrate both the importance of trying to underta#e environmental analysis( but also suggest that such analysis is not entirely ob8ective! "f the process is vie ed as a scientific e,periment( then the analyst is also part of the e,periment! 9onse6uently( the results of the analysis are as much the product of e,pectations( pre8udices( assumptions and typology as they are of $ob8ective% circumstances! 'espite these problems( the ans er to the 6uestion $does an organisation need to underta#e environmental analysis1% remains in the affirmative! :o ever( given the nature of the environment and the organisational dynamics outlined above( three further 6uestions are also orth a moment of reflection. 0hich areas of the environment should be analysed1 &his ill depend upon the nature of the organisation and the conte,t in hich it operates. the global company and village store( mentioned above( are li#ely to need to focus upon different issues and at different levels! :o much information is needed and from here can it be sought1 /gain( the global corporation is li#ely to re6uire much more information( from many sources and of a more detailed nature( than the village store! &he dangers of $information paralysis%( al ays see#ing more data before ta#ing action( are also a significant consideration here! 0hat techni6ues can be used to analyse important factors( trends and events1 &here are many tools and models available( some more comple, and detailed than others( so their appropriateness and depth of application needs to be considered. the global firm applying more tools and ith greater sophistication( in contrast to a more intuitive and informal approach ta#en by the village store!

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/bove all( the overall need for e,ternal analysis needs to be #ept in mind ; hat is the strategic significance of the changes and trends that are apparent for the particular organisation1

An Overall A,,roach to Analysing the External Environment

'espite the limits to ob8ectivity a systematic a,,roach to e,ternal environmental analysis can minimise problems and provide an important contribution to the process of strategy formulation! &he implicit assumption of all environmental analysis is that in understanding changes in the e,ternal environment( the implications for the strategy of an organisation can be identified and addressed! &he e,ternal environment can be considered at three levels. &he general environment affecting all organisations! &he com,etitive environment affecting all organisations in particular industries or sectors! &he com,etitive ,osition of individual organisations ithin a particular industry or sector!

/t each of these levels a range of tools and frame or#s can help to organise the analysis and point to underlying factors affecting the dynamics and comple,ity of the situation! &hese tools and frame or#s are outlined belo ( but in applying them you must remember. &a#e a holistic vie ; be a are of the interactions bet een individual factors! /dapt hat you read to the particular circumstances of the organisation or industry under analysis! &he most difficult aspect of environment analysis is often that of deciding e,actly hich factors are the most important! <e factors and ne priorities ill arise as the circumstances change!

!.

ASSESSIN- T&E -ENERA( EN+IRONMENT

&he ide range of potential influences on an organisation and the ays in hich they interact( ma#e the 8ob of assessing the general environment particularly difficult! "n addition( each organisation ill be affected in different ays by changes in the environment! &he factors that ill have a significant impact upon one organisation ill have little effect on another! For e,ample( the recent changes in the funding of students in the UK is of particular concern to universities li#e 'urham( but ill have only a marginal impact on a retailer li#e 2ar#s = Spencer!

'EST Analysis
'EST analysis *a mnemonic for >olitical( 3conomic( Social and &echnological factors+ is the most fre6uently used tool to consider the impact of the general environment! "t provides a broad frame or# for considering a ide range of potential factors in order to.

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Summarise the most important influences of the general environment upon a particular organisation! Evaluate the potential impact of these influences( both individually and 8ointly( upon the organisation( hether positive or negative ; the opportunities and threats to be faced!

3ach of the four headings can be bro#en do n further to suggest more detailed consideration of particular factors and changes that might influence the organisation both currently and in the future! 0hilst varying dependent upon the particular conte,t( the list of factors and changes may include. 'olitical factors and changes ; the introduction of specific legislation and regulation such as competition policy( trading standards( financial regulation( planning policies! 9hanges in the general political climate both domestically and internationally such as hether the UK ill become part of the 3uro ?one of countries! Economic factors and changes ; patterns and trends in overall economic activity and orld trade) movements in e,change rates( interest rates and ta,ation both ithin particular countries and internationally) fluctuations in capital mar#ets) broad changes in mar#et demand) industrial trends li#e increasing industry concentration and increased mergers and ac6uisitions activity! Social factors and changes ; changes in demographic patterns li#e the increasing age profile of populations in developed countries) changing social attitudes and tastes such as the ay in hich people spend their leisure time) patterns of spending on education and health) public concern on issues li#e the environment( smo#ing and food safety! Technological factors and changes ; this includes changes to products( processes and supply chains! &he importance of information and communications technology ith the gro th of the "nternet is the obvious e,ample( but other trends and changes also need to be evaluated! &rends in the physical environment such as climate change may have significant and une,pected conse6uences and lead to legislative responses affecting a ide range of industries and activities!

&he influences identified ill often cross bet een the headings( their position is less important than fact that they appear some here in the analysis! "t is also important that consideration of particular issues goes beyond the superficial to try and identify the underlying causes of the changes! For e,ample( the gro th of out-of-to n supermar#et shopping in the UK during the 19@0s reflected an increase in t o-earner households ith less time to devote to shopping( increased car o nership( more people moving to the suburbs and changes in planning la s to allo the stores to be built! 9hanges in some of these factors during the late 1990s have seen the supermar#ets no consider opening smaller stores in to n and city centres! &he follo ing illustration highlights some of the main environmental factors and trends influencing companies ithin the 3uropean -re ing "ndustry during the late 1990s! Illustration THE EUROPEAN BREWING INDUSTRY The brewing industry across Europe had developed from a long tradition of brewing across most of Europe. Indeed, in aggregate, Europeans produced 50% more beer than the U !,

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the largest beer"producing country in the world. #owever, there were significant differences between individual countries within Europe, both in terms of the nature of each mar$et and the structure of the industry that served them. That said, greater European integration of the industry was emerging as a significant trend as a result of a number of factors. Industry concentration across Europe as a whole was relatively low, with the top %0 brewers accounting for only 5&.'% mar$et share in %((&. #owever, the position was significantly different from country to country as the table below )for %((&* indicates+ Country ,enmar$ #olland Italy 0elgium 2rance 0ritain pain 4ermany Industry Situation -onopoly -onopoly -onopoly -onopoly -onopoly 3oncentrated 3oncentrated 2ragmented No. of Com !titors % % . . . 5 5 5 D!"r!! of Con#!ntration '%% '&% /%% 1/% '%% 1&% 1'% ./%

!s the %((0s progressed this situation was beginning to change as a number of cross" border mergers and ac5uisitions too$ place. 2or e6ample, the 2rench food, beer and pac$aging group, ,anone, group made ac5uisitions in Italy, pain and 4reece, before selling their brewing interests, in the form of 0rasseries 7ronenbourg to cottish 8 9ewcastle in %(((. 0elgian Interbrew attempted to buy 0ritish brewers :hitbread and 0ass during .000, though the U7 4overnment bloc$ed the latter purchase on competition grounds. -any of the larger brewers, li$e #eine$en and 3arlsberg, also entered into licensing agreements for local production of their brands in other countries, or set up ;oint ventures li$e 3arlsberg"Tetley in the U7. 4overnments had fre5uently had an influence upon developments within the industry within their countries. <einheitsgebot, the 4erman beer purity laws dating bac$ to %5%/, historically restricted the ability to transport beer over long distances, so that even in the %((0s there were around %,.00 breweries, often serving local mar$ets. These laws also meant it was difficult for foreign brewers to enter the 4erman mar$et, even after E3 intervention in %(1'. imilarly, ,enmar$=s ban on cans in favour of environmentally"friendly recyclable bottles was investigated by the EU in %((/, because it created a restriction on trade. !s well as preventing a number of brewing mergers, the U7 competition authorities had introduced restrictions on brewers owning public houses and outlawed tied"house arrangements )were pubs bought their beer from one supplier in return for long"term loans*, following a report by the -onopolies 8 -ergers 3ommission in the early %(1(. In contrast, the EU had made little progress in harmonising the different duty rates paid on beer within different member countries. In part, the moves towards greater industry concentration reflected increasing economies of scale in both brewing and distribution as a result of new technology. #owever, low growth or declining consumption of beer in many mar$ets was also important as companies attempted to restructure in order to reduce e6cess capacity. tagnant demand could be traced to a number of factors. 3hanging demographics, with fewer .0".( year olds in most countries, had reduced the si>e of the main group of beer drin$ers. ?eople were also choosing to spend their leisure time in pursuits unrelated to drin$ing, li$e going to the cinema.

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Tradition had been an important influence for beer drin$ers as well as the brewers. In mar$ets li$e 4ermany there is still great loyalty to locally produced beers. #owever, a number of trends were beginning to change this picture. 4rowing concerns about health issues and drin$"driving had changed the nature of customer re5uirements, favouring low alcohol and soft drin$s. ,ifferent groups of drin$ers were emerging as brewers increasingly segmented mar$ets, providing greater product ranges to meet these differing needs. This had increased the acceptance of the heavily promoted pan"European, even global, brands of the big brewers, amongst some consumers. ,istribution channels played an important part within the industry. In 4ermany and 0ritain the public houses and bars owned by the brewers had traditionally played an important role as retailers. #owever, as mentioned above, the picture in the U7 was changing as a result of competition legislation. pecialist pub retail companies li$e @ , :etherspoon had emerged alongside those companies, li$e 0ass, who turned towards Aleisure managementB, running pubs, restaurants and hotels but selling on their brewing businesses. !cross all European mar$ets, the supermar$et chains had become a large and growing channel of distribution, often selling their own"label brands alongside the brewers= brands. ources+ 0ased on T @acobs 8 - teele, AThe European 0rewing IndustryB in 4 @ohnson 8 7 choles, E6ploring 3orporate trategy, ?rentice #all, %((( and various newspaper reports.

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S// 1 Using the >3S& analysis frame or#( identify and assess the main factors that have influenced companies in the 3uropean -re ing "ndustry( as outlined in the illustration above! 'olitical

Economic

Social

Technological

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D.

ANA("SIN- T&E !OM'ETITI+E EN+IRONMENT

0hilst the general environment is important( the more immediate environment that surrounds most organisations is the com,etitive environment! "n order to understand ho the competitive environment might have an impact upon an organisation it is useful to first e,amine the dynamics of the competitive system! 9ompetition is at the very root of a mar#et economy! "f you read the or#s of riters as diverse as Keynes( :aye#( 2ar,( /dam Smith( Aenin( Bicardo( Cohn Stuart 2ill( 0eber( Deblen( Schumpeter or 2ilton Friedman( you ill find that they see competition as a critical aspect of a capitalist system! &oday( most politicians invo#e the mar#et economy as a superior system( focusing on the incentives and the dynamism provided by competition! 'espite problems such as periodic stoc# mar#et crashes and the financial crises of many countries in South 3ast /sia in 1997199@( the mar#et economy is still seen as the dominant paradigm of political economy! 'uring the 1990s( many public services such as health( elfare and education sa the introduction of mar#et-type structures and competition in an attempt to reduce costs and increase efficiency! Similarly( many fashionable trends in business have sought to improve efficiency through increased competition( such as multiple sourcing of supplies( recently reencouraged by the use of e-commerce) internal competition bet een business units) the creation of profit and cost centres) and $shado prices% for internal transactions!

&o. Does !om,etition /or01

&he foundations of competition go bac# to /dam Smith in the eighteenth century and Dilfredo >areto in the nineteenth! /ccording to these riters( competition potentially offers an optimal state in hich resources are efficiently *if not necessarily fairly+ allocated! Smith as so struc# by the effectiveness of competition that he spo#e of its or#ing as an $invisible hand% hich under certain conditions ould guide the selfish actions of individuals to the best outcome for society as a hole! 3ssentially firms compete in E ays. &hey try to undersell one another and capture mar#ets( customers and profits( through manipulating prices and lo ering costs! &his is termed $,rice com,etition%! &hey compete through $non2,rice com,etition% by differentiating their products( mar#eting( advertising( promoting( branding and other ise attempting to retain their o n customers and attract their rivals!

&he very process of competition provides a dynamic for the economic system! 3ntrants competing on price or non-price factors are at the same time a threat to e,isting competitors( a stimulus to develop ne mar#ets and products( and a pressure for lo er cost processes! "f businesses in a particular industry earn above the normal rate of return this is li#ely to attract in ne competitors and imitators( so reducing prices and profits! /s ell as providing an incentive or dynamic to the economy( competition provides information about opportunities for gain through the messages of prices and profits! Figure F.1 provides a picture of the competitive process and its role as both an incentive and information system!

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)igure 345 The Dynamic !om,etitive 'rocess

An A,,roach to !om,etitive Analysis

-ased on an understanding of the competitive process outlined above( 2ichael >orter of :arvard University has built a frame or# to allo for the analysis of competition ithin a particular industry! 2uch of his approach builds on the or# of 3d ard : 9hamberlain( also of :arvard University( and Coan Bobinson( of 9ambridge University( ho ere pioneer analysts of non-price competition in the 19F0s! /t the heart of >orter5s or# is hat economist5s refer to as the Structure2!onduct2 'er6ormance 'aradigm! &o understand the competitive pressures of an industry you need to focus upon its structure - its underlying economics!

Structure &he underlying economic factors in an industry

!onduct Strategies of competitors in an industry

'er6ormance >rofitability of competitors across industry as a hole

)igure 347 The Structure !onduct 'er6ormance 'aradigm

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&he underlying economics include such factors as the numbers of competitors and ho easy it is for firms to enter or leave the industry! For e,ample( if there are lots of competitors( ho can enter or leave the industry easily( ho sell similar products and ho are fully informed of each others strategies *the economists call this ,er6ect com,etition+( then it is unli#ely in the long term that any firm ill ma#e massive profits! &he competitive process described above ill ensure that prices and profits are reduced! "n contrast( if there is only one firm in the industry and entry into the industry is difficult *the economists call this ,er6ect mono,oly+ the profits are li#ely to remain high( unless customers find alternatives to the product! 0hilst these t o e,amples may be unrealistic e,tremes( the principle still applies to most industries that lie some here bet een the poles! >orter goes on to argue that firms ho come up ith a better strategies than their competitors( by understanding and e,ploiting the conditions of the industry better than others( might be able to achieve a more profitable position in the long term - he calls this sustaina#le com,etitive advantage!

The )ive )orces )rame.or0

/ccording to >orter( hether an industry produces a commodity or a service( or hether it is global or domestic in scope( the level of competition in an industry depends upon the strength of the competitive forces to hich it is e,posed! &hese forces( act individually and together to determine the ultimate profit potential of the industry and are a result of the structure *the underlying economics+ of the industry! 2any of the broad influences identified through >3S& analysis have an impact upon organisations through the ay in hich they affect the underlying competitive structure of the industry! /n understanding of the competitive dynamics of an industry re6uires analysis of the structural factors influencing each of these 6ive 6orces of competition. &he threat o6 ne. entrants coming into the industry! &he ability of ne competitors to enter the industry ill depend upon the e,istence of #arriers to entry ; the higher they are( the less li#ely it is that ne competitors ill pose a threat! &hese barriers to entry could come from factors such as large economies of scale( difficulty of access to distribution channels( high capital investment re6uirements( strong e,isting brand names( and scarce s#ills or resources! &he threat o6 su#stitute ,roducts or services to those produced by the industry! &his threat ill be high hen customer needs can be met by alternative products or services to those produced ithin the industry! &he relative price-performance of substitutes( the e,tent of s itching costs and the propensity of buyers to use substitutes( ill all affect the intensity of this threat! &he #argaining ,o.er o6 su,,liers affects the costs incurred by the industry! "f it is hard to s itch suppliers because there are fe of them or it is e,pensive to change( or the product supplied is a relatively minor mar#et for suppliers( then suppliers5 bargaining strength ill be high and costs ill be passed on to the industry! &he #argaining ,o.er o6 customers or buyers is the mirror image of that e,erted by suppliers to an industry! "f there are relatively fe buyers or they can s itch easily bet een suppliers( then the bargaining position of the industry ill be ea#ened( ith pressures to reduce prices or increase the 6uality of products provided! &he intensity o6 rivalry bet een e,isting competitors ithin the industry is determined by the number and si?e of competitors( the rate of gro th of the industry( the ris#s of

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creating over-capacity( the similarity of products and services( and the ease ith hich competitors can leave the industry! /ll of these forces of competition are illustrated in Figure F.F!
Figure F!I Five forces analysis

'otential entrants &hreat of entrants

Su,,liers -argaining po er

!OM'ETITI+E RI+A(R"

%uyers -argaining po er

&hreat of substitutes

Su#stitutes

Source. /dapted from 2! 3! >orter( 9ompetitive Strategy( Free >ress( 19@0( p! G! 9opyright by &he Free >ress( a division of 2acmillan >ublishing 9o!( "nc! Beproduced ith permission!

From. H Cohnson and K Scholes( E6ploring 3orporate trategy ( Gth edition

)igure 343 The )ive )orces )rame.or0 &he analysis of the underlying factors that potentially influence the strength of each force creates a better picture of the source of the competitive pressures ithin an industry ; usually t o or three of the forces are particularly important( the others less so! / summary of the ays in hich these underlying factors could influence the forces of competition( so affecting the profitability of an industry( is outlined in Figure F.G!

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/ill (o.er 'ro6ita#ility

Ease o6 entry Easy to enter Ao scale threshold Aittle brand franchise 9ommon technology /ccess to distribution channels ,ifficult to e6it Specialised assets :igh e,it costs "nterrelated businesses uppliers powerful 9redible for ard integration threat by suppliers Suppliers concentrated Significant cost to s itch suppliers

/ill Raise 'ro6ita#ility

,ifficult to enter :igh scale threshold -rand s itching difficult >roprietary #no -ho Bestricted distribution channels Easy to e6it Saleable assets "ndependent businesses

Ease o6 exit

'o.er o6 su,,liers

'o.er o6 customers

Availa#ility o6 su#stitutes

Industry Rivalry

3ustomers powerful -uyer concentrated -uyers purchase a significant proportion of output -uyers possess credible bac# ard integration threat ubstitution easy Ao user s itching costs Substitute producers profitable and aggressive -any competitors 9ompetitors e6ual in si?e Slo demand gro th :igh fi,ed cost 3,cess capacity 9ommodity products 'iversity of approach and historical bac#ground

uppliers wea$ 2any competitive suppliers >urchase commodity products 9redible bac# ard integration threat by purchasers 9oncentrated purchasers 3ustomers wea$ >roducers threaten for ard integration Significant buyer s itching costs -uyers fragmented >roducers supply critical proportion of buyers input ubstitution difficult :igh user s itching costs Substitute producers unprofitable and passive 2ew competitors 'iversity of competitor si?e "ndustry leader Fast demand gro th Ao fi,ed cost 'ifferentiated products 9ommonality of approach and historical bac#ground

)igure 348 !ritical )actors A66ecting !om,etitive )orces in an Industry >orter argues that an organisation can attempt to create com,etitive advantage ithin an industry by changing its strategy so as to build upon or avoid these pressures * e ill e,plore this in more detail later in the course+!

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S// E Using information dra n from the illustration The European 0rewing Industry underta#e a Five Forces Frame or# analysis to identify the factors influencing competitive pressures ithin the industry! Threat o6 Ne. Entrants

Threat o6 Su#stitutes

%argaining 'o.er o6 Su,,liers

%argaining 'o.er o6 !ustomers

Intensity o6 Rivalry #et.een Existing !om,etitors

0hich are the most significant competitive forces ithin the industry1

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0hilst the Five Forces Frame or# can be very helpful in understanding the competitive dynamics of an industry( some caution is needed in its application! &he analysis of the 3uropean bre ing industry highlights one #ey point ; the analysis depends upon a clear definition of the boundaries of the industry! &here are still significant structural differences bet een the bre ing industries of different 3uropean countries ; ta#ing 8ust one factor li#e the level of industry concentration( the fragmented Herman industry stands in contrast to the concentration of bre ing companies in the UK( or the near monopoly position of :eine#en in :olland! &hat said( as barriers to entry are reduced( more factors become pan-3uropean in nature! 9onse6uently( it might be orth conducting the analysis both at the level of individual countries and at a pan-3uropean level in order to highlight the comple,ity of change ithin the industry! Finally( the actions of the competitors themselves can also change the analysis ; the companies ithin an industry are an active part of the system not mere spectators( in changing their strategies the underlying economics of the forces themselves are changed! For e,ample( a company may underta#e the ac6uisition of other competitors in order to reduce competition!

E.

IDENTI)"IN- !OM'ETITI+E 'OSITION

0hilst the Five Forces Frame or# can give a good insight into the overall competitive dynamics of an industry( such an analysis does not fully e,plain ho differing organisations choose to compete against each other ithin the industry! &here is a need to understand ho these organisations position themselves relative to the other competitors .ithin the industry! & o techni6ues offer insight into this issue ; strategic grou, analysis and mar0et segmentation analysis!

Strategic -rou, Analysis

3ven ithin the same industry( not all competitors ill be follo ing similar strategies or competing directly against each other! Strategic group analysis can be used to identify the differing ays in hich particular groups of companies compete ithin an industry! &he #ey to this approach is to identify t o or three sets of characteristics that seem to establish #ey differences bet een the companies or groups of companies ithin an industry! Such characteristics might include di66erent a,,roaches to product diversity( geographic coverage( e,tent of vertical integration( distribution channels( branding( use of technology and research and development spending! 7nce the #ey characteristics have been identified( a strategic grou, ma, can plot the differing approaches ta#en by organisations ithin an industry! &his ill then highlight the similarities of approach ta#en by firms ithin a particular strategic group and the differences of approach bet een strategic groups! &he illustration belo sho s some of the ma8or strategic groups ithin the 3uropean bre ing industry around the mid-1990s!

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Illustration STRATEGIC GROUPS WITHIN THE EUROPEAN BREWING INDUSTRY 4lobal ?an European G!o"ra $i# #o%!ra"! 9ational <egional A Cocal Cimited Strat!"i# Grou s) A* B* C* D* E&t!nt of Brand 'ami(y 0road % !

Cocal microbreweries in U7 9ational breweries with medium"si>ed range of brands e.g. 0ass, cottish 8 9ewcastle, 3arlsberg"Tetley and :hitbread in U7 International niche brewers with limited brand range e.g. 4rolsh ?an"EuropeanDglobal brewers with broad brand families e.g. #eine$en, 3arlsberg, 0 9

Such an analysis can help identi6y the immediate com,etitors for a particular organisation. the ma8or UK bre er( Scottish = <e castle is unli#ely to be too concerned about the actions of a micro bre ery li#e &he 0allsend -re ery( even though their plants are ithin 10 miles of each other! &he analysis can also be ta#en to assess the #arriers #et.een the grou,s and any strategic problems that might ensue from structural changes ithin the groups( by applying the Five Forces Frame or# at the level of the strategic group! Such analysis can help e,plain the changes in strategy of the competitors outlined in the illustration belo ! Illustration THE CHANGING NATURE O' CO+PETITION WITHIN U, BREWING ince %((', the U7"based strategic group of brewers, including 0ass, cottish 8 9ewcastle, :hitbread and 3arlsberg"Tetley, has seen significant change as barriers to entry have been reduced, partly as an unintended conse5uence of U7 competition policy. 0ass, whose attempt to buy 3arlsberg"Tetley in %((' was re;ected by the competition authorities, sold its brewing interests to the 0elgian brewer Interbrew in late .000. Interbrew

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hoped to combine this purchase with the breweries previously ac5uired from :hitbread earlier in the year. #owever, in early .00% this deal was re;ected by the U7 4overnment who were concerned about the impact upon competition in the beer mar$et and ordered that the E..F million ta$e"over to be dismantled. ,uring %((( and .000, cottish 8 9ewcastle bought the 2rench brewer 0rasseries 7ronenbourg. !t the same time they sold on their interests in the ?ontin=s and 3enter ?arcs holiday camp chains. In .00%, cottish 8 9ewcastle also announced plans to sell off (.0 of its pubs and restaurants. The effects of all these changes were to a great e6tent to see the U7"based brewers strategic group disappear. 0y buying 0rasseries 7ronenbourg, cottish 8 9ewcastle has ;oined the pan"European brewers strategic group, concentrating on developing its now enlarged portfolio of international beer brands. In contrast, competitors li$e 0ass, who owns the Inter"3ontinental, 3rowne ?la>a and #oliday Inn hotel chains alongside its #arvester and Inn$eeper=s 2ayre pubs, are helping to define a new strategic group of diversified AhospitalityB providers, no longer involved in the brewing of beer.

Mar0et Segmentation Analysis

/s ell as competing in different ays( companies are also unli#ely to see# to serve the same customers! >eople5s tastes and needs differ( so not all products and services are li#ely to meet their re6uirements! -y identifying these different re6uirements through mar0et segmentation analysis( companies can change their strategies to more closely appeal to the needs of particular groups of customers( so defining a position ithin the mar#et that is more favourable relative to the forces of competition! 2ar#ets can be segmented in many different ays using characteristics of particular customers *li#e age( gender( income( location and family si?e+ or the nature of the customers5 ,urchase needs or ,roduct use! /fter so many e,amples from the bre ing industry " thin# " deserve a drin#! 0al#ing across 'urham( " could call at $"t5s a Scream%( part of a pub chain targeted at students) the $'unelm 9astle%( this time targeted at families ith children( the $'un 9o %( still untouched by the bre ery mar#eting people( or " could buy a pac# of cans from the Sainsbury5s supermar#et! /part from being a considerable $pub cra l%( this e,ample illustrates ell the differing types of mar#et segmentation ithin the local beer retailing mar#et!

).

S MMAR"

&he analysis of the external environment is a #ey tas# ithin the process of creating strategy! /n understanding of the nature of the environment is important in order to identify the strategic opportunities and threats that face organisations! "n discussing the nature of the e,ternal environment e sa it is possible to argue that environmental influences are becoming more com,lex and dynamic! &his increases the importance for systematic analysis in order to identify and understand the potential influences upon organisations! Such an analysis is possible by distinguishing bet een the general environment affecting all organisations( the more immediate com,etitive environment that affects organisations in particular industries( and the com,etitive ,osition of individual organisations ith respect to others ithin the industry!

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7ne of the main tools used for assessing the general environment is 'EST Analysis( hich lists the potential influences under a series of headings! &he most used frame or# for analysing the competitive environment is the )ive )orces )rame.or0( hich attempts to identify the main competitive pressures in an industry based upon its underlying economic structure! &ools li#e Strategic -rou, Analysis and Mar0et Segmentation Analysis allo for a more detailed assessment of the approach ta#en by an organisation ithin a particular industry or mar#et sector!

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