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

Strategic Planning : an Overview

We are here! (adapted
from Johnson, Scholes , & Whittington, 2008 )
Stakeholder expectations & purposes Internal environment: Resource audit Strategic Capability Value Chain/Networks Marketing Mix Benchmarking CSFs SWOT (SW) Culture Ext. Environment: PESTEL Porters diamond/ 5 Forces Convergence Strategic Group Analysis Life Cycle Analysis Market Segmentation SWOT (0T) Innovation Business Level Strategies Strategic choices Strategy in Action

Strategic Position

STAGE 1

Organising

Corporate Level Strategies

Resourcing Managing Change

STAGE 2
Evaluation Int. Strategies

Interaction creates potential for: Environment-led fit or

Resource-led stretch Competitive Advantage

STAGE 3

Processes

Practice

The External Environment of Organisations

In this Topic (Topic 2) and in Topic 3 we will consider how to approach the issue of analysing the external environment of organisations in detail from a strategic management and planning perspective This will involve using the environmental scanning analysis tool introduced in Topic 1 It will be recalled in this regard that environmental scanning is a strategic activity in organisations and should be treated as such by management

Analysing the External Environment

The External Environment

MacroEnvironment

PESTEL Porters Diamond Key drivers Scenarios

Industry/Sector/Task Porters 5 Forces Convergence

Competitors/ Markets

Product Life Cycle Strategic Groups Market segmentation

SWOT Analysis (OT only)

The Macro-Environment

PESTEL

Key drivers

Scenarios

Analysing the Macro-Environment (PESTEL Analysis)

Economic Factors Legal Factors
Competition law Employment law Health & Safety Product safety Business cycles GNP trends Interest rates Money supply Inflation Unemployment Disposable incomes

Political Factors
Govt. stability Tax policy Foreign trade regs Social welfare policy

Environmental Factors The Organisation

Env. protection Waste disposal Energy consumption

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

Sociocultural Factors
Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work & leisure Consumerism Levels of education

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 organisations 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 organisations environment, which can then be analysed further using other analysis tools/techniques

Porters Diamond:

The relative importance of PESTEL factors and their impact on the competitive environment varies from country to country In this respect, Porter suggests that there are inherent reasons why some countries are more competitive than others, and why some industries in countries are more competitive than others His Diamond Model helps explain this and, thus, adds to our strategic understanding of how the macroenvironment affects the competitive environment

Porters Diamond: The Determinants of National Advantage

Factor Conditions

Demand Conditions

Related and Supporting Industries

Firm Strategy, Structure, and Rivalry

What Are Key Drivers for Change?

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

What is a Scenario?
Scenarios are detailed and plausible views of how the business environment of an organisation might develop in the future based on key drivers for change about which there is a high level of uncertainty

Industries and Sectors

Competitive forces

Industry life cycle

Competitive cycles

Sources of Competition: Porters 5 Forces Framework

Michael Porters Five Forces Analytical Framework helps identify the sources of competition in an industry or sector It was originally developed as a way of assessing the attractiveness (essentially profit potential) of different industries Although developed for businesses, it is of value to all types of organisations NB: it must only be used at the level of strategic business units (SBUs), not at the level of the entire organisation. This is because organisations are diverse in their operations and markets The 5 forces are not independent of each other. Understanding the connections between the forces and their drivers in the macro-environment is essential Competitive behaviour can be as concerned with disrupting these forces as accommodating them, depending on the specific circumstances involved It is important to use the framework for more than simply listing the forces influencing an SBU e.g. what are the key drivers in the macro-environment behind the forces?; are some industries more attractive than others?; are the forces likely to change, and how?; how do particular competitors stand in relation to the forces?; what can managers do to influence the forces facing an SBU? Such questions are of major significance for competitive strategy

Porters Five Forces Framework

POTENTIAL ENTRANTS Threat of new entrants Bargaining power of suppliers SUPPLIERS Rivalry among existing firms Threat of substitute products or services INDUSTRY COMPETITORS Bargaining power of buyers

BUYERS

SUBSTITUTES

Porters Five Forces Framework

1. Barriers to Entry are factors that need to be overcome by new entrants if they are to compete successfully 2. Substitution reduces demand for a particular class of products as customers switch to the alternatives 3. Competitive rivals are organisations with similar products and services aimed at the same customer group 4. & 5. Buyer and Supplier Power can be considered together as they have similar effects on the strategic freedom of the organisation, affecting its margins and financial attractiveness

The Threat of Entry: Barriers to Entry

Scale and experience Access to supply and distribution channels Expected retaliation Legislation or government action Differentiation

Why Are Substitutes a Threat?

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

The Power of Buyers

Are buyers concentrated?

What are the costs of switching?

Does backward vertical integration exist?

The Power of Suppliers

Are suppliers concentrated?

What are the costs of switching?

Does forward vertical integration exist?

Degree of Competitive Rivalry

Competitor

balance Industry growth rate High fixed costs High exit barriers Low differentiation

Managerial Implications

Which industries should we enter or leave? What influence can we exert? How are competitors differently affected?

Other Issues in a Five Forces Analysis

Define

the right industry Determine whether industries are converging Identify complementary products

Convergence

An industry is a group of firms selling the same principal product, or products which are close substitutes for each other. (A sector extends the industry concept into the public services arena) However, the boundaries of an industry can change through convergence of previously separate industries Convergence occurs when previously separate industries begin to overlap in terms of activities, technologies, products, and customers The best of example of convergence in modern times is probably that of the Information Sector created by the convergence of the previously separate telecommunications, computing, and entertainment industries. This convergence was caused by the rapid development of digital information and communications technologies best exemplified, perhaps, by todays generation of cellular telephones. This convergence has led directly to modern society being referred to as the Information Society (see later slides)

Competitors and Markets

Strategic groups

Market segments

Strategic customers

Strategic Group Analysis

Strategic groups are organisations within an industry that have similar strategic characteristics, follow similar strategies, or compete on similar bases It is useful to consider the extent to which organisations differ in such terms The concept helps us understand who are the most direct competitors of a particular organisation in an industry It facilitates consideration of how an organisation could move from one group to another in an industry It also identifies potential opportunities and threats to an organisation

Steps in Strategic Group Analysis

1.

2. 3. 4.

5.

Select appropriate axes. These will be different for each industry. The axes should not be related to each other and should distinguish between companies in the industry Plot companies Interpret the results of this plotting Identify groups and strategic (sometimes also called white) spaces. Strategic spaces are gaps not covered in the map and may suggest market opportunities Explain why these groups seem to exist

Characteristics for Identifying Strategic Groups

Scope of activities Extent of product diversity Extent of geographic coverage Number of segments served Distribution channels Resource commitment Extent of branding Marketing effort Extent of vertical integration Product quality Technological leadership Organisational size

Benefits of Identifying Strategic Groups

Better understanding of competition

Better analysis of strategic opportunities

Better analysis of barriers to mobility

Example: Strategic Group Analysis in the Consulting Industry

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

Focus in this context refers to the degree of specialisation in a particular area versus the offering of an integrated, end-to-end service to a wide variety of clients from different industries Responsiveness refers to both how quickly a firm can move from analysis to execution and how swiftly it has adapted to environmental change The results of their industry mapping exercise (circa April 2000) is shown in the next slide

Strategic Groups in the Consultancy Industry ( 2000 )

N A R R O W Strategy Houses

Niche Firms

Service/ Industry Focus

B R O A D

Vendors SI Giants Big 5 Strategic Space E-Firms

SLOW

Responsivene ss

FAST

Competition over Time : the Life Cycle Model

The competitive advantage enjoyed by an organisation can be eroded over time because of changes in the five forces. Furthermore, competitors may manage to overcome negative forces This process of erosion can be speeded up by changes in the macroenvironment such as those resulting from increasing globalisation, technological development, and liberalisation of/de-regulation in particular markets (e.g. telecommunications, water, power, transport etc.) Organisations are then forced to respond to such erosion in order to regain the lost advantage, giving rise to a cycle of competition/competitive advantage (see next slide) Product life cycle analysis is used to plot the progress of a product over its life span. The model can be used to predict how some of the five forces may change over time The model can show between 4 and 6 stages in the life cycle It is important not to confuse the product life cycle with the industry life-cycle

Cycles of Competition

A Generic Product Life Cycle (4 Stages)

Sales

Introduction

Growth

Maturity

Decline

Time

The Industry Life Cycle

What is a Market Segment?

A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market

Market Segmentation

Market segmentation is the division of a market into homogeneous groups of potential customers who may be treated similarly for marketing purposes Each customer group will have somewhat different needs which can be met by offering each group, or market segment, a somewhat different marketing mix (i.e the 4 Ps see Topic 3) Research shows that segmentation leads to better marketing analysis, customer satisfaction, and higher sales

Some Bases of Market Segmentation

Managerial Issues in Market Segmentation

How

do customer needs vary by market? What is the relative market share within market segments? How can market segments be identified and serviced?

Types of Market Opportunities

In substitute industries In targeting buyers In new market segments In other strategic groups For complementary products Over time

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

There

is a debate over whether strategy making should be externally or internally oriented Porters work suggests that industry factors influence profitability more than firm-specific factors But, this varies by industry

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

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

Porter

& McGahans study, for example, suggests that some industries influence member firms profitabilities more than others Why might some industries have a larger influence on their members profitability than others?

SWOT (OT)

Potential Environmental Opportunities e.g.

Expand core business? Widen product range? Extend cost/differentiation advantage? Diversify into new business(es)? Expand into foreign markets? Apply R & D skills in new areas? Enter new related businesses? Vertically integrate forward? Vertically integrate backward? Enlarge corporate portfolio? Overcome barriers to entry? Reduce rivalry among competitors? Make new profitable acquisitions? Apply brand name capital in new areas? Seek fast market growth?

Potential Environmental Threats e.g.

Attacks on core business(es)? Increase in domestic competition? Increase in foreign competition? Change in consumer tastes? Fall in barriers to entry? Rise in new or substitute products? Increase in industry rivalry? New forms of industry competition? Potential for take-over? Existence of corporate raiders? Increase in regional competition? Changes in demographic factors? Changes in economic factors? Downturn in economy? Rising labour costs? Slower market growth?