3 The Environment – Outline MacroenvironmentPESTELScenariosSources of competition5-forcesUnderstanding competitionStrategic group analysisMarket segmentsCritical success factorsStrategic gapsOpportunitiesThreats
4 Layers of the business environment Very difficult to edit this picture. Idea would be to animate the slide (see slide show), first to show the basic ovals, then bring in the annotation. These lecture notes serve as revision sheets for students so it’s good to include some of the detail.Exhibit 2.1
5 Understanding the Environment DiversityMany different influencesComplexityInterconnected influencesSpeed of changeParticularly ICT
8 Macroenvironment – PESTEL (3) SocioculturalPopulation demographicsIncome distributionSocial mobilityLifestyle changesAttitudes to work and leisureConsumerismLevels of educationTechnologicalGovernment spending on researchGovernment and industry focus on technological effortNew discoveries /developmentsSpeed of technology transferRates of obsolescenceExhibit 2.2
10 Key Aspects of PESTEL Analysis Not just a list of influencesNeed to understand key drivers of changeDrivers of change have differential impact on industries, markets, and organisationsFocus is on future impact of environmental factorsCombined effect of some of the factors likely to be most important
11 Drivers of Globalisation Source: Based on G. Yip, Total Global Strategy ll, FT/Prentice Hall, 2003, chapter 2.Exhibit 2.3
12 Porter’s Diamond The Determinants of National Advantage Source: M. Porter, Competitive Advantage of Nations, Macmillan, 1990.Exhibit 2.4
13 Determinants of National Advantage Some nations are more competitive than othersFostering domestic competitionSome industries within nations are more competitive than othersClusters of organisations from the same industry/sector(Porter 1990,1998)
14 ScenariosDetailed and plausible views of future development of environment, based on groupings of key environmental influences and drivers of change about which there is a high level of uncertaintyDifferent views of possible futuresLong term view of strategy
15 Industries and Sectors Industry – a group of firms producing the sameprincipal product, e.g. mobile phonesSector – a group of organisations providing thesame kinds of services, e.g. healthcareCompetitive forces in the industry:Determine attractiveness of industryAffect the way individual companies competeInfluence decisions on product/market strategy
16 Changing Boundaries of Industry ConvergencePreviously separate industries begin to overlap in activities, technologies, products and customersSupply-led, e.g.bundling and unbundling of sectors in public servicesexternally driven by government regulationexternally driven by e-commerce trendsDemand-led, e.g.Substitution of one product by anotherCustomers want bundling of complementary productsCreates new market segments
17 Competitiveness Business Public sector Gaining advantage over competitorsCompetitive advantagePublic sectorDemonstrable excellence in service deliveryServqualAssess attractiveness of different industries/sectorsIdentify sources of competition in an industry/sectorPorter’s Five Forces
19 Five Forces Analysis (1) The threat of entry ...Dependent on barriers to entry such as:economies of scalecapital requirements of entryaccess to supply or distribution channelscustomer or supplier loyaltyexperienceexpected retaliationlegislation or government actiondifferentiation3
20 Five Forces Analysis (2) Threat of substitutesReduction in demand for products as customers switch to alternatives:Product for product substitutione.g. for postsubstitution of neede.g. reliable and cheap appliances reduce need for maintenance servicesgeneric substitutioncompetition for household income, e.g. cars versus holidaysdoing without6
21 Five Forces Analysis (3) Buyer power is likely to be high where there is / are:a concentration of buyersmany small operators in the supplying industryalternative sources of supplylow switching costscomponents/materials that are a high percentage of cost to the buyer leading to “shopping around”a threat of backward integration4
22 Five Forces Analysis (4) Supplier power is likely to be high where there is / are:a concentration of supplierscustomers that are fragmented and bargaining power lowhigh switching costspowerful supplier brandpossible integration forward by the supplier4
23 Five Forces Analysis (5) Competitive Rivalry is likely to be high when:competitors are in balancethere is slow market growth (product life cycle)there are high fixed costs in an industrythere are high exit barriersmarkets are undifferentiatedCompetitive rivals are organisations with similar products and services aimed at the same customer group = direct competitors4
24 Five Forces Analysis: Key questions and implications Are some industries more attractive than others? (weaker forces)What underlying forces in the macroenvironment drive the competitive forces?Will competitive forces change?What are the strengths and weaknesses of the competitors in relation to the competitive forces?Can competitive strategy influence competitive forces? (e.g. build barriers to entry)Missing in the text – the strengths and weaknesses of the organisation under study in relation to the competitive forces.8
25 Key Aspects of 5-Forces Analysis Use at level of strategic business units (SBU)Define the industry/market/sectorDon’t just list the forces: derive implications for industry/organisationNote connections between competitive forces and key drivers in macroenvironmentEstablish interconnections between the five forcesCompetition may disrupt the forces rather than accommodate themKevan – I am missing some key points in the text. It is absolutely critical that students define the industry they are analysing. And that they rate the forces and derive the implications of that for the industry/organisation. Also emphasise that this is industry analysis, not analysing the individual organisation.
27 Dynamics of Competition (1) Process of competition over timeErosion of competitive advantageChanges in five forcesCompetitors overcoming adverse forcesCycles of competitive responseSlow: long periods of established pattern of competitionFast: hypercompetition, constant disequilibrium and change
28 Dynamics of Competition (2) Implications of speed of competitive cycle:Slow-moving - build and sustain competitive advantages which are difficult to imitateFast-moving - advantage is temporary, disrupt status quo, sequence of short-lived moves
30 Strategic GroupsStrategic groups are organisations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases
31 Some characteristics for identifying strategic groups Sources: Based on M.E. Porter, Competitive Strategy, Free Press, 1980; and J. McGee and H. Thomas, ‘Strategic groups: theory, research and taxonomy’, Strategic Management Journal, vol. 7, no. 2 (1986), pp. 141–160.Exhibit 2.8
32 Identification of Strategic Groups (1) Scope of activitiesProduct/service diversityGeographical coverageNumber of market segments servedDistribution channelsI don’t think the MBA example for strategic groups is a very good one – food retail or cars would be easier for students to understand. In that case it would be worth an illustration.Sources: Based on M.E. Porter, Competitive Strategy, Free Press, 1980; and J. McGee and H. Thomas, ‘Strategic groups: theory, research and taxonomy’, Strategic Management Journal, vol. 7, no. 2 (1986), pp. 141–160.
33 Identification of Strategic Groups (2) Resource commitmentExtent of brandingMarketing effortExtent of vertical integrationProduct/service qualityTechnological position (leader, follower)Size of organisationI don’t think the MBA example for strategic groups is a very good one – food retail or cars would be easier for students to understand. In that case it would be worth an illustration.Sources: Based on M.E. Porter, Competitive Strategy, Free Press, 1980; and J. McGee and H. Thomas, ‘Strategic groups: theory, research and taxonomy’, Strategic Management Journal, vol. 7, no. 2 (1986), pp. 141–160.
34 Uses of Strategic Group Analysis To understand who are the most direct competitors of an organisationTo establish the different bases of competitive rivalry within and between the strategic groupsTo assess if an organisation could move from one group to anotherDepends on barriers to entryTo identify opportunities and threatsChanges in the macro-environment may create strategic space
35 Market Segments The strategic customer A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the marketThe strategic customerThe person(s) to whom strategy is primarily addressed because they have the most influenceWhat customers value – critical success factorsThose product features particularly valued by a group of customers and where the organisation must excel to outperform competitionThis is a very narrow definition of critical success factors. The critical success factors for an oil company are, for example, ability to negotiate with governments, access to large amounts of capital etc. Nothing to do with customers.
37 A Strategy Canvas Perceived value in the electrical engineering industry Exhibit 2.10
38 Strategic GapsOpportunities in business environment not being fully exploited by the competition:substitute industriesother strategic groups or strategic spacesthe chain of buyerscomplementary products and servicesnew market segmentsmarkets developing over time(Kim & Mauborgne 1999)
39 Environment – Key Points (1) PESTEL identifies key drivers of changeScenarios analyse future implications of uncertain environmental forces5 forces framework identifies sources of competition in an industryCompetition is dynamic
40 Environment – Key Points (2) Within an industry there are strategic groups competing on similar basesMarket segments help to understand differences between customersCritical success factors are those features particularly valued by customersEnvironmental analysis identifies opportunities and threats