Lecture 2 External Environment Analysis & Globalisation

SM Process: Strategic Position Strategic position considers the current position of the firm in the light of future changes in the external global environment and its internal resource capabilities. How to analyse an organisation’s position in the external, global environment (L2) How to analyse the a firm’s internal resources, capabilities and core competencies (L3).

Learning Outcomes Assess macro-environmental influences and the major drivers of change. Understand how industry structure drives competition and determines the level of industry profitability Analyse industry attractiveness by applying the 5 forces model and consider how changes to the forces can affect future profitability Define international business, globalisation, and the multinational company (MNC) Examine the impact of globalisation on the external macro-environment.

Strategic Position Analysis Internal Resources & Capabilities Strengths Weaknesses Opportunities Threats External Environment

External Environment Analysis O & T Opportunity A trend in the external environment which potentially has a positive impact on the organisation and, if exploited, will improve it’s performance. Threat A trend in the external environment which potentially has a negative impact on the organisation and, if not addressed, will hinder it’s performance.

Spheres of External Analysis Macro-Environment Industry Competitive Environment Competitors Organisation

Key Questions: Macro Environment Identify external trends – which are the most important environmental forces affecting the organisation? Assess the impact of the trend on the industry and the firm (+ opportunity or - threat) Evaluate trend and impact to derive key drivers from the external environment - which forces are likely to have a significant influence on the organisation in the future? Build alternative scenarios from key drivers. Useful framework = PEST ANALYSIS

Building your Analysis Identify the PEST factors affecting the organisation and monitor changes. Forecast/project the trends into the future. Impact analysis - anticipate the impact of the trends on the strategy of the organisation and the expected timing of events.

P = Political and legal factors E = Economic + globalisation PEST Identifies trends but remember your impact analysis, leading to key drivers for change P = Political and legal factors E = Economic + globalisation S = socio-cultural factors + environment T = technological developments Johnson et al expand the framework to PESTLE They have a separate set of trends for legal factors (L) and a 2nd E for changes in the natural environment - green issues.

From Macro to Industry Analysis The national/ global economy Technology The Competitive Environment Suppliers Competitors Customers Social -Cultural, Environment Political/Legal The Macro - Environment is difficult for the organisation to influence. The Macro Environment directly effects the Industry Competitive Environment. 3

Porter’s Model Use the 5 Forces Model to evaluate competiveness: Assess profitability – industry attractiveness Understand forces influencing competition Identify which forces are critical to future competitiveness Opportunities & Threats to support strategy choices: Can the firm develop strategies to influence the key forces? How can a firm develop a position against the forces & rivals to gain competitive advantage?

Porter’s Five Forces Model Competition in an industry is more than the visible rivalry between competitors, you must in addition to competitive rivalry, consider 4 other forces: Demand side (prices) – bargaining power of buyers Supply side (costs) – bargaining power of suppliers Potential for new entrants (more competitors) Threat from substitute products (less demand)

Potential entrants Threat of entrants Bargaining power Suppliers COMPETITIVE RIVALRY Buyers Bargaining power Threat of substitutes Substitutes

Industry Structure and Profitability Force Profitability Profitability higher if lower if Barg’ing power of suppliers weak suppliers strong suppliers Bargaining power of buyers weak buyers strong buyers Threat of new entrants high entry barriers low entry barriers Threats from substitutes few substitutes many substitutes Competitive rivalry little rivalry intense rivalry Environment Attractive Unattractive Analytical task: assess the influence of each force- weak/medium/strong using the factors which influence each force. What are these factors?

The Threat of Entry How easy it is for new potential competitors to enter the industry depends on the height of the barriers to entry: Sources of barriers to entry are one or more of: Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to channels of supply & distribution Legal and regulatory barriers Expected Retaliation 9

Power of Buyers Are the buyers concentrated v. the competitors? Are the switching costs high or low? High or low product differentiation? Does the buyer purchase a large portion of industry output? Is their a threat of vertical backwards integration?

Power of Suppliers Are the suppliers concentrated v. the competitors? Are the competitors a significant customer to the supplier group? Are the suppliers inputs critical to competitor’s success? (high or low product differentiation?) Are the switching costs high or low? Is their a threat of vertical forwards integration?

Threat of Substitutes Not to be confused with other competitor products, substitutes meet similar customer needs but are meet by players outside the industry. The threat depends on: the buyers’ propensity to substitute the price-performance characteristics of substitutes. 8

Visible Signs of Rivalry Using price competition Advertising battles Making new product releases Increasing consumer service levels

Degree of Competitive Rivalry Competitive Rivalry tends to be more intense when: There are numerous competitors or a smaller number of equally balanced competitors Industry growth is slowing and entering maturity There are high fixed costs to cover Products have limited differentiation (approaching commodity status) and low switching costs There are high exit barriers.

Industry Structure and Profitability Force Profitability Profitability higher if lower if Barg’ing power of suppliers weak suppliers strong suppliers Bargaining power of buyers weak buyers strong buyers Threat of new entrants high entry barriers low entry barriers Threats from substitutes few substitutes many substitutes Competitive rivalry little rivalry intense rivalry Environment Attractive Unattractive Analytical task: assess the influence of each force- weak/medium/strong using the factors which influence each force. What are these factors?

Applying the Five Forces Model Forecast Industry Profitability by: identifying and evaluating the key forces influencing the future competitive environment and their impact on profitability Review strategies to improve industry profitability: which key forces are lowering profitability which key forces can be changed in the future by individual firm strategy or in collaboration between existing or potential competitors

Strategic Groups Strategic Groups A group of firms within an industry which compete on a similar bases and share similar characteristics – a subset of the industry ‘s 5 forces. Examples of characteristics defining strategic groups are: Product range Geographic coverage – markets, production. Market segments Distribution channels Technology Organisation size Industry examples: Car industry, Airlines, Supermarkets

Global Environment: What’s Different? Multiple Operating Environments Diverse PEST trends impacting value chain e.g. consumer preferences, distribution channels Responding to diverse host governments and cultures Currency risks impacts on costs and revenues Organisational complexity and diversity Integration of operating units across time zones, languages and cultures

Summary External environment analysis identifies future threats and opportunities There are 3 potential levels of analysis: macro-environment (PEST), industry competitive environment (5 Forces), intra-industry strategic groups (SGA). In PEST: discuss trend, assess impact, identify key drivers of future change. In 5 Forces: assess each force by analysing underlying factors then conclude on the attractiveness of industry and key forces impacting future structure of industry competition Refine 5 forces analysis further through SGA.