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BUSINESS STRATEGYBUSINESS STRATEGY
MKT3002 / 51110MKT3002 / 51110
LECTURE THREE:
Topic 3: Strategic analysis
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Module 3Module 3
Strategic analysisStrategic analysis ² ² Analysing the environmentAnalysing the environment Learning outcomes
² Describe the components of the external
environment within which an organisation
operates
² Carry out a full PEST analysis
² Appropriately conduct a Porter·s ¶5 forces·
analysis to assess industry attractiveness
² Explain the significance of segmentation in
strategic planning
² Undertake a competitor analysis; and
² Undertake a directional policy matrix to
consider the portfolio of a business
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Key words and conceptsKey words and concepts Environmental uncertainty
PEST analysis
Environmental drivers of change Porter¶s diamond
Scenario planning
Five forces analysis
Life-cycle model
Exit barriers
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Key words and conceptsKey words and concepts Strategic group analysis
Market segmentation analysis
Perceived value Market attractiveness
Directional policy matrix
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IntroductionIntroduction
The external analysis may be viewed as a process
which:
± Identifies trends and future events, opportunities andthreats and strategic uncertainties;
± Analyses the impacts of these on organisations; and
± Ultimately suggests ways or strategies to cope with
such impacts.
Aaker 1999
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Steps in theSteps in the
environmental analysisenvironmental analysis
Assess the nature of the environment
Audit environmental influences
Identify key competitive forces
Identify competitive position
Identify key opportunities
and threats
Strategic
position
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Differences between externalDifferences between external& internal environments& internal environments
External environment: ± The management has no control over most of
its components.
± React to the changes in the environment.
Internal environment:
± The management has varying degree of influence of its components.
± Seeks to change the environmental influenceitself.
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Understanding the nature of Understanding the nature of
the environmentthe environment
Environmental uncertainty increases the
more that environmental conditions aredynamic or the more they are complex.
Environmental conditions:
± Simple / static conditions ± Dynamic conditions
± Complex situations
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Auditing environmentalAuditing environmental
influencesinfluences
The importance of environmental forces differ
from organisation to organisation.
Three auditing technique:
± PEST analysis
± Porter¶s diamond
± Scenario Planning
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PEST analysisPEST analysis It involves identifying factors that influence theorganisation. These factors include:
± Political / legal
(eg.Ta
xation policy, foreign trade regulations,government stability)
± Economic
(eg. unemployment, disposable income)
± Sociocultural
(eg. Lifestyle change, levels of education)
± Technological
(eg. Government spending on research, speed of technology transfer)
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Porter·s diamondPorter·s diamond
Porter·s Diamond: suggests that there are inherent reasons
why some nations are more competitive than others and why some
industries within nations are more competitive than others.
Firm strategy,
structure and rivalry
Factor conditions
Demandconditions
Related and
supporting industries
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Environmental drivers of changeEnvironmental drivers of change
Global marketconvergence
Global
competition
Govt
influence Cost
advantages
Trade policies
Technical
standards
Host
government
policies
Scale economies
Sourcing
efficiencies
Country-specific
costs
High product
development costs
Similar customer needs
Global customers
Transferable marketing
Interdependence
Competitors global
High exports / imports
Global strategies
Drivers of
globalisation
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Scenario planningScenario planning ¶build·s plausible views of different
possible futures for an organisation based
on grouping of key environmental
influences and drivers of change about
which there is a high level of uncertainty·.
Limited number of logically consistent.
Examine strategic options against thescenarios.
Implications of scenarios.
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External factor evaluationExternal factor evaluation
matrix (EFE)matrix (EFE)
¶The EFE matrix allows strategies to
summarise and evaluate economic, social,
cultural, demographic, environmental,
political, governmental, legal,
technological, and competitive
information·.
David 2001, p. 113
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External factor evaluationExternal factor evaluation
matrix (EFE) (Cont)matrix (EFE) (Cont)
Steps in developing the EFE matrix: ± Identify a list of KEY external factors (critical success
factors).
± Assign a weight to each factor, ranging from 0 (notimportant) to 1.0 (very important).
± Assign a 1-4 rating to each critical success factor to indicatehow effectively the firm¶s current strategies respond to thefactor. (1 = response is poor, 4 = response is extremelygood)
± Multiply each factor¶s weight by its rating to determine aweighted score.
± Sum the weighted scores.
± Average total weighted score is 2.5.
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External factor evaluationExternal factor evaluation
matrix (EFE) (Cont)matrix (EFE) (Cont)
Key external factors
Opportunities
1. Global markets are
practically untapped
by quality wool.
2. Increased demand
caused by a raised in
wool products.
Threats
1. Legislation against the
wool industry.
2. Increased competition.
Weight
0.35
0.2
0.3
0.15
Rating
4
2
1
2
Weighted
Score
1.4
0.4
0.3
0.3
Developing the EFE matrix - Example
Total 1.00 2.4
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Competitive profile matrixCompetitive profile matrix
(CPM)(CPM)
¶The CPM identifies a firm·s major competitors and
their particular strengths and weaknesses in
relation to a sample firm·s strategic position·.
David 2001, p. 115
Key success factors (KSFs)
± Technology related
± Distribution related
± Marketing related
± Skills related
± Organisational capability
± Other types of KSFs
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Competitive profile matrixCompetitive profile matrix
(CPM) (Cont)(CPM) (Cont)
Developing the CPM - Example
Key success factors
Advertising
Product quality
Customer loyalty
Financial position
Global expansion
Market share
Weight
0.1
0.3
0.2
0.2
0.1
0.1
Rating
3
4
3
3
2
3
Score
0.3
1.2
0.6
0.6
0.2
0.3
Total 1.00 3.2 2.1 3.1
CompanyA
Rating
3
2
2
2
2
2
Score
0.3
0.6
0.4
0.4
0.2
0.2
Company B
Rating
4
3
2
4
1
2
Score
0.4
1.2
0.4
0.8
0.1
0.2
Company C
Rating: 1=major weakness, 4=major strength
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The competitive environment:The competitive environment:
Five forces analysisFive forces analysis
¶Five forces analysis is a means of identifying
the forces which affect the level of competition in an industry·.
Johnson & Scholes 1999, p.115.
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Porter¶s Five forces industry analysisPorter¶s Five forces industry analysis
Potential entrants
Buyer Supplier
Substitutes
Competitive
rivalry
Threat of substitutes
Bargaining power
Bargaining power
Threat of entrants
Adapted from M. E. Porter, Competitive Strategy
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Competitive rivalryCompetitive rivalry
Development Growth Shakeout Maturity Decline
Few: trial of early adopters
Users/buyers
Competitive
conditions
Few:competitors
Growing adopters:trial of product/service
Entry of competitors
Attempt to achieve trial
Fight for share
Undifferentiatedproducts/services
Growing selectivityof purchase
May be many
Likely price cutting of
Volume
Shakeout of weakest
competitors
Saturation of Users
Repeat purchasereliance
Fight to maintainShare
Difficulties ingaining/taking share
Emphasis onefficiency/low cost
Drop-off In usage
Exit of some competitors
Selective distribution
The life cycle model
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Competitive rivalry (Cont)Competitive rivalry (Cont)
Other forces that affect competitive rivalry:
± Competitors balance;
± Market growth rates; ± Global customers;
± High fixed costs;
± Extra capacity;
± Differentiation;
± Acquisition of weaker companies; and
± High exit barriers.
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Identifying the organisation·sIdentifying the organisation·s
competitive positioncompetitive position
1. Strategic group analysis
2. Market segmentation
3. Perceived value (customer )
4. Boston consulting group matrix (BCG)
5. Market attractiveness & business strength
6. Competitor analysis
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1. Strategic group analysis1. Strategic group analysis
µaims to identify organisations with similar
strategic characteristics, following similar
strategies or competing on similar bases¶.David 2001, p. 127
The strategic group analysis is useful in the
following ways:
± Identify direct competitors.
± Identify the possibility for an organisation to movefrom one strategic group to another.
± Identify opportunities.
± Identify significant strategic problems.
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2. Market segmentation2. Market segmentation
µseeks to identify similarities and
differences between groups of customers or users¶.
David 2001, p. 129
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3. Analysing perceived3. Analysing perceived
value by customersvalue by customers
The development of competitive strategy needsto be based on a good understanding of
dimensions of strategy valued most bycustomers. This can be achieved through:
± Identify the relevant market segments.
± Identify the characteristics of the product/service that
customers value most.
± Rate the importance of these dimensions.
± Identify the relative strengths of competitors.
± Review organisation¶s competitive strategy.
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4. The BCG4. The BCG
?Sales
growth
Market share
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5. Market attractiveness5. Market attractiveness
and business strengthand business strength
Directional policy matrix ± It seeks to position SBUs according to:
(a) how attractive is the relevant market in which
they are operating, and
(b) the competitive strength of the SBU in that
market.
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6. Competitor analysis6. Competitor analysis
Obtain information about competitors.
Identification of appropriate criteria.
± Eg. Goals and objectives, culture, financial, target
market, and etc.
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Environmental analysisEnvironmental analysis
in practicein practice
Simplify the complexity.
Selective attention.
Prototypes.
Contribute to collective know-how.
Threats rather than opportunities.
Difficulty in building up an overall strategic view of
the environment.
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Lecture 3 reviewLecture 3 review
Strategic analysis ± Understanding the nature of the
environment ± Audit environmental influences
± Identify key competitive forces
± Identify competitive position
± Identify key opportunities and threats
± Environmental analysis in practice
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Next weekNext week lecturelecture
Module 4:
Resources, competencies, strategic
capability.
(Study book: Module 4 - Text Chapter 4)
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Next week·s tutorialNext week·s tutorial
Prepare by going over the casequestions at end of module
Read article from BRW 23/07/99
³Grooving in a new Mood´ p 84 ±7
Do a porters five forces analysis
Will environmental changes affect the way theretail music stores look like in the future?
If you were to invest money in a business,would you consider a music retailer?