Analysing the external environment of business (i.e. general, competitive)
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Transcript of Analysing the external environment of business (i.e. general, competitive)
Scanning the business
environment(i.e. general and
competitive)
Dr. Miles Weaver,Senior Lecturer in Strategic Management,Leicester Business [email protected]
Join an ongoing debate:With your lecturer: @DrMilesWeaverClassmates & the world using: #ManStrat
“It is not the strongest of the species that survive, nor the most intelligent, but the most responsive to change.”
- Darwin
Student appointment:
“if ignorant both of your enemy and yourself, you
are certain to be in peril”.
“The supreme art of war is to subdue the enemy
without fighting”.
“All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved”.
- Sun Tzu
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Session aims and objectivesAt the end of this lecture students should be able to:- Identify major external influences on
organisations and outline tools with which to analyse any business environment
Objectives:- Understand the importance of environmental
scanning and how it fits into the strategic management process
Conduct a PESTLE analysis for an organisation with which you are familiar
Identify the main sets of forces exerting influence on organisations
Use Porter’s five forces analysis to define the attractiveness of industries and sectors for investment and to identify their potential for change
Identify strategic groups within an industry with similar strategic characteristics
Remember last week ..The strategic management process
Strategic management involves the major decisions, business choices, and actions that chart the course of the entire organisation
It consists of: Analysis of the internal and
external environment of the firm
Definition of the firm’s mission Formulation and
implementation of strategies to provide a competitive advantage
Analyze internal and external environment
Define strategic intent and mission
Formulate strategies
Implement strategies
Assess strategic outcomes
Strategic management starts with the situation/position
External Factors
Internal Factors
Social,political,
regulatory,& community
considerations
Industryattractiveness,
industry dynamics, &competitiveconditions
Other opportunitiesand threats --
like new technologies
Company’s Strategic Situation/position
Firm’s strengths,
weaknesses,& competitive
market position
Ambitions,philosophies,
& ethical principles
of key executives
Shared vision, values
and companyculture
Analysing the external environment
Firms study the external environment in order to: Identify opportunities and threats in the
marketplace▪ we will centre on this when formulating
strategies, as well as the internal strengths and weaknesses to be discussed in the next lecture topic
Avoid surprises Respond appropriately to competitors’ moves
A major challenge is to gather accurate market intelligence in a timely fashion, and transform it into usable knowledge to gain a competitive advantage over other firms
Why do we care about the external environment?
Strategy needs to be adaptive and dynamic Need to know what to adapt to Need to understand dynamics
Impact on organisation On growth and scope for growth On level and nature of competition On “rules of the game” On costs On profit
Environmental influences
Environmental influences on the organisationSource: Adapted from Dobson et al.(2004), See Boddy (2010)
Lets look at the general
(macro) environment
Macro environment – The PESTLE framework
Economic Forces – regulate the exchange of materials, money, energy and information
Technological Forces – generate problem-solving inventions
Political-legal Forces - allocate power and provide constraining and protecting laws and regulations
Socio – cultural Forces – regulate the values, morals, and customs of society Johnson, Scholes, and Whittington (2011)
Identifying environmental influences – PESTEL analysis
Source: Boddy (2010)
Key aspects of PESTLE analysis Not just a list of influences Need to understand key drivers
of change Drivers of change have
differential impact on industries, markets, and organisations
Focus is on future impact of environmental factors
Combined effect of some of the factors likely to be most important
Your tutorial task is to consider the general (macro) environment of BP
Lets now turn to the competitive environment
Environmental influences on the organisationSource: Adapted from Dobson et al.(2004) as cited in Boddy (2010).
What was Michael Porter asking?
M.E. Porter (1980) discussed ‘Competitive Strategy’
What makes some industries more attractive/successful than others? “…identifying the basic, underlying
characteristics of an industry rooted in its economics and technology that shape the arena in which competitive strategy must be set.” (p.6)
Competition reflects structure Structure determines profit
potential Porter (1980)
Industries and sectors
Competitive forces in the industry: Determine attractiveness of industry Affect the way individual companies compete Influence decisions on product/market strategy
Industry – a group of firms producing the sameprincipal product, e.g. mobile phones
Sector – a group of organisations providing thesame kinds of services, e.g. healthcare
Industry – a group of firms producing the sameprincipal product, e.g. mobile phones
Sector – a group of organisations providing thesame kinds of services, e.g. healthcare
Competitiveness
Business Gaining advantage over competitors
▪ Competitive advantage
Public sector Demonstrable excellence in service
delivery▪ Servqual
Assess attractiveness of different industries/sectorsIdentify sources of competition in an industry/sector
Porter’s Five Forces
Assess attractiveness of different industries/sectorsIdentify sources of competition in an industry/sector
Porter’s Five Forces
Five forces framework
Key questions and implications:
Are some industries more attractive than others? (weaker forces)
What underlying forces in the macro-environment 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)
Key aspects of five forces analysis
Use at level of strategic business units (SBU)
Define the industry/market/sector
Don’t just list the forces: derive implications for industry/organisation
Note connections between competitive forces and key drivers in macro environment
Establish interconnections between the five forces
Competition may disrupt the forces rather than accommodate them
Adapted from: Porter (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, p. 4.
Power of other
Stakeholders
?
Threat of new entrants
Affected by entry barriers such as high costs of equipment and
facilities lack of distribution facilities customers loyal to established
brands small companies lack economies of
scale subsidies/regulations favour existing
firms
E.g. Patent-protected drugs, presentation software
Fewer new entrants = more profit
Bargaining power of buyers (customers)
Power of buyer increases if: Buyer takes high % of supplier’s
sales Many alternative products or
suppliers Product a high % of buyers costs,
creating incentive to seek alternatives
Cost of switching to other suppliers is low
E.g. online products, major supermarkets like Wal-Mart, Tesco
Greater power of buyers = less profit to seller
Bargaining power of suppliers
Power of supplier is high if: Buyer takes small % of sales Few alternative products or
suppliers (distinctive product keeps buyers loyal)
Product a low % of buyer’s costs, little incentive to seek alternatives
Cost of switching suppliers high
E.g. luxury brands, business software
High power of supplier = less profit to buyer
Substitutes
Substitution becomes easier if: Buyers willing to change
habits Technological developments
enable new products and services
Transport costs falling New suppliers entering a
market
E.g. online media, new materials
Easy to substitute = less profit to supplier
Intensity of rivalry amongst competitors
Rivalry increases when: many firms, but none dominant market growing slowly, so firms
fight for share high fixed costs encourages over-
production loyalties (family businesses or
political support) prolong over-capacity
e.g. airlines, agriculture, Nokia and new mobile suppliers, current banking industry?
Greater rivalry = lower profit
Managing the five forces
Subjective interpretation as well as objective realities
Forces contradict/balance each other
Managers can consciously try to shape them as part of their strategy
Competitive forces affected by those in the general environment
The mobile phone industry
Threat from Substitutes
Suppliers’ Power
Threat from New
Entrants
Buyers’ Power
Rivalryof
Firms
Is low due to the enormous cost in licences (£22bn) and general investment into new 3G technology. This might become a threat if policy towards heavy regulation is to change
Equipment manufacturers compete for the market share. Nokia, Motorola, Sony Ericsson. Consolidation in the industry.
Buying power of consumers is very high, as there is a lot of choice. Existence of independent retailers CPW, Link,
Others differentiated themselves through cheap advertising
Convergence of mobile telephony with PDAs and with Internet. This could switch both voice and text messaging into internet.
Very intense. Numerous offers, packages. If a customer threatens to withdraw , the provider could offer a new phone, free line rental.
Market is mature, and now emphasis is on price, coverage, customer service
In your own time consider this slide and the clip illustrating Apple iphone Vs competitors available on the blog
The dynamics of industry structure
Johnson, Scholes and Whittington (2008), pp. 67 - 69
Competitors and markets
An industry or sector may be too high a level to provide for a detailed understanding of competition
Many industries contain a range of companies, each of which has different capabilities and compete on different bases
These competitive differences are captured by the concept of strategic groups
Strategic groups
Strategic groups are organisations within
an industry with similar Strategic
characteristics, following similar strategies or
competing on similar bases
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.
See Johnson, Scholes, and Whittington (2008)
Use of strategic group analysis
To understand who are the most direct competitors of an organisation
To establish the different bases of competitive rivalry within and between the strategic groups
To assess if an organisation could move from one group to another Depends on barriers to entry
To identify opportunities and threats Changes in the macro-environment may
create strategic space
Strategic group analysisAutomotive manufacturers
Regionally Focused:Broad Line Producers
E.g. Fiat, PSA, Renault
Nationally FocusedIntermediate Line
ProducersE.g. Kia, Proton
Nationally Focused, Small, Specialist
ProducersE.g. Morgan (UK)
Performance CarProducers
E.g. Porche, Lotus
Luxury ManufacturersEg Jaguar, BMW
Global Suppliers of Limited Range
E.g. Volvo, Saab, Subaru, Daihatsu
Global Broad Line Producers
E.g. GM, Ford, ToyotaNissan, VW, Honda
Narrow
Broad
PRODUCTRANGE
National GlobalGEOGRAPHICAL SCOPE
McGee & Thomas, 1986
Summary
Strategic management starts with the strategic situation/position
A company’s strategic situation/position consists of understanding both the external and internal environment (internal environment to be discussed next week)
PESTEL identifies key drivers of change 5 forces framework identifies sources of
competition in an industry Competition is dynamic Within an industry there are strategic groups
competing on similar bases
Environmental analysis identifies opportunities and threats (NB: consider the strategic management process)
Learning strategy
READING
Capon (2008), chapter 2 (in custom text)
Boddy (2010), chapter 3
Indicative: Johnson, Scholes and
Whittington (2011) Worthington and Britton (2006)
ACTIVITY
Prepare BP case in your group using your WIKI, for forthcoming tutorial
Obtain the market report (e.g. Mintel, Datamonitor) for your chosen organisation and conduct research into its business environment
Use the tools noted in this lecture and in the texts to analyse the external environment You will need to demonstrate this
analysis in the assessment and use your findings to synthesise a view of the organisations strategic position (e.g. industry attractiveness, major external influences)
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