Ch2 3 General and Competitive Environment (2)

Henry: Understanding Strategic Management

The General & Competitive Environment

(Slides based on Chapters 2 and 3)

Key concepts we will cover:

• Analysing the General Environment– PEST analysis– Risk & Scenario Planning

• Analysing the Competitive Environment– Porter’s 5 Forces model– Porter’s Strategic Group Analysis– Hypercompetition

The General Environment

• The external environment facing the organization consists of:

• General environment • Competitive environment

• The changes that occur in the general environment transcend organizations and industries

• The competitive environment consists of the industry and markets in which an organization competes

Some Interactions Between Businesses & Their Environment

TheOrganisation

Customers

Suppliers

Competitors

Business SupportGroups

Wholesalers Public Opinion

Local Communities

Social Activist Groups

ForeignGovernments

National & Local

Governments

Shareholders& Creditors

Adapted from K Davis & W C Frederick “Business and Society: Management, Public Policy, Ethics”, 5th Edition, McGraw-Hill, 1984

Media

Employees


• The figure shows the

relationship between the

organization and its

external environment

• Other things being

equal, it is the competitive

environment that has

the greatest impact on

the organizationFigure 2.1


• PEST analysis is useful for scanning the general environment

• PEST is political, economic, social, and technological factors

• PEST analysis can be used to identify weak signals that may point to a discontinuity shaping the environment • PEST provides a link between the general and competitive environment • Weak signals in the general environment can become forces for change in the competitive environment

ESTEMPLE - expanding PESTDRIVERS

Economic

Social

Technological

Ecological

Media

Political

Legal

Ethical

Health & direction of economy in which firm competes - e.g. GDP, inflation, interest rates, unemployment

TIME

Demographic variables - e.g. population size & age, geographic distribution, ethnic mix etc. Also tastes, fashions, attitudes and values.

Primarily new products, processes and materials. Includes institutions and activities involved in knowledge creation and transfer.

Reflects concern for sustainability of resource use. Issues include CO2, genetic engineering, waste disposal, energy consumption

Increasingly important influence on business, politics and society as opinion former and shaper

Issues include government stability, alignment at international level, trade, social welfare, taxation and fiscal policies, state ownership

Generally employment law, H & S at work, product safety, monopolies & mergers, etc. Specific laws often have commercial implications

Codes rising in importance - affects operations internationally - can impact bottom line (in combination arguably with Media and Social factors)


Van Der Heijden (1996) identifies 3 types of uncertainty:

1. Risks - where past performance of similar events allows us to estimate the probabilities of future outcomes

2. Structural uncertainties - where an event is unique enough not to offer evidence of such probabilities

3. Unknowables - where we cannot even imagine the event

The Future …...

“We will never be able to escape from the ultimate dilemma that all our knowledge is about the past, and all our decisions are about the future”Ian Wilson (2000) “From Scenario Thinking to Strategic Action”,

Technological Forecasting and Social Change, Vol 65, pp23-29


• Scenario planning is an internally consistent view of what the future might turn out to be

• It is not a forecast but a tool of analysis to help the organization recognise weak signals

• Scenario planning helps managers to overcome biases and imperfect reasoning

• Scenario planning helps managers to recognise change that may not fit their theory of business


Undertaking Scenario Planning [1]

1. Define the Scope

2. Identify the Major Stakeholders

3. Identify Basic Trends

4. Identify Key Uncertainties

5. Construct Initial Scenario Themes


Undertaking Scenario Planning [2]

6. Check for Consistency and Plausibility

7. Develop Learning Scenarios

8. Identify Research Needs

9. Develop Quantitative Models

10. Evolve Towards Decision Scenarios

British Airways (BA) created two scenarios of possible change from 1995 to 2005.

Scenario Planning at BA

“Wild Gardens”• Asian markets grow rapidly• US falls into long recession• 1997 Election in UK won by

Conservatives for fifth time• EU enlarged but no single

currency• EC initiates an Atlantic Open

Skies agreement

“New Structures”• Asia’s rise slower than expected

and investment reduced• 1997 Election in UK won by Labour

who promote stronger European integration and a single currency

• This leads to EU integrated air traffic control and high speed rail expansion

• US commitment to environmental targets increases

K Moyer, “Scenario Planning at British Airways - a case study”, Long Range Planning, Vol 29, Iss 2, 1996

The Competitive Environment Porter’s five forces

• An analysis of industry structure

• The framework tries to capture the variation of competition while remaining pervasive and rigorous

• Generalizations are made to all industries on the basis of 5 core elements

• Undertaken from the perspective of incumbent organizations


• Undertaken at the level of an organization’s strategic business unit (SBU)

• Industry attractiveness (profit potential) determined by interaction of 5 competitive forces

• Organizations should position themselves to mitigate prevailing industry structure (See Ch. 7)

• It is the combined strength of these 5 forces that determine an organization’s return on investment


• Porter’s Five Forces Framework of Industry Competition

Figure 3.1


• The Threat of New Entrants

• The Bargaining Power of Buyers

• The Bargaining Power of Suppliers

• The Threat of Substitute Products and Services

• The Intensity of Rivalry among Competitors in an Industry


The Threat of New Entrants• New competitors entering an industry and

reducing its profitability• New entrants will be attracted to industries that

earn profits in excess of their cost of capital• The threat of entry will depend on:

– the existence of barriers to entry – the reaction of existing competitors.

• High barriers to entry make the threat of entry low

• Expected retaliation will deter firms entering the industry


The Bargaining Power of Buyers • This reflects the extent to which their purchase

represents a sizeable proportion of the organization's overall sales

• Buyer power increases when:- buyers are concentrated- the industry product is standard or

undifferentiated- the costs of switching are low - buyers pose a credible threat of backward

integration


The Bargaining Power of Suppliers

NB The buyer is the firm in the industry and the supplier is the producer of that firm’s input

• Supplier power increases when:- the supplier industry is dominated by a few companies - It is more concentrated than the industry it sells to - suppliers are faced with few substitutes - suppliers’ products are differentiated - suppliers pose a credible threat of forward integration


The Threat of Substitute Products and Services

• The threat from products and services that can meet similar needs

• It does not refer to competition from new entrants

• Substitutes limit the potential returns of an industry

• The price/performance ratio of substitute products will determine the extent of their threat


The Intensity of Rivalry among Competitors

This is affected by:• Numerous or equally balanced

competitors • Slow industry growth • High fixed costs • Lack of differentiation or switching costs • Extra capacity in large increments • High exit barriers

Industry Lifecycle Analysis

Stage

Embryonic Growing Shakeout Mature Decline

Users/Buyers

Few: trial of early users

Growing adopters: trial of product/service

Growingselectivity ofpurchase

Saturation ofusers: Repeatpurchasereliance

Drop-off inusage

CompetitiveConditions

Few competitors

Entry of competitors

Attempt to achieve trial.

Fight for share.

Undifferentiated product/service.

May be many.

Likely price cutting for volume.

Shakeout of weakest competitors.

Fight to maintain share.

Difficult to gain/take share.

Emphasis on efficiency and low cost

Exit of some competitors.

Selective distribution.

G Johnson, K Scholes and R Whittington, “Exploring Corporate Strategy”, 7th Edition, Pearson, 2005, p86

The Competitive Environment

Criticisms of Porter’s Five Forces • The five forces framework assumes a zero-

sum game • It is static and assumes stable markets• Many strategies are not deliberate but

emerge (Mintzberg and Waters, 1985)• The government might usefully constitute a

sixth force• The five forces need to approximate more

closely a dynamic theory of strategy

The Competitive Environment Extending Porter’s Five Forces

• Brandenburger and Nalebuff (1996) use of the value net

• The value net includes:- a map of the competitive game- the players in the game- their relationship to each other

• Complementors supply complements to an industry and thereby increase its value

The Competitive Environment

• The Inclusion of Complementors within Porter’s Five Forces

Figure 3.4

The Competitive EnvironmentStrategic Group Analysis

Strategic groups are:• Firms in an industry following similar or

identical strategies • Strategic groups constitute a cluster within an

industry• Mobility barriers deter movement between

strategic groups• If strategic groups are moving further apart

‘strategic space’ may exist that can be exploited

Strategic Group Analysis

Buzz

Go VirginExpress

Air One

KLMuk

easyJet

Ryanair

Broad

Narrow

Ext

ent

of

Ro

ute

Sys

tem

Services

Basic Many Added

European Airline Industry (Budget Sector) in 2001G Johnson and K Scholes, “Exploring Corporate Strategy”, 6th Edition, Pearson, 2002, p870

Other “axis” options could be flight frequencies, profitability, ownership by another airline etc

circle size indicates relative market share

A lucrative strategic space? Or is this cluster losing out to the mainstream carriers at the top end and the more budget carriers at the lower end?

The Competitive EnvironmentHypercompetition

• A relentless mode of competitive behaviour to force competitors out of the industry

• The market is characterised by constant disequilibrium

• An example is Microsoft in software application • It requires competitors to constantly upgrade

and innovate • The effect is to erode any competitive

advantage

Ch2 3 General and Competitive Environment (2)

Documents

Transcript of Ch2 3 General and Competitive Environment (2)