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BUSU9SM Strategic Management

Autumn 2015

Lectures 2 & 3

External analysis

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The new external environment

of business• The aftermath of the financial crisis

―Financial instability: complex, interconnectedness global financial system

―Subdued economic activity throughout the industrialised world

―Crisis in southern Europe (+ Ireland and Iceland)

• Political upheaval

–Arab spring of 2011; unrest China and Russia; Middle East unrest;

• Instability in the natural world

– Climate change, earthquakes; water shortages; flooding

• Accelerating technological change

–Disruption of established markets; convergence of markets

• New competitors

– Especially from China and India

• Social pressures

– Loss of legitimacy of market capitalism; concerns over equity, ethics and sustainability

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The Macro Environment

• 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

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PEST Analysis

How macro-environmental factors might impact a business organisation:

PoliticalChanges in government economic policy, e.g.

taxation, government spending, monetary policy

Changes in legal requirements e.g. employment

law, health and safety legislation, licensing

practices, environmental regulations, competition

policy

Changes in the government ownership

e.g. nationalisation, privatisation, de-regulation

EconomicChanges in the level of economic activity, e.g.

growth rates, rates of unemployment, inflation

Changes in wage rates and income distribution

Changes in exchange rates

SocialChanges in demographics e.g. the size of the

population, the age distribution with the population

Changing attitudes e.g. work/life balance,

concern for the environment, ethical standards

Changes in social structure e.g. socio-economic

groupings, social mobility

TechnologicalDevelopment of new products and processes

Automation

Developments in information and

communication technologies

Developments in the natural sciences

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PEST Analysis for Wireless

Handset Industry

Political

• Standardisation

• Restrictions on usage

Economic

• Level of economic activity

• Rapid take up of technology

Social

• Health scares

• Changes in fashion

Technological

• Improvements in battery

technology

• 4G and better encryption

technology

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From environmental analysis

to industry analysis

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Industries, markets and sectors

An industry is a group of firms producing products and

services that are essentially the same

A market is a group of customers for specific products

or services that are essentially the same

A sector is a broad industry group (or a group of

markets) especially in the public sector

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Types of industry (1)

• Monopolistic industries - an industry with one firm and

therefore no competitive rivalry. A firm has ‘monopoly

power’ if it has a dominant position in the market

• Oligopolistic industries - an industry dominated by a few

firms with limited rivalry and in which firms have power

over buyers and suppliers

• Perfectly competitive industries - where barriers to entry

are low, there are many equal rivals each with very similar

products, and information about competitors is freely

available

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Types of industry (2)

• Hypercompetitive industries - where the frequency,

boldness and aggression of competitor interactions

accelerate to create a condition of constant

disequilibrium and change

• Hypercompetition often breaks out in otherwise

oligopolistic industries (e.g) mobile phones

• Organisations interact in a series of competitive moves

in hypercompetition which often becomes extremely

rapid and aggressive as firms vie for market leadership

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The profitability of US

industries: 2000-2010

Industry Median ROE

2000-10(%)

Leading companies

Tobacco 33.5 Philip Morris Int., Altria,

Reynolds American

Household and personal

products

27.8 Procter & Gamble,

Kimberly-Clark, Colgate-

Palmolive

Motor vehicles and parts 4.4 GM, Ford, Johnson

Controls

Entertainment 3.9 Time Warner, Walt

Disney, News

Corporation

Airlines -11.3 AMR, UAL, Delta

Airlines

Source: Data from Fortune 1000 by industry

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Porter’s Five Forces of

Competition Framework

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The Porter’s Five Forces

Framework

Porter’s five forces framework helps identify the

attractiveness of an industry in terms of five competitive

forces:

• the threat of entry,

• the threat of substitutes,

• the bargaining power of buyers,

• the bargaining power of suppliers and

• the extent of rivalry between competitors.

The five forces constitute an industry’s ‘structure’

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Structural determinants of the

competitive forces

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The US Airline Industry

• In 2012 the US airline industry was following a familiar path

• The industry is a disaster in terms of its financial performance

• To explain the reasons for poor performance the key is to link competition in the industry to industry structure

• Porter’s five forces can assist us here

http://www.youtube.com/watch?v=cFjNdrcep4Q

http://www.youtube.com/watch?v=buGhbXFL1II

http://www.youtube.com/watch?v=9r7AkA529hM

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Five Forces of Framework:

Applied to US Airline Industry

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SUPPLIERS

POTENTIAL

ENTRANTS SUBSTITUTES

BUYERS

INDUSTRY

COMPETITORS

Rivalry among

existing firms

•Airplane makers

•Labour unions

•Airports

• Car/rail on journeys

<250 miles

• Videoconferencing

• Limited bargaining

power, but price

sensitive and low

switching costs

• Cost of entry modest

•Airlines attract

entrepreneurs

• Multiple competitors

• Low product

differentiation

• Excess capacity

• High exit barriers

• High ratio of fixed to

variable costs

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Can the Airline Industry

Improve Profitability?

• Product differentiation

• Capacity reduction

• Mergers and alliances

• Regional concentration

• Forward integration

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Industry profitability

2013-2017?

• Capacity growth

• Industry consolidation

• Entry to industry

• Supplier power

• Cost reduction

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Key issues in using Porter

•Defining the right industry

•Converging industries

•Complementarity (a 6th Force)

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SUPPLIERS

POTENTIAL

ENTRANTSSUBSTITUTES

BUYERS

INDUSTRY

COMPETITORS

Rivalry among

existing firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrantsThreat of

substitutes

COMPLEMENTS

The suppliers of

complements create

value for the industry

and can exercise

bargaining power

Five Forces or Six? —

Introducing Complements

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Implications of Porter’s five

forces

• Which industries to enter/exit?

• Can we influence the industry?

• Are our competitors affected in the same way?

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Drawing Industry Boundaries:

Identifying the Relevant Market

• What industry is BMW in?

– World car industry

– European car industry

– World luxury car industry?

• Key criterion: SUBSTITUTABILITY

– On the demand side : are buyers willing to substitute between types of

cars and across countries

– On the supply side : are manufacturers able to switch production

between types of cars and across countries

• May need to analyze industry at different levels for different types of

decision

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Identifying Key Success Factors

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Analysis of demand

• Who are our

customers?

• What do they want?

KEY SUCCESS FACTORS

Analysis of competition

• What drives competition?

What are the main

dimensions of competition?

•How intense is competition?

•How can we obtain a superior

competitive position?

What do customers

want?

How does the firm

survive competition

Pre-requisites for successful

strategy

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Identifying Key Success Factors:

some examples

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What do customers want? How do firms survive competition? Key success factors

Steel Low price

Product consistency

Reliability of supply

Specific technical specifications

for special steels

Strong price competition and cyclical

profitability necessitates cost efficiency

and strong financial resources

Cost efficiency through: large-scale

plants, low-cost location, speedy

capacity adjustment

Or hi-tech mini-mills can achieve low

costs through flexibility and high

productivity

Quality and service differentiation

Fashion

clothing

Demand segmented by garment

type, style, quality, colour

Customers pay price premium for

brand, style, exclusivity and

quality

Intensely competitive due to low entry

barriers, low seller concentration and

strong retail buying power

Differentiation can yield substantial price

premium but imitation rapid

Combining differentiation with low-

costs

Key differentiation variables: design,

speedy to fashion trends, brand

reputation, quality

Cost efficiency requires manufacture in

low wage countries

Super-

markets

Low prices

Convenient location

Wide range of products adapted to

local preferences

Freshness of produce, good

service, pleasant ambience, easy

parking

Market localized

Intensity of price competition depends on

number and proximity of competitors

Bargaining power a critical determinant

of cost of bought-in-goods

Low-cost operation requires operational

efficiency, scale-efficient stores, strong

buying power, low wage costs

Differentiation requires wide product

range (hence, large stores), convenient

location, easy parking

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Strategic groups

• Strategic groups are organisations within an industry or

sector with similar strategic characteristics, following

similar strategies or competing on similar bases

• These characteristics are different from those in other

strategic groups in the same industry or sector

• There are many different characteristics that

distinguish between strategic groups

• Strategic groups can be mapped on to two dimensional

charts – maps. These can be useful tools of analysis

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Strategic Groups in the World

Car Industry

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Uses of strategic group analysis

•Understanding competition - enables focus

on direct competitors within a strategic

group, rather than the whole industry

• Analysis of strategic opportunities - helps

identify attractive ‘strategic spaces’ within

an industry

•Analysis of ‘mobility barriers’ i.e. obstacles

to movement from one strategic group to

another

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Market segmentation

• Markets are rarely homogenous

• Within markets there are subgroups known as

market segments

• This process of segmentation represents a powerful

competitor tool

• By identifying a specific market segment and

concentration effort here firms can build a mini-

monopoly

Segmentation & Key Success Factors:

The US/UK Bicycle Market

Segment Key Success Factors

Low price bicycles sold primarily through

department and discount stores, mainly under the

retailer’s own brand

Low cost through global sourcing of components

and low wage assembly

Supply contract with major retailer

Leading competitors: Assemblers in Taiwan &

China and a few US manufacturers

Medium-priced bicycles sold mainly under

manufacturer’s brand; distributed through

specialist cycle stores

Cost efficiency through scale and low wage costs

Reputation for quality

Good dealer reputation

International marketing and & distribution

Leading competitors: Raleigh, Peugeot, Fuji

High-priced bicycles for enthusiasts Quality components and assembly

Design innovation – e.g. less weight/wind

resistance

Reputation (e.g. success in racing)

Strong dealer relations

Children’s bicycles/tricycles sold through

discount stores and toy stores

Similar to low price bicycle segment

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The limitations of analytical

models

• All of the models are static, assume stability and

are in essence a ‘snap’ shot of the real world

• Change in the environment can happen far too

quickly and many of the models can’t adapt quickly

enough

• Competition is the only game in town

• Complementors exist that support other firms