Strategic management Strategic management

Lecture 2. Lecture 2. Environmental analysisEnvironmental analysis

Strategicposition

Assess the nature of theAssess the nature of theenvironmentenvironment

Audit environmentalAudit environmentalinfluencesinfluences

Identify keyIdentify keycompetitive forcescompetitive forces

Identify keyIdentify keyopportunitiesopportunities and threatsand threats

IdentifyIdentifycompetitive positioncompetitive position

StrategicStrategicpositionposition

Steps in environmental analysis

Trend extrapolationTrend extrapolation DecentralisationDecentralisation

or Delphy analysisor Delphy analysis

Experience Experience and learningand learning

ScenarioScenario planningplanning

ENVIRONMENTALENVIRONMENTALCONDITIONSCONDITIONS

StaticStatic

DynamicDynamic

ENVIRONMENTALENVIRONMENTALCONDITIONSCONDITIONS

SimpleSimple ComplexComplex

Approaches to making sense of the environment

Strategic analysisStrategic analysis

Determinants of profits in an industryDeterminants of profits in an industry

Value of the product or service to the Value of the product or service to the customercustomer

Intensity of competitionIntensity of competition Relative bargaining power at Relative bargaining power at

different levels in the production different levels in the production chainchain

Deregulation

Digitization / technology

Globalization

Five-plus forces of competition

Other force/s

Five Forces Analysis (1)Five Forces Analysis (1)The threat of entry ...The threat of entry ...

Dependent on barriers to entry such as:Dependent on barriers to entry such as: Economies of scaleEconomies of scale Capital requirements of entryCapital requirements of entry Access to distribution channelsAccess to distribution channels Cost advantages independent of size (eg the Cost advantages independent of size (eg the

““experience curve”)experience curve”) Expected retaliationExpected retaliation Legislation or government actionLegislation or government action DifferentiationDifferentiation

Five Forces Analysis (2)Five Forces Analysis (2)Buyer power is likely to be high when:Buyer power is likely to be high when: There are many small operators in the supplying There are many small operators in the supplying

industryindustry There are alternative sources of supplyThere are alternative sources of supply Components or materials are a high percentage of Components or materials are a high percentage of

cost to the buyer leading to “shopping around”cost to the buyer leading to “shopping around” There is a concentration of buyersThere is a concentration of buyers Switching costs are lowSwitching costs are low There is a threat of backward integrationThere is a threat of backward integration

Five Forces Analysis (3)Five Forces Analysis (3)

Supplier power is high when:Supplier power is high when: There is a concentration of suppliersThere is a concentration of suppliers Switching costs are highSwitching costs are high The supplier brand is powerfulThe supplier brand is powerful Integration forward by the supplier is possibleIntegration forward by the supplier is possible Customers are fragmented and bargaining Customers are fragmented and bargaining

power lowpower low

Five Forces Analysis (4)Five Forces Analysis (4)

Threat of substitutesThreat of substitutes

Substitutes take different forms:Substitutes take different forms: Product substitutionProduct substitution Substitution of needSubstitution of need Generic substitutionGeneric substitution Doing withoutDoing without

Pressure from substitute products

Firms in an industry are also affected by competition from related markets. The availability of substitutes influences the ability of a firm to raise prices, or to change the attributes of its products

Identify possible substitute products by asking: “What set of products constrains the ability of firms in this

industry to substantially increase prices ?“

Substitute products become particularly important in times of rapidly increasing demand, and in industries with few competitors (making it difficult to increase supply quickly)

Five Forces Analysis (5)Five Forces Analysis (5)Competitive Rivalry is high when:Competitive Rivalry is high when: Entry is likelyEntry is likely Substitutes threatenSubstitutes threaten Buyers or suppliers exercise controlBuyers or suppliers exercise control Competitors are in balanceCompetitors are in balance There is slow market growthThere is slow market growth Global customers increase competitionGlobal customers increase competition There are high fixed costs in an industryThere are high fixed costs in an industry Markets are undifferentiatedMarkets are undifferentiated There are high exit barriersThere are high exit barriers

Five Forces Analysis: Five Forces Analysis: Key Questions and ImplicationsKey Questions and Implications

What are the What are the key forces key forces at work in the competitive at work in the competitive environment?environment?

Are there Are there underlying forces underlying forces driving competitive driving competitive forces?forces?

Will competitive Will competitive forces forces change?change? What are the What are the strengths and weaknesses strengths and weaknesses of of

competitors in relation to the competitive forces?competitors in relation to the competitive forces? Can Can competitive strategy competitive strategy influence competitive forces influence competitive forces

(eg by building barriers to entry or reducing (eg by building barriers to entry or reducing competitive rivalry)?competitive rivalry)?

The importance of the five force modell

In each of its businesses, the firm faces an industry structure that shapes the rules of competition it must respond to or try to influence, and that is the basis and motivation for a unique strategy

One way to organize information about an industry is the FIVE FORCES model that helps to explain why one industry is profitable while another is not

The strategist‘s goal is to find a place in the industry where the firm can best defend itself against the forces, and influence them in its favor.

what to do …?what to do …?

1. Positioning1. Positioning : : accept competive structure as given and accept competive structure as given and match yourself to it:match yourself to it:

.. build defenses against competitive forces.. build defenses against competitive forces

.. identify positions where forces are weakest .. identify positions where forces are weakest

2. Take the offensive: 2. Take the offensive: Influencing the BalanceInfluencing the Balance

.. identify key factors driving competition that you can .. identify key factors driving competition that you can controlcontrol

.. influence those costs that yield the greatest payoff.. influence those costs that yield the greatest payoff

3. Exploiting Change3. Exploiting Change

.. understand which trends affect the sources of competition.. understand which trends affect the sources of competition, , andand forecast the magnitude of each trend and underlaying forecast the magnitude of each trend and underlaying causecause

.. construct a picture of the likely profit potential of the .. construct a picture of the likely profit potential of the industryindustry

4. Set and evaluate diversification potential4. Set and evaluate diversification potential

Strategic Group AnalysisStrategic Group Analysis

Strategic Group Analysis is useful to:Strategic Group Analysis is useful to: Identify firms with similar strategic Identify firms with similar strategic

characteristicscharacteristics Therefore identify the most direct competitorsTherefore identify the most direct competitors Identify mobility barriersIdentify mobility barriers Identify strategic opportunities (“strategic Identify strategic opportunities (“strategic

spaces”)spaces”) Strategic threats and problemsStrategic threats and problems

Mapping Strategic Groups in the U.S. Restaurant Chain Industry

Limited menu Full menuProduct-Line

Pri

ce

Lo wH

igh

Mc’Donald’s, Taco Bell, Burger King, Hardee’s

K.F.C

Pizza Hut, Wendy’s

Perkins, Int. House of Panckake

Red Lobster, Olive Garden

Shoney’s, Denny’s Country Kitchen

StylingStyling PerformancePerformance MarqueMarquestrengthsstrengths

EngineeringEngineeringinnovationsinnovations

Build qualityBuild quality

Most importantMost important Least importantLeast important

Source: D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995.

Car XCar XCompetitor A's carCompetitor A's carCompetitor B's carCompetitor B's car

Figure 3.10 Perceived value by customers: the luxury car market

Rat

ing

Rat

ing 55

4.54.5

44

3.53.5

33

2.52.5

22

1.51.5

11

0.50.5

00

Industry and Competitive Analysis - QuestionsIndustry and Competitive Analysis - Questions

Tasks :

What is our business ?How do we create value ?

What are our organizational and/or technological capabilities ?

Who are we in business with ?

How is our business/industry changing ?What drives this change ?

What are our strengths and weaknesses ?What opportunities open up, and what threats exist ?

Competitive & IndustryAnalysis

("Where do we stand?")

Strategy formulation("Where do we want

to go ?")

Implementation andControl

("How do we get there?")

1

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