Business Strategy

BMG527
Week 2: Strategic Position: The Environment

Learning Outcomes Lecture 2

1.
2.

3.

4. 5.

Describe the forces in the broad macro-environment using PESTEL Identify key drivers in this macro-environment and construct alternative scenarios with regard to environmental change Use the 5 Forces Framework to identify the attractiveness of industries and sectors for investment and to identify their potential for change Define strategic groups, market segments and critical success factors Explain the different types of strategic gaps which might present opportunities or threats in the market

In linking to the previous Lecture

Organisations do not exist in a vacuum, they are part of a complex world.

Management should be continually aware of the external forces which not only influence demand for existing products and services, but also create opportunities for new products and services.

(Bowman and Asch, 1987, p. 60)

Link from Lecture 1: Recap?

In week 1, we explored and discussed the following:

Describe the characteristics of strategic decisions Define what is meant by strategy and strategic management Explain how strategic priorities vary by level: Corporate, Business and Operational Understand the basic vocabulary of strategy Explain the elements of the Exploring Strategy strategic management model Understand that strategy development can be interpreted through four Lenses - the Design; Experience, Ideas and Discourse lenses

Remember where we are on this model..

The Exploring Corporate Strategy Model

(Johnson et al., 2008)

Week 2 Environment

(The Strategic Position)

Exploring the Environment.

Environmental Scanning

Before a firm can formulate strategy, it needs to scan the environment to identify possible opportunities and threats, and its internal environment for strengths and weaknesses
(Wheelen and Hunger, 2000, p. 53).

Making Sense of The Environment

Environmental Scanning is difficult for many reasons:
1. 2. 3.

Environment encapsulates diverse influences Environment is complex - some influences discrete and/or interrelated Speed of change is rapid e.g. in terms of technological change and the extent of global communications

All helps to build a strategic picture

Exhibit 2.1 Layers of the business environment (Johnston et al., 2011)

The Organisation

Layers of the Business Environment

(Johnson et al, 2011)

1.

Macro-environment: a general layer consisting of broad factors which impact to a greater or lesser extent on all organisations
Industry/Sector Environment: a group of organisations producing the same types of products/services Competitors and Markets: within industries/sectors, many different organisations with different characteristics and competing on different bases; similarly, consumers expectations differ

2.

3.

1. Understanding the Macro-Environment

PESTEL Framework - used to identify how future trends in the Political, Economic, Socio-cultural, Technological, Environmental, Legal environments might impinge on organisations Other writers call it different things, eg ESTEMPLE (Angwin et al, 2007), separating out the media and ethical aspects Provides broad data from which key drivers of change can be identified
Use to consider future impact (not just past/present)

Macroenvironment PESTEL

JWS (2011)

PESTEL Framework
Political (e.g. government stability; foreign trade

regulations, ) Economic (e.g. business cycles; interest rates) Socio-cultural (e.g. population demographics) Technological (e.g. new discoveries; speed of technological transfer; rates of obsolescence) Environmental (green e.g. environmental protection laws; waste disposal; energy consumption) Legal (e.g. monopolies legislation; employment law; health and safety; product safety)

The PESTEL analysis provides the broad data from which to identify KEY DRIVERS OF CHANGE

Key drivers for change are the high-impact factors that are likely to affect significantly the success or failure of a Strategy Highlight the biggest priorities Key drivers can be used to construct scenarios of possible futures Vary by industry or sector

Limitations of PESTEL and the Key Drivers of Change

On its own, PESTEL is not enough and is limited if it is merely seen as a listing of the current influences. What we must then do is to seek to understand the Key Drivers of Change These are the forces likely to affect the structure of an industry, sector or market (ie cutting across all the layers) and involve: Identifying a number of key drivers of change Establishing any interrelationships and their combined effect Focusing on the likely future impact of environmental factors as opposed to looking at the current position only

Scenario Building
Scenarios are: (Johnson et al., 2011) detailed and plausible views of how the business environment of an organisation might develop in the future based on the key drivers for change about which there is a high level of uncertainty

Point is to consider alternative futures Improves organisational learning - making mangers more perceptive about the forces in the business environment and what is really important Usually three scenarios optimistic, middling and pessimistic experts suggest require more Value lies in process of exploration and contingency planning

2. Sources of Competition in Industries/ Sectors

The environmental impact might surface in the more immediate environment through competitive forces of organisations in the industry An industry (or sector) is a group of firms producing the same principal product (Rutherford, 1995) convergence trend

Concept of an industry extended into public services through the idea of a sector

Porters Five Forces Framework: can be useful in understanding how competitive dynamics within and around an industry are changing

Porters Five Forces Framework

Source: Adapted from M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors 1980, Free Press, 1980, p. 4. Copyright 1980,1988 by The Free Press, a division of Simon & Schuster Inc. Reproduced with permission.

Johnston et al., (2011)

Or should it be 6 forces?
(Hill and Jones, 2007)
Porters Five Forces model ignores a sixth force: the power, vigor, and competence of complementors These are companies that sell products that add value to (complement) the products of companies in an industry because when used together, the products better satisfy company demands

Five Forces Analysis (1)

The threat of new entrants ...

Dependent on barriers to entry such as: Economies of scale Capital requirements of entry Access to supply or distribution channels Experience Curve Expected retaliation Legislation or government action Differentiation & robustness of this
Barriers to entry need to be overcome by new entrants if they are to compete successfully high barriers are good for existing competitors (protect from new competitors entering the market)

Five Forces Analysis (2) The threat of substitutes..

Substitutes reduce demand for a particular class of product as customers switch to alternatives 2 key points:
1.

Price/Performance ratio

2.

Extra-industry effects

Substitutes take different forms:

Product for product substitution (email vs post) Substitution of need (IT reducing need for printing) Generic substitution (new car vs holiday) Doing without

Five Forces Analysis (3) The Power of Buyers.

Buyers are the organisations immediate customers, not always the ultimate customers
Buyer (Bargaining) power is likely to be high when:

There is a concentration of buyers Low switching costs - Cost of switching between suppliers is low so that can easily change they have a strong negotiating position Buyer competition threat - There is a threat of Backward Vertical Integration (moving back to the source of supply) acquiring a supplier. Is possible if satisfactory prices or quality not achieved

Five Forces Analysis (4) The Power of Suppliers

Suppliers those who supply the organisation with what it requires to produce the product or service (fuel, raw materials, equipment, labour and sources of finance)
Supplier (Bargaining) power is high when:

There is a concentration of suppliers - customers are fragmented and bargaining power low Switching costs are high expensive or disruptive The supplier brand is powerful Supplier competition threat - Forward Vertical Integration by the supplier is possible moving closer to the ultimate customer

Five Forces Analysis (5) Competitive Rivalry

Organisations with similar products and services aimed at the same target markets (customer group)
A number of factors affect the degree of competitive rivalry in an industry or sector:

Competitor balance
Industry growth rate High fixed costs High exit barriers

Low differentiation

Managerial Implications of Porters 5 Forces Framework

Which industries should we enter or leave? What influence can we exert? How are competitors differently affected?

By using 5 forces framework we need to think about Defining the right industry Converging industries Complementary products

Limitations of Porters Five Forces

Porters Five Forces has real merit in the issues raised and in providing a logical and structured framework. But, like all models, there are potential limitations if taken in isolation: It needs to link to a wider PESTEL analysis, to understand the underlying driving forces A static framework can compartmentalise factors that are actually connected and constantly changing It assumes the organisations own interests come first for some charitable institutions and government bodies for example, this may not be the case

Limitations of Porters Five Forces ctd

It assumes that buyers (customers) have no greater importance than any other aspect In general, its starting point is that the environment (suppliers and buyers) poses a threat to the organisation some companies have found it useful to have closer cooperation with suppliers It largely ignores the human resource aspects of strategy (such as country cultures, management skills) The analysis is based on a prescriptive rather than emergent approach
(Adapted from Lynch, 2006 and Johnson et al, 2011)

The Industry Life Cycle

3. Understanding Competitors and Markets (the next layer)

An analysis of industry/sector may be useful but may still provide too general an understanding of competition Strategic groups start to focus more on organisations in an industry with similar characteristics following similar strategies or competing on similar bases Strategic group analysis will therefore help to identify direct and indirect competitors

A. Strategic Group Analysis

1.

Considers the extent to which organisations differ in terms of:

2.

- Extent of product/service diversity; Extent of geographical coverage; Number of market segments served; Distribution channels used Resource Commitment - Extent of branding; marketing effort; product/service quality; technological leadership; size of organisation
Scope of Activities

Competitors Might Be
firms

offering similar product/ utilising similar technology (e.g. Penguin V Twix six pack)

firms firms firms

operating in same product category

(e.g Penguin V Tayto)

offering products which deliver same service (e.g. long-distance coach firm V railways) competing for the same spending power (Harley Davidson V conservatory, boat
manufacturers)
(Wilson and Gilligan, 1997, p. 122)

Benefits of Identifying Strategic Groups

Understanding competition

Analysis of strategic opportunities

Analysis of mobility barriers

B. Market Segments
group of customers who have similar needs that are different from customer needs in other parts of the market.

Success is also determined by understanding of customer needs and ability to satisfy them (what customers value)
Methods of analysis include:

Consumer characteristics - e.g. demographics

Purchase situation - needs and preferences for product characteristics, features and benefits
Use situation - sensorial factors associated with the actual consumption experience itself

Some Bases of Market Segmentation

An alternative view

Blue and Red Ocean theory Further step in the theory development of strategic groups and market segments

Blue Red

Oceans are new market spaces where competition is minimised Oceans were industries are well defined and rivalry is intense

C. Critical Success Factors

understanding what customers value

CSFs = product features particularly valued by market and which firm must excel at providing to outperform rivals

Ensure determination of these comes from outside and not from within (e.g. not designers, engineers) Remember that customers perceptions of value change over time

Opportunities and Threats

Armed with knowledge and understanding of the environment, and an organisations position within it, they look for strategic gaps to fill Taking advantage of a strategic gap is an effective way of managing opportunities and threats A strategic gap is an opportunity in the competitive environment that is not being fully exploited by competitors Types of opportunities include: in substitute industries; in other strategic groups; in targeting buyers; for complementary products and services; in new market segments; and over time The key strategic message from this lecture and the one to follow can be summarised in the SWOT framework.

Wk 2 Environment - Summary.
Environmental influences can be thought of as layers around an organisation The macro-environment can be analysed in terms of PESTEL factors Industries and sectors can be analysed in terms of Porters Five Forces model Industry changes can be analysed in terms of the industry life cycle The inner layer of the environment can be analysed with strategic group analysis and market segment analysis

In summary, methods used to establish Environmental Position include:

Macro-environment
PESTEL

analysis Key drivers of change Scenario planning

Industry/Sector
Porters

5 forces framework (competitive forces) Industry lifecycle

Competitors/Markets
Strategic

group analysis/ red and blue ocean Market segments / critical success factors

Learning Outcomes Lecture 2 Met

1.
2.

3.

4. 5.

Describe the forces in the broad macro-environment using PESTEL Identify key drivers in this macro-environment and construct alternative scenarios with regard to environmental change Use the 5 Forces Framework to identify the attractiveness of industries and sectors for investment and to identify their potential for change Define strategic groups, market segments and critical success factors Explain the different types of strategic gaps which might present opportunities or threats in the market