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Business Policy & Strategy

External Environment Analysis PEST

The General Environment Segments & Elements


Demographic Segment Population size Ethnic Mix Age Structure Income Distribution Geographic distribution Inflation Rates Interest Rates Trade and fiscal deficits Personal savings rate Business Saving rates GDP and GNP

Economic Segment

Political/legal segment

Antitrust laws Labor laws Taxation laws Educational Deregulation philosophy philosophies GAAR Product safety / liability

The General Environment Segments & Elements


Socio-cultural segment Women in the w/f Work force diversity Attitudes about the quality of work life Environmental concerns Shifts in work and career preferences Shifts in preferences regarding products and service characteristics Public Private partnerships New communication technologies Newly industrialized countries Culture and institutional attributes

Technological segment

Product Innovations Applications of knowledge Important political events Critical markets

Global segment

Entry Barriers
Scale Economies Product differentiation Capital requirements Switching costs Distribution access Cost disadvantages independent of scale (proprietary product technology, raw material access, locations, subsidies, Govt. policies Expected retaliation

Entry Barriers
Slow Industry Growth High fixed / storage costs Lack of differentiation and low switching costs Capacity Augmentation (PVC) Diverse competition High strategic stakes High exit barriers and Mobility barriers

Strategic Groups
A group of firms in an industry following the same or similar strategy along the same strategic dimensions

Strategic Group Analysis


Strategic group mapping is an analytical tool

Strategic Group Analysis


Strategic group mapping is an analytical tool. Methods and Techniques for Analyzing Business Competition, we have often been asked to identify the most useful or insightful models for CI. Each model has its own strengths and weaknesses: selecting the most useful or most insightful technique is always highly dependent on the strategic issue at hand. However, among the vast number of techniques available, many are either unknown to most analysts and CI professionals or under-utilized, and yet they can provide great insight. One of these analytical techniques is strategic group analysis.

Background
Subset of industry analysis Developed in early 1970s Porters Competitive Strategy: Techniques for Analyzing Industries and Competitors in 1980

Strategic Group Analysis


Strategic groups is a cluster of companies in an industry Groups of companies clustered around a similar competitive approach or strategic position Companies in a group are similar to each other but different from companies in other groups

Analysis is used to determine:


Different competitive positions of companies in the industry Intensity of rivalry within and between groups Profit potential of various groups Implications of competitive position

Porters Five Force Model:


Threats of entry Internal rivalry Bargaining power of buyers and suppliers Threat of substitution

The Five Forces jointly determine the profitability of the industry, the groups in the industry and individual companies within the groups

Strengths
Comprehensiveness Helpful in dealing with fast-changing environment Encourages finding new ideas and strategies More accurate strategic analysis

Weaknesses
Provides little guidance on implementation Depends on identifying the strategically important dimensions Requires in-depth industry knowledge and experience Does not incorporate importance of government and social issues

Step 1: Analyze industry structure


Complete a Five Force Industry Analysis:
Threat of new entrants Bargaining power of suppliers Bargaining power of buyers Threat of substitution Degree of internal rivalry

Identify all major competitors in the industry based on competitive variables

Step 2: Map the strategic groups


Key variable for defining strategic groups:
Specialization Cost position Brand identification Service Push vs. Pull Price policy Channel Selection Leverage Product quality Technological leadership

Strategic Maps of the United States Airline Industry


The Late 1970s
International
Laker World Braniff North west TWA Pan Am

The Early 1990s


International United American

Eastern

Conti- Northwest nental TWA USAir National

Delta

Geographic Scope

United Delta National American

Continental Western Southwest

Republic Ozark Piedmont AirCal

USAir Southwest

Frontier PSA

Kiwi
Reno Air

America West

Regional

Texas Intl

Others

Regional Full Service

No Frills

No Frills

Full Service

Quality of Service

Quality of Service

Step 3:Measure the strength of barriers between groups


Identify factors that prevent firms in one groups from competing with companies in other groups Assess the strength of bargaining power between groups and industry buyers/suppliers Determine the treat of substitutes between groups Evaluate the degree of rivalry between groups Undertake Five Force analysis of groups to determine relative competitive position

Step 4: Understand companies strategy with reference to groups interaction


Recognize groups strengths and weaknesses Identify the strategic group that represents the greatest opportunity

Step 5:Identify next step


Create a new group Move to a better group Strengthen the existing group Strengthen companys position within existing group Move to a new group and make it better

Strategic Group Analysis Summary


Depends on highly qualitative inputs and analysts judgment Does not require a lot of resources Can be used for current and dynamic strategy planning Can be performed in short period of time

Competitive Intelligence
Future Objectives Goal Comparisons Future Emphasis Attitude towards risk
Current Strategy How are we currently competing? Does the strategy support changes in the competitive structure?

Assumptions Is the future volatile? Are we operating under a status quo? What assumptions do the competitors hold about the industry and themselves?
Capabilities Strengths/weaknesses Rating compared to competitors

Response Competitors future actions Future competitive advantage How will the relationship change