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Business Strategy
BMG527
Week 2: Strategic Position:
The Environment
Learning Outcomes – Lecture 2
1. Describe the forces in the broad macro-environment using PESTEL
2. Identify key drivers in this macro-environment and construct alternative scenarios with regard to environmental change
3. Use the 5 Forces Framework to identify the attractiveness of industries and sectors for investment and to identify their potential for change
4. Define strategic groups, market segments and critical success factors
5. 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. Environment encapsulates diverse influences
2. Environment is complex - some influences discrete and/or interrelated
3. 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
2. Industry/Sector Environment: a group of organisations producing the same types of products/services
3. Competitors and Markets: within industries/sectors, many different organisations with different characteristics and competing on different bases; similarly, consumers’ expectations differ
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
Porter’s Five Forces Framework: can be useful in understanding how competitive dynamics within and around an industry are changing
Porter’s 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)
Porter’s 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 Porter’s Five
Forces……
Porter’s 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 organisation’s own interests come first – for some charitable institutions and government bodies for example, this may not be the case
Limitations of Porter’s 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
Considers the extent to which organisations differ in terms of:
1. Scope of Activities - Extent of product/service diversity; Extent of geographical coverage; Number of market segments served; Distribution channels used
2. Resource Commitment - Extent of branding; marketing effort; product/service quality; technological leadership; size of organisation
Competitors Might Be…
firms offering similar product/ utilising similar technology (e.g. Penguin V Twix six pack)
firms operating in same product category(e.g Penguin V Tayto)
firms offering products which deliver same service (e.g. long-distance coach firm V railways)
firms 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 Segmentsgroup 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 Oceans – are new market spaces
where competition is minimised
Red Oceans – were industries are well
defined and rivalry is intense
C. Critical Success Factorsunderstanding 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 organisation’s 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 Porter’s 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
Porter’s 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. Describe the forces in the broad macro-environment using PESTEL
2. Identify key drivers in this macro-environment and construct alternative scenarios with regard to environmental change
3. Use the 5 Forces Framework to identify the attractiveness of industries and sectors for investment and to identify their potential for change
4. Define strategic groups, market segments and critical success factors
5. Explain the different types of strategic gaps which might present opportunities or threats in the market
