External Enviroment

8/9/2019 External Enviroment

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© Business eLearning

Lecture 2: The External Environment


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MCQ Èxam

The Mid-Term MCQ

Exam has been re-scheduled

Thursday 23rd October at 6.00pm


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Key Issues

1. Analyse an organisation’s external macro-environment andidentify the most strategically relevant components.

2. Diagnose the factors which shape industry dynamics and forecasttheir effects on future industry attractiveness

3. Identify the competitive forces at work in an organisation’sindustry

4. Describe different industry structures, industry lifecycle stagesand identify strategic groups within an industry

5. Discuss the merits/demerits of the five forces framework.6. Explain why in-depth evaluation of a business’s strengths and

weaknesses in relation to the specific industry conditions it

confronts is an essential prerequisite to crafting a strategy that iswell-matched to its external situation.

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The external environment

♦ The Macro-Environment● The broad environmental context in which a

firm’s industry is situated.

● Includes strategically relevant componentsover which the firm has no direct control.

General economic conditions

Immediate industry and competitive

environment

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Components of the macro environment

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7 components of

the macro

environment


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Building blocks for scenarios

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Current practice: VisitsScotland

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Thinking strategically about your industry &competitive environment

1. Does the industry offer attractive opportunities for growth?

2. What kinds of competitive forces are industry members facing,

and how strong is each force?

3. What factors are driving changes in the industry, and what

impact will these changes have on competitive intensity and

industry profitability?

4. What market positions do industry rivals occupy - who is

strongly positioned and who is not?

5. What strategic moves are rivals likely to make next?

6. What are the key factors for competitive success in theindustry?

7. Does the industry offer good prospects for attractive profits?

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Q. 1 Does the industry offer attractivegrowth opportunities?

♦ Defining Growth:● What is the current market size in units or sales?

● What is the past, current and expected rate of growth

for the market\industry?

♦ Considerations:● Different sectors\regions of a market grow at different

rates.

● Growth varies with the industry’s life cycle stage -

emergence, rapid growth, maturity, and decline.

● Growth does not guarantee profitability.

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Q. 2 What competitive forces are you facingand how strong are they?

♦ The Five Competitive Forces:● Competition from rival sellers

● Competition from potential new entrants

● Competition from substitute productsproducers

● Supplier bargaining power

● Customer bargaining power

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Five competitive forces

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Using the 5 forces

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Step 1

For each of the five forces, identify the different parties

involved, and the specific factors that bring about

competitive pressures.

Step 2Evaluate how strong the pressures stemming from each of

the five forces are (strong, moderate to normal, or weak).

Step 3

Determine whether the strength of the five competitive

forces, overall, is conducive to earning attractive profits in

the industry.


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Competitive Weapons Primary Effects

Price discounting, clearance sales,

“blowout” sales

Lowers price (P), acts to boost total sales volume and market share,

lowers profit margins per unit sold when price cuts are big and/or

increases in sales volume are relatively small

Couponing, advertising items on sale Acts to increase unit sales volume and total revenues, lowers price (P),

increases unit costs (C), may lower profit margins per unit sold (P – C)

Advertising product or service

characteristics, using ads to enhance

a company’s image or reputation

Boosts buyer demand, increases product differentiation and perceived

value (V), acts to increase total sales volume and market share, may

increase unit costs (C) and/or lower profit margins per unit sold

Innovating to improve product

performance and quality

Acts to increase product differentiation and value (V), boosts buyer

demand, acts to boost total sales volume, likely to increase unit costs (C)

Introducing new or improved features,

increasing the number of styles or

models to provide greater product

selection

Acts to increase product differentiation and value (V), strengthens buyer

demand, acts to boost total sales volume and market share, likely to

increase unit costs (C)

Increasing customization of product or

service

Acts to increase product differentiation and value (V), increases

switching costs, acts to boost total sales volume, often increases unit

costs (C)

Building a bigger, better dealer network Broadens access to buyers, acts to boost total sales volume and market

share, may increase unit costs (C)

Improving warranties, offering low-

interest financing

Acts to increase product differentiation and value (V), increases unit

costs (C), increases buyer costs to switch brands, acts to boost total

sales volume and market share


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Factors that increase rivalry

♦ Buyer demand is growing slowly or declining.♦ It is becoming less costly for buyers to switch brands.

♦ Industry products are becoming more alike.

♦ There is unused production capacity, and\or products

have high fixed costs or high storage costs.♦ The number of competitors is increasing and\or they are

becoming more equal in size and competitive strength.

♦ The diversity of competitors is increasing.

♦ High exit barriers stop firms from exiting the industry.

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Types of Industry Structure

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Monopoly

Perfect

Competition

Oligopoly

Monopolistic

Competition


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Competitive pressures and newentrants

♦ Entry Threat Considerations:● Strength of barriers to entry

● Expected reaction of incumbent firms

● Attractiveness of a particular market’s growth in

demand and profit potential

● Capabilities and resources of potential entrants

● Entry of existing competitors into market segments in

which they have no current presence

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Pressures from the sellers of substitutegoods

♦ Substitute Products Considerations:● Ready availability of substitutes

● Pricing, quality, performance, and other relevant

attributes of substitutes

● Switching costs that buyers incur

♦ Indicators of Substitutes’ Competitive Strength:

● Increasing rate of growth in sales of substitutes

● Substitute producers adding output capacity

● Increasing profitability of substitute producers

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Pressures from buyer bargainingpower & price sensitivity

♦ Buyer Bargaining Power Considerations:● Buyer costs for switching to competing sellers

● Degree to which industry products are commoditized

● Number and size of buyers relative to sellers

● Strength of buyer demand for sellers’ products

● Buyer knowledge of products, costs and pricing

● Backward integration of buyers into sellers’ industry

● Buyer discretion in delaying purchases● Buyer price sensitivity due to low profits, size of

purchase, and consequences of purchase

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♦ Is the state of competition in the industrystronger than “normal”?

♦ Can industry firms expect to earn decent

profits given prevailing competitive forces?

♦ Are some of the competitive forces

sufficiently powerful to undermine industry

profitability?

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Collective strength of 5 forces &profitability


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Matching strategy to competitiveconditions

1. Pursuing avenues that shield the firm from asmany competitive pressures as possible.

2. Initiating actions calculated to shift competitive

forces in the firm’s favor by altering underlying

factors driving the five forces.

3. Spotting attractive arenas for expansion, where

competitive pressures in the industry are

somewhat weaker.

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Limitations

• Doesn’t cover all the significant forces found incurrent industry environments – e.g. Governmentand regulation

• Complexity of products and services mean that

firms have to work in networks rather than asisolated units – complementors become animportant force

• Developed in an era when markets were less

dynamic, so of limited use in high-velocityindustries where change is rapid and industryboundaries change frequently

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The Value Net

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Q. 3 What factors are driving industrychange & what impact will they have?

♦ Strategic Analysis of Industry Dynamics:1. Identifying the drivers of change.

2. Assessing whether the drivers of change

are, individually or collectively, acting tomake the industry more or less attractive.

3. Determining what strategy changes are

needed to prepare for the impacts of theanticipated change.

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1. Changes in the long-term industry growth rate

2. Increasing globalization

3. Changes in who buys the product and how they use it

4. Technological change

5. Emerging new Internet capabilities and applications

6. Product and marketing innovation

7. Entry or exit of major firms8. Diffusion of technical know-how across companies and

countries

9. Improvements in efficiency in adjacent markets

10. Reductions in uncertainty and business risk

11. Regulatory influences and government policy changes

12. Changing societal concerns, attitudes, and lifestyles


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Assessing overall impact

1. Overall, are the factors driving change causingdemand for the industry’s product to increase or

decrease?

2. Is the collective impact of the drivers of change

making competition more or less intense?

3. Will the combined impacts of the change drivers

lead to higher or lower industry profitability?

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Crafting strategy

♦ What strategy adjustments will be neededto deal with the impacts of the changes in

industry conditions?

● What adjustments must be made immediately?

● What actions must we not take or should we cease to

do now?

● What can we do now to prepare for adjustments we

anticipate making in the future?

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Q. 4 How are competitors positioned?

♦ A Strategic Group:● A cluster of industry rivals that have similar

competitive approaches and market positions:

Have comparable product-line breadth

Sell in the same price/quality range

Emphasize the same distribution channels

Use the same product attributes to buyers

Depend on identical technological approaches Offer similar services and technical assistance

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Using strategic groups to ascertainpositioning

♦ Constructing a strategic group map:● Identify the competitive characteristics that

differentiate firms in the industry.

● Plot the firms on a two-variable map using pairs of

differentiating competitive characteristics.

● Assign firms occupying about the same map location

to the same strategic group.

● Draw circles around each strategic group, making the

circles proportional to the size of the group’s share of

total industry sales revenues.

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Common variables for differentiatingcompetitor positions.

♦ Price/quality range (high, medium, low)

♦ Geographic coverage (local, regional, national, global)

♦ Product-line breadth (wide, narrow)

♦ Degree of service offered (no frills, limited, full)

♦ Distribution channels (retail, wholesale, Internet, multiple)

♦ Degree of vertical integration (none, partial, full)

♦ Degree of diversification into other industries (none,

some, considerable).

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Choosing variables for group maps

♦ Variables selected as map axes:● Must not be highly correlated.

● Must reflect key approaches to customer

value and expose sizable differences in the

marketplace positions of rivals.

● May be quantitative, continuous, discrete

and\or defined in terms of distinct classes and

combinations.

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Guidelines for constructing groupmaps

♦ Draw map circles proportional to the combinedsales of firms in each strategic group to reflect

the relative sizes of each group to the total size

of the industry.

♦ Use different variable sets to show differentviews of relationships among competitive

positions in the industry’s structure—there is no

one best map for portraying how competing firms

are positioned

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Example => Mobile handsets

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What can be learnt from maps?

♦ Maps are useful in identifying which industrymembers are close rivals and which are distant

rivals.

♦ Not all map positions are equally attractive.

1. Prevailing competitive pressures in the industry

and drivers of change favor some strategic groups

and hurt others.

2. Profit prospects vary from strategic group to

strategic group.

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Q 5 What strategic moves are


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Q. 5 What strategic moves arecompetitors likely to make?

♦ Competitive Intelligence● Information about rivals that is useful in anticipating

their next strategic moves.

♦ Signals of the Likelihood of Strategic Moves:

● Rivals under pressure to improve financialperformance

● Rivals seeking to increase market standing

● Public statements of rivals’ intentions

● Profiles developed by competitive intelligence units

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Reflecting on the potential moves ofcompetitors…

♦ Which competitors’ strategies are achieving good

results?

♦ Which competitors are losing in the marketplace or badly

need to increase their unit sales and market share?

♦ Which rivals are likely make major moves to enter new

geographic markets or to increase sales and market

share in a particular geographic region?

♦ Which rivals can expand product offerings to enter new

product segments where they do not have a presence?

♦ Which rivals can be acquired? Which rivals are financially

able and looking to make an acquisition?

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A different view: Blue ocean strategy

• Creating new industries – tapping marketsthat currently don’t exist • Break market boundaries between

industries• Reduce or eliminate features that

customers do not value• Enhance and develop those features that

will add value• Differentiate on the basis of valueinnovation

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Q.6 What are the KSFs

♦ Key Success Factors● Are the strategy elements, product and

service attributes, operational approaches,

resources, and competitive capabilities that

are necessary for competitive success by any

and all firms in an industry.

● Vary from industry to industry, and over time

within the same industry, as drivers ofchange and competitive conditions change.

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How to identify KSFs

1. What product attributes and service featuresbuyers strongly affect buyers when choosing

between the competing brands of sellers?

2. What resources and competitive capabilities are

required for a firm to execute a successfulstrategy in the marketplace?

3. What shortcomings will put a firm at a

significant competitive disadvantage?

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Q 7 I i d t d i t fit


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Q. 7 Is industry conducive to profitmaking?

♦ Industry Profitability Considerations:● The industry’s overall growth potential

● Effects of strong competitive forces

● Effects of prevailing drivers of change in the industry

● Competitive strength of the firm: its market position

relative to its rivals, its capability to withstand

competitive forces, and whether its position will

change in the course of competitive interactions

● The success of the firm’s strategy in delivering on the

industry’s key success factors

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Tutorial One (Weeks 2&3)

• Case Study: Reinventing Accor page 456• • 1 Analyse Accor’s Business Model and Strategy • • Readings • • Johnson, M., C. Christensen and H. Kagermann

(2008) “Reinventing your Business Model” HarvardBusiness Review , Dec.

• Boston Consulting Group (2009 )“Business Model

Innovation” • Collins and Porras (1996) “Building your Companies

Vision”. Harvard Business Review, Sept/Oct.


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Even Week Tutorials

Even weeks

Weeks 2,4 ,6, 8 &10

Tue 11:00 91037 QUI 012 (50)

Tue 16:00 91039 QUI 011 (50)

Wed 09:00 91042 QUI 012 (50)

Wed 11:00 91043 QUI 012 (50)

Thu 11:00 91045 QUI 013 (50)

Thu 15:00 91047 QUI 013 (50)


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Odd Week Tutorials

Odd weeks

Weeks 3,5 ,7, 9 &11

Tue 16:00 91040 QUI 011

(50)

Wed 09:00 91038 QUI 012

(50)

Wed 09:00 91041 QUI 012

(50)

Thu 11:00 91044 QUI 013

(50)

Thu 15:00 91046 QUI 013

(50)


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Week Three Lecture

Chapter Four

Evaluating Resources Capabilities& Competencies

Documents

External Enviroment