BUSINESS STRATEGYBUSINESS STRATEGY MKT3002 / 51110 MKT3002 / 51110

LECTURE THREE:

• Topic 3: Strategic analysis

Module 3Module 3Strategic analysis – Analysing Strategic analysis – Analysing

the environmentthe environment Learning outcomes

– Describe the components of the external environment within which an organisation operates

– Carry out a full PEST analysis– Appropriately conduct a Porter’s ‘5 forces’ analysis to

assess industry attractiveness– Explain the significance of segmentation in strategic

planning– Undertake a competitor analysis; and– Undertake a directional policy matrix to consider the

portfolio of a business

Key words and conceptsKey words and concepts

Environmental uncertainty PEST analysis Environmental drivers of change Porter’s diamond Scenario planning Five forces analysis Life-cycle model Exit barriers

Key words and conceptsKey words and concepts

Strategic group analysis Market segmentation analysis Perceived value Market attractiveness Directional policy matrix

IntroductionIntroduction

The external analysis may be viewed as a process which:– Identifies trends and future events, opportunities and

threats and strategic uncertainties;– Analyses the impacts of these on organisations; and– Ultimately suggests ways or strategies to cope with

such impacts.

Aaker 1999

Steps in the Steps in the environmental analysisenvironmental analysis

Assess the nature of the environment

Audit environmental influences

Identify key competitive forces

Identify competitive position

Identify key opportunities and threats

Strategic position

Differences between external & Differences between external & internal environmentsinternal environments

• External environment:– The management has no control over most of

its components.– React to the changes in the environment.

• Internal environment:– The management has varying degree of

influence of its components.– Seeks to change the environmental influence

itself.

Understanding the nature of Understanding the nature of the environmentthe environment

Environmental uncertainty increases the more that environmental conditions are dynamic or the more they are complex.

Environmental conditions:– Simple / static conditions– Dynamic conditions– Complex situations

Auditing environmental Auditing environmental influencesinfluences

• The importance of environmental forces differ from organisation to organisation.

• Three auditing technique:

– PEST analysis

– Porter’s diamond

– Scenario Planning

PEST analysisPEST analysis• It involves identifying factors that influence the

organisation. These factors include:

– Political / legal

(eg. Taxation policy, foreign trade regulations, government stability)

– Economic

(eg. unemployment, disposable income)

– Sociocultural

(eg. Lifestyle change, levels of education)

– Technological

(eg. Government spending on research, speed of technology transfer)

Porter’s diamondPorter’s diamond

Porter’s Diamond: suggests that there are inherent reasons why some nations are more competitive than others and why some industries

within nations are more competitive than others.

Firm strategy, structure and rivalry

Factor conditions

Demand conditions

Related and supporting industries

Environmental drivers of changeEnvironmental drivers of changeGlobal market convergence

Global competition

Govtinfluence Cost

advantages

• Trade policies• Technical standards• Host government policies

• Scale economies• Sourcing efficiencies• Country-specific costs• High product development costs

• Similar customer needs• Global customers• Transferable marketing

• Interdependence• Competitors global• High exports / imports

Global strategies

Drivers of globalisation

Scenario planningScenario planning ‘build’s plausible views of different possible

futures for an organisation based on grouping

of key environmental influences and drivers of change about which there is a high level of uncertainty’.

• Limited number of logically consistent.• Examine strategic options against the

scenarios.• Implications of scenarios.

External factor evaluation matrix External factor evaluation matrix (EFE)(EFE)

• ‘The EFE matrix allows strategies to summarise and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information’.

David 2001, p. 113

External factor evaluation matrix External factor evaluation matrix (EFE) (Cont)(EFE) (Cont)

Steps in developing the EFE matrix:– Identify a list of KEY external factors (critical success

factors).– Assign a weight to each factor, ranging from 0 (not

important) to 1.0 (very important).– Assign a 1-4 rating to each critical success factor to indicate

how effectively the firm’s current strategies respond to the factor. (1 = response is poor, 4 = response is extremely good)

– Multiply each factor’s weight by its rating to determine a weighted score.

– Sum the weighted scores.– Average total weighted score is 2.5.

External factor evaluation matrix External factor evaluation matrix (EFE) (Cont)(EFE) (Cont)

Key external factors

Opportunities1. Global markets are

practically untapped by quality wool.

2. Increased demand caused by a raised in wool products.

Threats1. Legislation against the

wool industry.2. Increased competition.

Weight

0.35

0.2

0.3

0.15

Rating

4

2

1

2

WeightedScore

1.4

0.4

0.3

0.3

Developing the EFE matrix - Example

Total 1.00 2.4

Competitive profile matrix (CPM)Competitive profile matrix (CPM)

• ‘The CPM identifies a firm’s major competitors and their particular strengths and weaknesses in relation to a sample firm’s strategic position’.

David 2001, p. 115

• Key success factors (KSFs)

– Technology related

– Distribution related

– Marketing related

– Skills related

– Organisational capability

– Other types of KSFs

Competitive profile matrix (CPM) Competitive profile matrix (CPM) (Cont)(Cont)

Developing the CPM - Example

Key success factors

Advertising

Product quality

Customer loyalty

Financial position

Global expansion

Market share

Weight

0.1

0.3

0.2

0.2

0.1

0.1

Rating

3

4

3

3

2

3

Score

0.3

1.2

0.6

0.6

0.2

0.3

Total 1.00 3.2 2.1 3.1

Company A

Rating

3

2

2

2

2

2

Score

0.3

0.6

0.4

0.4

0.2

0.2

Company B

Rating

4

3

2

4

1

2

Score

0.4

1.2

0.4

0.8

0.1

0.2

Company C

Rating: 1=major weakness, 4=major strength

The competitive environment: The competitive environment: Five forces analysisFive forces analysis

‘Five forces analysis is a means of identifying the forces which affect the level of competition in an industry’.

Johnson & Scholes 1999, p.115.

Porter’s Five forces industry analysisPorter’s Five forces industry analysis

Potential entrants

BuyerSupplier

Substitutes

Competitive rivalry

Threat of substitutes

Bargaining power

Bargaining power

Threat of entrants

Adapted from M. E. Porter, Competitive Strategy

Competitive rivalryCompetitive rivalry

Development Growth Shakeout Maturity Decline

Few: trial of early adopters

Users/buyers

Competitive conditions

Few: competitors

Growing adopters:trial of product/service

Entry of competitors

Attempt to achieve trial

Fight for share

Undifferentiated products/services

Growing selectivityof purchase

May be many

Likely price cutting of Volume

Shakeout of weakest competitors

Saturation of Users

Repeat purchase reliance

Fight to maintain Share

Difficulties in gaining/taking share

Emphasis on efficiency/low cost

Drop-offIn usage

Exit of some competitors

Selective distribution

The life cycle model

Competitive rivalry (Cont)Competitive rivalry (Cont)

Other forces that affect competitive rivalry:– Competitors balance;– Market growth rates;– Global customers;– High fixed costs;– Extra capacity;– Differentiation;– Acquisition of weaker companies; and– High exit barriers.

Identifying the organisation’s Identifying the organisation’s competitive positioncompetitive position

1. Strategic group analysis

2. Market segmentation

3. Perceived value (customer )

4. Boston consulting group matrix (BCG)

5. Market attractiveness & business strength

6. Competitor analysis

1. Strategic group analysis1. Strategic group analysis

‘aims to identify organisations with similar strategic characteristics, following similar strategies or competing on similar bases’.

David 2001, p. 127

• The strategic group analysis is useful in the following ways:– Identify direct competitors.– Identify the possibility for an organisation to move

from one strategic group to another.– Identify opportunities.– Identify significant strategic problems.

2. Market segmentation2. Market segmentation

• ‘seeks to identify similarities and differences between groups of customers or users’.

David 2001, p. 129

3. Analysing perceived value 3. Analysing perceived value by customersby customers

• The development of competitive strategy needs to be based on a good understanding of dimensions of strategy valued most by customers. This can be achieved through:

– Identify the relevant market segments.– Identify the characteristics of the product/service that

customers value most.– Rate the importance of these dimensions.– Identify the relative strengths of competitors.– Review organisation’s competitive strategy.

4. The BCG4. The BCG

?Sales

growth

Market share

5. Market attractiveness and 5. Market attractiveness and business strengthbusiness strength

• Directional policy matrix– It seeks to position SBUs according to:

(a) how attractive is the relevant market in which they are operating, and

(b) the competitive strength of the SBU in that market.

6. Competitor analysis6. Competitor analysis

• Obtain information about competitors.• Identification of appropriate criteria.

– Eg. Goals and objectives, culture, financial, target market, and etc.

Environmental analysis in Environmental analysis in practicepractice

• Simplify the complexity.

• Selective attention.

• Prototypes.

• Contribute to collective know-how.

• Threats rather than opportunities.

• Difficulty in building up an overall strategic view of

the environment.

Lecture 3 reviewLecture 3 review

• Strategic analysis– Understanding the nature of the

environment– Audit environmental influences– Identify key competitive forces– Identify competitive position– Identify key opportunities and threats– Environmental analysis in practice

Next weekNext week lecture lecture

Module 4:

Resources, competencies,

strategic capability.

(Study book: Module 4 - Text

Chapter 4)

Next week’s tutorialNext week’s tutorial

• Prepare by going over the case

questions at end of module

• Read article from BRW 23/07/99

“Grooving in a new Mood” p 84 –7

• Do a porters five forces analysis

• Will environmental changes affect the way the retail music stores look like in the future?

• If you were to invest money in a business, would you consider a music retailer?