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Strategy and Strategic Analysis
GEST-S-468
Pr Manuel Hensmans
Your student reps!
• ULB students – Jamy Delfosse [email protected]
– Corentin Scarcez [email protected]
• Exchange students – Inga Salaseviciute [email protected]
2 |
Blog
• Please check regularly! – http://strategy2013.skynetblogs.be/
• Class schedule, syllabus, slides, cases, e-clips, ...
• Exam info!
3
Overview Course
• Introduction – Class 1: What is Strategy?
• Part I: The Strategic Position What is our current strategic context?
– Class 2: The Environment
– Class 3: Strategic Capabilities
– Class 4: Strategic Purpose
– Class 5: Culture and Strategy
4
Overview Course (2)
• Part II: Strategic Choices What choices can we make for the future?
– Class 6: Business strategy
– Class 7: Corporate strategy
– Class 8: McKinsey guest lecture
– Class 9: International Strategy
– Class 10: Innovation I
– Class 11: Innovation II
– Class 12: M&A, alliances, organic growth
5
Overview Course (3)
• Part III: Strategy in Action How do we get there in practice?
– Class 13: Strategy development processes
6
Slide 2.7
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 2.7
The Strategic Position 2: The Environment
Learning outcomes (1)
• Analyse the broad macro-environment of organisations in terms of political, economic, social, technological, environmental (‘green’) and legal factors (PESTEL)
• Identify key drivers in this macro-environment and use these key drivers to construct alternative scenarios with regard to environmental change
Learning outcomes (2)
• Use Porter’s five forces analysis in order to define the attractiveness of industries and to identify their potential for change
• Importance strategic customer
Layers of the business environment
10 |
The PESTEL framework
The PESTEL framework categorises macro-environmental influences into six main types:
political, economic,
social, technological,
environmental legal
Thus PESTEL provides a comprehensive list of influences on the possible success or failure of particular strategies.
11
12
Political
• Government support for national carriers
• Security controls
• Restrictions on migrations
Economic
• National and regional growth rates
• Fuel prices (euro exchange rates)
Social
• Rise in travel by elderly
• Student international study exchange
Technological
• Fuel-efficient engines
• Security check technology
• Business teleconferencing
Environmental
• Noise pollution controls
• Energy consumption controls
• Land for growing airports
Legal
• Restrictions on mergers
• Preferential airport rights
13
Political
• Political pressures against drinking & driving / binge drinking
Economic
• Rise of the Asian economies
• Energy prices soaring
Social
• Maturing tastes N-Europe / rising consumption S-Europe/Asia
• Awareness of alcohol on fitness
Technological
• Innovations around products such as ice-cold lager
Environmental
• Packaging issues
Legal
• Changes in licensing laws & permitted alcohol limits for driving
Use key PESTEL factors to build scenarios
Goal scenario analysis? 1) Predict future scenarios
2) Debate plausible scenarios
3) Forecast scenarios
• Consider plausible alternative futures
do not to attempt to predict the unpredictable
• Value = Organizational learning & debate
Give scenarios memorable titles
• How many scenarios? – Avoid 3 scenarios: increases risk-aversion
• Managers will go for the middling scenario
• Two or four scenarios – avoid an easy mid-point
• Adapt strategy to how scenarios actually play out
– Influence & monitor environment
15
Scenario analysis
From PESTEL to scenarios?
• Identify key factors • high impact on the industry, market and organisation in question
– factors that bring most uncertainty
• In brewing industry?
– Shifting geography of consumption
• Shift to Asian economies and southern Europe (under Ec & S)
– Responsibility for product side-effects in West
• Increasing hostility to side-effects of drinking in West (under P and L)
16
Attitudes to drinking & side-effects in - Part of everyday life - Little consideration of side-effects - Self-control expected even when intoxicated
Scenarios brewing industry (2022)
17
Tobacco II Escape from
Alcatraz
Colonising the world
lMuch ado about
nothing
High
responsibility
side-effects
Low
responsibility
side-effects
Rapid
geographical
shift
Slow
geographical
shift
% Chinese men that smoke? 53
% Chinese doctors (GPs) that smoke? 50
% of Chinese adults who believe smoking causes health problems? 20
Scenarios brewing industry (2022)
18
Tobacco II Escape from
Alcatraz
Colonising the world
lMuch ado about
nothing
High
responsibility
side-effects
Low
responsibility
side-effects
Rapid
geographical
shift
Slow
geographical
shift
Scenarios for the global financial system, 2020 https://members.weforum.org/pdf/scenarios/TheFutureoftheGlobalFinancialSystem.pdf
19
TRY YOURSELF!
European Airlines industry
Financial Services industry!
Slide 2.20
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Layers of the business environment
Industry analysis
• What is an industry?
– Firms producing same principal products/services
• 2 goals of industry analysis?
– Assess attractiveness industry structure
• Should we get in or out?
– Can we shape industry structure in our favour
• Not just passive stance
21
Industry analysis: 5 forces framework
22
1 Threat of Entry
• 5 main considerations – Economies of scale and experience
• Automobiles, advertising FMCG, biopharma
– But Internet banking (only 10,000 customers to be viable)
– Expected retaliation
• Price war or marketing blitz; global retaliation
– Access to supply or distribution channels
• Problem for new entrants in industries with retail component
– Yet, bypassed by Dell and Amazon
– Legislation or government action
• From patent protection to tariffs
– (De)regulation!
23
1 Threat of Entry
• Height entry barriers – Differentiation
• Soft drinks versus steel
– Brand loyalty versus commoditizaton
24
2 Threat of substitutes
• Substitutes are? – Products/services that offer similar benefit to an industry’s products or services, but
by a different process coming out of different industry
• Price/performance ratio • Alumnium vs steel in automobile manufacturing applications
• Videoconferencing vs travel
• Extra-industry influences – Always take into account!
• Demand wired telephone lines in emerging economies
– Capped due to?
• choice for wireless mobilies
25
3 Power of Buyers
• Buyers are? – organization’s immediate customers, not necessarily ultimate consumers
• B2B versus B2C
• 3 main factors – Concentrated buyers
• Few grocery retailers = bulk of milk market demand
– Low switching costs
• Low for weakly differentiated commodities
– Steel, airlines, hotels
– Buyer competition threat
• Buyer owns supply or retail facilities?
– Threat of backward vertical integration
• E.g some steel companies own iron ore sources themselves
26
4 Power of Suppliers
• 3 main factors – Concentrated suppliers
• Iron ore industry: 3 main producers
– Most steel companies still weak bargaining power
– High switching cost
• Microsoft’s operating system / office software
– Buyers prepared to pay premium to avoid hassle
– Supplier competition threat
• Foward vertical integration: e.g. on-line booking
– Low-cost airlines cut out travel agencies
27
5 Competitive rivalry
• Among existing industry competitors – Competitor balance
• Numerous or roughly equal in size & power?
• One or two very dominant = less intense rivalry
– Industry growth
• Slow often means fierce rivalry
– Fixed costs
• High often means fierce rivalry
– Need larger volume to lower unit costs (overcapacity!)
– Exit barriers
• High tends to increase rivalry (esp declining ind)
– Differentiation
• Low increases rivalry
28
29
Industry structure: profitability & growth
• Choice of industry has important consequences – Soft-drinks, pharmaceutical: 5 star industry
• Five forces are relatively weak
– Airlines, hotels: 0 star industry
• Five forces are relatively strong
30
Airline industry: profitability? (US figures)
31
Annual Loss and Earnings
1990 $ 3.9 billion loss
1991 $ 1.9 billion loss
1992 $ 4.8 billion loss
1993 $ 2.1 billion loss
1994 $ 0.3 billion loss
1995 $ 2.3 billion profit
1996 $ 2.8 billion profit
1997 $ 5.2 billion profit
1998 $ 4.9 billion profit
1999 $ 5.4 billion profit
2000 $ 2.5 billion profit
2001 $ 8.3 billion loss
2002 $ 11.0 billion loss
2003 $ 2.4 billion loss
2004 $ 7.6 billion loss
2005 $ 5.7 billion loss
US airlines (but also EU!) - Never a sustained return on
investment!
- Long periods of loss-making
- Spurts of mediocre profitability
Airlines industry: 5 forces
1. Threat of entry? – Low barriers of entry make for a constant stream of new entrants
• You can rent a plane, lease a gate, it’s all generic technologies
• No high capital requirements for planes: high resale value!
• Can start with one flight, very sexy industry
• Overall threat? strong
32
Airlines industry: 5 forces
2. Threat of substitutes? – Business travellers: videoconferencing
– Short-haul customers: trains, cars, ferries
• Overall threat? strong
33
Airlines industry: 5 forces
3. Power of buyers? – Online-comparison easy
– Strong middle men
– Buy tickets in bulk and sell to customers
• Overall buyer power? strong
34
Airlines industry: 5 forces
4. Power of suppliers? – Only 2 main manufacturers
• Boeing and Airbus
– Airports have lots of clout
– Pilots
• No substitute!
• If they strike they can shut you down!
• Overall supplier power? strong
35
Airlines industry: 5 forces
5. Competitive rivalry? – Very hard to differentiate economy travel
• Same planes, seats
– All about price!
• Overall strength rivalry? strong
36
What can airlines do?
• Buyer power – Find better ways of differentiating
– Sell directly to customers
• Supplier power – Encourage new aircraft manufacturers
• Bombardier, Embraer...
• Substitutes – Improve reliability and check-in procedures
– Total journey times should fall!
37
What can airlines do?
• New entrants – Find ways to discourage airports and others to let in new players
• Competitive rivalry – Enforce new price discipline
• Form new alliances
• Let strong players take over weak ones
38
39
Industry analysis: difficulty! Strategic Customer
Industry analysis: difficulty! Strategic Customer
• The Strategic customer – the person(s) in market segment at whom the strategy is primarily
addressed because they have the most influence over which goods or services are purchased.
most disliked European short-haul airline
– Poll TripAdvisor (Oct 2006), Polls Consumer Watchdogs (2008-2013)
• Amongst frequent (business) travellers
– E-clip parody low-cost airlines
40
• Market segment
– budget travellers
• Not business travellers
– Travel from low-cost, low-tax point to point airports
• not hub & spoke
• Strategic customer
– On-line end customer
• Not large businesses or travel agencies
41
Does not care at all about parody!
Do the exercise for the European brewing industry!
42
Threat of entry: global brewers
• Facilitating entry
– Beer brands enter new territories through industry consolidation
• Budweiser & ABInbev
– Counter-globalization niche for micro-brewers
• lots of small, specialist regional brewers with authentic experience
• Discouraging entry
– High on experience curve / capital requirements given mature, consolidating industry
– Strict regulations, high taxes and high retaliation odds
– Importance international branding to command premium price
• Overall threat of entry?
moderate
43 |
Threat of substitutes: global brewers
• Maturing tastes in N-Europe
• Diversification threat
– from wine and cider/perry, other non-beer industries
• Overall threat of substitutes?
– moderately strong
44 |
Power of buyers: global brewing
• Buyers are? – Supermarkets, hypermarkets, specialist retailers, clubs, pubs, restaurants…
• Forces that strengthen buyer power? – Low switching costs for some standard beers
– Large supermarkets can negotiate on bulk purchases
• Forces that weaken buyer power? – Diversity & number
– Brewers differentiate beers globally and locally
• Buyers around the world have to offer large variety of beers
– Some forward integration by larger brewers
• Into pubs
• Overall buyer power?
– moderate
45 |
Power of suppliers: global brewing
• Suppliers are?
– providers of raw materials, other flavoring, packaging, machines, equipment and licenses
• Forces that strengthen supplier power?
– Smaller, traditional brewers not vertically integrated
• Even Heineken purchases malt on a contractual basis
– Quality raw material is highly important
• Forces that weaken buyer power?
– Independent hop growers are numerous
– Scale dominant multinational players
- e.g. SabMiller now grows own hops, and has its own apple orchards
• Overall supplier power?
moderate
46 |
Competitive rivalry: global brewing
47 |
Competitive rivalry: global brewing
• Increasing rivalry – recent economic downturn (depressing already slim margins)
– presence of large incumbents (overcapacity!)
• high fixed costs
• specialized assets lead to high exit barriers
– globalization of brands
• No territory is shielded from competiton anymore
• Decreasing rivalry – New differentiation
• “Light” beers (health)
• Overall rivalry? – strong
48 |
Summary 5 forces: global brewing
49 |
What can brewers do?
• Differentiate premium brands internationally
–
• Standard lager sells best world-wide
– Potential growth low/non-alcohol beer!
• Cider, flavoured & light beers
– Innovative marketing campaigns
• 2014 FIFA World Cup
• Focus on Asia & Brazil
– rising disposable incomes & cultural shift twds alcoholic bvges
• Africa & Middle East
– Biggest growth potential
• Further consolidation?
– AB Inbev & SabMiller to drive down costs!
50
What can brewers do?
• Differentiate premium brands internationally
–
• Standard lager sells best world-wide
– Potential growth low/non-alcohol beer!
• Cider, flavoured & light beers
– Innovative marketing campaigns
• 2014 FIFA World Cup
• Focus on Asia & Brazil
– rising disposable incomes & cultural shift twds alcoholic bvges
• Africa & Middle East
– Biggest growth potential
• Further consolidation?
– AB Inbev & SabMiller to drive down costs!
51