LEARNING UNIT 3

Strategic analysis: analysing the external environmentKey Concepts

Global business environment External business environment Broad or macroenvironment Task or industry environment Environmental factors and forces PESTEL analysis Macroenvironmental analysis Complementors Industry dynamics Industry analysis Competitor analysis Strategic risk analysis Fiveforce framework Competitor behavior Scenario analysis Industry lifecycle

3.3 Introduction (TB 8.1 pg 138)

The external environment - Is complex and one that is constantly changing. Management does not have control over what happens in the external environment.

The organisation and the environment in which it operates, is an Open-System, because it the influence each other. This means that an organisation’s growth and profitability is influenced by the changing External Environment.

External Environmental Analysis focuses its attention on identifying and evaluating trends and events beyond the control of a single organisation, and also reveals key opportunities and threats confronting the organisation that could have a major influence on the organisation’s strategic actions.

There are 3 levels of analysis which will influence the organisation’s strategic direction (vision and mission) and strategic action:

1. Analysis of broad environmental (environmental trends)2. Analysis of the task environment (key role players, along with the factors and

conditions influencing an industry’s profit potential.3. Analysis of strategic groups and competitors (predicting competitor’s actions,

responses and intentions)

The analysis and evaluation of the external business environment focuses on the macroenvironment as well as on the industry environment, and include the following:

explaining the structure, relevance and importance of the external environment in strategic planning

identifying and analysing macroenvironmental forces and their implications for strategic planning in organisations

discussing the relevant techniques for analysing the macroenvironment identifying and analysing the forces that impact industry competitiveness and

profitability evaluating the techniques for industry analysis, including strategic group analysis analysing industry structure, dynamics and attractiveness identifying an organisation's competitors and predicting competitor behaviour explaining relevant techniques for analysing uncertainty and risk in the

macroenvironment

3.4 Structure and strategic importance of the external environmen t (TB 8.2 pg 139)

Boundaries and interfaces that exist between organisations and their external environments are relatively fluid and cannot easily be defined.

As a result: external environment sometimes springs surprises to organisation from time to time and managers have to be prepared to react.

Under such conditions, timely and accurate information about the environment is critical to decision making and planning

Eg: if organisation know little about the likes and dislikes of their customers and future trends, they will have difficulty designing new products or services, setting up production or developing marketing strategic plans.

Environment usually changes faster than the organisation can adjust to it Managers do not always have sufficient information about external environment

readily available. Managers are also limited by ability to understand or predict the future. Ideally, for strategic decision making and planning to work, managers must be

aware of & understand all the dimensions of the external environment: current competitive environment and future competitive environment.

The need for identifying opportunities and threats originating from the environment. (TB 8.2.1 pg 139)

Company’s performance and success → certain extent determined by characteristics of industry in which it exist and competes.

Different industries are charaterised different competitive conditions and dynamics.

In relation to competitors as well as competitive threats and opportunities in external environment, all organisations have inherited strengths and weaknesses.

Strengths: internal organisational resources and capabilities that can lead to a competitive advantage.Weakness: internal resources and capabilities that firm may not possess yet and are necessary – resulting in competitive disadvantage until firm requires theOpportunities: conditions in the external environment that allow a firm to take advantage of organizational strengths overcome weaknesses and/or neutralise environmental threats. Threats: conditions in the external environment that may stand in the way of organizational competitiveness or achievement of stakeholder satisfaction.

If managers do not understand how environment affects organisation, they cannot identify threats and opportunities and execute plans.

Understanding of external environment provides a foundation for strategic direction and management. (TB 8.2.2 pg 140)

The external environment is composed of all the dimensions in the broader society that influence an industry & the organisation within it, regarding decision making and performance.

When undertaking a study of organisation in relation to its environment and key role players, strategic decision making and planning should: o Take advantage of internal strengths and identified opportunity arising from

external environment.o Overcome weaknesses, or neutralise threats found in the external

environment. o Ensure the strategic ‘fit’ or consistency between its external and internal

environment. Strategic direction → outcome of melding the desires of key organizational

stakeholders with environmental realities. Understanding should lead to identification of strategic alternatives and provide a

basis for formulating strategies.

Analysing the broad environment (TB 8.3 pg 141)

Context within which organisations exist is defined by its broad environment and task environment.

Organisations can only respond to the fundamental forces arising from the broad environment.

Individual firms can influence their task environment and rarely have the ability to influence the broad environment (except, for example, through radical technological innovation like Intel and Microsoft.)

All businesses operate in the macroenvironment − comprising the political, legal, economic, sociocultural, technological and natural environments as well as population demographics − appearing in the “outer ring” in figure 8.1.

The competitive industry environment and its components in the “middle ring” in figure 8.1 are, however, of more immediate interest to organisations mainly for reasons relating to the competitive nature of industry involvement.

Analysis of the "outer ring" of macroenvironmental components should be based on the assumption that discontinuous change has become the norm instead of the exception in today's world of business.

A conscious effort to recognise, understand and respond to changing trends, opportunities, threats and risks, has become a vital prerequisite for any degree of

success in strategy formulation. For the analysis of the external environment to be meaningful for strategy

formulation, the following critical issues need to be considered: identifying and analysing relevant environmental forces (as opposed to

those that are not relevant to the organisation) assessing and attempting to predict the expected changes that could

emanate from these forces, as well as predicting the potential strategic impact that these identified changes could have on an organisation.

3.5 Analysing the Macroenvironment: Factors and forces that affect industries and organisations

3.5.1 Introduction

Most important elements and components can be identified using traditional PEST framework: political, economic, social and technological

PESTLE → PEST model extended to include legal and environment.PESTLE:

political, economic, social, technological, legal and environment (ecological)

Macroenvironmental analysis is based on the PESTLE approach.

Management should understand the potential impact of relevant environmental factors and forces on the industry or industries in which they are involved and hence on their own organisations

3.5.2 Political-legal factors

Any government is a major regulator, deregulator, subsidiser, employer & customer of an organisation.

Political, governmental & legal factors can represent key opportunities or threats for both small & large organisations. Not all laws and regulations apply equally to all organisations as some pertain only to specific industries.

The most important legal considerations from a business perspective are the appropriateness of a country's legal system, the effectiveness of law enforcement and whether the country adheres to the rule of law.

The extent of political stability and a government's ability to ensure a stable business environment are possibly the two main political considerations for business.

These political and legal factors could have a positive or a negative influence on business, depending on the actual situation.

A positive factor in a market economy would include the privatisation of state-owned enterprises (SOEs).

In contrast, nationalising an industry would typically be regarded as highly negative. Analysis of the political-legal factors should include an assessment of a country's political risk, especially where organisations are involved in international business.

Eg: governments, political parties, legislation and competitive parties

3.5.3 Economic factors

Impact largely on demand for products and services. Important for managers to monitor and forecast events in domestic and global

economies are often interdependent with sociocultural forces. Apart from a country's gross national product (GNP) and gross domestic product

(GDP), other factors also play a role in assessing the economic environment and economic growth prospects for doing business in a country, especially income levels and disposable income that could reflect buying power and thus market demand in a country.

To assess the effect of interdependent forces, organisations should model their business environment by proposing different scenarios to help managers make better decisions.

The following four economic factors are important from a business perspective: (1) the growth rate of the economy (2) the level of interest rates (3) the currency exchange rates (4) price inflation

Eg: economic growth, inflation, interest rates, employment, ageing population can impact on unemployment figures and salaries of a younger workforce, income levels in a country; levels of disposable income; levels of savings; unemployment rates; and stock market indices and trends over time.

3.5.4 Sociocultural factors (TB 8.4 pg 145 - stakeholders)

Stakeholder groups are products of society. Values, morals, beliefs and subsequent behaviors and lifestyles are therefore

influenced by society. Developing social trends may also offer business opportunities. Organisations

can therefore gain if managers can identify and assess the effects and opportunities presented as well as managing and sustaining their relations and reputation with stakeholder group.

Eg: social values, culture, lifestyles and demographics, health and fitness lifestyles trends have created opportunities for home fitness and supplements, etc.

Figure 8.1 shows the stakeholders that have potential to be the most important. Due to the ‘stake’ they can claim and ‘influence’ they can exert.

‘Stakeholders’ are the individuals, groups and organisations who can affect the firm’s vision and mission.

They are affected by the strategic outcomes achieved; and have enforceable claims on the company’s performance.

All stakeholders should be analysed at both global and domestic level. Eg of stakeholders: customers, suppliers, competitors, government agencies and

a variety of external groups that have stake in the organisation. Various stakeholders can lay claim to different stakes as follows:

Shareholders and directors can claim an ownership stake Suppliers, creditors, customers and employees can claim an ecomomic

stake Regulators, activist groups and local communities can calm a social stake.

In addition, various stakeholders can influence organisations as follows Shareholders exercise formal power associated with their rights. Labour can display economic power by withholding services Government can influence organisation behavior through political power.

External stakeholders : individuals, groups, and organizations that are not directly affected by the

business’s performance. These parties are not directly involved in decision making and other

business affairs and, therefore, may or may not be affected by the company’s decisions or operations.

External stakeholders include government entities, the general public, community businessmen, politicians, analysts, stock brokers, potential investors, etc.

External stakeholders will use the company’s financial information and other publicly available information for a number of purposes.

Government entities such as Internal Revenue will use this information for assessing tax payments.

Potential investors will use the information to make investment choices, media will use them for public awareness purposes, and analysts and stock brokers will use them to advise clients or potential investors.

Internal stakeholders : Internal stakeholders are those that are directly affected by the business’s

performance. Internal stakeholders such as owners, shareholders, creditors, managers,

customers, employees, business partners, and suppliers are directly involved with the operations of the business.

Internal stakeholders are also known as primary stakeholders. Internal stakeholders generally have a large influence on how the

company is run. For example, the company’s owners will take part in important business decisions.

Customers are also internal stakeholders that are extremely important to a business as the extent to which their needs are met will influence the company’s sales.

Company’s managers and workers also influence the company’s day to day operations by the various business decisions that they make.

3.5.5 Technological factors

The innovation and technology fields have grown exponentially in recent years. Continuously driving development of new products and services and therefore

new industries. Also have power to transform society and way business is conducted. Innovation

and technology can spill over from one industry to another. Thus, organisations should monitor developments in innovation and technology

in other related industries. Evaluate consequences of their own products. Managers must be aware of and understand how these changes could affect

their business and how they need to respond strategically to ensure that they are at the cutting edge of new technological advances in order to remain competitive.

The dramatic increase in the number of internet users referred to in the “thought-provoker” has undoubtedly created new and unique marketing and other opportunities.

Information technology (IT) is regarded as a major management, financial, marketing, operational and communications component of any strategy.

3.5.6 Factors relating to the natural environment

Concerns about the natural environment have increased dramatically in recent years.

Preservation of the ecology worldwide is threatened by continuous air, water and land pollution.

Global climate change and global warming have been accelerated by humanity's activities.

Corporate strategies worldwide are affected by environmental legislation and the cost implications of such legislation.

Increasing legislation and regulation have also created opportunities for new products and services that are environmentally friendly and increasingly demanded by consumers.

3.5.7 Global tectonics: Factors relating to the global environment. (TB 8.3.2 pg 142)

Include Global (G) factors to PESTLE Framework PESTLE/G 12 Global Trends which have potential to significantly affect and change leaders

in next 30 years:1. Increasing population2. Increasing urbanization3. The spread of infectious disease4. Natural resource crises5. Environmental degradation6. Economic integration7. Knowledge dissemination8. Information technology9. Biotechnology10.Nanotechnology11. Increasing conflict12.Governance

These global trends have the potential to shake up individual companies, entire industries or even entire economies

Companies attuned to these challenges, which prepare for them and response appropriately, will likely thrive; those that ignore them will do so at their own peril.

With increasing globalization, interconnectedness and interdependencies between countries is increasing and current global competition is intensifying.

Please refer to 143 for two phenomena that has already created shifts as examples and reference.

This phase of ‘globality’ is creating huge opportunity as well as threats for developed-world multinational and new champions from countries alike.

3.5.6 Evaluation of an organisation’s strategic response to external factors and forces.

List of factors that constitute an environment is almost endless. While changes in the broad (macro) environment may affect a cross-section of

industries, some factors PESTLE/G are more important in different industries Factors are context specific and vary from industry to industry and even from

business to business. Factors can also be operating at a national, regional or even a global level. When analysing the broad environment, managers are required to go beyond a

mere description of change in the environment. Managers need to do an assessment of the forces driving it in order to prioritise it

so that the organisation can focus its resources on the most strategically important issues.

An organisation can buffer itself against threats and take advantage of opportunities through first identifying and evaluating these factors.

A usefool tool to identify the strategically relevant and significant factors in the broad environment = External factor evaluation (EFE) matrix illustrated in Table 8.1 pg 144 (its only an example as as used for a holiday resort) please note: pg 145 has notes regarding the table.

The EFE matrix can therefore assist in summarising and evaluating PESTLE/G information and subsequently indicate an assessment of the organisation’s strategic response to the identified individual factors in the environment as a whole.

It also reveals whether the organisation’s current strategy is seizing external opportunities and minimizing the potential effects of external threats.

Inform managers in devising alternate strategies.

3.6 Analysing the Industry environment: Factors and forces that affect industries and organisations

3.6.1 Introduction

According to Grant and Jordan (2012:55-56), the purpose of external analysis should be to identify those macroenvironmental factors that are likely to have an effect on shaping industry conditions, for the following reasons:

For an organisation to make a profit, it must create value for customers – hence the need for it to understand its customers and their needs.

In creating value, the organisation acquires goods and services from suppliers and manages relationships with them.

The ability to generate profits depends on the intensity of competition between rival organisations that compete for the same value-creating opportunities – hence the need for the organisation to understand its competition.

The core of the organisation's business environment is therefore based on its relationships with three sets of role players − customers, suppliers and competitors.

Grant and Jordan (2012:87) aptly state the following: “To survive and prosper in an industry a firm must meet two criteria: first, it must supply what customers want to buy; second, it must survive competition.”

3.6.2 Defining an industry

A classification that refers to a group of companies that are related in terms of their primary business activities.

In modern economies, there are dozens of different industry classifications, which are typically grouped into larger categories called sectors.

The ultimate purpose of defining an industry is to know who your customers and competitors are.

More specifically, an industry is defined as a group of organisations offering products and services that are close substitutes for one another – in other words, products or services that satisfy the same basic customer needs.

Industries can be defined broadly or narrowly, but each approach has its limitations.

Where industries are defined too broadly, it might be difficult to decide exactly who your competitors are, which could result in devising inappropriate competitive strategies.

Defining industries too narrowly could mean that you are not including all relevant competitors, again leading to inappropriate strategies.

A narrow definition could result in missing out on viable opportunities, which competitors who are alert could capitalise on.

The basic customer needs that are served by a market define an industry’s boundary.

3.6.3 Analysing industry attractiveness (TB 8.5.2 pg 148)

According to Porter, customers, suppliers and competitors are the primary determinants of industry competition

PORTE’S FIVE ANALYSIS CustomersExisting industry members and rivalryPotential competitors and threat of entrySubstitute providers

SEVEN FORCES OF INDUSTRY ATTRACTIVENESSCustomersExisting industry members and rivalryPotential competitors and threat of entrySubstitute providers

PlusGovernment interventionComplementors as additional forces

1. Customers

(power of buyers): Some customers exert greater economic power than others and have greater ability to dictate prices and other contract terms as they negotiate with sellers. Powerful customers and buyers may actually reduce the profitability levels of an industry. Power of buyer is high when:

They are few in numbers and/or when they have the ability to buy in bulk.The product or service being offered is similar, making it easier to switch to alternate suppliers.The value of the buyers’ purchases is a significant portion of the sellers’ total incomeThe byers can move backwards into the supply chain by acquiring or developing the ability to produce the products or services themselves.

2. Suppliers: Since suppliers provide all the required inputs to the organisation, including materials, capital and labour, they have the power to influence pricing and profitability and even create uncertainty in the buying industry. Supplier power is high when:

There are only a few major suppliers and they are highly concentrated in relation to the industry they serve. Suppliers to the industry are not similar, thereby making it difficult for incumbents to switch to alternate suppliers.Few or no alternative or substitute products or services existThe suppliers can move forward into the supply chain; andThe value of the industry purchases represents but a small portion of the suppliers total income (Eg: suppliers’ income derived from serving other or multiple industries)

3. Existing industry members and rivalry: Competitive rivalry is strategic maneuvering and retaliatory countermoves on the part of industry incumbents. This leads to increased competitive pressure resulting in profitability. The degree of rivalry is dependent on industry growth rate as well as the number of players, and their relative size and competitive abilities. Competitive rivalry is high when:

There are a large number of rivals who are relatively equal in size and power.The industry is growing slower and incumbents are vying for the support of the existing customers rather than seeking new customers.Incumbents carry huge fixed costsRivals have excess capacity; and

Existing players are unable to exit the 4. Potential competitors and threat of entry:

Existing industry players want to retain their market share and positions and are weary of new entrants since these can increase the level of competition leading to reduce profits. Organisations therefore create entry barriers which are forces intent on keeping potential competitors out while offering protection to existing industry incumbents. There are 6 barriers to entry:

Capital requiredAccess to distributionCost of disadvantages not related to sizeEconomic of scaleGovernment legislation and regulationsHigh switching costs.

5. Substitute providers: Defintion of substitute: Different goods that, at least partly, satisfy the same needs of the consumers and, therefore, can be used to replace one another. Organisations providing products that serve as a replacement alternatives or substitutes to the products of an organisation in a specific industry could be regarded as indirect competitors. (Eg: sucralose contained in artificial sweetners is a substitute for sucrose in cane sugar) Substitute goods and services pose enormous threats to most industries and often place a cap on a particular industry’s pricing. Definitely affect its profitability.A large part of what constitutes a substitute is a matter of personal judgment. Managers should be vigilant and closely monitor neighbouring sectors, industries and markets for changes in technology or cost structures.Strategic perspective: substitutes that show improvements in price performance relative to industry averages should be closely scrutinised – especially if produced by substitute providers who have huge financial resources.

6. Government intervention: Note that government intervention could be enhancing (e.g. deregulation) or constraining (e.g. nationalisation, competition policy). It could affect the structure, competitiveness and profitability of industries, especially where interventions are industry specific (e.g. telecommunications, energy and licensing in the retail liquor sector).

7. Complementors as additional forces: Complementors are products that enhance an industry member's own products (e.g. lease financing that enhances the sale of cars; or handsets to use the service provided by mobile communication providers such as MTN, Vodacom and CellC).

The original five factors all have high ratings, industry competition increases and profitability decreases, and vice versa.

The three steps of a Five Forces Analysis include the analysis of each one of the five forces and determining their combined effect, which then provides an indication of overall attractiveness or otherwise of an industry.

This information is vital for strategic planning. Managers should not only consider the influence of the 5 forces but should seek

ways of manipulating these forces to the advantage of the organisation. Firm may also alter its competitive environment by creating partnerships with

powerful stakeholders Result of analyses should not only guide organisationsing making strategic

decisions pertaining the industry but also assist in identifying forces relevant to opportunities and threats.

3.6.4 Industry structure, dynamics, competiveness and profitability

3.6.4.1 Industry structure

Please refer to Table 8.2 pg 151 and 152

1. Monopoly player: the exclusive possession or control of the supply of or trade in a commodity or service.

Like a state-owned enterprise, serving in a closed domestic market, will have total advantage while it retains government support.

Virtually no legimate competition Organisation’s market will be stable and predictable Managers will typically adopt a defensive approach to maintain barriers to

prevent entry to the market.2. Oligopolistic structures are characterised by a few large organisations with

substantial shares of the market. Try to maintain their own long-term competitive advantage through

crafting largely defensive strategies. 3. Monopolistic competition has more rivals of a similar size that can result in

less stability and short-term competitive advantage. This leads to aggressive strategic approaches and more intense

competition4. As the industry nears perfect conditions, it’s likely that an aggressive strategic

approach would be required. The market would be volatile with frequent entry and exit of players.

Few if any organisations will operate in industry structures that correspond to these theoretical models, but will rather lie somewhere on a continuum between the two extremes.

The greater the number of rivals in an industry, the closer it will be to perfect competition.

3.6.4.2 Industry dynamics

Industry dynamics refer to the rate of competitive and structural changes in an industry over time.

Recall the difficulty of defining an industry from the point of view of an individual organisation, mainly because of the blurring of industry boundaries and the difference between the concepts of industry and market.

The management challenge of dynamic industries is to know at all times the rules of the industry, who their competitors are and why change takes place.

Change can be due to external factors such as technological change or a change in one or more of the industry forces, or internal factors such as new product and/or process development, or some other factors.

While Porters’ five forces model identifies the main drivers at the industry level, it is not able to distinguish other characteristics that may be important in competing in certain types of industries.

3.6.4.3 Industry evolution

Please refer to Table 8.3 pg 153

Industry changes over time are important determinant of the strength of the competitive forces in the industry and the nature of threats and opportunities.

The strength and nature of each force also change as the industry evolves, Especially risk of entry by potential competitors and rivalry among existing firms. Industry life cycle is a useful tool for analysing the effects that industry evolution

has on a competitive force.

3.6.4.4 Drivers of industry change

All industries are affected by new developments and ongoing trends that alter industry conditions.

Strategically, organisations should focus on changes in an industry that will most likely reshape the industry and change competitive conditions.

Some drivers could originate in the macroenvironment (recall the PESTLE factors in fig 8.1), most drivers originate in the more immediate industry environment.

There are many potential drivers of change. Key questions are: what forces are driving industry change and what impact will

they have on the organisation? Firstly Recall Porter's five forces analysis. Secondly, given the answer to this question,the need to assess its strategic

implications and revise or adjust strategy accordingly. Some of the most common industry drivers, amongst others:

Changes in the industry’s long-term growth rate Increasing globalization Changes in who buys the product and how they use it

Technological change Emerging new internet capabilities and applications Product and marketing innovation Entry or exit of major firms

3.6.4.5 Limitations of industry analysis

Methods and models for industry analysis are particularly valuable, but also have limitations.

Porter's five forces model has been criticised for being static, and for not accommodating other relevant factors.

The industry lifecycle provides a useful analytical framework, but is seen as not reflecting the real world of business.

3.7 Strategic group analysis

3.7.1 Introduction

Strategic groups are those industry members with similar competitive approaches and industry market positions.

Strategic group analysis, providing further information on industry competitiveness, occurs at an intermediary level between the industry and the organisation.

The purpose of strategic group analysis: provide information that will help to explain the characteristics and

current behaviour of these groups in an industry and to predict the future behaviour of such groups for strategic decision-making.

3.7.2 Strategic groups: analysis and forecasting

Please refer to Figure 8.3 pg 156 – example of a strategic group map for a local airline industry

The strategic group concept looks at grouping of firms within an industry. Organisations can adopt different competing strategies within an organisation. One approach to revealing the market positions of strategic groups in an industry

is strategic group mapping, as illustrated in figure 8.3.

Three-dimensional nature of a strategic group map: First two dimensions are axes: Representing two good variables of any of the

competitive dimensions Eg, from Figure 8.3 – geographic coverage and service scope

Third dimension – depicted by size of circles: proportional to the combined sales or market share of the firms in each group.Allows map to reveal the position and relative size of each strategic group.

The actual location of groups on the map is insightful as a basis for comparative competitor analysis – where the best place on the map is and why.

Not all positions on the map are equally attractive. An organisation's closest competitors - in its own group. Even within groups, organisations are bound to face different circumstances,

opportunities and threats, and this implies that the results of analyses should be questioned.

3.7.3 Strategic space and industries dynamics.

Strategic groups are not static and change over time, inter alia, as a result of changing organisational strategies of group members as well as industry changes.

Because of these changes, existing strategic spaces between groups, which are evident in figure 8.3, could also change over time.

Industry dynamics dictate that while existing strategic space, in effect uncontested industry-market segments, could present strategic opportunities, new strategic space and opportunities could emerge over time.

3.7.4 Key success factors

As previously stated in section 3.4.1, Grant and Jordan (2012:87-90) relate key success factors to the following two questions: • What do our customers want? • What does the organisation need to do to survive competition?

From the second questions - the following questions relating to the key success factors need to be answered for the specific organisation:

What drives competition? What are the main dimensions of competition?How intense is the competition? How can we obtain a superior competitive position? This information is for management to formulate appropriate strategies, or adapt existing strategies, and to ensure that the necessary resources and capabilities are available.

Company will have to produce high and consistent quality levels and meet delivery promises to customers.

These stakeholder requirements represent key success. 3.7.5 Competitor analysis

Competitive analysis: transforming incisive information (competitors and nonmarket factors) into usable and actionable intelligence for strategic planning purposes

Competitor analysis involves the following two issues:1. identification of the organisation's competitors2. prediction of competitor behaviour

It is difficult to accurately define an industry, and then decide where to compete − across the entire industry, or merely in a segment of the market that the industry serves?

The answer to this question will indicate who the competitors are. Next have to gather information on those identified competitors regarding their

strategic intentions, long-term objectives, strategies and capabilities, the assumptions on which their strategies are based, and their expected competitive behaviour.

.It is immediately obvious that much of this information is highly confidential, which means that the value of conventional analytical techniques is limited.

To gather this type of information on competitors, organisations started using competitive intelligence (CI), a highly specialised approach derived from the field of military intelligence.

Reflection: Competitive intelligence (CI) for superior competitor analysis

Purpose of strategy is to outperform the competition. CI has long been recognised as a strategic management tool that may enhance

competitiveness. CI is the process of developing actionable foresight regarding competitive dynamics and

nonmarket factors that can be used to enhance competitive advantage (Sewdass& Du Toit 2014:185–186).Fleisher and Bensoussan (2007:6–7) define

CI as ”the process by which organisations gather actionable information about competitors and the competitive environment and, ideally, apply it to their planning processes and decision-making in order to improve their enterprise’s performance.”

Core of any CI system in a company is an intelligence cycle; a process perspective of the collection and transformation of data into actionable intelligence, essentially comprising the following five stages:

1. Plan. Determine client needs, establish requirements and develop a plan.2. Collect and process data. Collect data from inside and outside the firm,

conduct an initial classification of the collected data and process the data production.

3. Analyse. Analyse the data in order to generate effective informational outputs and outcomes, involving the skilful application of a variety of techniques in order to make sense of intelligence.

4. Disseminate intelligence. Present or provide the insights generated to the customer/client.

5. Evaluate and control. Obtain feedback and assess whether the process satisfied the client’s present and ongoing needs, and possibly restarting the process if the client is dissatisfied.

Please refer to: Managerial perspective pg 158

3.7.6 Competition vs Cooperation

Individual organisations can influence the industry environment to some extent. Organisations can create cooperative strategies with these stakeholders Pursue a variety of other management techniques to enhance competitive

position. Some factors are likely to influence process of interaction between:

o Individual organisations ando Pressures that may exist to choose competition or cooperation. o or some intermediate stage between the two extremes.

Competition: ‘zero sum’ game or head-on conflict. One party benefit from expense of another.

Collaboration: ‘non-zero’ sum game. All parties to collaboration may gain some benefit.

Benefits of collaboration have been recognised for some time. No single firm possesses or has access to all the requisite resources to bring

product to market. Each partner must contribute something distinctive. Aim is to create advantage in relation to companies outside alliance while Preventing a wholesale transfer of core skills to the partner. Coalitions are not static – develop and evolve. Partners in early stage of product/market evolution frequently become

competitors in later stage, Stakeholders who can influence organisational outcomes are often identified as

suitable candidates for cooperative relationships.

3.7.7 The CPM (Competitive Profile Matrix)

The CPM can be used to identify an organisation's major competitors and determine the organisation's strengths and weaknesses relative to its competitors

It provides relative as opposed to actual information, but nevertheless provides informative data as an input for decisionmaking.

The use of these tools must be accompanied by intuitive judgement rather than robotic examination of weights and ratings.

According to David (2013:103–104), seven characteristics describe most competitive organisations:1. Market share matters. 2. Understand and know exactly what business you are in.

3. Even if it is not broken, fix it – continuously improve products, processes and the entire organisation.

4. Innovate or evaporate – particularly in technology-driven businesses. 5. Acquisitions lead to growth – moving into related or niche markets.6. People do make a difference. 7. There are no substitutes for quality or cost effectiveness.

Please refer to Figure 8.4 pg 160 for an example.

3.8 The external environment: change, uncertainty and risk

3.8.1 Introduction

Change is pervasive, whether in business or other walks of life. With reference to an organisation's external environment, change in both the

macroenvironment or industry environment may occur rapidly or slowly, with or without advance warning, and may have a huge or a negligible impact on an organisation's performance,

growth and survival.

3.8.2 The changing and uncertain environment

Many strategic choices involve future events that are difficult to predict such as credit crunch and economic recession

Under conditions of certainty, accurate, measurable information is available about the outcome of each alternative being considered.Conditions of certainty lend themselves to formal analysis.When event is risky, cannot predict its outcome with certainty, but have enough information to assess its probabilityUnder conditions of uncertainty, little is known about the alternatives or their outcomes. Uncertainty presents unique problems and challenges in terms of analysis.

Four levels of uncertainty:1. LEVEL 1: a clear-enough future: Some environments are sufficiently

transparent managers can develop a single forecast that is a sufficiently precise basis for their strategies. To help generate this usefully precise prediction of the future, managers can use the standard strategy tool kit: market research, analyses of competitors' costs and capacity, value chain analysis, Michael Porter's five-forces framework, and so on.

At level 1, everything is pretty much perfectly predictable. You can plan for the longer term with relative ease as the future is well known and next year will very likely be similar to this year.

2. LEVEL 2: alternate futures: At level 2, there is moderate change -- something equivalent to a light wind. It is, with reasonable intelligence, quite easy to predict what will happen.

Change at this level is easy enough to handle, provided people do consider that it is a good idea. Quite typically, little reorganization is needed, if any, and the change can go through without much disturbance.

Standard techniques can be used for analysing each discrete outcome, but different analysis may be needed for different scenarios, making them difficult to compare.

3. LEVEL 3: a range of futures: At the next level, things start to get trickier as the winds of change pick up and the ability to predict drops to within the annual business planning and budgeting cycle.

The ability to respond to external forces is not guaranteed and those who sat back in easier times will run into difficulties as risks multiply and the need to spend money and other resources on change rises sharply.

At this level, change moves firmly onto the agenda, although some will still be in denial and the problems inside the company of managing change can be as bad as the environmental issues outside.

Situations on this level are prime candidates for techniques such as scenario planning.

4. LEVEL 4: true ambiquity: Even the driving forces that are likely to shape the future are hard to identify. As a consequence: no discrete scenarios can be predicted. Rare but do exist.

Every aspect of the environment is fraught with uncertainty.

In these situations, traditional analysis techniques and forecasting tools are of little value.

At best – a qualitative analysis can be performed where it may be useful to analyse comparable, past environments and extract lessons learned.

Strategic moves are used to construct a generic framework for formalting strategies.

In charaterising how firms deal with uncertainties, important to distinguish between:

Shapers: drive industry towards a structure that is to their benefit. Out to change the rules of the competitive game and try control direction of the market.Adapters: Companies that exhibit a more reactive posture. Take the industry structure as given and often bet on gradual, evolutionary change. Reserving the right to play is also a reactive posture. Companies pursuing this posture often make incremental investments to preserve their options until the strategic environment becomes easier to read and less uncertain.

Level 1 strategic environment: a clear-enough future

Most companies are adapters. This state of relative tranquility is

maintained until a shaper upsets system. Raise level of uncertainty by challenging

existing order Higher levels: objectives are to reduce

level of uncertainty through determined action.

LEVEL 2: alternate futures A shaping strategy, designed to tilt

probabilities to specific outcome. Adapting or reserving right to play is

easier at this level than at higher levels of uncertainty.

Forces of change are known Only few scenarios are thought to occur.

LEVEL 3: a range of futures No discrete outcome can be identified. Shapers focus on limiting the range of

possible outcomes to a smaller set of more desirable future.

Adapting and reserving right to play are also common

Keeping options open. Adapters will be more aggressive and

craft a strategy in real time, Reserving right to play will often wait till a

more definitive strategy can be adopted.

LEVEL 4: true ambiguity Extreme uncertainty exists. When true ambiguity prevails , situation

invites new rules and a sense of order! May represent enormous opportunities to

shapers who can exploit it. As a consequence, shaping strategies

may be less risky at this level. Adaptive strategies and reserve the right

to play postures may represent opportunities lost.

3.8.3 Scenarios and scenario planning

3.8.3.1 Introduction

Scenarios are defined as possible or plausible futures of events. Scenarios are not mere extrapolations of the past, and assume that the past is

no guide to the future. Basically, scenario planning compensates for two common errors of traditional

planning approaches, that is, the under- and overprediction of change. Apart from its predictive value, scenario planning can assist with strategic

decision-making by providing valuable insights into the direction and potential impacts of plausible future macroenvironmental and industry developments.

3.8.3.2 Building scenarios

A popular view is that scenarios are developed to answer "What if?" questions about the future.

Following three themes underpin effective scenario planning:(1) identifying what a business can and cannot change (2) not disregarding what appear to be even trivial considerations (3) exploring multiple, plausible scenarios.

The type of scenario used depends on the purpose for which it is intended. 4 Different types of scenarios:

1. Inductive scenarios – emerge from the discussion and exploration of drivers and trends

2. Deductive scenarios – choose two or more of those drivers to structure scenario world. (please refer to page 165 – Practicing strategy box of future of SA example)

3. Incremental scenarios – similar to official future. One written in the strategic plans of organisations, but different enough to move organisation in a different direction and requiring new thinking.

4. Normative scenarios – realm of visioning – these are the futures we believe ‘should’ happen.

3.8.3.3 The test for and limitations of scenario planning

The real test for scenario planning is whether or not it changes the way managers think and do their business, and

not whether the scenario is right or wrong. Note that with regard to strategic planning, it compels managers to anticipate

what they would do differently should a scenario materialise in future. Limitations of scenario planning are that it may be expensive and time-

consuming, and mainly appropriate for large, resource-rich organisations in relatively turbulent

external environments. The underlying logic is sound and could be beneficial in a variety of business

settings for all types and sizes of organisations. Please refer back to page 165 – Practicing strategy box of future of SA example

3.9 Scenarios and scenario planning

The process of external environmental analysis includes four interrelated activities which are: 1. Scanning- Early signals of environmental changes and trends are identified 2. Monitoring- Meaning of environmental changes & trends is detected through ongoing observation. 3. Forecasting- based on monitoring changes and trends, projections of anticipated outcomes are developed.

4. Assessing- the timing and importance of environmental changes and trends for organisations strategies and their management are determined.

An organisation’s external environment is divided into three major areas:- the macro, industry and market environments.

For organisations to achieve strategic competitiviness, they must be aware of and understand all the dimensions of the external environment.

Just extras:

External environment: PEST analysis is a framework used to examine the remote external environmental factors that can affect the organization, such as political, economic, social/demographic, and technological. Common variations include SLEPT, PESTLE, STEEPLE, and STEER analysis, each of which incorporates slightly different emphases.

Industry environment: The Porter Five Forces Analysis framework helps to determine the competitive rivalry and therefore attractiveness of a market. It is used to help determine the portfolio of offerings the organization will provide and in which markets.

Relationship of internal and external environment: SWOT analysis is one of the most basic and widely used frameworks, which examines both internal elements of the organization — Strengths and Weaknesses — and external elements — Opportunities and Threats. It helps examine the organization's resources in the context of its environment.