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Analysing the external environment of business (i.e. general, competitive)
Student appointment: “It is not the strongest of the species that survive, nor the most intelligent, but the most responsive to change.” - DarwinDr. Miles Weaver,Senior Lecturer in Strategic Management,Leicester Business Schoolmweaver@dmu.ac.ukJoin an ongoing debate:With your lecturer: @DrMilesWeaverClassmates & the world using: #ManStrat
“if ignorant both of your enemy and yourself, youare certain to be in peril”.“The supreme art of war is to subdue the enemywithout fighting”.“All men can see these tactics whereby Iconquer, but what none can see is the strategyout of which victory is evolved”. - Sun Tzu 1-2
At the end of this lecture students should be able to:- Identify major external influences on organisations and outline tools with which to analyse any business environmentObjectives:- Understand the importance of environmental scanning and how it fits into the strategic management process Conduct a PESTLE analysis for an organisation with which you are familiar Identify the main sets of forces exerting influence on organisations Use Porter’s five forces analysis to define the attractiveness of industries and sectors for investment and to identify their potential for change Identify strategic groups within an industry with similar strategic characteristics
Analyze internal and Strategic management involves external environment the major decisions, business choices, and actions that chart Define strategic intent the course of the entire and mission organisation It consists of: Formulate strategies Analysis of the internal and external environment of the firm Definition of the firm’s mission Implement strategies Formulation and implementation of strategies to provide a competitive advantage Assess strategic outcomes
Social, Industry Other political, attractiveness, opportunitiesExternal regulatory, industry and threats -- & community dynamics, & like newFactors considerations competitive technologies conditions Company’s Strategic Situation/position Firm’s Ambitions, Shared strengths, philosophies, vision, valuesInternal weaknesses, & ethical and company & competitive principles cultureFactors market position of key executives
Firms study the external environment in order to: Identify opportunities and threats in the marketplace ▪ we will centre on this when formulating strategies, as well as the internal strengths and weaknesses to be discussed in the next lecture topic Avoid surprises Respond appropriately to competitors’ moves A major challenge is to gather accurate market intelligence in a timely fashion, and transform it into usable knowledge to gain a competitive advantage over other firms
Strategy needs to be adaptive and dynamic Need to know what to adapt to Need to understand dynamics Impact on organisation On growth and scope for growth On level and nature of competition On “rules of the game” On costs On profit
Lets look at the general (macro) environmentEnvironmental influences on the organisationSource: Adapted from Dobson et al.(2004), See Boddy (2010)
Economic Forces – regulate the exchange of materials, money, energy and information Technological Forces – generate problem-solving inventions Political-legal Forces - allocate power and provide constraining and protecting laws and regulations Socio – cultural Forces – regulate the values, morals, and customs of society Johnson, Scholes, and Whittington (2011)
Not just a list of influences Need to understand key drivers of change Drivers of change have differential impact on industries, markets, and organisations Focus is on future impact of environmental factors Combined effect of some of the factors likely to be most important Your tutorial task is to consider the general (macro) environment of BP
Environmental influences on the organisationSource: Adapted from Dobson et al.(2004) as cited in Boddy (2010).
M.E. Porter (1980) discussed ‘Competitive Strategy’ What makes some industries more attractive/successful than others? “…identifying the basic, underlying characteristics of an industry rooted in its economics and technology that shape the arena in which competitive strategy must be set.” (p.6) Competition reflects structure Structure determines profit potential Porter (1980)
Industry – a group of firms producing the sameprincipal product, e.g. mobile phonesSector – a group of organisations providing thesame kinds of services, e.g. healthcare Competitive forces in the industry: Determine attractiveness of industry Affect the way individual companies compete Influence decisions on product/market strategy
Business Gaining advantage over competitors ▪ Competitive advantage Public sector Demonstrable excellence in service delivery ▪ Servqual Assess attractiveness of different industries/sectors Identify sources of competition in an industry/sector Porter’s Five Forces
Key questions and implications: Are some industries more attractive than others? (weaker forces) What underlying forces in the macro- environment drive the competitive forces? Will competitive forces change? What are the strengths and weaknesses of the competitors in relation to the competitive forces? Can competitive strategy influence competitive forces? (e.g. build barriers to entry)
Use at level of strategic business units (SBU) Define the industry/market/sector Don’t just list the forces: derive implications for industry/organisation Note connections between competitive forces and key drivers in macro environment Establish interconnections between the five forces Competition may disrupt the forces rather than accommodate them ?Adapted from: Porter (1980), Competitive Strategy: Techniques Power of other Stakeholdersfor Analyzing Industries and Competitors, Free Press, p. 4.
Fewer new entrants = more profit Affected by entry barriers such as high costs of equipment and facilities lack of distribution facilities customers loyal to established brands small companies lack economies of scale subsidies/regulations favour existing firms E.g. Patent-protected drugs, presentation software
Greater power of buyers = less profit to seller Power of buyer increases if: Buyer takes high % of supplier’s sales Many alternative products or suppliers Product a high % of buyers costs, creating incentive to seek alternatives Cost of switching to other suppliers is low E.g. online products, major supermarkets like Wal-Mart, Tesco
High power of supplier = less profit to buyer Power of supplier is high if: Buyer takes small % of sales Few alternative products or suppliers (distinctive product keeps buyers loyal) Product a low % of buyer’s costs, little incentive to seek alternatives Cost of switching suppliers high E.g. luxury brands, business software
Easy to substitute = less profit to supplier Substitution becomes easier if: Buyers willing to change habits Technological developments enable new products and services Transport costs falling New suppliers entering a market E.g. online media, new materials
Greater rivalry = lower profit Rivalry increases when: many firms, but none dominant market growing slowly, so firms fight for share high fixed costs encourages over- production loyalties (family businesses or political support) prolong over-capacity e.g. airlines, agriculture, Nokia and new mobile suppliers, current banking industry?
Subjective interpretation as well as objective realities Forces contradict/balance each other Managers can consciously try to shape them as part of their strategy Competitive forces affected by those in the general environment
Equipment manufacturers Is low due to the enormouscompete for the market share. cost in licences (£22bn) andNokia, Motorola, Sony general investment into newEricsson. Consolidation in the 3G technology. This mightindustry. Threat from become a threat if policy New Entrants towards heavy regulation is to Suppliers’ change Power Very intense. Numerous offers, packages. If a customer threatens to withdraw , the provider Rivalry Buyers’ could offer a new phone, of Power free line rental. Firms Market is mature, and Buying power of now emphasis is on consumers is very high, price, coverage, customer as there is a lot of service choice. Existence of Convergence of mobile independent retailers CPW, Link, telephony with PDAs and Threat from with Internet. This could Others differentiated switch both voice and text Substitutes themselves through messaging into internet. cheap advertising In your own time consider this slide and the clip illustrating Apple iphone Vs competitors available on the blog
Johnson, Scholes and Whittington (2008), pp. 67 - 69
An industry or sector may be too high a level to provide for a detailed understanding of competition Many industries contain a range of companies, each of which has different capabilities and compete on different bases These competitive differences are captured by the concept of strategic groups
Some characteristics for identifying strategic Strategic groups are groups: organisations within an industry with similar Strategic characteristics, following similar strategies or competing on similar basesSources: Based on M.E. Porter, CompetitiveStrategy, Free Press, 1980; and J. McGee andH. Thomas, ‘Strategic groups: theory, researchand taxonomy’, Strategic Management Journal,vol. 7, no. 2 (1986), pp. 141–160.See Johnson, Scholes, and Whittington (2008)
To understand who are the most direct competitors of an organisation To establish the different bases of competitive rivalry within and between the strategic groups To assess if an organisation could move from one group to another Depends on barriers to entry To identify opportunities and threats Changes in the macro-environment may create strategic space
Broad Regionally Focused: Global Broad Line Broad Line Producers Producers E.g. Fiat, PSA, Renault E.g. GM, Ford, Toyota Nissan, VW, Honda Nationally Focused Global Suppliers ofPRODUCT Intermediate Line Limited RangeRANGE Producers E.g. Volvo, Saab, E.g. Kia, Proton Subaru, Daihatsu Nationally Focused, Luxury Manufacturers Small, Specialist Eg Jaguar, BMW Producers E.g. Morgan (UK) Performance Car Narrow Producers E.g. Porche, Lotus National GEOGRAPHICAL SCOPE Global McGee & Thomas, 1986
Strategic management starts with the strategic situation/position A company’s strategic situation/position consists of understanding both the external and internal environment (internal environment to be discussed next week) PESTEL identifies key drivers of change 5 forces framework identifies sources of competition in an industry Competition is dynamic Within an industry there are strategic groups competing on similar bases Environmental analysis identifies opportunities and threats (NB: consider the strategic management process)
READING ACTIVITY Capon (2008), chapter 2 (in custom Prepare BP case in your group using text) your WIKI, for forthcoming tutorial Boddy (2010), chapter 3 Obtain the market report (e.g. Mintel, Datamonitor) for your chosenIndicative: organisation and conduct research Johnson, Scholes and Whittington into its business environment (2011) Worthington and Britton (2006) Use the tools noted in this lecture and in the texts to analyse the external environment You will need to demonstrate this analysis in the assessment and use your findings to synthesise a view of the organisations strategic position (e.g. industry attractiveness, major external influences) 1-31