Slide of strategic management w4

Learning Objectives• Explain why an understanding of the competitive environment is critical to strategic analysis • Conduct a political, economic, social, technological, environmental

Learning Objectives

• Explain why an understanding of the competitive

environment is critical to strategic analysis

• Conduct a political, economic, social, technological,

environmental and legal (PESTEL) analysis

• Explain the use of Porter’s diamond for assessing

determinants of national competitive advantage

• Conduct a five forces analysis and describe the industry structure

• Conduct a network environment analysis

• Develop scenarios and explain their uses

• Identify key success factors and strategic groups

External Analysis

Macro Environmental Influences

• Macro environment refer to the environment

external to the organisation, its operations and its industry

• Macro environment factors influence the medium and long term features of the strategy

• These factors are usually independent of the

organisation and its activities

• An organisation has limited influence on these

factors

PESTEL Analysis

• PESTEL analysis is one of the most popular and useful tool (or perspective) for analysing the

external macro environment

• It includes the analysis of political, economic,

social, technological, and legal environments of

Six Elements of PESTEL Analysis

Fig 4.1

Using a PESTEL Analysis

• PESTEL analysis should provide detailed

understanding of the key forces and trends

• Two key questions should drive the analysis:

1 Which environmental factors are currently affecting

the organisation?

2 Which of these factors are more important now and

in future?

Using a PESTEL Analysis

• The result of PESTEL analysis often leads to the identification of key success factors (KSFs)

• Key success factors (KSFs) are the

characteristics defined by industry conditions that are important for the success of an organisation

National Competitive Advantage

• National competitive advantage also known as Porter’s diamond is an influential tool of assessing country

competitiveness

• It consider four broad features of the local environment that provide competitive advantage for organisations located in a particular country

National Competitive Advantage

Fig 4.2

Micro External Environment Analysis

• Micro external environment refers to the

conditions in the organisation’s industry (i.e in the environment immediately surrounding the

organisation)

• Micro external environmental conditions result

from the behaviours of other organisations in the industry, suppliers to the industry, customers of

the industry and organisations attempting to enter the industry

Porter’s Five Forces of Competition

Fig 4.3

Competition From Substitutes

• The customer’s perception of the value of a

product or service depends, in part, on the

availability of substitute products

• Three aspects of this type of competition relate to factors such as:

• Presence of substitutes

• Price elasticity

• Differentiation

Threat of Entry

• Threat of entry is present in industries that

provide an attractive environment in which to

achieve a good return on investment

• The threat of entry itself may keep pricing within competitive levels

Creating Barriers

• Many organisations can create barriers to entry

by maintaining high levels of competition

• While price is the most common mechanism used

to create barriers to entry, other measures

including negotiation to create licensing and

regulatory constraints is often used as well

• Other forms of barriers to entry can result from

large economies of scale

Economies of Scale

• Economies of scale refers to a situation where the greater the volume of activity, the lower the set up and operating costs per unit of activity

• Achieving efficiency in industries that are capital, research or advertising intensive requires large-scale operations and therefore act as a barrier to entry

Other Barriers to Entry

• Other barriers to market entry include factors such as:

• Absolute cost advantages

• Product differentiation

• Access to channels of distribution

• Governmental and legal barriers

• Retaliation

The Effectiveness of Barriers to Entry

resources and capabilities that potential entrants

possess

barriers tend to earn above average rates of profit

particularly effective impediments to entry

may be ineffective against established organisations that are diversifying from other industries

Rivalry Between Established Competitors

• The major determinant of the general level of

competition attractiveness of an industry is the

competitive stance of the organisations operating within the industry

• The intensity of competition between established organisations is the result of interactions between six factors

Rivalry: Concentration

• Concentration is the number and size distribution

of organisations competing in an industry

• Concentration is most commonly measured using the concentration ratio (CR) — the combined

share of the market held by the largest

organisations

Rivalry: Diversity of Competitors

that a group of organisations avoids

aggressive price-based competition

depends on the similarity of their strategies, objectives and costs.

industry.

Rivalry: Product Differentiation

• Organisations offering very similar products will often compete aggressively using price based competition

• In industries where products are highly

differentiated price competition tends to be weak

Bargaining Power of Customers

• In output markets, customer influence depends upon two distinct factors:

1. Importance of product to customers

2. Relative bargaining power of customers

Bargaining Power of Suppliers

• According to Porter, bargaining power of

suppliers can influence the attractiveness of an industry

• The key factors in determining the power of

suppliers is the importance of what they are

supplying, the cost to the organisation of

switching between different suppliers and the relative bargaining skills of each party

Applying Porter’s Analysis

important results to an organisation of a five forces analysis:

organisation strategy should focus on

Describing Industry Structure

the principal features of the industry’s

structure: competitors, customers, suppliers and producers of substitute goods

these groups determine the overall level of competition and relative strength of each

group

Industries and Markets

• Economists define an industry as a group of

organisations that supplies a market

• The principal difference between analysing

industry structure and analysing market structure

is that industry analysis looks at industry

attractiveness as a reflection of competition

between specific markets, such as suppliers,

customers and substitutes

• Market analysis focuses predominantly on the

customers alone

Competitor Analysis

• Analysis of the strategies through which competitors in an industry create a competitive advantage refers to

competitor analysis

• The main purpose of competitor analysis is to:

1 Forecast competitors’ future strategies and decisions,

2 Predict competitors’ likely reactions to an organisation’s

strategic initiatives,

3 Determine how competitors’ behaviour can be

influenced to make it more favourable.

Porter’s Framework for Competitor

Analysis

Fig 4.6

Network Environment Analysis

• In recent times, networks have become an

important feature of the competitive landscape

• It is important to assess the characteristics and scope of networks that affect the conditions in the external environment

• Some key factors include:

• Level of trust

• Network membership

• Longevity

Identifying Key Success Factors

Fig 4.8

Strategic Groups

• Strategic group refers to a group of organisations

in an industry that adopt a similar strategy

• Strategic group analysis refers to an analysis of the organisations in a particular industry on the basis of two key variables selected for that

industry, indicating how organisations group on the basis of the strategies they have adopted

The SWOT Analysis

• A commonly used and familiar concept is the SWOT (strengths, weaknesses, opportunities, threats) analysis

• The purpose of an external environmental

analysis is closely linked with the opportunities and threats component of SWOT

• As a tool it has limitations

Environmental Analysis and Strategic

Plans

• That environment is the principal determinant of organisational success is dominant view amongst many strategist

• Environmental analysis has relevance at two

strategic levels of thinking:

• Corporate level

• Business level