Week 2 strategic position the environment

Strategic Drift •Engaged in an environmental or industrial analysis PESTLE or Porter’s 5 forces •Evidenced substantial criticality – counter arguments, deeper examples etc.. Why external

3BM020 Organisational Strategy and

Decision Making

Session 2 Strategic Position & The Environment

Strategic Position & The

Environment

Outcomes covered in this session

HMV: January 2013

HMV: August 2014 – return to profitability (see following slide)

Strategy Diagnosis

“Re-engaging with music

shoppers…This is about being

an authority in music, not selling

music as a commodity”

Core competencies: a defining capability or advantage that

distinguishes an enterprise from its competitors

Reclaim business from

supermarket

Supermarkets are suffering due to the impact of low-cost retailers (Aldi, Lidl) this presents an opportunity due to

environmental turbulence

Driven by a focus upon live

experiences – e.g Megadeth

(not Megadeath!) and Ed

Sheeran

Links to the industry (core competencies) and control/good relations with suppliers (see Porter’s 5 forces)

Retailer reopened 363 Oxford

Street – the London location of

its first store – complete with

retro neon “His Master’s Voice”

sign

Unique resource – a brand that cannot be imitated by other

organisations

Closed loss making stores and

stopped selling iPads and

tablets Returned to selling band

merchandise (e.g T-shirts)

Stuck in the middle? Re-engaging with a core strategic

focus which sends a message to consumers This will be

considered with reference to Porter’s Generic Strategies and Bowman’s Strategy Clock

Argument ?

HMV is synonymous with music and has resources (buildings and

people) – which HMV can use to create a unique experience Online

retailers cannot do this A source of differentiation and competitive

advantage

The company could rely on its unique resources which met the

demands of market This may mean that customers were prepared to

pay a price premium

Focus upon what the company does well Can the question “What

business are you in?” be answered easily? Perhaps more so now than

when HMV was stuck in the middle

The organisation engaged in a turnaround strategy to be successful in

a competitive market

The report and HMV

HMV example:

•Identified issues in an organisation’s strategic direction

•Added the language of strategy to make an argument

•Drawn on core concepts to demonstrate understanding

•Supported this understanding with some evidence

But…it needs:

•Deep theoretical links – e.g to other concepts and theories (e.g Strategic Drift)

•Engaged in an environmental or industrial analysis (PESTLE or Porter’s 5 forces)

•Evidenced substantial criticality – counter arguments, deeper examples etc

Consider your organisation and the report requirements Your understanding of strategy will develop over the coming weeks; use this understanding to advance critical academic arguments which link to your chosen organisation

Layers of The Business

Environment

Also: strategic groups

Why external analysis?

External analysis allows organisations to:

• Discover threats and opportunities

• Better understand the nature of competition

• Make more informed strategic choices

• See if above normal profits are likely in an industry

• If environments were stable you’d simply need to take stock once of the environment and the

organisation’s position in it

• Obviously this is not the case Environmental

scanning is an ongoing process.

• Types of change: incremental, radical…(more of this in week 9)

Change

Understanding The Environment

Environmental influences surrounding the organisation – 1

● Changeability: the degree to which the environment is

Understanding The Environment

The Macro-Environment

PESTEL

Scenarios

Key drivers

Macro environment – PESTEL (1)

Macro environment – PESTEL (3)

• Government and industry focus on technological

effort

• New discoveries /developments

• Speed of technology transfer

• Rates of obsolescence

Macro environment – PESTEL (4)

Key Aspects of PESTEL

Drivers of Globalisation

Source: Based on G Yip, Total Global Strategy ll, FT/Prentice Hall, 2003, chapter 2.

Porter’s DiamondThe Determinants of National Advantage

Source: M Porter, Competitive Advantage of Nations, Macmillan, 1990.

Determinants of National Advantage

• Some nations are more competitive than

others

– Fostering domestic competition

(Porter 1990,1998)

• Some industries within nations are more

competitive than others

• Clusters of organisations from the same industry/sector

Applying concepts:

National Advantage

Speaking in the centre of Frankfurt, the country’s financial capital, the

young charity worker says: “It’s catastrophic I feel let down VW and

the other [German carmakers] were companies I felt I could believe

in, but Volkswagen has ruined that image for me.

The German media are almost united in warning that the revelation that VW

had been cheating on US emissions tests for years could affect the world’s opinion of “Made in Germany” — the country’s reputation for quality, especially

in manufacturing.

Scenarios

• Detailed and plausible views of future

development of environment, based on

groupings of key environmental influences and drivers of change about which there is

a high level of uncertainty

• Different views of possible futures

• Long term view of strategy

• Step 1: identify key drivers

• Step 2: development of strategies (or

contingency plans) for each scenario

• Step 3: Monitor the environment to see how it is unfolding

Did HMV build scenarios? What could be the key drivers of change? Were there other plausible scenarios to build?

Scenarios

Industries & Sectors

Competitive forces in the industry:

– Determine attractiveness of industry

– Affect the way individual companies compete– Influence decisions on product/market strategy

Industry – a group of firms producing the same

principal product, e.g mobile phones

Sector – a group of organisations providing the

same kinds of services, e.g healthcare

Industry – a group of firms producing the same

principal product, e.g mobile phones

Sector – a group of organisations providing the

same kinds of services, e.g healthcare

• Best practice/value for money/benchmarking

Assess attractiveness of different industries/sectors Identify sources of competition in an industry/sector

Porter’s Five Forces

Assess attractiveness of different industries/sectors Identify sources of competition in an industry/sector

Porter’s Five Forces

The Five Forces Framework

Five Forces Analysis (1)

The threat of entry

Dependent on barriers to entry such as:

• economies of scale

• capital requirements of entry

• access to supply or distribution channels

• customer or supplier loyalty

• experience

• expected retaliation

• legislation or government action

• differentiation

Five Forces Analysis (2)

Why are substitutes a threat?

Substitutes can reduce demand

for a particular class of products as customers switch to alternatives.

• Price/performance ratio

• Extra-industry effects

The power of buyers

Are buyers concentrated?

What are the costs of switching?

Does backward vertical integration exist?

Five Forces Analysis (3)

Buyer power is likely to be high where there

is / are:

• a concentration of buyers

• many small operators in the supplying industry

• alternative sources of supply

• low switching costs

• components/materials that are a high percentage

of cost to the buyer leading to “shopping around”

• a threat of backward integration

The power of suppliers

Are suppliers concentrated?

What are the costs of switching?

Does forward vertical integration exist?

Five Forces Analysis (4)

Supplier power is likely to be high where there is / are:

• a concentration of suppliers

• customers that are fragmented and bargaining power low

• high switching costs

• powerful supplier brand

• possible integration forward by the supplier

Five Forces Analysis (5)

Competitive Rivalry is likely to be high

when:

• competitors are in balance

• there is slow market growth (product life cycle)

• there are high fixed costs in an industry

• there are high exit barriers

• markets are undifferentiated

Competitive rivals are organisations with similar products and services aimed at the same customer group = direct competitors

Competitive rivals are organisations with similar products and services aimed at the same customer group = direct competitors

Degree of competitive rivalry

• Competitor balance

• Industry growth rate

• High fixed costs

• High exit barriers

• Low differentiation

Five Forces Analysis (6)

Key questions and implications

• Are some industries more attractive than others? (weaker forces)

• What underlying forces in the macroenvironmentdrive 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)

Key Aspects of 5-Forces Analysis

• 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 macroenvironment

• Establish interconnections between the five forces

• Competition may disrupt the forces rather than

accommodate them

Factors specific to competition

• Underpinning logic: economic power in the market place

• Key question: how much bargaining power does a company

have against the five forces acting against it?

• The Five Forces: each with an example of their power

1 Industry competitors – e.g some may have stronger

brands

2 Customers – e.g may be large enough to dictate buying

terms

3 Suppliers – e.g perhaps supplying a unique ingredient

4 Substitutes for the company’s products – e.g may be

cheaper

5 Potential new entrants – e.g could enter the market with

new technology and threaten the company’s existence

Criticisms of the 5 – forces model

 Analytical framework is static while existing

environment is constantly changing.

 Assumes organisation’s own interests come first.

 Assumes all aspects of micro-environment have the

same importance to the company.

 The model views the environment as a threat and

could therefore, discourage co-operation with

suppliers and customers

 Ignores Human Resource aspect of strategy

 Strategy formed is prescriptive rather than emergent.

The Life Cycle Model

Criticisms of the industry life cycle

1. It is difficult to determine the duration of some life

cycles and to identify the precise stage an industry

has reached.

2. Some industries miss stages or cannot be clearly

identified in their stages, particularly as a result of

technological change

3 Companies themselves can instigate change in their

products and can, as a result, alter the shape of the

curve.

4. At each stage of evolution, the nature of

competition may be different.

Environment – Key Points (1)

• PESTEL identifies key drivers of change

• Scenarios analyse future implications of uncertain environmental forces

• 5 forces framework identifies sources of competition in an industry

• Competition is dynamic

• Within an industry there are strategic

groups competing on similar bases

• Market segments help to understand

differences between customers

• Critical success factors are those features particularly valued by customers

• Environmental analysis identifies

opportunities and threats

Environment – Key Points (2)

Results from environmental analysis

Environmental analysis can be used to provide either

a proactive strategy outcome

or

a reactive strategic situation.

Not sure what these approaches are?

Go and find out…read around these areas

• Political – legislation, competition regulation

etc.

• Economic – GDP, Inflation, Unemployment

etc

• Social – Demographics, changes in attitudes

or values, tastes, fashions etc.

• Technological – New products, adoption of

new technologies, R&D expenditure etc.

• Environmental – ‘Green’ issues, types of

energy consumption (renewable, solar) etc.

• Legal – Employment laws, health and safety

laws, product laws etc.

Checklist for PESTEL Analysis

Take Aways

• Environmental influences can be thought of as layers around an organisation

• The macro-environment can be analysed in

terms of PESTEL factors

• Industries and sectors can be analysed in terms

of Porter’s Five Forces model