The Environment (Week 3)

The Environment (Week 3)

1. Macro-Environment

   • Broad environmental factors
   • Impact almost all firms
   • 'PESTEL' used to identify key drivers of change
     • Drivers used to construct future scenarios
     • "The environmental factors likely to have a high impact on the future success or failure of strategy"
     • Vary by industry or sector

2. Industry/Sector

   • Firms producing similar P&Ss
   • Porter's Five Forces used in understanding attractiveness
   • Complementors are opportunities for cooperation

3. Competitors & Markets

   • 'Strategic Groups' help identify different kinds of competitors
   • 'Market segments' used to organise consumers
     • "A group of customers that have similar needs that are different to customers in other parts of the market"
     • Variation in customer needs
       • Focus on those with distinctive needs
         • Serving those that other firms find difficult to serve = long-term strategy!
     • Specialisation
       • Niche strategy
       • Should have lower costs and solid relationships
   • 'Strategy canvas' used to understand competitors' positions
     • Helps find the 'Blue Ocean'

4. PESTEL Framework

   • Categorises environmental factors
   • Political
     • Role of state and other forces
     • State can be owner, buyer, supplier
   • Economic
     • Macro-economic factors
     • e.g. Exchange rates, business cycles, economic growth rates
   • Social
     • Changing cultures and demographics
     • Changes cultural and ethical attitudes
   • Technological
     • Influences by the internet, nano technology, new materials
     • Opportunities for some, challenges others
   • Ecological
     • 'Green' environmental issures
     • Pollution, waste, climate change
   • Legal
     • Legislative and regulatory constraints/changes

5. Building Scenarios

   • Plausible alternative views
   • Prevent management from being close-minded
   • 1. Define scenario scope
     • Global, region, or market?
     • 3-5-10 years?
     • 2. Identifying key drivers for change
       • PESTEL analysis used here
       • What issues will have a major impact on the future of the industry?
       • Uncertainty and mutual independence are additional criteria
       • 3. Developing scenario 'stories'
         • Knit together plausible stories incorporating key drivers
         • 4. Identifying impacts
           • What impacts will these scenarios have on the firm?
           • 5. Establishing early warning systems
             • Identify indicators that may serve as early warning signals

6. Industries and Sectors

   • A group of firms producing P&Ss that are essentially the same
     • e.g. automobile industry, airline industry
   • A market is a group of customers for specific P&Ss that are essentially the same
   • Competitive Forces - Porter's Five Forces
     • Attractiveness = how easy it is for participating firms to earn high profits
     • Helps identifies attractiveness of an industry in terms of:
       • Threat of entry
         • How easy it is to enter influences rivalry
         • Barriers to entry: factors that need to be overcome by new entrants if they are to compete in the industry
         • Scale and experience
           • Once incumbents have reached large-scale, new entrants will find it hard to match
             • Increased by high investment requirements
             • New entrants will produce at high cost until it catches up
           • Incumbents have learnt to be more effective
         • Access to supply channels
         • Expected retaliation
           • Will it be so great as to prevent entry?
         • Legislation
         • Differentiation
           • Providing a P&S with higher PERCEIVED value than competitors
           • Reduces threat of entry due to customer loyalty
       • Threat of substitutes
         • P&Ss that offer a similar benefit to an industry's P&Ss, but have a DIFFERENT NATURE
         • Reduce demand for a certain type of product
           • Customers switch, may cause obsolescence
         • Puts a price cap on industry!
         • Price/Performance Ratio
           • Still a threat even if more $$$
             • If it out-performs your product...
         • Extra-Industry Effects
           • Come from OUTSIDE the industry
             • Not to be confused with competitor threats INSIDE
       • Buyer power
         • Organisation's immediate customers
         • Concentrated buyers
           • Few large customers = increased buyer power
         • Low switching costs
         • If buyer can supply itself or possibility to do so
       • Supplier power
         • Those who supply the organisation with what it needs to produce the P&S
         • Concentrated suppliers
           • Fewer = more power
         • High switching costs
           • Expensive or disruptive to switch?
         • If supplier can cut out buyer "middle men"
           • "Forward vertical integration"
       • Rivalry
         • Competition between incumbents
           • "Organisations with similar P&Ss aimed at the same customer group"
         • Competitor balance
           • If all of equal size, one will try to dominate
           • Less rivalry = one or two dominants
             • Smaller firms will focus on niches to avoid 'attention'
         • Industry growth rate
           • Firms can grow with the market
           • In low growth/decline, growth will be at expense of a rival
             • Low growth -> price competition and low profitabilty
         • High fixed costs
           • Tend to be highly rivalrous
           • High investment capital
           • Will try to spread costs by increasing volumes and typically cutting prices
             • Prompts rivals to do the same = PRICE WARS!
             • Adding incremental extra capacity = short-term over capacity -> increased competition
         • High exit barriers
           • i.e. Closure, disinvestment
           • e.g. high redundancy costs, high investment in assets
         • Low differentiation
           • Commodities = increased rivalry
             • Customers can switch easily
     • If these are high, it's not attractive to compete in
   • Complimentors
     • Enhances your business attractiveness to customers or suppliers
     • Cooperate to increase total value available
       • e.g. Sony is both a competitor and complementor of Apple
   • Industry Life Cycle
     • 1. Development
       • Experimental
       • Few players
       • Little direct rivalry
       • Scarce profits due to high investment
       • Innovation!
     • 2. High Growth
       • Lots of market space = low rivalry
       • Barriers to entry may still be low
       • Suppliers may be powerful if materials in short-supply
       • Growth ability!
     • 3. Shake-out
       • Saturated + cluttered with competitors
       • Increased rivalry
       • Variable profits
       • Managerial + Finance strength!
     • 4. Maturity
       • Increased barriers to entry
       • Tendency of P&S standardisation
       • Buyers may be more confident in switching
       • Market share + Cost!
     • 5. Decline
       • Extreme rivalry
       • High exit barriers
       • Some survivors may be left as monopoly players
       • Cost + Commitment!

7. Strategic Groups

   • "Firms within an industry with similar strategic characteristics, following similar strategies or competing on similar bases"
   • Scope
     • Product range, geographical coverage, range of distribution channels
   • Resource Commitment
     • Brands, marketing spend, extent of vertical integration
   • Understand Competition
     • Focus on direct rivals within their S.G rather than the whole industry
     • Establish dimensions that may set them apart
   • Analysis of Strategic Opportunities
     • Identify the most attractive strategic spaces
     • 'White space' = under-occupied
       • May be unexploited opportunities
   • Analysis of Mobility Barriers
     • Moving isn't costless!
     • Obstacles to movement from one strategic group to another

8. Competitor Analysis

   • Strategy canvas
     • "Compares competitors according to their performance on key success factors in order to establish the extent of differentiation"
     • Critical Success Factors
       • Those valued by customers or provide advantage in terms of cost
     • Value Curves
       • Graphic depiction of how customers perceive competitors' performance
     • Value Innovation
       • Creation of new market space by excelling on CSF that rivals aren't
       • Competes in a 'BLUE OCEAN'
         • "A new market space where competition is limited"
         • Contrast with 'Red Oceans'
           • Well defined with intense rivalry
         • Useful for identifying potential spaces with little competition
         • 'Strategic gaps' in the market place
         • FOCUS & DIVERGENCE
           • FOCUS on your CRFs
           • Create a value curve that DIVERGES from rivals
             • One that creates a substantial strategic gap