SM Lecture Two : The Environment

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SM Lecture Two : The Environment

  1. 1. Strategic Management BUSM 3200 These Lecture Slides summarize the key points covered in the respective chapters in your recommended text; these slides do NOT substitute, at all, the required reading of the assigned chapter from the text. These slides also may contain additional supplementary material extracted from other texts and sources outside your text book.BUSM 3200- Strategic Management (Jan 2013) GDS 2-1
  2. 2. The Focus of part 1 of t he Text The strategic position • How to analyse an organisation’s position in the external environment. • How to analyse the determinants of strategic capability – resources, competences and the linkages between them. • How to understand an organisation’s purposes, taking into account corporate governance, stakeholder expectations and business ethics. • How to address the role of history and culture in determining an organisation’s position.BUSM 3200- Strategic Management (Jan 2013) GDS 2-2
  3. 3. Strategic Position Chapter 3 Chapter 2 Chapter 5 Chapter 4 See page 46: 4 chapters comprise analysis of the Strategic PositionBUSM 3200- Strategic Management (Jan 2013) GDS 2-3
  4. 4. The Strategic Position Analysis Essentially one of determining the answers to the question “where are we now” External analysis: opportunities and threats/ industry attractiveness Internal analysis: strengths/weaknesses, capabilities TAKEN together we can do the SWOT and TOWS analysis (discussed next lecture) The Strategic Position Analysis guides the planner on the type of STRATEGY/IES the company should pursue: are they viable and attractive?BUSM 3200- Strategic Management (Jan 2013) GDS 2-4
  5. 5. Learning outcomes of Chapter Two: • Analyse the broad macro-environment of organisations in terms of political, economic, social, technological, environmental (‘green’) and legal factors (PESTEL). • Identify key drivers in this macro-environment and use these key drivers to construct alternative scenarios with regard to environmental change.BUSM 3200- Strategic Management (Jan 2013) GDS 2-5
  6. 6. Learning outcomes of Chapter Two • Use Porter’s five forces analysis in order to define the attractiveness of industries and sectors and to identify their potential for change. • Identify successful strategic groups, valuable market segments and attractive ‘Blue Oceans’ within industries. • Use these various concepts and techniques in order to recognise threats and opportunities in the marketplace.BUSM 3200- Strategic Management (Jan 2013) GDS 2-6
  7. 7. OPPORTUNITIES AND THREATS Opportunities and Threats is one-half of the SWOT analysis. We still need to cover the internal factors (next lecture) Lots of confusion between SWOT and PEST- do NOT use these terms interchangeably!  Know this: PEST is part of SWOT PEST leads to the identification of the O and T (opportunities and threats) When you list the PEST factors:  + factors are considered Opportunities  - factors are considered ThreatsBUSM 3200- Strategic Management (Jan 2013) GDS 2-7
  8. 8. OPPORTUNITIES AND THREATS PESTEL analysis reveals  Opportunities and threats  Key drivers of change  Different scenarios Porter Five Forces  Threats and opportunities arising from the specific set of five forces in a given industry Blue Ocean  Reveals where companies can create new market spaces or identify new success factors We will cover these concepts in detail in this lecture.BUSM 3200- Strategic Management (Jan 2013) GDS 2-8
  9. 9. THINKING STRATEGICALLY ABOUT A COMPANY‘S INDUSTRY AND COMPETITIVE ENVIRONMENT These set of points is taken from another text by Thompson and Strickland. I will use some of the PWPT slides and intersperse them with our textbook content so as to give a fuller dimension to External analysis. These seven questions will be examined throughout this lecture topic. Read them now.1. Does the industry offer attractive opportunities for growth?2. What kinds of competitive forces are industry members facing, and how strong is each force?3. What factors are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability?4. What market positions do industry rivals occupy—who is strongly positioned and who is not?5. What strategic moves are rivals likely to make next?6. What are the key factors for competitive success in the industry?7. Does the industry offer good prospects for attractive profits?Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–9 2-9
  10. 10. Layers of the business environment Figure 2.1 Layers of the business environmentBUSM 3200- Strategic Management (Jan 2013) GDS 2-10
  11. 11. 3.2 The Components of a Company’s Macro-EnvironmentThis version shows how to place the industry five forces (Porter) within the context of thebroader External Macro Environmental forces Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–11 2-11
  12. 12. The External Environment ♦ The Macro-Environment ● Is the broad environmental context in which a firm‘s industry is situated. ● Includes strategically relevant components over which the firm has no direct control.  General economic conditions  Immediate industry and competitive environmentCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–12 2-12
  13. 13. The PESTEL framework (1) The PESTEL framework categorises environmental influences into six main types: political, economic, social, technological, environmental legal Thus PESTEL provides a comprehensive list of influences on the possible success or failure of particular strategies.BUSM 3200- Strategic Management (Jan 2013) GDS 2-13
  14. 14. The PESTEL framework (2) • Political Factors: For example, Government policies, taxation changes, foreign trade regulations, political risk in foreign markets, changes in trade blocks (EU). • Economic Factors: For example, business cycles, interest rates, personal disposable income, exchange rates, unemployment rates, GDP trends. • Socio-cultural Factors: For example, population changes, income distribution, lifestyle changes, consumerism, changes in culture and fashion.BUSM 3200- Strategic Management (Jan 2013) GDS 2-14
  15. 15. The PESTEL framework (3) • Technological Factors: For example, new discoveries and technology developments, ICT innovations, rates of obsolescence, increased spending on R&D. • Environmental (‘Green’) Factors: For example, environmental protection regulations, energy consumption, global warming, waste disposal and re-cycling. • Legal Factors: For example, competition laws, health and safety laws, employment laws, licensing laws, IPR laws.BUSM 3200- Strategic Management (Jan 2013) GDS 2-15
  16. 16. NOTE: it is important to do a PESTEL analysis with a specific emphasis on the industry you are studying (see page 51) Keep the PESTEL factors specific to the industry you are studying; avoid using broad generic factors that have no relevance to your analysis. Important to note for your Group Assignment on Strategic Analysis!BUSM 3200- Strategic Management (Jan 2013) GDS 2-16
  17. 17. Key drivers of change Key drivers for change: • The environmental factors likely to have a high impact on the success or failure of strategy. • For example, the birth rate is a key driver for those planning nursery education provision in the public sector. • Typically key drivers vary by industry or sector. • (in you Group Assignment, make sure you identify the correct ‘key drivers’)BUSM 3200- Strategic Management (Jan 2013) GDS 2-17
  18. 18. Using the PESTEL framework • Apply selectively –identify specific factors which impact on the industry, market and organisation in question. • Identify factors which are important currently but also consider which will become more important in the next few years. • Use data to support the points and analyse trends using up to date information • Identify opportunities and threats – the main point of the exercise! Note this well !!!BUSM 3200- Strategic Management (Jan 2013) GDS 2-18
  19. 19. Scenarios Scenarios are detailed and plausible views of how the environment of an organisation might develop in the future based on key drivers of change about which there is a high level of uncertainty. • Builds on PESTEL analysis . • Do not offer a single forecast of how the environment will change. • An organisation should develop a few alternative scenarios (2–4) to analyse future strategic options.BUSM 3200- Strategic Management (Jan 2013) GDS 2-19
  20. 20. Carrying out scenario analysis (1) • Identify the most relevant scope of the study – the relevant product/market and time span. • Identify key drivers of change – PESTEL factors that have the most impact in the future but have uncertain outcomes. • For each key driver select opposing outcomes where each leads to very different consequences.BUSM 3200- Strategic Management (Jan 2013) GDS 2-20
  21. 21. Carrying out scenario analysis (2) • Develop scenario ‘stories’ - That is, coherent and plausible descriptions of the environment that result from opposing outcomes • Identify the impact of each scenario on the organisation and evaluate future strategies in the light of the anticipated scenarios. • Scenario analysis is used in industries with long planning horizons for example, the oil industry or airlines.BUSM 3200- Strategic Management (Jan 2013) GDS 2-21
  22. 22. Scenarios for the global financial system, 2020 Illustration 2.2BUSM 3200- Strategic Management (Jan 2013) GDS 2-22
  23. 23. Moving from Macro to Industry- Specific Analyses Once you complete your Macro- environment analysis, you then move down to study the forces impacting specifically on the industry that you company operates in.BUSM 3200- Strategic Management (Jan 2013) GDS 2-23
  24. 24. Industries, markets and sectors An industry is a group of firms producing products and services that are essentially the same. For example, automobile industry and airline industry. A market is a group of customers for specific products or services that are essentially the same (e.g. the market for luxury cars in Germany). A sector is a broad industry group (or a group of markets) especially in the public sector (e.g. the health sector)BUSM 3200- Strategic Management (Jan 2013) GDS 2-24
  25. 25. QUESTION 2: WHAT KINDS OF COMPETITIVE FORCES ARE INDUSTRY MEMBERS FACING, AND HOW STRONG ARE THEY? Porter’s five forces framework helps identify the attractiveness of an industry in terms of five competitive forces: • the threat of entry, • the threat of substitutes, • the bargaining power of buyers, • the bargaining power of suppliers and • the extent of rivalry between competitors. The five forces constitute an industry’s ‘structure’.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–25 2-25
  26. 26. The five forces framework (1) Figure 2.2 The five forces framework Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reservedBUSM 3200- Strategic Management (Jan 2013) GDS 2-26
  27. 27. The five forces framework (2) The Threat of Entry & Barriers to Entry • The threat of entry is low when the barriers to entry are high and vice versa. • The main barriers to entry are:  Economies of scale/high fixed costs  Experience and learning  Access to supply and distribution channels  Differentiation and market penetration costs  Government restrictions (e.g. licensing) • Entrants must also consider the expected retaliation from organisations already in the marketBUSM 3200- Strategic Management (Jan 2013) GDS 2-27
  28. 28. 3.5Factors Affectingthe Threat of Entry Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–28 2-28
  29. 29. The five forces framework (3) Threat of Substitutes Substitutes are products or services that offer a similar benefit to an industry’s products or services, but by a different process. Customers will switch to alternatives (and thus the threat increases) if: • The price/performance ratio of the substitute is superior (e.g. aluminium maybe more expensive than steel but it is more cost efficient for some car parts) • The substitute benefits from an innovation that improves customer satisfaction (e.g. high speed trains can be quicker than airlines from city centre to city centre)BUSM 3200- Strategic Management (Jan 2013) GDS 2-29
  30. 30. 3.6Factors AffectingCompetition fromSubstitute Products Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–30 2-30
  31. 31. The five forces framework (4) The bargaining power of buyers Buyers are the organisation’s immediate customers, not necessarily the ultimate consumers. If buyers are powerful, then they can demand cheap prices or product / service improvements to reduce profits . Buyer power is likely to be high when:  Buyers are concentrated  Buyers have low switching costs  Buyers can supply their own inputs (backward vertical integration)BUSM 3200- Strategic Management (Jan 2013) GDS 2-31
  32. 32. 3.8Factors Affectingthe BargainingPower of BuyersCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–32 2-32
  33. 33. The five forces framework (5) The bargaining power of suppliers Suppliers are those who supply what organisations need to produce the product or service. Powerful suppliers can eat into an organisation’s profits. Supplier power is likely to be high when:  The suppliers are concentrated (few of them).  Suppliers provide a specialist or rare input.  Switching costs are high (it is disruptive or expensive to change suppliers).  Suppliers can integrate forwards (e.g. low cost airlines have cut out the use of travel agents).BUSM 3200- Strategic Management (Jan 2013) GDS 2-33
  34. 34. Matching Strategy to Competitive Conditions 1. Pursuing avenues that shield the firm from as many competitive pressures as possible. 2. Initiating actions calculated to shift competitive forces in the firm‘s favor by altering underlying factors driving the five forces. 3. Spotting attractive arenas for expansion, where competitive pressures in the industry are somewhat weaker. We will discuss this in greater depth when we cover Business and Corporate Strategies later in the course.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–34 2-34
  35. 35. 3.7 Factors Affecting the Bargaining Power of SuppliersCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–35 2-35
  36. 36. The five forces framework (6) Rivalry between competitors Competitive rivals are organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market (they are distinct from substitutes). The degree of rivalry is increased when :  Competitors are of roughly equal size  Competitors are aggressive in seeking leadership  The market is mature or declining  There are high fixed costs  The exit barriers are high  There is a low level of differentiationBUSM 3200- Strategic Management (Jan 2013) GDS 2-36
  37. 37. Some Practical Examples of the Common ―Weapons‖ for Competing with Rivals Competitive Weapons Primary Effects Price discounting, clearance sales, Lowers price (P), acts to boost total sales volume and market share, ―blowout‖ sales lowers profit margins per unit sold when price cuts are big and/or increases in sales volume are relatively small Couponing, advertising items on sale Acts to increase unit sales volume and total revenues, lowers price (P), increases unit costs (C), may lower profit margins per unit sold (P – C) Advertising product or service Boosts buyer demand, increases product differentiation and perceived characteristics, using ads to enhance value (V), acts to increase total sales volume and market share, may a company’s image or reputation increase unit costs (C) and/or lower profit margins per unit sold Innovating to improve product Acts to increase product differentiation and value (V), boosts buyer performance and quality demand, acts to boost total sales volume, likely to increase unit costs (C) Introducing new or improved features, Acts to increase product differentiation and value (V), strengthens buyer increasing the number of styles or demand, acts to boost total sales volume and market share, likely to models to provide greater product increase unit costs (C) selection Increasing customization of product or Acts to increase product differentiation and value (V), increases service switching costs, acts to boost total sales volume, often increases unit costs (C) Building a bigger, better dealer network Broadens access to buyers, acts to boost total sales volume and market share, may increase unit costs (C) Improving warranties, offering low- Acts to increase product differentiation and value (V), increases unit interest financing costs (C), increases buyer costs to switch brands, acts to boost total sales volume and market share Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–37 2-37
  38. 38. 3.4Factors Affecting theStrength of Rivalry Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–38 2-38
  39. 39. Is the Collective Strength of the Five Competitive Forces Conducive to Good Profitability? ♦ Is the state of competition in the industry stronger than ―normal‖? ♦ Can industry firms expect to earn decent profits given prevailing competitive forces? ♦ Are some of the competitive forces sufficiently powerful to undermine industry profitability? In your analysis of a case company, you must not only identify the relevant factors for each force but you must be able to make a critical judgment of which forces carry more impact and could pose a threat to the firm. These factors need to be considered when the firm develops its business and corporate strategies to mitigate the threat of such competitive forcesCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–39 2-39
  40. 40. Types of industry (1) • Monopolistic industries - an industry with one firm and therefore no competitive rivalry. A firm has ‘monopoly power’ if it has a dominant position in the market. For example, BT in the UK fixed line telephone market. • Oligopolistic industries - an industry dominated by a few firms with limited rivalry and in which firms have power over buyers and suppliers. • Perfectly competitive industries - where barriers to entry are low, there are many equal rivals each with very similar products, and information about competitors is freely available. Few (if any) markets are ‘perfect’ but may have features of highly competitive markets, for example, mini- cabs in London.BUSM 3200- Strategic Management (Jan 2013) GDS 2-40
  41. 41. Types of industry (2) • Hypercompetitive industries - where the frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change. • Hypercompetition often breaks out in otherwise oligopolistic industries (e.g. mobile phones). • Organisations interact in a series of competitive moves in hypercompetition which often becomes extremely rapid and aggressive as firms vie for market leadership.BUSM 3200- Strategic Management (Jan 2013) GDS 2-41
  42. 42. Implications of five forces analysis Read Page 61 in detail ! • Identifies the attractiveness of industries – which industries/markets to enter or leave. • Identifies strategies to influence the impact of the forces, for example, building barriers to entry by becoming more vertically integrated. • The forces may have a different impact on different organisations e.g. large firms can deal with barriers to entry more easily than small firms.BUSM 3200- Strategic Management (Jan 2013) GDS 2-42
  43. 43. Key Issues in using the five forces framework • Apply at the most appropriate level – not necessarily the whole industry. E.g. the European low cost airline industry rather than airlines globally. • Note the convergence of industries – particularly in the high tech sectors (e.g. digital industries - mobile phones/cameras/mp3 players). • Note the importance of complementary products and services (e.g. Microsoft windows and McAfee computer security systems are complements). This can almost be considered as a sixth force.BUSM 3200- Strategic Management (Jan 2013) GDS 2-43
  44. 44. The value net Value Net: is a model that maps out the organizations in a business environment that create opportunities for value-creating cooperation as well as competition Figure 2.3 The value net Reprinted by permission of Harvard Business Review. From ‗The Right Game‘ by A. Brandenburger and B. Nalebuff, July–August 1996, pp. 57–64. Copyright © 1996 by the Harvard Business School Publishing Corporation. All rights reservedBUSM 3200- Strategic Management (Jan 2013) GDS 2-44
  45. 45. QUESTION 3: WHAT FACTORS ARE DRIVING INDUSTRY CHANGE, AND WHAT IMPACTS WILL THEY HAVE? ♦ Strategic Analysis of Industry Dynamics: 1. Identifying the drivers of change. 2. Assessing whether the drivers of change are, individually or collectively, acting to make the industry more or less attractive. 3. Determining what strategy changes are needed to prepare for the impacts of the anticipated change.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–45 2-45
  46. 46. 3.3 The Most Common Drivers of Industry Change1. Changes in the long-term industry growth rate2. Increasing globalization3. Changes in who buys the product and how they use it4. Technological change5. Emerging new Internet capabilities and applications6. Product and marketing innovation7. Entry or exit of major firms8. Diffusion of technical know-how across companies and countries9. Improvements in efficiency in adjacent markets10. Reductions in uncertainty and business risk11. Regulatory influences and government policy changes12. Changing societal concerns, attitudes, and lifestylesCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–46 2-46
  47. 47. Assessing the Impact of the Factors Driving Industry Change 1. Overall, are the factors driving change causing demand for the industry‘s product to increase or decrease? 2. Is the collective impact of the drivers of change making competition more or less intense? 3. Will the combined impacts of the change drivers lead to higher or lower industry profitability?Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–47 2-47
  48. 48. Developing a Strategy That Takes the Changes in Industry Conditions into Account ♦ What strategy adjustments will be needed to deal with the impacts of the changes in industry conditions? ● What adjustments must be made immediately? ● What actions must we not take or should we cease to do now? ● What can we do now to prepare for adjustments we anticipate making in the future? The industry and the market forces are always in a state of flux!Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–48 2-48
  49. 49. Industry Life Cycles Industries are not in a static state Rather they evolve through different stages In your strategic analysis, you need to find out which stage your industry is in Each stage creates different opportunities, challenges and suits different types of business strategies See Figure 2.4BUSM 3200- Strategic Management (Jan 2013) GDS 2-49
  50. 50. The industry life cycle Figure 2.4 The industry life cycleBUSM 3200- Strategic Management (Jan 2013) GDS 2-50
  51. 51. Comparative industry structure analysis A mapping model used to mark the dimensions of the various scores in the five forces model Which force scores higher lower Plot them down in a ‘radar map’ Analyze the implications of the ‘profile’ Compare plots over two or more periods Analyze the implications of the ‘changes’ See Figure 2.5BUSM 3200- Strategic Management (Jan 2013) GDS 2-51
  52. 52. Comparative industry structure analysis Figure 2.5 Comparative industry structure analysisBUSM 3200- Strategic Management (Jan 2013) GDS 2-52
  53. 53. Cycles of Competition (page 67) Enables the planner to map out the competitive moves of the firm versus its competitors Show the chronology or sequence of strategic actions Sequence of ‘moves’ and ‘counter-moves’ = cycles of competition (see Figure 2.6) An analogy: remember your physics course we learnt an important principle from Newton: “for every action there is an equal and opposite reaction” – seems also relevant in strategy.BUSM 3200- Strategic Management (Jan 2013) GDS 2-53
  54. 54. Cycles of competition Figure 2.6 Cycles of competition Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Hypercompetitive Rivalries: Competing in Highly Dynamic Environments by Richard A. D‘Aveni with Robert Gunther. Copyright © 1994, 1995 by Richard A. D‘Aveni. All rights reservedBUSM 3200- Strategic Management (Jan 2013) GDS 2-54
  55. 55. QUESTION 4: HOW ARE INDUSTRY RIVALS POSITIONED—WHO IS STRONGLY POSITIONED AND WHO IS NOT? ♦ A Strategic Group ● Is a cluster of industry rivals that have similar competitive approaches and market positions:  Have comparable product-line breadth  Sell in the same price/quality range  Emphasize the same distribution channels  Use the same product attributes to buyers  Depend on identical technological approaches  Offer similar services and technical assistanceCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–55 2-55
  56. 56. Strategic Groups Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases. • These characteristics are different from those in other strategic groups in the same industry or sector. • There are many different characteristics that distinguish between strategic groups. • Strategic groups can be mapped on to two dimensional charts – maps. These can be useful tools of analysis.BUSM 3200- Strategic Management (Jan 2013) GDS 2-56
  57. 57. Characteristics for identifying strategic groups Figure 2.7 Some characteristics for identifying strategic groupsBUSM 3200- Strategic Management (Jan 2013) GDS 2-57
  58. 58. Using Strategic Group Maps to Assess the Market Positions of Key Competitors ♦ Constructing a strategic group map: ● Identify the competitive characteristics that differentiate firms in the industry. ● Plot the firms on a two-variable map using pairs of differentiating competitive characteristics. ● Assign firms occupying about the same map location to the same strategic group. ● Draw circles around each strategic group, making the circles proportional to the size of the group‘s share of total industry sales revenues.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–58 2-58
  59. 59. Typical Variables for Differentiating the Market Positions of Key Competitors on Group Maps ♦ Price/quality range (high, medium, low) ♦ Geographic coverage (local, regional, national, global) ♦ Product-line breadth (wide, narrow) ♦ Degree of service offered (no frills, limited, full) ♦ Distribution channels (retail, wholesale, Internet, multiple) ♦ Degree of vertical integration (none, partial, full) ♦ Degree of diversification into other industries (none, some, considerable).Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–59 2-59
  60. 60. Choosing Variables for Group Maps ♦ Variables selected as map axes: ● Must not be highly correlated. ● Must reflect key approaches to customer value and expose sizable differences in the marketplace positions of rivals. ● May be quantitative, continuous, discrete andor defined in terms of distinct classes and combinations.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–60 2-60
  61. 61. Guidelines for Constructing Group Maps ♦ Draw map circles proportional to the combined sales of firms in each strategic group to reflect the relative sizes of each group to the total size of the industry. ♦ Use different variable sets to show different views of relationships among competitive positions in the industry‘s structure—there is no one best map for portraying how competing firms are positioned.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–61 2-61
  62. 62. Strategic groups in the Indian pharmaceutical industry Figure 2.8 Strategic groups in the Indian pharmaceutical industry Source: Developed from R. Chittoor and S. Ray, ‗Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis‘, Journal of International Management, vol. 13 (2009), pp. 338–55BUSM 3200- Strategic Management (Jan 2013) GDS 2-62
  63. 63. An example of using Strategic Group Analysis in the US Retailing Sector.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–63 2-63
  64. 64. What Can Be Learned from Strategic Group Maps? ♦ Maps are useful in identifying which industry members are close rivals and which are distant rivals. ♦ Not all map positions are equally attractive. 1. Prevailing competitive pressures in the industry and drivers of change favor some strategic groups and hurt others. 2. Profit prospects vary from strategic group to strategic group.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–64 2-64
  65. 65. Uses of strategic group analysis • Understanding competition - enables focus on direct competitors within a strategic group, rather than the whole industry. (E.g. Tesco will focus on Sainsburys and Asda) • Analysis of strategic opportunities - helps identify attractive ‘strategic spaces’ within an industry. • Analysis of ‘mobility barriers’ i.e. obstacles to movement from one strategic group to another. These barriers can be overcome to enter more attractive groups. Barriers can be built to defend an attractive position in a strategic group.BUSM 3200- Strategic Management (Jan 2013) GDS 2-65
  66. 66. Market segments A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market. • Where these customer groups are relatively small, such market segments are called ‘niches’. • Customer needs vary. Focusing on customer needs that are highly distinctive is one means of building a secure segment strategy. • Customer needs vary for a variety of reasons -these factors can be used to identify distinct market segments. • Not all segments are attractive or viable market opportunities – evaluation is essential.BUSM 3200- Strategic Management (Jan 2013) GDS 2-66
  67. 67. Bases of market segmentation (1) Table 2.1 Some bases of market segmentationBUSM 3200- Strategic Management (Jan 2013) GDS 2-67
  68. 68. Who are the strategic customers? A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased. Examples: • For a food manufacturer it is the multiple retailers (e.g. Tesco) that are the strategic customers not the ultimate consumer. • For a pharmaceutical manufacturer it is the health authorities and hospitals not the final patient.BUSM 3200- Strategic Management (Jan 2013) GDS 2-68
  69. 69. The Remaining Three Questions on Strategic External Analysis ♦ Before we move on to Blue Ocean Strategy, let us review the last three stages of external analysis as outlined by Thompson and Strickland 5. What strategic moves are rivals likely to make next? 6. What are the key factors for competitive success in the industry? 7. Does the industry offer good prospects for attractive profits?Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–69 2-69
  70. 70. QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT? ♦ Competitive Intelligence ● Information about rivals that is useful in anticipating their next strategic moves. ♦ Signals of the Likelihood of Strategic Moves: ● Rivals under pressure to improve financial performance ● Rivals seeking to increase market standing ● Public statements of rivals‘ intentions ● Profiles developed by competitive intelligence unitsCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–70 2-70
  71. 71. Useful Questions to Help Predict the Likely Actions of Important Rivals♦ Which competitors‘ strategies are achieving good results?♦ Which competitors are losing in the marketplace or badly need to increase their unit sales and market share?♦ Which rivals are likely make major moves to enter new geographic markets or to increase sales and market share in a particular geographic region?♦ Which rivals can expand product offerings to enter new product segments where they do not have a presence?♦ Which rivals can be acquired? Which rivals are financially able and looking to make an acquisition?Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–71 2-71
  72. 72. QUESTION 6: WHAT ARE THE KEY FACTORS FOR FUTURE COMPETITIVE SUCCESS? This is similar to the concept of critical ♦ Key Success Factors success factors which we will cover under Blue Ocean Strategy ● Are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry. ● Vary from industry to industry, and over time within the same industry, as drivers of change and competitive conditions change.Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–72 2-72
  73. 73. Identification of Key Success Factors 1. What product attributes and service features buyers strongly affect buyers when choosing between the competing brands of sellers? 2. What resources and competitive capabilities are required for a firm to execute a successful strategy in the marketplace? 3. What shortcomings will put a firm at a significant competitive disadvantage?Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–73 2-73
  74. 74. QUESTION 7: DOES THE INDUSTRY OFFER GOOD PROSPECTS FOR ATTRACTIVE PROFITS? ♦ Industry Profitability Considerations: ● The industry‘s overall growth potential ● Effects of strong competitive forces ● Effects of prevailing drivers of change in the industry ● Competitive strength of the firm: its market position relative to its rivals, its capability to withstand competitive forces, and whether its position will change in the course of competitive interactions ● The success of the firm‘s strategy in delivering on the industry‘s key success factorsCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 3–74 2-74
  75. 75. Blue ocean thinking • ‘Blue oceans’ are new market spaces where competition is minimised. • ‘Red Oceans’ are where industries are already well defined and rivalry is intense. • Blue Ocean thinking encourages entrepreneurs and managers to be different by finding or creating market spaces that are not currently being served. • A ‘strategy canvas’ compares competitors according to their performance on key success factors in order to develop strategies based on creating new market spaces. Check the website: http://www.blueoceanstrategy.com/BUSM 3200- Strategic Management (Jan 2013) GDS 2-75
  76. 76. © Strategy in Marketing (Pearson Asia 2009) Blue Ocean Strategy: Create a New Value Curve Competitor AAttribute Strength Competitor B Competitor C #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 Attributes 2-76
  77. 77. Strategy canvas Figure 2.9 Strategy canvas for electrical components companies Source: Developed from W.C. Kim and R. Mauborgne, Blue Ocean Strategy, 2005, Harvard Business School PressBUSM 3200- Strategic Management (Jan 2013) GDS 2-77
  78. 78. Blue Ocean: Critical success factors (CSFs) • Critical success factors are those factors that are either particularly valued by customers or which provide a significant advantage in terms of cost. • Critical success factors are likely to be an important source of competitive advantage if an organisation has them (or a disadvantage if an organisation lacks them). • Different industries and markets will have different critical success factors (e.g. in low cost airlines the CSFs will be punctuality and value for money whereas in full service airlines it is all about quality of service). Note this point well!!BUSM 3200- Strategic Management (Jan 2013) GDS 2-78
  79. 79. Blue Ocean Model Value Curves: graphic depiction of how customers perceive competitors’ relative performance across the critical success factors. Value Innovation: is the creation of a new market space by excelling on established critical success factors on which competitors are performing badly and/or by creating new critical success factors representing previously unrecognized customer wants.BUSM 3200- Strategic Management (Jan 2013) GDS 2-79
  80. 80. The budget airline market Blue Ocean market space for budget airlines BUSM 3200- Strategic3-80 Management (Jan 2013) 2-80 GDS
  81. 81. 2-81
  82. 82. 2-82
  83. 83. © Strategy in Marketing (Pearson Asia 2009) BO Strategy- more examples  Innovate products and services that redefine the market  Create new categories not thought of before  Apple i-Pod is a good example  Even marketing real estate- DUBAI  Palm  The World BUSM 3200- Strategic3-83 Management (Jan 2013) 2-83 GDS
  84. 84. Chapter summary (1) • Environmental influences can be thought of as layers around an organisation, with the outer layer making up the macro-environment, the middle layer making up the industry or sector and the inner layer strategic groups and market segments. • The macro-environment can be analysed in terms of the PESTEL factors, from which key drivers of change can be identified. Alternative scenarios about the future can be constructed according to how the key drivers develop. • Industries and sectors can be analysed in terms of Porter’s five forces – barriers to entry, substitutes, buyer power, supplier power and rivalry. Together, these determine industry or sector attractiveness.BUSM 3200- Strategic Management (Jan 2013) GDS 2-84
  85. 85. Chapter summary (2) • Industries and sectors are dynamic, and their changes can be analysed in terms of the industry life cycle, comparative five forces radar plots and hypercompetitive cycles of competition. • In the inner layer of the environment, strategic group analysis, market segment analysis and the strategy canvas can help identify strategic gaps or opportunities. • Blue Ocean strategies characterised by low rivalry are likely to be better opportunities than Red Ocean strategies with many rivals. • The most important reason for environmental analysis is to identify OPPORTUNITIES AND THREATSBUSM 3200- Strategic Management (Jan 2013) GDS 2-85
  86. 86. PRACTICE ESSAY QUESTIONS IMPORTANT NOTE: →  These questions are provided for your reference only – they are only INDICATIVE of the standard of questions you might expect in the final exam.  DO NOT use these questions to “spot”  The RMIT examiner will post advice on the exam on the Learning Hub closer to the exam; you are required to pay attention to that advise  The questions here show the range of topics that could be tested from this lecture; they are NOT exhaustive  To score a high grade it is important to LINK the theory to applications and examples. Where from?  You have been assigned specific cases to read from the text. Each case study will show you the kinds of strategic decisions the case company needs to make. You can draw from these examples.  You have selected a case company for your project; you may use examples from there.  You are supposed to read widely from the business press about local, regional and international companies strategies. You can use examples from there as well.BUSM 3200- Strategic Management (Jan 2013) GDS 6-86
  87. 87. Sample Exam Question: Why would you want to do an environmental analysis? In answering the question critically discuss the objectives behind an environmental analysis as well as discuss what two of the relevant tools will tell the user and how they may collectively contribute to achieving the desired outcomes.BUSM 3200- Strategic Management (Jan 2013) GDS 1-87
  88. 88. Sample Exam Question: Discuss the various elements of the firm’s macro-environment. Give examples of how two of these elements might influence a firm’s business level strategy.BUSM 3200- Strategic Management (Jan 2013) GDS 1-88
  89. 89. Sample Exam Questions: Explain how Porters Five Forces Analysis can be used in the formulation of business level strategy. Illustrate your answer with examples from any case you have studied from the text or other examples of your own.  NOTE: this question is not strictly on the five forces model alone because it needs to be LINKED to a future topic to be covered on “Business Strategies”  This however reminds us of the fact that exam questions are often set with overlapping or linked themes. Be prepared for this!BUSM 3200- Strategic Management (Jan 2013) GDS 1-89
  90. 90. Sample Exam Question: Discuss the following two forces in the industry environment: power of suppliers and power of buyers. Use examples to support your answer.  Note in this question, the examiner asks you to focus just on two forces. It is therefore pointless to write about all the five forces. Learn to be selective!BUSM 3200- Strategic Management (Jan 2013) GDS 1-90

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