STRATEGIC MANAGEMENT

1. The Management of Strategy
(Concepts and Cases)
Part I: Strategic Management Inputs
Chapter 2: Exploring the External Environment:
Competition and Opportunities
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2. The Strategic Management Process
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3. 3

4. Chapter 2: Exploring the External
Environment: Competition and Opportunities
• Overview: Seven content areas
– The firm’s external environment
– General and industry environment
– External environment analysis process activities
– General environmental segments
– Porter’s 5 Competitive Forces
– Strategic groups: Definition and influence
– Competitors and intelligence collection methods
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5. External Environment Analysis Goal
• Identification of Opportunity
– General environment condition that, if exploited, helps a
company achieve strategic competitiveness
• Identification of Threat
– General environment condition that may hinder a
company's efforts to achieve strategic competitiveness
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6. External Environment Analysis process
• 4 general steps in conducting External
Environmental analysis
– Scanning
– Monitoring
– Forecasting
– Assessing
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7. Scanning
• Scanning entails the study of all segments in the general
environment. Firms use the scanning process to either
– detect early warning signals regarding potential changes or
– to detect changes that are already underway. In most cases,
information and data being collected or observed are
ambiguous, incomplete, and appear to be unconnected.
• Scanning is most important in highly volatile environments, and
the scanning system should fit the organizational context (e.g.,
scanning systems designed for volatile environments are not
suitable for firms competing in a stable environment).
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8. Monitoring
• Monitoring represents a process whereby
analysts observe environmental changes (over
time) to see if, in fact, an important trend
begins to emerge.
• The critical issue in monitoring is that analysts
be able to detect meaning from the data and
information collected during the scanning
process.
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9. Forecasting
• The next step is for analysts to take the information
and data gathered during the scanning and
monitoring phases and attempt to project forward.
• Forecasting represents the process where analysts
develop feasible projections of what might happen—
and how quickly—as a result of the changes and
trends detected through scanning and monitoring.
• Because of uncertainty, forecasting events and
outcomes accurately is a challenging task.
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10. Assessing
• Assessing represents the step in the external
analysis process where all of the other steps
come together.
• The objective of assessing is to determine the
timing and significance of the effects of
changes and trends in the environment on the
strategic management of a firm.
• Getting the strategy right will depend on the
accuracy of the assessment.
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11. Layers of the business
environment
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12. External Environment:
General, Industry and Competitor (Cont’d)
• The General Environment
– The broader society dimensions that influence an industry and the
firms within it
– Grouped into 6 dimensions OR ‘environmental segments’ Each
segment composed of elements
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13. The External Environment
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14. Conducting an analysis using 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.

15. The PESTEL framework (2)
• Political Factors: For example, Government policies,
taxation changes, foreign trade regulations, political risk in
foreign markets, changes in trade blocks.
• Economic Factors: For example, Business Cycles,
Interest Rates, Inflation, Disposable Income, Exchange Rates,
Energy Availability & Cost, Unemployment Rates, GDP Trends.
• Socio-cultural Factors: For example, population
changes, income distribution, lifestyle changes, consumerism,
Educational Level, Attitude to Leisure Belief Systems and
Values, changes in culture and fashion.

16. 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, etc.

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 (demographic) is a key
driver for those planning nursery education
provision in the public sector etc.
• Typically key drivers vary by industry or sector.

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!

19. Scenarios in conducting external
analysis
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.
• Build 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.

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.

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.

22. Defining Scenario Planning
“An attempt to paint a picture of the future, providing a
realistic description of possible future developments within
the environment or industry and to consider their likely
impact on the organization should they occur ” -
Worthington & Britton
Note
The future is an infinity of branching possibilities -
Wildarvsky
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23. Defining Scenario Planning - 2
Given the impossibility of not knowing with
mathematical precision how the future would
play out, a good decision or strategy to adopt is
one that plays out well across several possible
future outcomes
Plausible scenarios can be considered by
identifying forces, factors or variables that push
the future in different directions
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24. Defining Scenario Planning - 3
Scenario Planning Encourages the prediction of
1. Best Case Scenario
2. Worst Case scenario
3. Most Likely Case Scenario
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25. The Scenario Planning Process
• I] Define the issue / problem
• 2] Identify the driving forces
• Social dynamics
• Economic trends
• Political issues
• Technological development
[In real life these factors are interwoven, mutually dependent and exclusive]
• 3] Separate the constant factors from the variable factors
• Monitor the driving forces/ indicators [early warning signs] in
preparation for the most likely / appropriate case scenario strategy
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26. External Environment:
General, Industry and Competitor (Cont’d)
• Industry Environment
– Set of factors directly influencing
• A firm’s competitive actions/responses
• Relates to Porter’s 5 Forces – see upcoming slides
• Competitor analysis: gather and interpret competitor information
• Competitor Environment
– Gives details about
• A firm’s direct and indirect competitors
• The competitive dynamics expected to impact a firm's efforts to
generate above-average returns
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27. Industry Environment Analysis
• Industry
– Definition: Group of firms producing products that are close
substitutes
– Industry environment, in comparison to the general environment, has
more direct effect on firms.
– 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)
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28. Porter’s five forces framework
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
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29. Porter’s five forces framework
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Plus
Government

30. Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
– 1/5: New entrants
• Can threaten market share of existing competitors
• May bring additional production capacity
• Function of two factors
– 1: Barriers to entry
» Economies of scale
» Product differentiation
» Capital requirements
» Switching costs
» Access to distribution channels
» Cost disadvantages independent of scale
» Gov’t policy
– 2: Expected retaliation
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31. Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
– 2/5: Bargaining power of suppliers
• They are powerful when …
1. Few large companies are more concentrated than the
industry to which they sell
2. No substitutes
3. Industry firms not significant customer to supplier gp
4. Supplier’s goods are critical to buyer’s success
5. High switching costs due to effectiveness of supplier’s
products
6. Threat of forward integration
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32. Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
– 3/5: Bargaining power of buyers
• They are powerful when …
1. Purchase large portion of industry’s total output
2. Product sales accounts for significant seller annual revenue
3. Low switching costs (to other industry product)
4. Industry products are undifferentiated or standardized and
threat of backward integration
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33. Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
– 4/5: Threat of substitute products
• Goods or services outside of given industry perform same or
similar functions (I.e., sugar vs. sugar substitute such as
NutraSweet)
– 5/5: Intensity of Rivalry Among Competitors
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed costs or high storage costs
• Lack of differentiation or low switching costs
• High strategic stakes
• High exit barriers
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34. Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
– 5/5: Intensity of Rivalry Among Competitors
• High exit barriers (Cont’d)
1. Specialized assets
2. Fixed costs of exit (i.e., labor agreements)
3. Strategic interrelationships (i.e., one business depends on
another)
4. Emotional barriers (i.e., loyalty to employees, etc.)
5. Government and social restrictions
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35. Strategic Groups in Competitor
analysis
• Strategic Groups
– Set of firms emphasizing similar strategic dimensions to use a similar
strategy
– Implications
• Because firms within a group compete (offer similar products)
rivalry can be intense – the greater the rivalry the greater the
threat to each firm’s profitability
• Strengths of the 5 forces differs across strategic groups
• The closer the strategic groups, in terms of strategy, the greater
the likelihood of rivalry
– Benchmarking within strategic groups is stronger than
industry-wide average benchmarking
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36. Strategic Group Alliance
and
Competitive Positioning
• Strategic Groups
– Big Players
– Medium Size Players
– Small players
• Competitive Positioning
– Leaders
– Challengers
– Followers
– Nichers

37. Competitor Analysis as input for
organization’s strategy formulation (1)
(Cont’d)
• Competitor analysis and organization
response:
– What drives competitors
• Shown by organization's future objectives
– What the competitor is doing and can do
• Revealed in organization's current strategy
– What the competitor believes about the industry
• Shown in organization's assumptions
– What the competitor’s capabilities are
• Shown by organization's strengths and weaknesses
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38. Competitor Analysis as input for
organization’s strategy formulation (2)
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39. Competitor Analysis (Cont’d)
• Competitor intelligence
– Set of data and information the firm gathers to
better understand and anticipate competitors'
objectives, strategies, assumptions, and
capabilities
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40. Intelligence Collection (Cont’d)
• Follow ethical practices when gathering
competitor intelligence
– Obtain public information
– Attend trade fairs and shows and collect brochures, view
exhibits, listen to their discussions
• Some practices may be legal, but unethical
• Unethical tactics can include
– Blackmail
– Trespassing
– Eavesdropping
– Stealing drawings, samples or documents
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41. Portfolio Analysis
Product Life Cycle (PLC)
Vol
Time
Intro Growth Maturity Decline

42. Key Success Factors
1. Strategic Focus
{Leadership, Management and Planning}
2. People
{Personnel, staffing, Learning & Development]
3. Operations
{Processes and work}
4. Marketing
{Customer Relations, sales & Responsiveness}
5. Finance
{Assets, Facilities & Equipment}
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43. Benchmarking
Defined/ Explained
Is a performance improvement measure for business
operations. It takes several forms and focuses on either
factors internal or external to the organization.
External benchmarking determines the performance of
other, preferably world class companies
Internal Benchmarking involves Business Process Re-
engineering
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44. Benchmarking -2
Types/ Methods
1. Metric Benchmarking
2. Process Benchmarking
3. Practice Benchmarking
Why Benchmarking?
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45. .
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46. Concepts & Tools To Understand
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1. Vision/ Mission Statement
2. Goals & Objectives (SMART)
3. Strategy Formulation
4. Strategy Implementation
5. Strategy Evaluation ( Control/ Review)
6. Environmental Analysis {Internal & External (PESTLE Framework) Analysis
7. Porters 5 Forces Framework
8. SWOT Analysis
9. Stakeholder Analysis
10. Ansoff’s Product/ Market Matrix
11. Porter’s Generic Strategies
12. Strategic Group alliance
13. Value Chain Analysis
14. Bench-Marking
15. Balance Scorecard
16. Key Performance Indicators
17. Culture
18. Vertical/ Horizontal Integration
19. Synergy
20. Diversification
21. Business Process Re-engineering
22. Mergers & Acquisition
23. CSR
24. Corporate Governance/ BODs
25. Globalization
26. Business Ethics