Business strategy 2.pdf

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Slide 2.1
Johnson, Whittington, Scholes, Angw in and Regnér, Exploring StrategyPowerpoints on the Web, 10th edition ©Pearson Education Limited 2014
The Strategic Position
2: The Environment

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Learning outcomes (1)
• Analyse the broad macro-environment of organisations in terms of
political, economic, social, technological, ecological and legal factors
(PESTEL).
• Construct alternative scenarios in order to address possible
environmental changes.

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Learning outcomes (2)
• Use Porter’s five forces analysis in order to define the attractiveness
of industries and markets and to identify their potential for change.
• Analyse strategic and competitor positions in terms of strategic
groups, market segments and ‘Blue Oceans’.
• Use these various concepts and techniques in order to recognise
threats and opportunities in the market place.

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Layers of the business environment
Encyclopaedias
Encyclopaedia Britannica is written by about 100 full-time editors and
more than 4,000 contributors, who have included 110 Nobel Prize
winners and five American presidents.
It is the environmentthat forced the traditional market-leader
Encyclopaedia Britannica to cease publishing its print editions
after two-and-a-half centuries of production.
The 2010 version of the 15th edition, which spans 32 volumes and
32,640 pages, was the last printed edition; digital content and
distribution has continued since then.

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TOOL: PESTEL
• Key drivers of change
• Scenarios possiblefutures
Organisations producing the
same sort of services/products
• TOOL:Porter’s 5 forces framework;
identifying threats and opportunities
Immediate layer:
• Strategic groups
• Market Segments
• TOOL:Strategy canvas

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The PESTEL framework (1)
 The PESTEL framework categorises environmental factors into six
key types:
Political Economic
Social Technological
Ecological Legal
 The organisation environment is not just about market forces: there
is an important non-market environment to the taken into account.
 PESTEL helps to provide a list of potentially important issues
influencing strategy. It is important to assess the impact of each
factor.

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• Political factors: The role of the state e.g. as an owner, customer
or supplier of businesses. Other political factors include government
policies, taxation changes, foreign trade regulations, political risk in
foreign markets, changes in trade blocks (e.g. expansion of EU).

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• Economic factors: The role of macro-economic factors.
This includes business cycles, interest rates, personal disposable
income, exchange rates, unemployment rates, differential growth
rates around the world.
• Social factors: Including changing cultures and demographics.
Examples are the ageing population in Western societies, income
distribution, lifestyle changes, consumerism, changes in culture and
fashion.
• Technological factors: New discoveries and technology
developments.
Examples include developments on the internet, nano-technology or
the rise of new composite materials.

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• Ecological factors:
This refers to ‘green’ environmental issues, such as pollution waste and
climate change. Examples are environmental protection regulations,
energy problems, global warming, waste disposal and re-cycling.
• Legal factors: Legislative and regulatory constraints or changes.
Examples are IPR, competition law, health and safety law, employment
law, liberalisation of trade law.

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Technology factors
• Competing technology development
• Research funding
• Associated/dependent technologies
• Replacement technology/solutions
• Maturity of technology
• Manufacturing maturity and capacity
• Consumer buying mechanisms/technology
• Technology legislation
• Innovation potential
• Technology access, licensing, patents
• Technology is vital for competitive advantage, and is a major driver of globalization.
Consider the following points:
Does technology allow for products and services to be made more cheaply, and
of a better quality?
Do the technologies offer consumers and businesses more innovative products
and services such as Internet banking, new generation mobile telephones, etc?
How is distribution changed by new technologies e.g. books via the Internet, flight
tickets, auctions, etc?
Does technology offer companies a new way to communicate with consumers
e.g. banners, Customer Relationship Management (CRM), etc
Source: PEST Analysis Template,
http://web.ics.purdue.edu/~pbawa/421/PEST%20Template.htm

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Technological Factors to Consider
 Are there any new technologies that you could be using?
 Are there any new technologies on the horizon that could radically affect your work or
your industry?
 Do any of your competitors have access to new technologies that could redefine their
products?
 In which areas do governments and educational institutions focus their research? Is there
anything you can do to take advantage of this?
 How have infrastructure changes affected work patterns (for example, levels of remote
working)?
 Are there existing technological hubs that you could work with or learn from?
 Are there any other technological factors that you should consider?
Source: https://www.mindtools.com/pages/article/newTMC_09.htm

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Key drivers of change
Key drivers for change:
• Analysing all PESTEL factors and their interdependencies can
produce long and too complex lists.
• We need to identify the key drivers for change: the
environmental factors likely to have a high impact on the
success or failure of strategy.
• Typically key drivers vary by industry or market.
• For example, retailers are concerned with social changes and
customer behaviour which have driven a move to ‘out of town’
shopping. Personal disposable income also drives demand for
retailers.

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Using the PESTEL framework (2)
• 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!

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 Megatrends – large-scale changes that are slow to form but
influence many other activities over decades to come. Examples
include ageing populations and increased economic growth in Asia.
 Inflexion points – when trends shift sharply in direction, e.g.
upwards or downwards. E.g. sub-Saharan Africa may have
reached an inflexion point after decades of stagnation (and may
embark on a period of rapid growth). Inflexion points are likely to
invalidate forecasts that extrapolate existing trends.
 Weak signals – advanced signs of future trends that may help to
identify inflexion points – often unstructured and fragmented bits of
information. E.g. mortgage failures in California in 2007 were a
weak signal for the financial crisis that hit the global economy in
2008.

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PESTEL framework (3)
https://www.youtube.com/watch?v=v7pUv_ZWnyM

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Scenarios and forecasting
Scenarios are 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 and drivers of change.
• Offer more than a single view. An organisation will typically develop a few
alternative scenarios (2–4) to explore and evaluate future strategic options.
• Scenarios prevent managers from closing their minds to alternatives.
• The point is not to predict but to alert managers.
• Scenario analysis is used in industries with long planning horizons, for
example the oil industry or airlines industry.

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Scenarios
Instead of a continuously
graduated range of
likelihoods, alternative
futures are discontinuous:
they happen or they do not,
with radically different
outcomes
This kind of single-point
forecasting implies a great
degree of certainty, e.g.
demographic trends
Different outcomes may be
expressed with different
degrees of probability, with a
central projection identified
as the most probable, “‘fan
charts’”

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Carrying out scenario analysis (1)
• Scenarios are not strategies in themselves, but alternative possible
environments which strategies have to deal with.
• Scenario analysis is typically used in conditions of high uncertainty, for
example where the environment could go in several highly distinct directions.
• Identify the most relevant scope of the study – the relevant subject
(product/market) and time span.
• Identify key drivers of change – PESTEL factors which will have the most
impact in the future but which have uncertain outcomes and are mutually
independent.
• For each key driver select opposing outcomes where each leads to very
different consequences.

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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.
• Establish early warning systems. Identify indicators that might give an
early warning of the way the environment is changing and monitor such
indicators.

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Assessing the attractiveness of industries:
Porter’s Five Forces Framework

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Industries, markets and sectors
An industry is a group of firms producing products and services that are
essentially the same. For example, the automobile industry and the 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).

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Competitive forces:
The 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’.
 Industries vary widely in terms of their attractiveness, as measured by how
easy it is for participating firms to earn high profits.
 Porter’s main message is that where the five forces are high and strong,
industries are not attractive. Excessive competitive rivalry, powerful buyers and
suppliers and the threat of substitutes or new entrants will all combine to
squeeze profitability.

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The Five Forces framework (1)
Source: Adapted fromCompetitive Strategy: Techniques for Analyzing Industriesand Competitors The Free Press by Michael E. Porter, copyright © 1980, 1998 by The Free Press.
All rights reserved.

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Rivalry between existing 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
(distinct from substitutes).
The degree of rivalry increases when:
➢ Competitors are of roughly equal size
➢ Competitors are aggressive in seeking leadership
➢ Industry growth rate: the market is mature or declining
➢ There are high fixed costs, e.g. high investments in capital equipment or initial research
➢ The exit barriers are high, e.g. high investment in specific assets such as plant and
equipment which others would not buy
➢ There is a low level of differentiation, e.g. petrol

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The threat of entry
Barriers to entry are the factors that need to be overcome by new entrants if
they are to compete. 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, high capital investment requirements for
entry, for example research costs in pharmaceuticals
➢ Experience and learning
➢ Access to supply and distribution channels
➢ Expected retaliation
➢ Legislation or government restrictions, protection (e.g. licensing, patents)

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Threat of substitutes
Substitutes are products or services that offer a similar benefit to an industry’s
products or services, but have a different nature i.e. they are from outside the industry.
Example: THALYS hi-speed train connection between Brussels-London and the cost of
flights.
Customers will switch to alternatives (and thus the threat increases) if:
• The price/performance ratio of the substitute is superior (e.g. Aluminium is more
expensive than steel but it is more cost efficient for 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 on
short haul routes).
Important aspects:
 Disruptive change due to substitutes
 Perceived level of differentiation
 Level of price/performance of substitute
 Ease of substitution (fungility)

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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, a few large customers account for the majority of sales
• Buyers have low switching costs, switching costs are typically low for standardised
and undifferentiated products like commodities such as steel
• Buyers can supply their own inputs (backward vertical integration), steel
companies have gained power over their iron ore suppliers as they have acquired iron
ore sources for themselves
• Low buyer profits and impact on quality, if the buyer group is unprofitable, or if the
quality of the buyer’s product or services is little affected by the purchased product.

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The bargaining power of suppliers
Suppliers are those who supply what organisations need to produce the
product or service.
As well as fuel, raw materials and equipment, this can include labour and
sources of finance.
Powerful suppliers can reduce an organisation’s profits.
Supplier power is likely to be high when:
• The suppliers are concentrated (few of them), the iron ore industry is now
concentrated in the hands of three main producers, leaving the steel companies, still
relatively fragmented, in a weak negotiating position for this essential raw material.
• Suppliers provide a specialist or rare input, pilots’ unions in the airline industry.
• Switching costs are high as it is disruptive or expensive to change suppliers. Microsoft
is a powerful supplier because of the high switching costs of moving from one
operating system to another.
• Suppliers can integrate forwards, enter the industry themselves or cut out buyers who
are acting as intermediaries e.g. low-cost airlines have cut out the use of travel agents.

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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, Google in the US search engine market.
• Oligopolistic industries – an industry dominated by a few firms with limited rivalry
and in which firms have power over buyers and suppliers. E.g. Boeing and Airbus
dominate the market for civil aircraft.
• 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 markets are ‘perfect’ but many may have features of highly
competitive markets, for example, mini-cabs in London.
• Hypercompetitive industries – where the frequency, boldness and aggression of
competitor interactions accelerate to create a condition of constant disequilibrium and
change (e.g. mobile phones).

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Types of industry (2)

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Implications of Five Forces analysis
• Which industries/markets to enter or leave – it helps identify the
attractiveness of industries.
• What influence can be exerted? Identifies strategies that can influence the
impact of the five forces. E.g. 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.

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Determine how to position a business in relation to the five forces. Can you:
• exploit any of the weak forces?
• neutralise any of the strong forces?
• exploit industry change in any way?
• influence and change the industry structure to your advantage?
Implications of Five Forces analysis

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Issues in Five Forces analysis
• Defining the ‘right’ industry. Applying the model at the most appropriate
level – not necessarily the whole industry. E.g. the European low-cost airline
industry rather than airlines globally.
• Converging industries – particularly in the high tech arenas – where
industries overlap (e.g. digital industries – mobile phones/cameras/mp3
players).
• Complementary organisations – which enhance the attractiveness of a
business to customers or suppliers. Microsoft Windows and McAfee
computer security systems are complementors. This can almost be
considered as a sixth force.

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https://www.youtube.com/watch?v=mYF2_FBCvXw
The Five Forces framework
Explained by M. Porter

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The value net
A value net is a map of organisations in a business environment
demonstrating opportunities for value-creating cooperation as well as
competition.
An organisation is a complementor if:
 Customers value your product more when they have the other organisation’s
product than when they have your product alone (e.g. sausages and mustard)
 It is more attractive for suppliers to provide resources to you when it is also
supplying the other organisation than when it is supplying you alone (e.g. Boeing
and airlines).

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The value net
Source: 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 SchoolPublishing Corporation. All rights reserved.
Opportunitiesfor cooperationcan
be seen through a value net:
A map of organisationsin a business
environmentdemonstrating
opportunitiesfor value-creating
cooperationas well as competition

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The value net
Source: 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 SchoolPublishing Corporation. All rights reserved.
Customers may not only value a product more if
they also have another product or service as
discussed above, but if other customers use the
same product or service.
When this is the case the product or service
shows network effects or network externalities.
There are network effects in an industry when
one customer of a product or service has a
positive effect on the value of that product for
other customers. This implies that the more
customers that use the product, the better for
everyone in the network.
For example, the value of the online auction site
eBay increases for a customer as the network of
other sellers and buyers grows on the site.

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The industry life cycle

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Comparative industry structure analysis
The larger the enclosed area, the greater is the profit potential

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Strategic groups: more fine-grained industry analysis
 An industry or sector may be too high a level to provide for a detailed
understanding of competition.
 The five forces can impact differently on different kinds of players, which
requires a more fine-grained understanding.
 For example, Hyundai and Porsche may be in the same broad industry
(automobiles), but they are positioned differently: they are protected by
different barriers to entry and competitive moves by one are unlikely to
affect the other.

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Market segments
Industries can also be disaggregated into smaller and specific market sections
known as segments. The concept of market segment focuses on differences in
customer needs.
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.

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Blue Ocean thinking

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Blue Ocean thinking
W. Chan Kim and Renée Mauborgne, "Blue Ocean Strategy: How To Create
Uncontested Market Space And Make The Competition Irrelevant".
• ‘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 in order to establish the extent of differentiation.

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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.

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Strategy canvas
Figure 2.10 Strategy canvas for electrical components companies
Source: Developed from W.C. Kim and R. Mauborgne, Blue Ocean Strategy, Harvard Business
School Press, 2005.
http://strategiccoffee.chriscfox.com/2012/10/how-to-use-strategy-canvas.html

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Strategy canvas
There are 4 relatively simple steps to preparing your own Strategy Canvas.
1. Identify the competition
The first step to drawing a Strategy Canvas is to know who your competition is Depending on the
nature of your industry, you could identify individual competitors by name, or you might find it easier
to cluster them into homogeneous groups. Don't forget to include your own business, if you are
already in the market.
When identifying competitors, it is always important to look at the problem from the customer's
perspective - who or what else could satisfy your customer needs? Had Southwest Airlines not done
this, they would simply have listed the other airlines, and not realised that, in many case, customers
are choosing between flying and other modes of transport. It is unlikely they would have had the
insight that led to their very successful strategy if they had not taken this broaderview.
2. Identify the factors of competition
The second step is to identify the factors that your customers value when choosing the product or
service you are offering. In the above example, these include the price, meals, lounges, seating
choices, etc.
The simplest way to do this is to actually get out and speak to your target customers. Remember, it is
important to speak to people who already buy your product and service, people who buy it but from
your competitor, and people who don't yet buy your product and service but might in the future
(especially if your strategy is successful). And don't forget that people don't always know what they
want, so you may need to get a little creative in orderto find out.

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Strategy canvas
3. Evaluate the competition
The third step is to draw the actual chart - draw a line for each competitor / type of
competitor showing how well they perform in terms of each of the factors that your
customers value.
It is often interesting to do steps 1 to 3 with a team in a closed room, just to see how
different peoples strategy maps look in terms of the competitors/groups they select, the
factors they consider important, and how they rate the competition. Strategy Canvases
prepared on this basis can be significantly different, and the ensuing debate can be a
valuable team building and strategising exercise if managed well.
However, once again, you can also ask your customers directly, just by talking to them
or using a variety of research techniques, to get a more accurate and objective picture.
4. Chart your competitive differentiation
Now you are ready to map your new strategy onto the Canvas. The objective is to chart
a line which is substantially different to the lines of any of your competitors/groups. That
difference, that unique blend of competitive factors, is your competitive differentiation.
Of course, not just any differentiation will do. You must pick a combination that a
sufficient number of your target customers will find compelling, in order to sustain your
commercial objectives. You will undoubtedly have to dig deep into your box of other
strategy tools to do so.

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Strategy canvas
Create the strategy canvas for a company or an organization you know well

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External environment analysis: a summary
• Understanding the factors in the macro-, industry and competitor/market
environments of an organization
• The critical issue is the implications that are drawn from this understanding in
guiding strategic decisions and choices
• The crucial next stage, therefore, is to draw from the environmental analysis specific
strategic opportunities and threats for the organisation. Identifying these
opportunities and threats is extremely valuable when thinking about strategic
choices for the future
• Opportunities and threats form one half of the Strengths, Weaknesses,
Opportunities and Threats (SWOT)
• In responding strategically to the environment, the goal is to reduce identified
threats and take advantage of the best opportunities.

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External environment analysis: a summary
The techniques and concepts in this and the previous chapter should help in
identifying environmental threats and opportunities, for instance:
• PESTEL analysis of the macro-environment might reveal threats and
opportunities presented by technological change, or shifts in market demographics
or such like factors.
• Identification of key drivers for change can help generate different scenarios for
managerial discussion, some more threatening and others more favorable.
• Porter’s five forces analysis might, for example, identify a rise or fall in barriers to
entry, or opportunities to reduce industry rivalry, perhaps by acquisition of
competitors.
• Blue Ocean thinking might reveal where companies can create new market
spaces; alternatively, it could help identify success factors which new entrants
might attack in order to turn ‘Blue Oceans’ into ‘Red Oceans’.

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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.

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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. 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 a better means of avoiding
Red Ocean with many similar rivals and low profitability.
• Tools:
➢ PESTEL analysis
➢ Porter’s 5 forces framework
➢ Value Net
➢ Strategy Canvas

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