MBA lecture

1. Management, Organizational
Policies and Practices
Lecture 3

2. Recap Lecture 2
• Intended Strategy Development
Processes
– Strategic Planning
– Strategy Workshop
– External Consultants
– Externally Imposed Strategies

3. Recap Lecture 2
• Emergent Strategy Development
Processes
– Logical Incrementalism
– Resource Allocation Routines
– Cultural Processes
– Political Processes
• Strategic Drift
• Learning Organization
• Multiple Strategy Development Processes
• Vision and Mission Statements

4. The External Environment
Lecture 3
Dr Amna Yousaf
PhD HRM
MBA HRM
MSc Economics

5. Learning Outcomes (1)
• Analyze the broad macro-environment of
organizations in terms of political,
economic, social, technological,
environmental and legal factors
• Identify key drivers in this macro-
environment and use these key drivers to
construct alternative scenarios with regard
to environmental change

6. Learning Outcomes (2)
• Use five forces analysis in order to define
the attractiveness of industries and sectors
for investment and to identify their
potential for change
• Identify strategic groups, market
segments, and critical success factors,
and use them in order to recognise
strategic gaps and opportunities in the
market

7. “It is not the strongest of the species that
survive, nor the most intelligent, but the
one most responsive to change.”
– Charles Darwin
External Assessment
“Nothing focuses the mind better than the
constant sight of a competitor who wants
to wipe you off the map.”
– Wayne Calloway, Former CEO,
PepsiCo

8. • Purpose of an External Audit
• Develop a finite list of opportunities that
could benefit a firm threats that should be
avoided
• Industrial/Organizational view -
1960 through 1980’s
External Strategic
Management Audit

9. 2-9
Layers of the
business environment
The
Organisation

10. 2-10
The Macro-Environment
PESTEL
Scenarios
Key
drivers

11. 2-11
PESTEL Framework
Political Economic
Technological
Environmental Legal
Social

12. The Demographic Segment (1)
• Phenomenon of graying population – increase in life
expectancy rates – upto 100 or even 200 years in US
– Workers aged 60-70 years increase from 4% to7%
– 2025 = 18.5% population > 65 years
– Numerous opportunities for firms to produce goods
– Societal issues might emerge such as change of
pension plans
– Glaksosmithkline provides drugs to elderly at 25%
discounts – increase in sales and services to
important class
• Change in ethnic mix - Less White
– 2075 = no ethnic or racial majority

13. The Demographic Segment (1)
• Move of people from non metropolitan to
metropolitan areas
– Societal challanges
– Industry implications & Agricultural impact ;
mechanisation
• Work force diversity
• Hethrogenous work teams more effective strategies, more
creative and innovative than homogenous
– Conflict management may be a challenge

14. Economic Segment
• Interest Rates
• Infation Rates
• Monetary Policy
• Income Levels/Buying power
– Widening gap between rich & poor
• Nations throughout the world affected by
chinese economy
• 9/11 affected bilateral trade

15. Political Segment
– Privatizatoin of state owned firms
– Labor training laws, taxation laws, trading laws affect
industries and firms
– Debate over protectionism policies and free trade
– As per IMF free trade when tarrifs low than 9; barriers
are restrictive when barriers exceed 25% of product
price
• Firms often develop political strategies
• Regulations may vary with change of governments

16. The sociocultural Segment
• Concerned with a society’s attitudes and
cultural values
– More women in jobs and businesses
– Continuing growth of contingency workres
– Breakdown of life time employment practices,
flexibity pressures

17. Technological Segment
• Transfer of Technology
• Product Life cycles
• Early adopters of new technology acheive
greatest market share and higher returns
– Strategist must keep an eye on newly emerging
technologies
– Fully automated plants, mechanisation of agriculture,
employees dont particpate in manufacturing process
but in servicing part or maintaining machinery
• E-commerce

18. Technological Forces
Significance of IT
•Chief Information Officer (CIO)
•Chief Technology Officer (CTO)

19. Macro Environement-Sun
Microsystems
• Different parties can have different
reactions as to how to react to general
environemnt
– In Sun’s case analysists believe they should
cut costs in economic downturn while CEO of
SUN believes it should invest heavily in R&D
for survival

20. Macro Environment-Key Drivers of
Change
• Market Globalization
– Convergence of customer needs, lifestyles
and patterns
• Soft drinks, jeans, electrical items such as audio
equipment, tastes
– Opening of Mcdonlads world over
» Global operators; global markets also driven by
international distributors, suppliers, global
communication and distribution channels

21. Macro Environment-Key Drivers of
Change
• Cost Globalization
– Especially true for large scale industries,
standarized production, economies of scale
• Components of electronics industry
• Advantages from country specific costs
• Technical standardization
– World trade order

22. 2-22
What is a Scenario?
Scenarios are detailed and plausible views
of how the business environment of an
organisation might develop in the future
based on key drivers for change about
which there is a high level of uncertainty.

23. Management Implications
• Firms can not directly control general environment’s
segments and elements
– Firms need to understand these mechanisms in
general environemnt while devising and implementing
strategies
– Retailer more concerened with consumer tastes
– Computer manufacturer with technological
devlopments, speed of change and obsolesence

24. Porter’s Diamond
• Certain factors make some countries more competitive
– Legislations in Sweden and Japan not to lay off has encouraged
automation of industries
– Home demand conditions- japnasee customers expectations of
high quality electrical and electronic equipment have provided
imeptus to those industries in leading global dominance
– Advatages gained by related and supporting industries; Italy
footware benefits italian leather working machinery and design
services
– Competition must be encouraged at home rather than protecting
from international competition
• Governments can enhance this by setting high standards of product
performance, safety and environmental standards, encouraging
cooperation between buyers anbd suppliers on domestic level

25. Industry Environment
• Industry refers to group of firms competing over
close substitutes.
• Compared to general envirnment, industry
environemnt has direct effect on firms strategic
competitiveness
• Determines a firm’s profit margins in industry

26. Industry Environment
 Convergence
 Boundaries of business blurred such as
automakers sell insurance and do financing
 Consumers start substituting products such
as TVs for PCS
 E commerce giving new dimensions to
manufacturers instead of traditional retailing –
New business models

27. The Five-Forces Model of
Competition

28. Threat of New Entrants
• Exisiting firms often not identify new competitors
early
– Can threaten market share
• Threat to entry
– New firms enter industry where entry barriers are
small and potential profit margins high

29. Barriers to Entry (1)
– Economies of scale
• Marginal improvements in efficiency that a firm
experiences as it incrementally increases in size
• Increase in production quantity associated with
lower per unit costs
• Enhances firm’s flexibility such as firm may reduce
price and increase sales or keep price constant
enhance profits
• Gives greater cash flows

30. Barriers to Entry (2)
• Product Differentiation
– Companies spend heaviliy to win customer
loyalties through advertisements etc such as
cocla cola, Pepsico
– Estabilishing value of new products by new
firms is challange
• New entratnts may offer products at low prices to
win customers but may end up in losses

31. Barriers to entry (3)
• Capital Requirements
– Huge capital requirments such as in the case
of steel industry may impose entry barriers
– Capital needed for physical facilities,
inventories, marketing activities and other
capital functions

32. Barriers to Entry (4)
• Access to distribution and supplier
channels
– Exsisting competitors in good terms with
distributors; established long term relationship
– Serve as barrier to new entrants
• May not be possible to cater products from new
entrant for a grocery store

33. Barriers to Entry (5)
• Cost advantages independent of scale
– Raw materials at low cost
– Desirable locations
– Government subsidies

34. Implications for New Entrants
– Small scale entry is costly
– Large scale entry may invite competitive retaliation
– Locating market niches can be an option
– May bypass retailor distribution channels and
sell directly to consumers through e-
commerce
– Small enterprenual firms can cater ignored
market segments
• Honda in US market – focus on small engine motor
cycles – ignored before

35. Bargaining Power of Suppliers
• Supplier power increases
– in case of concentration as to the firms
– Non availability of (satisfactory) product substitutes
– The firm(s) not significant customer for supplier(s)
– Supplier goods critical to firm’s market success
– Effectiveness of supplier goods creates high
switching costs for buyer products
– Suppliers provide highly differentiated products

36. Bargaining Power of
Consumers
• Firm’s objective – highest returns on capital
– Customers want goods at lowest prices with high quality and
better services
• Customers are powerful when
– They purchase large portion of industry’s total output
– They could switch to another product with little cost, if at all
– Industry products are undifferentaited or standarized
– Greater amount of informtaion, internet, e-commerce,
distribution alternatives
• Airline industry changing strategy to cut costs – individual buyer has
practically zero switching cost

37. Threat of Substitute Products
• When the products price is high, quality
lower, customers look for substitutes
outside the industry
– Tea for coffee
– Fax machine over overnight deliveries
– Plastic container than glass jars
• Performance capabilities of such products are
generally equal to or greater than competitor’s
products

38. Intensity of Rivalry among
Competitors (1)
• Numerous or equally balanced competitors
– Airbus and Boeing competitive battle
• Slow Industry Growth invites fierce
competition as
– Firms competing to protect their customers
– Rivalry reduces when market is growing and industry has
opportunbity to target new customers

39. Intensity of Rivalry among
Competitors (2)
• High fixed cost and storage costs
– Fixed costs large part of total costs –
comapnies want to produce at excess
capacity to cut costs by large volume outputs
• Lower prices to attract customers – give rebates
etc
– Perishable products lose value
• Lack of differentiation
– Competition based on prices enhances rivalry
• Dell, HP and other computer manufacturers

40. Exit Barriers
• Firms continue operating in an industry
even in the event of low profitability when
exit barriers are high
– Specialized assets with values linked to
particular business
– Government Restrictions (concerns for job
losses and regional economic effects)
– Fixed costs of exit (such as labor agreements)

41. Industry Analysis: Management
Implications
•Collection & evaluation of data on competitors is
essential for successful strategy formulation
•General environemnt focused on future, industry
environemnt focused on the factors and conditions
influencing a firm’s profitability within industry,
competitor analysis help understand their actions
and intentions
•Which industries should we enter or leave?
•What influence can we exert?
•How are competitors differently affected?

42. Key Questions Concerning
Competitors
• Their strengths
• Their weaknesses
• Their objectives and strategies
• Their responses to external variables
• Their vulnerability to our alternative
strategies
• Our vulnerability to strategic
counterattack

43. Key Questions Concerning
Competitors
• Our product/service positioning
• Entry and exit of firms in the industry
• Key factors for our current position in
industry
• Sales/profit ranking of competitors over
time
• Nature of supplier and distributor
relationships
• The threat of substitute products/services

45. Strategic Groups
• Bases of groups could be
– Market segments
– Geographical
– Technology (leader or follower)
– Size
– Product range

46. 2-46
What is a Market Segment?
A market segment is a group of
customers who have similar needs
that are different from customer
needs in other parts of the market.