Strategic Analysis

21/12/2016 1 BUSM3200 Strategic Management Module 2 The Environment Dr Xueli (Charlie) Huang School of Management Learning Objectives After studying this module, you should be able to •Analyse the broad macro -environment of organisations using the PESTEL framework –Identify key drivers in this macro -environment and use these key drivers to construct alternative scenarios with regard to environmental change. •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 . •Use these various concepts and techniques in order to recognise threats and opportunities in the marketplace. •Porter’s structure – conduct –performance perspective or Industrial organisation / positioning perspective . RMIT University©2017 2 School of Management 3 External environment or factors: Macro and industry environment Internal factors or environment Two broad sets of factors primarily determine an organisational performance: internal and external environment Organisational performance Production Marketing Human Resources R&D The firm Logistics Services Info system RMIT University©2017 School of Management 21/12/2016 2 What is the environment of an organisation? •Environment refers to those aspects outside the organisation that affect the business strategy of an organisation (Hubbard, 2008) •The environment can be broken into two levels for analytical convenience –Macro -environment (those aspects outside the industry) –Industry environment (those factors within the industry which affect both its profitability and the competitive position of organisations within it). RMIT University©2017 4 School of Management Layers of the business environment RMIT University©2017 5 School of Management Why is the environment important to organisations? •The changes in the environment generate opportunities and threats •The opportunities and threats present challenges to which organisations must respond in order to survive and/or prospect. •Organizations need to –Scan its environment, monitor it, and collect competitive intelligence . –Predic t how environment will be changed and understand its implications. RMIT University©2017 6 School of Management 21/12/2016 3 Why conducting external environment analysis? •Understand how these environmental changes can affect performance of the industries and our organization RMIT University©2017 7 Changes in the environment Opportunities and/or threats Strategic implications School of Management Macro -environment •The PESTEL framework categorises environmental influences into six main types: political, economic, social, technological environmental (green) legal •These f actors are external to an industry, usually beyond a firm’s control •Thus PESTEL provides a comprehensive list of influences on the possible success or failure of particular strategies. RMIT University©2017 8 School of Management Key trends and events in the macro environment (1/3) •Political –Trump Presidency –Brexit –Government stability –Privatization –Terrorism –Tax reform –Foreign trade regulations (such as Free Trade Agreement between Australia and the USA, Australia and China) –Immigration policy •Economic –Interest rates –Unemployment –Consumer price index (inflation) –Trends in GDP –Trade deficit –Exchange rate RMIT University©2017 9 School of Management 21/12/2016 4 Key trends and events in the macro environment (2/3) •Social –Aging population –Baby boomers start turning 65 –Postponement of family formation –Greater concern for fitness and environment –e-generation –Greater disparities in income levels •Technological – ICT innovations – Speed of technology transfer –New discovery and development (e.g., digital, genetic and nanotechnology) – R&D spending RMIT University©2017 10 School of Management “Australian Financial Review “ •“This aging population is unprecedented, and its implication will be felt through Australian society – in what job we do, what services we need, what houses will suit, what transport will be needed and at what cost” •“We will also have to ask who get the pension and who will fund it” RMIT University©2017 School of Management 11 Key trends and events in the macro environment (3/3) • Environment (green) – Climate change ( global warming) – environmental protection regulations, – energy consumption – waste disposal and re - cycling –renewable energy •Legal –Competition laws –Health and safety laws –Employment laws –Licensing laws –IPR laws. –Carbon Tax RMIT University©2017 13 School of Management 21/12/2016 5 Key drivers of change •These are those environmental factors that are 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; – Technology for IT industry; – Sociocultural changes for fast food industry. •Typically key drivers vary by industry or sector. •These drivers need to be monitored closely RMIT University©2017 14 School of Management Using the PESTEL framework •Apply selectively –identify specific factors which impact on the industry , market and organisation in question. In other words, these macro -env factors are Industry –specific !!! •Identify factors which are important currently but also consider which will become more important in the next few years. •Identify inter -connection among the elements •Identify opportunities and threats – by single factor and combined one - the main point of the exercise! RMIT University©2017 15 School of Management The purpose of the macro -environment analysis •To understand how the environmental factors affect the growth of the particular industry and the performance of the organisation being analysed, particularly in the future through identifying key opportunities and threats in the environment and evaluating their impacts. •The level of analysis is on the environmental factors surrounding the industry , that is, factors (opportunities and threats) that are common to all firms in the industry. •. RMIT University©2017 16 School of Management 21/12/2016 6 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) RMIT University©2017 18 School of Management Industry (competitive) environment and 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’. RMIT University©2017 19 School of Management The Porter’s five forces framework (1) Figure 2.2 The five forces framework RMIT University©20147 20 School of Management 21/12/2016 7 The five forces framework (1 ) 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 (e.g., steel industry, airline) Experience and learning (e.g., pharmaceutical industry’s R&D spending) 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 market RMIT University©2017 21 School of Management The five forces framework (2) Threat of Substitutes 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 one city centre to another) RMIT University©2017 22 School of Management The five forces framework (3) The bargaining power of buyers Buyer power is likely to be high when: Buyers are concentrated e.g., Coles buys milk from a large number of farmers Buyers have low switching costs e.g., Universities contract travel agency for their services Buyers can supply their own inputs (backward vertical integration) RMIT University©2017 23 School of Management 21/12/2016 8 The five forces framework (4) The bargaining power of suppliers Supplier power is likely to be high when: The suppliers are concentrated (few of them), (e.g., iron ore suppliers to the steel industry) Suppliers provide a specialist or rare input (e.g., Intel). 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). RMIT University©2017 24 School of Management The five forces framework (5) Rivalry between competitors 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 differentiation RMIT University©2017 25 School of Management Interpreting industry analyses RMIT University©2017 School of Management 26 21/12/2016 9 Implications of five forces analysis •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 (or strategic group) e.g. large firms can deal with barriers to entry more easily than small firms. RMIT University©2017 27 School of Management Issues in five forces analysis •Apply at the most appropriate level – not necessarily the whole industry. For example, 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. RMIT University©2017 28 School of Management Using Industry Analysis: A Few Caveats •Managers must not always avoid low profit industries –Can still yield high returns for players with sound strategies •Five Forces analysis is essentially a static and single industry analysis •Good industry analysis looks rigorously at the structural underpinnings of profitability. •The point of industry analysis is not to declare the industry attractive or unattractive but to understand the underpinnings of competition and the root causes of profitability. RMIT University©2017 29 School of Management 21/12/2016 10 Some key questions to ask in conducting competitive environmental analysis –What are the key forces at work in the competitive environment (which ones are more important than others to us?) –What are the underlying forces in the macro - environment (such as the Internet) that are driving the competitive forces (How the competitive forces links to macro - environmental forces)? –How does a particular competitor stand in relation to these competitive forces (competitor analysis)? –How can a firm influence these forces? RMIT University©2017 30 School of Management The connection between macro and industry environments •The closing down of Border, Angus and Roberson Bookstores –Technology (Internet technology) and the birth of e - retailing (rivalry or substitutes) such as Amazon.com. –Buyers have more choices and less switch costs –Entry barriers are lowered RMIT University©2017 School of Management 31 Michael Porter on five forces model •http://www.youtube.com/watch?v=mYF2_F BCvXw (Porter on five -forces analysis) • Watch at home “What is strategy” (From12’48” to 20’ minutes) by Michael Porter http://www.youtube.com/watch?v=KvYwKM 5bY0s RMIT University©2017 School of Management 32 21/12/2016 11 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. RMIT University©2017 33 School of Management Characteristics for Identifying Strategic Groups Scope of activities •Extent of product diversity •Extent of geographic coverage •Number of segments served •Distribution channels •Degree of vertical integration Resource commitment •Extent of branding •Marketing effort •Extent of vertical integration •Product quality •Technological leadership •Organisational size RMIT University©2017 34 School of Management Breadth of product line Narrow W ide Low High Quality Toyota Ford GM Chrysler Honda Nissan Mercedes BMW Ferrari Porsche Hyundai Kia Great Wall The World Automobile Industry: Strategic Groups RMIT University©2017 35 School of Management 21/12/2016 12 Why is the concept of strategic group useful? •Understanding competition - enables focus on direct competitors within a strategic group, rather than the whole industry. (e.g. Coles will focus on Woolworth) • Analysis of strategic opportunities - helps identify attractive ‘strategic spaces’ within an industry and thus chart the future directions of firms’ strategies. •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. •It also helps a firm –identify groups those competitive position may be marginal or tenuous –think through the implications of each industry trend for the strategic group as a whole RMIT University©2017 36 School of Management Understanding markets •A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market. •Market segmentation –It identifies similarities and differences between groups of customers and users –Some bases of market segmentation –Characteristics of people/organisations (demographics) –Purchase/use situation (behaviours) –Needs and preferences (motivations and psychological issues) •Customer value –Value = benefits – sacrifice –Critical success factors vs threshold requirements –Satisfaction = real performance - expectation RMIT University©2017 37 School of Management 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). RMIT University©2017 39 School of Management 21/12/2016 13 Major environmental factors – A brief summary Organization Market Competitors Value Competitive advantages RMIT University©2017 42 School of Management Strategic ‘positioning’ or competitive perspective •There are two broad ways to competition –Externally –focused or “strategizing”: by positioning your firm against your competitors, suppliers, users, and potential entrants –Internally -focused or “economizing”: by improving internal efficiency or innovation. •Market positioning or competitive view – The external environment is a key determinant of strategy and performance, and – A firm performance is a function of industry and firm specific effect. RMIT University©2017 43 School of Management Module 2 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. RMIT University©2017 44 School of Management 21/12/2016 14 Module 2 summary (2) •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 THREATS RMIT University©2017 45 School of Management