externalanalysisstrategicmanagementljmu-12778920009027-phpapp02

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Abhishek Srivastav


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Learning OutcomesyAfter studying this topic you should be able to:

y Understand the role of external analysis in

strategy formulation.

y Use a range of tools to analyse an

organisations external environment.

y

Explain the limitations of these analytical toolsand the role of more subjective analytical

approaches.


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Link to overall strategic managementy Strategic management includes understanding

the strategic position of an organisation, strategic

choices for the future and managing strategy in

action (Johnson et al., 2008:12).

y Strategic position identifies the impact of

y External environment

y Strategic capability

y Expectation and influence of stakeholders onstrategy


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The Business Environment(Johnson et al. 2008: 54)

2-4

TheOrganisation


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External analysis stagesExternal analysis stages

y Macro-environment these are broad trends shaping thenational and international environment in terms of political,economic, social and technological trends (i.e. PESTEL factors,key drivers ).

y Micro-environment this is the operating environment orindustry sector in which the firm competes. It addresses a range ofissues such as suppliers, customers, competitive intensity, threatof new entry and of substitute products arising (i.e. the five-forces analysis).

y Competitor analysis seeks to understand the rival offers fromother firms seeking to serve the same customers and to out

manoeuvre their managers with our innovation and competitivemoves.

y Market analysis seeks to evaluate the current needs of todayscustomers and the emerging needs of tomorrows customers sonew products can be anticipated. These will be different indifferent market segments.

Analysing the external environment involves breaking a complex inter-related reality into sets of issues to make the analysis manageable. The

main sets of issues are usually:


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The Macro-Environmenty Difficult for the firm to influence

y Changes can be far-reaching

y The media: rich source of both information and

speculation

y Tools for analysing the macro-environment

y The PESTEL (Variants PEST/DEEPLIST) framework

y Key driversy Scenarios


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The PESTEL Frameworky The PESTEL framework categorises environmental

influences into six main types:

y Political -

y Economic

y Socio-culturaly Technological

y Environmental

y Legal

y PESTEL analysis evaluates the broad societaltrends that affect many industries. It identifies currentand future developments that will shape the micro-environments of each industry sector.


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G

ood PEST

EL Analysisy Focuses on society wide.

y Based on sound research of actual issues.

y Provides evidence from the research to validatepoints made.

y Future oriented.

y

Interpretive and not descriptive


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Major Risky Like the old-fashioned SWOT technique, PESTEL

helps us make lists

y Lists can help us think, but

y A list should be the beginning, not the end of

thinking

y Harrison (2003: Ch 2) integrates this with industry

and company analysis

y

Johnson et al. (2008:55-59) look at the wayPESTEL factors combine

y then at key drivers and trends of business change


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Key Drivers and Scenarios Planning

y Key drivers for change are environmental

factors that are likely to have a high impact on

the success or failure of strategy.

y 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.


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Industries and Sectors Analysis

yAn industry is a group of firms producing the sameprincipal product or service.

y The industry analysis involves identifying

y Competitive forcesy Industry life cycles

y Competitive cycles

yPorters five forces framework has two main aims:

yTo understand the drivers of competitive behaviour inthe sector and;

yTo evaluate the long-run profit potential of the sector


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The Five Forces Framework (Johnson et al. 2008: 60)The Five Forces Framework (Johnson et al. 2008: 60)

Competitiverivalry

Potentialentrants

Buyers

Substitutes

Suppliers


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5

Five forces model Details

Power of

Suppliers

Power of

Customers

Substitute

Threats of Potential

entrants

Competitive rivalry

Capital requirements

Differentiation

Switching costs

Access to

supply/distribution

channels

Intellectual property

Expected retaliation

Legislation/Government

action

Economies of scale

Degree of differentiation

Technological innovation

Price performance relationships

Size of purchases Undifferentiated product

Per cent of cost

Low margins (buyer)

Threat of forward

integration

Impact on quality

Price performance is

high

Size of purchases

Differentiation in product

Few substitutes

A few big suppliers

T

hreat of backward integration

Competitor balance

Industry growth rate

High fixed costs

High exit barriers

Low differentiation


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Evaluation of the Five Force Model

y Identifies drivers ofcompetitive behaviour.

y Indicates trends inprofitability.

y Highlights strategies toalter industry structure.

(Lynch 2000)

y Firms industry environment is asmall determinant of that firmsprofitability

y Suppliers of complementary

products are ignoredy Highlights the need to

disaggregate broad industrygroupings and examinecompetition at segment orstrategic group level Assumes allbusiness relationships are

competitive.y Assumes industry boundaries are

stable over time, ignoringinnovation and entrepreneurship.(Grant 2005)

ADVANTAGESADVANTAGES DISADVANTAGESDISADVANTAGES


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The IndustryThe Industry Life CycleLife Cycle

(Johnson et al. 2008: 68)(Johnson et al. 2008: 68)


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Cycles of CompetitionCycles of Competition

(Johnson(Johnson et al. 2008: 69)et al. 2008: 69)


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Competitors analysis

y This involves the analysis of strategic groups,market segments and strategic customers.

y Strategic groupsy

Strategic groups are organisations within an industry withsimilar strategic characteristics, following similar strategies orcompeting on similar bases.

y Benefits identifying strategic group analysisy

Understanding competitiony Analysis of strategic opportunities

y Analysis of mobility barriers


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Strategic Group Analysis (SGA)Strategic Group Analysis (SGA)

A strategic group is the group of firms in an industry followingA strategic group is the group of firms in an industry following

the same or a similar strategy along the strategic dimensionsthe same or a similar strategy along the strategic dimensions11..

Porter (1980), p.129.Porter (1980), p.129.

1. strategic dimensions refers to any significant criteria for grouping firms, e.g. segments served,1. strategic dimensions refers to any significant criteria for grouping firms, e.g. segments served,branding, cost position, etc.branding, cost position, etc.

BroadBroad

NarrowNarrow

National GlobalNational Global

Global fullGlobal full--lineline

producersproducers

National NicheNational Niche--

specialistsspecialists

High performanceHigh performance

sportssports

RegionalRegional

BroadBroad--lineline

LuxuryLuxury

producersproducers

The key to the strategic

group concept is that

differences in profitability

between groups persists

because of the existence

of mobility barriers thatstop firms entering or

moving between groups

and thus competing away

profit differentials.

ProductProduct

RangeRange

GeographicGeographic

ScopeScope

Motor Industry


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Characteristics for IdentifyingCharacteristics for Identifying

StrategicG

roupsStrategicG

roupsScope of activities

y Extent of productdiversity

y

Extent of geographiccoverage

y Number of segmentsserved

y Distribution channels

Resource commitment

y Extent of branding

y Marketing effort

y Extent of verticalintegration

y Product quality

y Technologicalleadership

y Organisational size


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Market Analysis

Determines attractiveness and competitiveadvantage

Key variables to determine:

Overall size Market shares of key competitors Growth rates/trends Segments (relative growth rates)

Profitability Existing/likely competitors Accessibility issues


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Strategic customer and critical

success factorsy A strategic customer is the person(s) at whom the strategy is primarily

addressed because they have the most influence over which goods orservices are purchased.

y What do our customers want? (basic source of profit in the industry,who are they, what are their needs and how do they makedecisions?)

y Critical success factors (CSFs) are those product features withwhich a organisation must outperform the competition because theyare particularly valued by a group of customers.y those factors within the firms market environment that determine

its ability to survive and prosper (Grant 2005, p92)

y What does the firm need to do to survive competition? (how intenseis competition and what are the key dimensions upon whichcompetitors compete?)

y How then can firms use their resources and capabilities to profitfrom KSF?


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Market segment analysis

yAmarket segment is a group of customers who havesimilar needs that are different from customer needsin other parts of the market.

y Market segment analysisy Identify key segmentation variables

y Construct a segmentation matrix

y Analyse segment attractiveness

y Identify KSFs in each segment

y Choose between broad or narrow segment focus.


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Some Bases ofSome Bases ofMarket SegmentationMarket Segmentation

(Johnson et al. 2008:77)(Johnson et al. 2008:77)


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Summaryy External analysis involves four main areas: PESTEL

factors, Industry analysis, competitor profiling andmarket analysis.

y The macro-environment can be analysed in terms of

PESTEL factors.y Industries and sectors can be analysed using PortersFive Forces model.

y Industry changes can be analysed through industry life

cycle & hypercompetitive models of competition.y The inner layer of the environment can be analysed

with strategic group analysis, market and segmentanalysis.


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Reading materialsRequired reading:yJohnson et al (2008), chapter 2.

Recommended reading:

y Porter,M.E. (1980). Competitive Strategy:Techniques for analysing industries andcompetitors. Free Press: New York. Chapters 1 &3

y

Harvard Business Review (1991).M

ichael EPorter on Competition and Strategy. HarvardBusiness Press, pp3-11


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Assignment Case Study 1

y Using the data from the case study assignment,carry out for the tourism industry:

yA PESTEL analysis

yA five force analysis and what do you

conclude?

y How does the changes in the PESTEL and

five forces impact on TUIy What are the relative strengths and

weaknesses of the TUI

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