Scanning the business

environment(i.e. general and

competitive)

Dr. Miles Weaver,Senior Lecturer in Strategic Management,Leicester Business Schoolmweaver@dmu.ac.uk

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“It is not the strongest of the species that survive, nor the most intelligent, but the most responsive to change.”

- Darwin

Student appointment:

“if ignorant both of your enemy and yourself, you

are certain to be in peril”.

“The supreme art of war is to subdue the enemy

without fighting”.

“All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved”.

- Sun Tzu

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Session aims and objectivesAt the end of this lecture students should be able to:- Identify major external influences on

organisations and outline tools with which to analyse any business environment

Objectives:- Understand the importance of environmental

scanning and how it fits into the strategic management process

Conduct a PESTLE analysis for an organisation with which you are familiar

Identify the main sets of forces exerting influence on organisations

Use Porter’s five forces analysis to define the attractiveness of industries and sectors for investment and to identify their potential for change

Identify strategic groups within an industry with similar strategic characteristics

Remember last week ..The strategic management process

Strategic management involves the major decisions, business choices, and actions that chart the course of the entire organisation

It consists of: Analysis of the internal and

external environment of the firm

Definition of the firm’s mission Formulation and

implementation of strategies to provide a competitive advantage

Analyze internal and external environment

Define strategic intent and mission

Formulate strategies

Implement strategies

Assess strategic outcomes

Strategic management starts with the situation/position

External Factors

Internal Factors

Social,political,

regulatory,& community

considerations

Industryattractiveness,

industry dynamics, &competitiveconditions

Other opportunitiesand threats --

like new technologies

Company’s Strategic Situation/position

Firm’s strengths,

weaknesses,& competitive

market position

Ambitions,philosophies,

& ethical principles

of key executives

Shared vision, values

and companyculture

Analysing the external environment

Firms study the external environment in order to: Identify opportunities and threats in the

marketplace▪ we will centre on this when formulating

strategies, as well as the internal strengths and weaknesses to be discussed in the next lecture topic

Avoid surprises Respond appropriately to competitors’ moves

A major challenge is to gather accurate market intelligence in a timely fashion, and transform it into usable knowledge to gain a competitive advantage over other firms

Why do we care about the external environment?

Strategy needs to be adaptive and dynamic Need to know what to adapt to Need to understand dynamics

Impact on organisation On growth and scope for growth On level and nature of competition On “rules of the game” On costs On profit

Environmental influences

Environmental influences on the organisationSource: Adapted from Dobson et al.(2004), See Boddy (2010)

Lets look at the general

(macro) environment

Macro environment – The PESTLE framework

Economic Forces – regulate the exchange of materials, money, energy and information

Technological Forces – generate problem-solving inventions

Political-legal Forces - allocate power and provide constraining and protecting laws and regulations

Socio – cultural Forces – regulate the values, morals, and customs of society Johnson, Scholes, and Whittington (2011)

Identifying environmental influences – PESTEL analysis

Source: Boddy (2010)

Key aspects of PESTLE analysis Not just a list of influences Need to understand key drivers

of change Drivers of change have

differential impact on industries, markets, and organisations

Focus is on future impact of environmental factors

Combined effect of some of the factors likely to be most important

Your tutorial task is to consider the general (macro) environment of BP

Lets now turn to the competitive environment

Environmental influences on the organisationSource: Adapted from Dobson et al.(2004) as cited in Boddy (2010).

What was Michael Porter asking?

M.E. Porter (1980) discussed ‘Competitive Strategy’

What makes some industries more attractive/successful than others? “…identifying the basic, underlying

characteristics of an industry rooted in its economics and technology that shape the arena in which competitive strategy must be set.” (p.6)

Competition reflects structure Structure determines profit

potential Porter (1980)

Industries and sectors

Competitive forces in the industry: Determine attractiveness of industry Affect the way individual companies compete Influence decisions on product/market strategy

Industry – a group of firms producing the sameprincipal product, e.g. mobile phones

Sector – a group of organisations providing thesame kinds of services, e.g. healthcare

Industry – a group of firms producing the sameprincipal product, e.g. mobile phones

Sector – a group of organisations providing thesame kinds of services, e.g. healthcare

Competitiveness

Business Gaining advantage over competitors

▪ Competitive advantage

Public sector Demonstrable excellence in service

delivery▪ Servqual

Assess attractiveness of different industries/sectorsIdentify sources of competition in an industry/sector

Porter’s Five Forces

Assess attractiveness of different industries/sectorsIdentify sources of competition in an industry/sector

Porter’s Five Forces

Five forces framework

Key questions and implications:

Are some industries more attractive than others? (weaker forces)

What underlying forces in the macro-environment drive the competitive forces?

Will competitive forces change? What are the strengths and

weaknesses of the competitors in relation to the competitive forces?

Can competitive strategy influence competitive forces? (e.g. build barriers to entry)

Key aspects of five forces analysis

Use at level of strategic business units (SBU)

Define the industry/market/sector

Don’t just list the forces: derive implications for industry/organisation

Note connections between competitive forces and key drivers in macro environment

Establish interconnections between the five forces

Competition may disrupt the forces rather than accommodate them

Adapted from: Porter (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, p. 4.

Power of other

Stakeholders

?

Threat of new entrants

Affected by entry barriers such as high costs of equipment and

facilities lack of distribution facilities customers loyal to established

brands small companies lack economies of

scale subsidies/regulations favour existing

firms

E.g. Patent-protected drugs, presentation software

Fewer new entrants = more profit

Bargaining power of buyers (customers)

Power of buyer increases if: Buyer takes high % of supplier’s

sales Many alternative products or

suppliers Product a high % of buyers costs,

creating incentive to seek alternatives

Cost of switching to other suppliers is low

E.g. online products, major supermarkets like Wal-Mart, Tesco

Greater power of buyers = less profit to seller

Bargaining power of suppliers

Power of supplier is high if: Buyer takes small % of sales Few alternative products or

suppliers (distinctive product keeps buyers loyal)

Product a low % of buyer’s costs, little incentive to seek alternatives

Cost of switching suppliers high

E.g. luxury brands, business software

High power of supplier = less profit to buyer

Substitutes

Substitution becomes easier if: Buyers willing to change

habits Technological developments

enable new products and services

Transport costs falling New suppliers entering a

market

E.g. online media, new materials

Easy to substitute = less profit to supplier

Intensity of rivalry amongst competitors

Rivalry increases when: many firms, but none dominant market growing slowly, so firms

fight for share high fixed costs encourages over-

production loyalties (family businesses or

political support) prolong over-capacity

e.g. airlines, agriculture, Nokia and new mobile suppliers, current banking industry?

Greater rivalry = lower profit

Managing the five forces

Subjective interpretation as well as objective realities

Forces contradict/balance each other

Managers can consciously try to shape them as part of their strategy

Competitive forces affected by those in the general environment

The mobile phone industry

Threat from Substitutes

Suppliers’ Power

Threat from New

Entrants

Buyers’ Power

Rivalryof

Firms

Is low due to the enormous cost in licences (£22bn) and general investment into new 3G technology. This might become a threat if policy towards heavy regulation is to change

Equipment manufacturers compete for the market share. Nokia, Motorola, Sony Ericsson. Consolidation in the industry.

Buying power of consumers is very high, as there is a lot of choice. Existence of independent retailers CPW, Link,

Others differentiated themselves through cheap advertising

Convergence of mobile telephony with PDAs and with Internet. This could switch both voice and text messaging into internet.

Very intense. Numerous offers, packages. If a customer threatens to withdraw , the provider could offer a new phone, free line rental.

Market is mature, and now emphasis is on price, coverage, customer service

In your own time consider this slide and the clip illustrating Apple iphone Vs competitors available on the blog

The dynamics of industry structure

Johnson, Scholes and Whittington (2008), pp. 67 - 69

Competitors and markets

An industry or sector may be too high a level to provide for a detailed understanding of competition

Many industries contain a range of companies, each of which has different capabilities and compete on different bases

These competitive differences are captured by the concept of strategic groups

Strategic groups

Strategic groups are organisations within

an industry with similar Strategic

characteristics, following similar strategies or

competing on similar bases

Some characteristics for identifying strategic groups:

Sources: Based on M.E. Porter, Competitive Strategy, Free Press, 1980; and J. McGee and H. Thomas, ‘Strategic groups: theory, research and taxonomy’, Strategic Management Journal, vol. 7, no. 2 (1986), pp. 141–160.

See Johnson, Scholes, and Whittington (2008)

Use of strategic group analysis

To understand who are the most direct competitors of an organisation

To establish the different bases of competitive rivalry within and between the strategic groups

To assess if an organisation could move from one group to another Depends on barriers to entry

To identify opportunities and threats Changes in the macro-environment may

create strategic space

Strategic group analysisAutomotive manufacturers

Regionally Focused:Broad Line Producers

E.g. Fiat, PSA, Renault

Nationally FocusedIntermediate Line

ProducersE.g. Kia, Proton

Nationally Focused, Small, Specialist

ProducersE.g. Morgan (UK)

Performance CarProducers

E.g. Porche, Lotus

Luxury ManufacturersEg Jaguar, BMW

Global Suppliers of Limited Range

E.g. Volvo, Saab, Subaru, Daihatsu

Global Broad Line Producers

E.g. GM, Ford, ToyotaNissan, VW, Honda

Narrow

Broad

PRODUCTRANGE

National GlobalGEOGRAPHICAL SCOPE

McGee & Thomas, 1986

Summary

Strategic management starts with the strategic situation/position

A company’s strategic situation/position consists of understanding both the external and internal environment (internal environment to be discussed next week)

PESTEL identifies key drivers of change 5 forces framework identifies sources of

competition in an industry Competition is dynamic Within an industry there are strategic groups

competing on similar bases

Environmental analysis identifies opportunities and threats (NB: consider the strategic management process)

Learning strategy

READING

Capon (2008), chapter 2 (in custom text)

Boddy (2010), chapter 3

Indicative: Johnson, Scholes and

Whittington (2011) Worthington and Britton (2006)

ACTIVITY

Prepare BP case in your group using your WIKI, for forthcoming tutorial

Obtain the market report (e.g. Mintel, Datamonitor) for your chosen organisation and conduct research into its business environment

Use the tools noted in this lecture and in the texts to analyse the external environment You will need to demonstrate this

analysis in the assessment and use your findings to synthesise a view of the organisations strategic position (e.g. industry attractiveness, major external influences)

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