Strategic Analysis Report
Corporate Strategy.
Week 4: Lecture
Analysing the Strategic Environment.
Environmental Analysis:
- introduction & explanation.
Far Environment & PESTLE Analysis.
- understanding & applying the tool.
Near Environment & Porter’s 5 Forces Analysis:
- competing in the near environment.
Learning Outcomes.
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The business environment consists of all factors inside and outside the company, which influence the firm’s competitive success.
(Frynas and Mellahi, Global Strategic Management 3e, 2014)
The business environment can be divided into:
the external macro environment (or: far environment)
the external industry environment (or: near environment)
the firm environment (or: internal environment)
The Business Environment.
FAR
ENVIRONMENT
Little/no influence and no control
NEAR
ENVIRONMENT
Some influence, but less control
INTERNAL
ENVIRONMENT
Strong influence and control
Layers of the Business Environment.
Source: Frynas, J. G. and Mellahi, K. Global Strategic Management
The external business environment of the firm can provide both opportunities and threats to firms.
Opportunities refer to events or processes in the external business environment, which may help the company to achieve competitive success.
Threats refer to events or processes in the external business environment, which may prevent the company from achieving competitive success.
Opportunities and threats.
Strategy can be seen as the matching of the resources and activities of a firm to the environment in which it operates – known as “strategic fit”.
Strategic fit is about developing strategy by identifying opportunities in the business environment and adapting resources and competences so as to take advantage of these.
Organizations, which do not possess minimum degree of strategic fit are bound to fail.
Strategic Fit.
Applied Corporate Strategy.
The Far Environment &
PESTLE Analysis.
Understanding PESTLE.
PESTLE categorises Macro Environment (or: Far Environment) factors into 6 main types:
Political, Economic, Social, Technological, Legal and Environmental.
It is a broad tool or checklist to help managers understand the far environment by identifying strategic opportunities, threats or issues.
A description of factors often given without analysing impact only does half the job. Impact of PESTLE factors is crucial.
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The PESTLE Categories.
Political: - Government policies, regulatory rules, trade regulations, political risk.
Economic: - GDP trends, interest & exchange rates, real incomes, unemployment.
Socio-cultural: - demographics, lifestyles, culture & fashion trends.
Technological: - discoveries & technology, ICT innovations, R&D spending.
Legal: - competition, health & employment laws, licensing, laws on intellectual property rights.
Environmental: - green regulations, emissions, energy issues, global warming, waste & re-cycling
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Using the PESTLE Framework.
Full PESTLE analysis should comprise:-
Identification – relevant impact factors.
Validation – focus on those factors that have a real impact on strategic issues.
Quantification – test impact & probability.
Projection – foresight and scenarios
Planning – respond to foresight and scenarios
Implementation – you should take action on key strategic threats & opportunities.
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Using PESTLE : Factor/Impact.
“Factor/Impact” is key & context changes impact:-
(1). Single organisation effect: E.g Roehampton loses fee income from a political change - allowing for-profit Universities.
(2). More complex when PESTLE changes across many sectors & organisations. E.g. Brexit and the weak pound - positive for UK tourism and some export firms, but negative for retailers and some importers.
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Using PESTLE for country selection at Baser Food
United States
Political:
High political stability (O)
Economic:
High per cap. income (O)
Stability in terms of trade/currency rates (O)
Low market growth (T)
Social:
Mediterranean cuisine familiarity (O)
What advice would you give to Baser Food on country selection for exporting olive oil?
Australia
Political:
High political stability (O)
Economic:
High per cap. income (O)
Stability in terms of trade/currency rates (O)
Low market growth (T)
Social:
Mediterranean cuisine familiarity (O)
Concern with diet (O)
China
Political:
Corrupt officials (T)
Regulations (T)
Political risk (T)
Economic:
High market growth (O)
Low per cap. income (T)
Trade/currency rates (T)
Social:
Little awareness of health benefits (T+O)
Baser Food was a Turkish company that produced olive oil. The company wanted to expand its exports of olive oil to new international markets.
Key Drivers of Change.
These are factors having a high impact on strategic success or failure. Typically they vary by industry or sector. For example:
Mediterranean cuisine familiarity (social) is a key driver in olive oil sector
The oil price (economic) is a key driver of profitability in the airline industry
ICT innovations and R&D spending (technological) are key drivers for technology companies such as Google
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Forecasts versus scenario planning
Scenario is ‘a hypothetical sequence of events constructed for the purpose of focusing attention on causal processes and decision points’.
Scenarios explore possible future events by looking at particular causes and seek to understand and explain why certain events might or might not occur.
Scenario analysis does not try to predict what will actually happen – it tries to identify several possible futures (typically, 2-4 scenarios), each of which is plausible but not assured.
Scenario planning is used mostly (but not exclusively) in industries with long planning horizons.
Scenario planning.
Using Scenario Planning.
2014 EU-wide Banking “stress test”
scenarios were used on European Banks to test capital levels in potential future financial crises.
https://www.eba.europa.eu/-/eba-publishes-2014-eu-wide-stress-test-results
Shell and long-term investments
the global oil company was a pioneer of scenario planning. The link shows how they use it:
http://www.shell.com/global/future-energy/scenarios/40-years.html
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Applied Corporate Strategy.
The Near Environment & Porter’s Five Forces.
The Near Environment.
Comprises industries & sectors, competitors & markets where the firm competes for resources & consumers.
Industry/sector structure a key element. Boundaries are fuzzy & can change through industry convergence.
Strategic Groups are relevant - industry competition is dynamic & can change rapidly.
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What industry are you in? Consider Ferrari and Ford
A focus on a broad industry may lead to inaccurate understanding of the market and the nature of competition. Indeed, using the word “industry” may be unhelpful because it is very broad.
Firms need to properly understand their industry, which can be achieved by identifying critical success factors and conducting a strategic group analysis.
Understanding your industry.
Industry Analysis.
Defining an industry involves knowing:-
a). customers & their needs
b). who the competitors are
c). the nature of competitive forces
The outcome is “attractiveness” i.e. how profitable the industry is for firms.
“The basic premise (of) industry analysis is that…industry profitability is neither random nor the result of entirely industry-specific influences, but is determined…by the systematic influence of industry structure.” (Grant, 1998)
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Critical Success Factors (CSFs).
INDUSTRY factors customers particularly value. They answer: “What do firms in the industry have to do well to succeed?” Grant (1998) gives two keys:-
Industries have different CSFs (e.g. low cost airlines have punctuality & price, full service airlines are about quality of service).
Firms without competitive advantage based on key industry CSFs will not succeed.
What do our customers want?
How do we survive competition?
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Strategic Groups.
Strategic group analysis is about identifying firms with similar strategies or those competing on similar bases.
It helps to understand the nature of competition and profitability within an industry sub-group and provides better information about where to invest or what type of strategic action to expect from competitors.
A good predictor of strategic groups are “mobility barriers”, which prevent other firms entering the strategic group and threatening the existing members.
Strategic groups can be mapped as “segments” & can be useful tools of analysis.
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Example: Strategic Groups in the global car industry
Understanding Porter’s Five Forces.
Michael Porter suggested that managers must understand the underlying economic and technical characteristics of their industry or strategic group.
The Five Forces Model (1985) is still popular and assumes that industry attractiveness and the firm’s competitive position in an industry are influenced by five competitive forces.
The Five Forces model can be used to analyse a firm’s competitive position in a specific market segment or similar market segments.
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Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved
The Five Forces Framework.
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Barriers to Entry.
Barriers to entry are obstacles, which potential newcomers would encounter when entering the market.
High barriers to entry help maintain a firm’s profitability.
Barriers to entry include:
Capital Requirements
Economies of Scale
Product Differentiation
Access to Distribution Channels
Government Policy
Expected Retaliation
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Bargaining Power of Buyers and Suppliers.
Buyers push firms to sell products at the lowest possible price.
Suppliers push firms to buy at the highest possible price.
So both buyers and suppliers can reduce firm profitability.
Their bargaining power depends on:
Buyer/Supplier Concentration
Buyer Switching Costs
Product Differentiation
Price/Total Purchases
Threat of vertical integration
Buyer information
Impact on Quality/Performance
International expansion
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Rivalry Between Competitors.
Rivalry encourages innovation, but it also reduces profits. In intensely competitive markets, firms are forced to lower prices or invest in new R&D, just to keep up with competitors; so intense rivalry leads to lower profits.
The intensity of rivalry is influenced by:
Concentration
Diversity of Rivals
Product Differentiation and Switching Costs
Industry Growth
Fixed Costs and Storage Costs
Exit Barriers
Excess Capacity
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The Threat of Substitutes
Don’t confuse “Substitutes” with “Competitors”!
A substitute product is a good or service, which buyers regard as interchangeable. If substitutes are available, buyers will switch to substitutes when the price of the product increases (e.g. new plastic for steel; mobile phones vs. land lines).
The existence of substitutes provides a limit as to how much the seller can charge for a product, so the threat of substitutes ultimately constrains the profitability of a firm.
The the threat of substitutes depends on:
relative price performance of a substitute
2) switching costs for the buyer
3) buyer’s propensity to substitute
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Issues in Five Forces Analysis.
Apply at the appropriate level – maybe not a whole industry. E.g. European low cost airlines rather than global airlines.
Note the convergence of industries – particularly in the high tech sectors (e.g. digital - phones/cameras/mp3 players).
Note importance of government actions in the near environment. Maybe a 6th force?
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The Industry Life Cycle.
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