exploring business strategy

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Exploring Business Strategy
(247SAM)

Lecture 3: Analysis of
Industrial Environment
(competitive environment)

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Recap the last lecture:
Macro-environment analysis for strategic position and change

Key drives

(Current position)

Impact 1

Impact 2

Impact 3

Scenario 1

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Case study: scenarios for the global fashion industry, 2025

Five steps of the Scenario analysis:
S1: Scenario scope?
S2: Key drivers for change in the next 15 years from 2010 on?
S3: Scenario stories?
S4: Impact of alternative scenario on Levi Strauss & Co.?
S5: Early warning system?

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Exploring Business Strategy
(247SAM)

Lecture 3: Analysis of
Industrial Environment
(competitive environment)

Slide 2.*

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Learning objectives for this week

Use Porter’s five forces analysis to define the attractiveness of industries and markets;
Analyse strategic and competitive positions in terms of strategic groups, market segments and ‘Blue Oceans’.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Concepts: Industry-Sector-Market

An industry is a group of firms producing products and services that are essentially the same. For example, automobile industry and airline industry.

A sector is a broad industry group (or a group of markets) especially in the public sector (e.g. the health sector)

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).

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Porter’s (1980) Five Forces framework

Theoretical underpinning for the framework: There are five competitive forces which determine the nature of competition within an industry;
To analyse and understand the nature and extent of competition within an industry;
To assist managers in developing competitive strategy for organisations.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

The five forces framework

The Threat of Entry

This is often analysed via ‘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

Experience and learning

Access to supply and distribution channels (Defence industry)

Differentiation and market penetration costs

Government restrictions (e.g. licensing)

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

The five forces framework

The Threat of Substitutes

Substitutes are products or services that offer a similar benefit to an industry’s products or services, but by a different process.

Customers will switch to alternatives (and thus the threat increases) if:

The price/performance ratio of the substitute is superior

customer satisfaction improves

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)

customer satisfaction improves

(e.g. high speed trains can be quicker than airlines)

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

The five forces framework

The bargaining power of buyers

Buyers are the organisation’s immediate customers, not necessarily the ultimate consumers.

If buyers are powerful, then they can demand cheap prices or product /service improvements to reduce profits.

Buyer power is likely to be high when:

Buyers are concentrated

Buyers have low switching costs

Note: a concentration of buyers: fewer buyers with large volumes of purchases, implying bigger bargaining power; large number of buyers acting independently of each other and buying small quantities, implying smaller bargaining power

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Ultimate vs strategic consumer?

Are ultimate consumers the strategic customers?

A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased.

Examples of strategic consumers:

For a food manufacturer it is the multiple retailers (e.g. Tesco) that are the strategic customers but not the ultimate consumer.

For a pharmaceutical manufacturer it is the health authorities and hospitals but not the final patient.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

The five forces framework (5)

The bargaining power of suppliers

Suppliers are those who supply what organisations need to produce the product or service. Powerful suppliers can eat into an organisation’s profits.

Supplier power is likely to be high when:

The suppliers are concentrated (few of them).

Suppliers provide a specialist or rare input.

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).

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

The five forces framework (6)

Rivalry between competitors

Competitive rivals are organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market.

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

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Implications of five forces analysis

Identifies the attractiveness of industries.

Identifies strategies to influence the impact of the forces.

Note that the forces may have a different impact on different organisations.

Identifies the attractiveness of industries.

(e.g., to decide industries/markets to enter or leave)

Identifies strategies to influence the impact of the forces.

(e.g., to build barriers to entry by becoming more vertically integrated)

Note that the forces may have a different impact on different organisations.

(e.g. large firms can deal with barriers to entry more easily than small firms)

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Issues in five forces analysis

Apply at the most appropriate level – not necessarily the whole industry at the global level.

Note the convergence of industries – particularly in the high tech sectors

Note the importance of complementary products and services

Apply at the most appropriate level – not necessarily the whole industry at the global level.

(e.g. 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.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Four types of industry structure based on the Five Forces

Types	Rivals	Attributes
Monopolistic industries	One	No competitive rivalry. (e.g. Google)
Oligopolistic industries	A few	Limited rivalry (e.g. Airbus and Boing)
Hypercompetitive industries	Many small rivals	constant competitive and disequilibrium (e.g. Nokia/Samsung/Apple)
Perfectly competitive industries	Many many small rivals	Low barriers to entry Many equal rivals (e.g. Minicab in large cities)

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Is industry structure static? No change over time?

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The dynamics of industry structure

More often than not industry structure is dynamic

The key drives, e.g. PESTEL, are likely to change industry structure

Scenario analyses can be used to understand possible impacts

Structural changes of Industry and sectors can be analysed in terms of the industry life cycle and comparative five forces radar plots over time.

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The industry life cycle

Source: Johnson et al. (2014: 53)

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Comparative industry structure analysis

Source: Johnson et al. (2014: 53)

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Industry-level strategy so far!
Assuming that all companies within an industry follows a same strategy?

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Competitive position-Strategic Groups

Company strategies differ within an industry or sector and companies can be disaggregated into ‘strategic groups’.

Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases.

Mapping strategic groups to identify key dimensions for variation in profitability between top and low performers within the industry/sector…an example followed

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Mapping strategic groups
(e.g. a two-dimension chart)

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Competitive position-Market segments

A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.

Small market segments: ‘niches’

Dominance of a market niche can be very valuable as dominance of an industry does

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Competitive advantage-Blue ocean

‘Blue Oceans’ are new market spaces where competition is minimised. ‘Red Oceans’ are where industries are already well defined and rivalry is intense.

Blue Ocean strategies are likely to be better opportunities than Red Ocean strategies with many rivals.

Blue Ocean thinking encourages entrepreneurs and managers to be different by finding or creating market spaces that are not currently being served.

A ‘strategy canvas’ compares competitors according to their performance on key success factors in order to develop strategies based on creating new market spaces.

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Strategy canvas and blue ocean
(e.g. strategy canvas for electrical components companies)

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Guide for Seminars of this week

Activity: Group 1 to present

All members present

For around 20 minutes

Theme: Environmental analysis of Advertising Industry

Slides/ presentation contents: (1) group members and work allocation; (2) context of the case; (3) PESTEL and Five forces model.

Seminar procedure:

Group presentation (20mins);

Peer questions and discussion (15mins);

Feedback from peers and seminar tutors on the group presentation, the contents, slide present and format (20 mins);

Self-reflection (10mins): three good things you have learned; three things to avoid or to improve for group presentation and for case studies.

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