Slide of strategic management w4

BMA799 STRATEGIC MANAGEMENT Lecture Four: External Environment and Industry Analysis Learning Objectives • Explain why an understanding of the competitive • • • • • • environment is critical to strategic analysis Conduct a political, economic, social, technological, environmental and legal (PESTEL) analysis Explain the use of Porter’s diamond for assessing determinants of national competitive advantage Conduct a five forces analysis and describe the industry structure Conduct a network environment analysis Develop scenarios and explain their uses Identify key success factors and strategic groups External Analysis Macro Environmental Influences • Macro environment refer to the environment external to the organisation, its operations and its industry • Macro environment factors influence the medium and long term features of the strategy • These factors are usually independent of the organisation and its activities • An organisation has limited influence on these factors PESTEL Analysis • PESTEL analysis is one of the most popular and useful tool (or perspective) for analysing the external macro environment • It includes the analysis of political, economic, social, technological, and legal environments of an organisation • PESTEL involves an evaluation framework that helps to identify the features of the macro environment that may affect the organisation Six Elements of PESTEL Analysis Fig 4.1 Using a PESTEL Analysis • PESTEL analysis should provide detailed understanding of the key forces and trends • Two key questions should drive the analysis: Which environmental factors are currently affecting the organisation? Which of these factors are more important now and in future? Using a PESTEL Analysis • The result of PESTEL analysis often leads to the identification of key success factors (KSFs) • Key success factors (KSFs) are the characteristics defined by industry conditions that are important for the success of an organisation National Competitive Advantage • National competitive advantage also known as Porter’s diamond is an influential tool of assessing country competitiveness • It consider four broad features of the local environment that provide competitive advantage for organisations located in a particular country National Competitive Advantage Fig 4.2 Rivalry: Diversity of Competitors • Diversity of competitors refers to the extent that a group of organisations avoids aggressive price-based competition depends on the similarity of their strategies, objectives and costs • It will also be affected by the maturity of the industry Rivalry: Product Differentiation • Organisations offering very similar products will often compete aggressively using price based competition • In industries where products are highly differentiated price competition tends to be weak Bargaining Power of Customers • In output markets, customer influence depends upon two distinct factors: Importance of product to customers Relative bargaining power of customers Bargaining Power of Suppliers • According to Porter, bargaining power of suppliers can influence the attractiveness of an industry • The key factors in determining the power of suppliers is the importance of what they are supplying, the cost to the organisation of switching between different suppliers and the relative bargaining skills of each party Applying Porter’s Analysis • Porters model can provide two very important results to an organisation of a five forces analysis: Identification of industry attractiveness The industry conditions that an organisation strategy should focus on Describing Industry Structure • It is important to understand and identify the principal features of the industry’s structure: competitors, customers, suppliers and producers of substitute goods • The key structural characteristics of each of these groups determine the overall level of competition and relative strength of each group Industries and Markets • Economists define an industry as a group of organisations that supplies a market • The principal difference between analysing industry structure and analysing market structure is that industry analysis looks at industry attractiveness as a reflection of competition between specific markets, such as suppliers, customers and substitutes • Market analysis focuses predominantly on the customers alone Competitor Analysis • Analysis of the strategies through which competitors in an industry create a competitive advantage refers to competitor analysis • The main purpose of competitor analysis is to: Forecast competitors’ future strategies and decisions, Predict competitors’ likely reactions to an organisation’s strategic initiatives, Determine how competitors’ behaviour can be influenced to make it more favourable Porter’s Framework for Competitor Analysis Fig 4.6 Network Environment Analysis • In recent times, networks have become an important feature of the competitive landscape • It is important to assess the characteristics and scope of networks that affect the conditions in the external environment • Some key factors include: • Level of trust • Network membership • Longevity Scenario Planning • Scenario planning is a relatively new analytical tool in the armoury of strategic planners • Scenario planning is the process of identifying one or more likely and major environmental changes against which to test the organisation’s ability to respond • Scenario planning is a particularly useful tool for organisations that face significant environmental uncertainty and complexity Identifying Key Success Factors Fig 4.8 Strategic Groups • Strategic group refers to a group of organisations in an industry that adopt a similar strategy • Strategic group analysis refers to an analysis of the organisations in a particular industry on the basis of two key variables selected for that industry, indicating how organisations group on the basis of the strategies they have adopted The SWOT Analysis • A commonly used and familiar concept is the SWOT (strengths, weaknesses, opportunities, threats) analysis • The purpose of an external environmental analysis is closely linked with the opportunities and threats component of SWOT • As a tool it has limitations Environmental Analysis and Strategic Plans • That environment is the principal determinant of organisational success is dominant view amongst many strategist • Environmental analysis has relevance at two strategic levels of thinking: • Corporate level • Business level ... perception of the value of a product or service depends, in part, on the availability of substitute products • Three aspects of this type of competition relate to factors such as: • Presence of substitutes... major determinant of the general level of competition attractiveness of an industry is the competitive stance of the organisations operating within the industry • The intensity of competition between... features of the industry’s structure: competitors, customers, suppliers and producers of substitute goods • The key structural characteristics of each of these groups determine the overall level of