external enviroment
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© Business eLearning
Lecture 2: The External Environment
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MCQ Èxam
The Mid-Term MCQ
Exam has been re-scheduled
Thursday 23rd October at 6.00pm
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Key Issues
1. Analyse an organisation’s external macro-environment andidentify the most strategically relevant components.
2. Diagnose the factors which shape industry dynamics and forecasttheir effects on future industry attractiveness
3. Identify the competitive forces at work in an organisation’sindustry
4. Describe different industry structures, industry lifecycle stagesand identify strategic groups within an industry
5. Discuss the merits/demerits of the five forces framework.6. Explain why in-depth evaluation of a business’s strengths and
weaknesses in relation to the specific industry conditions it
confronts is an essential prerequisite to crafting a strategy that iswell-matched to its external situation.
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The external environment
♦ The Macro-Environment● The broad environmental context in which a
firm’s industry is situated.
● Includes strategically relevant componentsover which the firm has no direct control.
General economic conditions
Immediate industry and competitive
environment
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Components of the macro environment
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7 components of
the macro
environment
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Building blocks for scenarios
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Current practice: VisitsScotland
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Thinking strategically about your industry &competitive environment
1. Does the industry offer attractive opportunities for growth?
2. What kinds of competitive forces are industry members facing,
and how strong is each force?
3. What factors are driving changes in the industry, and what
impact will these changes have on competitive intensity and
industry profitability?
4. What market positions do industry rivals occupy - who is
strongly positioned and who is not?
5. What strategic moves are rivals likely to make next?
6. What are the key factors for competitive success in theindustry?
7. Does the industry offer good prospects for attractive profits?
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Q. 1 Does the industry offer attractivegrowth opportunities?
♦ Defining Growth:● What is the current market size in units or sales?
● What is the past, current and expected rate of growth
for the market\industry?
♦ Considerations:● Different sectors\regions of a market grow at different
rates.
● Growth varies with the industry’s life cycle stage -
emergence, rapid growth, maturity, and decline.
● Growth does not guarantee profitability.
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Q. 2 What competitive forces are you facingand how strong are they?
♦ The Five Competitive Forces:● Competition from rival sellers
● Competition from potential new entrants
● Competition from substitute productsproducers
● Supplier bargaining power
● Customer bargaining power
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Five competitive forces
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Using the 5 forces
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Step 1
For each of the five forces, identify the different parties
involved, and the specific factors that bring about
competitive pressures.
Step 2Evaluate how strong the pressures stemming from each of
the five forces are (strong, moderate to normal, or weak).
Step 3
Determine whether the strength of the five competitive
forces, overall, is conducive to earning attractive profits in
the industry.
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Competitive Weapons Primary Effects
Price discounting, clearance sales,
“blowout” sales
Lowers price (P), acts to boost total sales volume and market share,
lowers profit margins per unit sold when price cuts are big and/or
increases in sales volume are relatively small
Couponing, advertising items on sale Acts to increase unit sales volume and total revenues, lowers price (P),
increases unit costs (C), may lower profit margins per unit sold (P – C)
Advertising product or service
characteristics, using ads to enhance
a company’s image or reputation
Boosts buyer demand, increases product differentiation and perceived
value (V), acts to increase total sales volume and market share, may
increase unit costs (C) and/or lower profit margins per unit sold
Innovating to improve product
performance and quality
Acts to increase product differentiation and value (V), boosts buyer
demand, acts to boost total sales volume, likely to increase unit costs (C)
Introducing new or improved features,
increasing the number of styles or
models to provide greater product
selection
Acts to increase product differentiation and value (V), strengthens buyer
demand, acts to boost total sales volume and market share, likely to
increase unit costs (C)
Increasing customization of product or
service
Acts to increase product differentiation and value (V), increases
switching costs, acts to boost total sales volume, often increases unit
costs (C)
Building a bigger, better dealer network Broadens access to buyers, acts to boost total sales volume and market
share, may increase unit costs (C)
Improving warranties, offering low-
interest financing
Acts to increase product differentiation and value (V), increases unit
costs (C), increases buyer costs to switch brands, acts to boost total
sales volume and market share
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Factors that increase rivalry
♦ Buyer demand is growing slowly or declining.♦ It is becoming less costly for buyers to switch brands.
♦ Industry products are becoming more alike.
♦ There is unused production capacity, and\or products
have high fixed costs or high storage costs.♦ The number of competitors is increasing and\or they are
becoming more equal in size and competitive strength.
♦ The diversity of competitors is increasing.
♦ High exit barriers stop firms from exiting the industry.
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Types of Industry Structure
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Monopoly
Perfect
Competition
Oligopoly
Monopolistic
Competition
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Competitive pressures and newentrants
♦ Entry Threat Considerations:● Strength of barriers to entry
● Expected reaction of incumbent firms
● Attractiveness of a particular market’s growth in
demand and profit potential
● Capabilities and resources of potential entrants
● Entry of existing competitors into market segments in
which they have no current presence
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Pressures from the sellers of substitutegoods
♦ Substitute Products Considerations:● Ready availability of substitutes
● Pricing, quality, performance, and other relevant
attributes of substitutes
● Switching costs that buyers incur
♦ Indicators of Substitutes’ Competitive Strength:
● Increasing rate of growth in sales of substitutes
● Substitute producers adding output capacity
● Increasing profitability of substitute producers
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Pressures from buyer bargainingpower & price sensitivity
♦ Buyer Bargaining Power Considerations:● Buyer costs for switching to competing sellers
● Degree to which industry products are commoditized
● Number and size of buyers relative to sellers
● Strength of buyer demand for sellers’ products
● Buyer knowledge of products, costs and pricing
● Backward integration of buyers into sellers’ industry
● Buyer discretion in delaying purchases● Buyer price sensitivity due to low profits, size of
purchase, and consequences of purchase
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♦ Is the state of competition in the industrystronger than “normal”?
♦ Can industry firms expect to earn decent
profits given prevailing competitive forces?
♦ Are some of the competitive forces
sufficiently powerful to undermine industry
profitability?
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Collective strength of 5 forces &profitability
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Matching strategy to competitiveconditions
1. Pursuing avenues that shield the firm from asmany competitive pressures as possible.
2. Initiating actions calculated to shift competitive
forces in the firm’s favor by altering underlying
factors driving the five forces.
3. Spotting attractive arenas for expansion, where
competitive pressures in the industry are
somewhat weaker.
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Limitations
• Doesn’t cover all the significant forces found incurrent industry environments – e.g. Governmentand regulation
• Complexity of products and services mean that
firms have to work in networks rather than asisolated units – complementors become animportant force
• Developed in an era when markets were less
dynamic, so of limited use in high-velocityindustries where change is rapid and industryboundaries change frequently
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The Value Net
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Q. 3 What factors are driving industrychange & what impact will they have?
♦ Strategic Analysis of Industry Dynamics:1. Identifying the drivers of change.
2. Assessing whether the drivers of change
are, individually or collectively, acting tomake the industry more or less attractive.
3. Determining what strategy changes are
needed to prepare for the impacts of theanticipated change.
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1. Changes in the long-term industry growth rate
2. Increasing globalization
3. Changes in who buys the product and how they use it
4. Technological change
5. Emerging new Internet capabilities and applications
6. Product and marketing innovation
7. Entry or exit of major firms8. Diffusion of technical know-how across companies and
countries
9. Improvements in efficiency in adjacent markets
10. Reductions in uncertainty and business risk
11. Regulatory influences and government policy changes
12. Changing societal concerns, attitudes, and lifestyles
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Assessing overall impact
1. Overall, are the factors driving change causingdemand for the industry’s product to increase or
decrease?
2. Is the collective impact of the drivers of change
making competition more or less intense?
3. Will the combined impacts of the change drivers
lead to higher or lower industry profitability?
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Crafting strategy
♦ What strategy adjustments will be neededto deal with the impacts of the changes in
industry conditions?
● What adjustments must be made immediately?
● What actions must we not take or should we cease to
do now?
● What can we do now to prepare for adjustments we
anticipate making in the future?
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Q. 4 How are competitors positioned?
♦ A Strategic Group:● A cluster of industry rivals that have similar
competitive approaches and market positions:
Have comparable product-line breadth
Sell in the same price/quality range
Emphasize the same distribution channels
Use the same product attributes to buyers
Depend on identical technological approaches Offer similar services and technical assistance
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Using strategic groups to ascertainpositioning
♦ Constructing a strategic group map:● Identify the competitive characteristics that
differentiate firms in the industry.
● Plot the firms on a two-variable map using pairs of
differentiating competitive characteristics.
● Assign firms occupying about the same map location
to the same strategic group.
● Draw circles around each strategic group, making the
circles proportional to the size of the group’s share of
total industry sales revenues.
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Common variables for differentiatingcompetitor positions.
♦ Price/quality range (high, medium, low)
♦ Geographic coverage (local, regional, national, global)
♦ Product-line breadth (wide, narrow)
♦ Degree of service offered (no frills, limited, full)
♦ Distribution channels (retail, wholesale, Internet, multiple)
♦ Degree of vertical integration (none, partial, full)
♦ Degree of diversification into other industries (none,
some, considerable).
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Choosing variables for group maps
♦ Variables selected as map axes:● Must not be highly correlated.
● Must reflect key approaches to customer
value and expose sizable differences in the
marketplace positions of rivals.
● May be quantitative, continuous, discrete
and\or defined in terms of distinct classes and
combinations.
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Guidelines for constructing groupmaps
♦ Draw map circles proportional to the combinedsales of firms in each strategic group to reflect
the relative sizes of each group to the total size
of the industry.
♦ Use different variable sets to show differentviews of relationships among competitive
positions in the industry’s structure—there is no
one best map for portraying how competing firms
are positioned
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Example => Mobile handsets
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What can be learnt from maps?
♦ Maps are useful in identifying which industrymembers are close rivals and which are distant
rivals.
♦ Not all map positions are equally attractive.
1. Prevailing competitive pressures in the industry
and drivers of change favor some strategic groups
and hurt others.
2. Profit prospects vary from strategic group to
strategic group.
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Q 5 What strategic moves are
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Q. 5 What strategic moves arecompetitors likely to make?
♦ Competitive Intelligence● Information about rivals that is useful in anticipating
their next strategic moves.
♦ Signals of the Likelihood of Strategic Moves:
● Rivals under pressure to improve financialperformance
● Rivals seeking to increase market standing
● Public statements of rivals’ intentions
● Profiles developed by competitive intelligence units
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Reflecting on the potential moves ofcompetitors…
♦ Which competitors’ strategies are achieving good
results?
♦ Which competitors are losing in the marketplace or badly
need to increase their unit sales and market share?
♦ Which rivals are likely make major moves to enter new
geographic markets or to increase sales and market
share in a particular geographic region?
♦ Which rivals can expand product offerings to enter new
product segments where they do not have a presence?
♦ Which rivals can be acquired? Which rivals are financially
able and looking to make an acquisition?
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A different view: Blue ocean strategy
• Creating new industries – tapping marketsthat currently don’t exist • Break market boundaries between
industries• Reduce or eliminate features that
customers do not value• Enhance and develop those features that
will add value• Differentiate on the basis of valueinnovation
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Q.6 What are the KSFs
♦ Key Success Factors● Are the strategy elements, product and
service attributes, operational approaches,
resources, and competitive capabilities that
are necessary for competitive success by any
and all firms in an industry.
● Vary from industry to industry, and over time
within the same industry, as drivers ofchange and competitive conditions change.
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How to identify KSFs
1. What product attributes and service featuresbuyers strongly affect buyers when choosing
between the competing brands of sellers?
2. What resources and competitive capabilities are
required for a firm to execute a successfulstrategy in the marketplace?
3. What shortcomings will put a firm at a
significant competitive disadvantage?
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Q 7 I i d t d i t fit
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Q. 7 Is industry conducive to profitmaking?
♦ Industry Profitability Considerations:● The industry’s overall growth potential
● Effects of strong competitive forces
● Effects of prevailing drivers of change in the industry
● Competitive strength of the firm: its market position
relative to its rivals, its capability to withstand
competitive forces, and whether its position will
change in the course of competitive interactions
● The success of the firm’s strategy in delivering on the
industry’s key success factors
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Tutorial One (Weeks 2&3)
• Case Study: Reinventing Accor page 456• • 1 Analyse Accor’s Business Model and Strategy • • Readings • • Johnson, M., C. Christensen and H. Kagermann
(2008) “Reinventing your Business Model” HarvardBusiness Review , Dec.
• Boston Consulting Group (2009 )“Business Model
Innovation” • Collins and Porras (1996) “Building your Companies
Vision”. Harvard Business Review, Sept/Oct.
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Even Week Tutorials
Even weeks
Weeks 2,4 ,6, 8 &10
Tue 11:00 91037 QUI 012 (50)
Tue 16:00 91039 QUI 011 (50)
Wed 09:00 91042 QUI 012 (50)
Wed 11:00 91043 QUI 012 (50)
Thu 11:00 91045 QUI 013 (50)
Thu 15:00 91047 QUI 013 (50)
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Odd Week Tutorials
Odd weeks
Weeks 3,5 ,7, 9 &11
Tue 16:00 91040 QUI 011
(50)
Wed 09:00 91038 QUI 012
(50)
Wed 09:00 91041 QUI 012
(50)
Thu 11:00 91044 QUI 013
(50)
Thu 15:00 91046 QUI 013
(50)
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Week Three Lecture
Chapter Four
Evaluating Resources Capabilities& Competencies
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