sample assignment - strategic management assignment
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BABS‐STRATEGIC MANAGEMENT
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A
EXECUTIVE
SUMMARY
The external environmental change is
one of the major influences upon the performance of any organisation and at the same time it is largely beyond the control of management. In fact, for some companies, it is so turbulent that sometimes it appears to be hostile to their smooth operation.
The future can not be foreseen. So the
analysis of the external environment can never be complete because there will be usual irresistible changes. The purpose of external analysis is to understand as much as possible about the external business environment, how it is changing and the forces driving the change. The analysis is likely to take place at three levels‐ changes in macro environment, changes in the industry and the changes in the operating environment. A variety of widely used analytical tools and frameworks are available to attempt an assessment of the external environment. In practice, some of these tools will prove to be powerful in generating insights for a successful business strategy formulation. However, the choice of appropriate tools depends on the requirements of the context and data available.
A sound knowledge about the
forthcoming future, gathered from an extensive analysis of the external environment will assist the management formulating strategy to grab new strategic opportunities and defend upcoming threats leading the organisation to its desired success.
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Acknowledgement
I would like to express my gratitude and thanks to our faculty Dr.
Rajendra Kumar for his constant support and helping hand in preparing this coursework.
Special thanks to our course administrator Mr. Greg Vincent for
providing us with all the academic guidelines.
Thanks to the IT Manager, LSC, London, for his helping hand in
internet surfing and printing. Thanks to the library in charge and all other staffs for their guidance. Finally, Thanks to my fellow classmates as well for their inseparable support.
Hasan Riaz
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CONTENTS
Brief Description of the Topic iv
Key Factors to Be Discussed iv
Approaches & Sources of Data v
Learning Aids v
Introduction 1
Identical Layers in Business Environment 2
The External Environment 3
Significance of External Environmental Analysis in Successful Business
Operation 4
Levels of External Environmental Analysis 4
Suitable Analytical Tools & Frameworks to Support Different Levels of
External Environmental Analysis 5
Tools for Analysing the Remote Environment 6
Significance of Analysing the Remote Environment 11
Tools for Analysing the Company Specific Industry 15
Significance of Analysing the Industry Environment 20
Tools for Analysing the Operating Environment 22
Significance of Analysing the Operating Environment 29
Analysing the Overall External Environment 35
Other External Considerations in Strategy Development 38
Observations & Recommendations 40
Conclusion 41
Appendices 42
List of References 48
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CO
NTENTS
BRIEF DESCRIPTION OF THE TOPIC
A model of the elements of the strategic management by Johnson,
Scholes and Whittington (2005) (See Appendix1) suggest that there are three elements under strategic management i.e. strategic position (strategic analysis), strategic choice and strategy into action (strategic implementation). Each of these elements is also three important phases of strategic planning. The topic of the given coursework is based on the ‘Strategic Position (Strategic Analysis)’ phase of strategic planning process. Under the strategic analysis there are three key factors: (a) The environment within and surrounding the organization (b) Strategic Resources, competencies and capabilities (c) Expectations and Purposes of the organisation. The coursework requires detailed study of the significance of external environmental analysis, identification of suitable tools and frameworks for environmental analysis, observation of key external issues affecting the success of organisations and examine the factors unavoidable in strategy development process.
KEY FACTORS TO BE DISCUSSED
This paper attempts discuss the following issues: Three Layers in Business Environment The External Environment and its Constituents Importance of External Analysis in Successful Business Operation Levels of External Environmental Analysis Suitable Analytical Tools & Frameworks to Support Different Levels of
External Environmental Analysis Tools for Analysing the Remote Environment Significance of Analysing the Remote Environment Tools for Analysing the Company Specific Industry Significance of Analysing the Industry Environment Tools for Analysing the Operating Environment Significance of Analysing the Operating Environment Analysing the Overall External Environment Other External Considerations in Strategy Development
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APPROACHES & SOURCES OF DATA
Information was obtained from a variety of sources. These sources
include: textbook information, academic journals, magazines, newspapers, corporate articles, previous research papers, electronic booklets, private and public websites, TV programmes, etc. Some potential elements of external environment were discussed. Thus identifying the suitable tools and frameworks for external environmental analysis, the discussion proceeded. I had to use some critic statement in favour and against of some corporate entities for illustration purpose only (where appropriate) for which I anticipate apology under any inconvenience. Though necessary attempts were taken to avoid error & plagiarism, there might be some inconvenience for which I anticipate apology.
LEARNING AIDS
• Understanding the importance of different layers in environment; • Learning about the factors that constitute external environment; • Gathering knowledge about successful corporate strategies; • Importance of different levels in external business environment and
how does they affect decision making; • Exploring the available tools and frameworks for external analysis; • Understand which tools and frameworks can be utilized in various
situations; • Understanding the role of government and economy in business; • Learning about socio‐cultural and technological impact on business; • Gather knowledge about industry competitive factors; • Learning about skills and capabilities required to compete in an
industry; • Learning about how to identify competitor’s weakness and grab
opportunity; • Understanding the factors that affect the relationship between
organisations and its customers; • Understanding how to grab opportunities and defend threats;
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IInnttrroodduuccttiioonn
The purpose of this coursework is to examine the
multidimensional impact of forces external to business environment
and demonstrate their importance as an analytical issue while
formulating an effective organisational strategy.
This brief report defines the layers of business environment and
looks at the constituents of external environment. Different levels of
the external business environment are identified followed by a
widespread study of suitable tools and frameworks for environmental
analysis. The importance of each level in external environment is
described with a relevant reference to the corporate affairs.
Finally, the pathway to identifying opportunities and threats in
the external environment, exploiting strategic gap in the industry or
market and postulating possible future scenarios is advised. Some
other external considerations in strategy development are also
explained.
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According to Johnson, Scholes and Whittington (2005), Hitt (2002) and
Marketing Teacher (2000) there are three identical layers in the business
environment (See Appendix2):
Figure: Layers in Business Environment by Michael A. Hitt (2002) Source: Hitt, Michael A. (2002), Creating Value, Blackwell Publishing, Canada The Macro Environment: This consists of political structure and ideology
of the host government, economic dimensions of the market, socio‐
cultural environment, demographic extent, technological infrastructure,
legislative boundaries, national objectives, ecological factors and the
natural environment.
The Micro Environment: This layer basically consists of the industry or
sector, the market (buyers or customers) and the competitors. However,
this also includes suppliers, intermediaries, distributors, retailers, financial
institutions, advertisers, tangible and intangible service providers, etc.
Infra Firm Environment: Infra firm consists of different departments
within the organisation, their activities related to the creation and delivery
of product or services, resources, competencies and capabilities of the
The Macro Environment
The Micro Environment
Infra Firm Environment
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firm. Men, money, machinery and materials are generally attributed as
components of this environment.
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The external environment comprises of macro and micro environment.
Every business is affected by the actions of other players within the external
environment who does not hold a direct control on business but plays vital
role in formulating a successful business strategy (Scott, 2005). Organisations
are influenced by forces in these two layers of business environment. All
businesses run in a changing world. However, the changes in external
environment are beyond the control of management and are subject to
forces of macro and micro environmental forces (Parrish, 2003). Changes in
these environments may affect the company or even the total industry in a
large scale (Scholte J. A., 2005). The key drivers of change in the environment
differ from sector to sector, country to country. Therefore they cause
different impact on one organization to another (Johnson, Scholes and
Whittington, 2005).
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Jack Welch, Former CEO of General Electric Company, believes, “When the
rate of Change inside the company is exceeded by the rate of change outside
the company, the end is near” (Wilson and Gilligan, 2005). An effective
business strategy formulation requires an extensive study of external
environment of the enterprise. All corporate strategists regard the
environment as uncertain (Lynch, 2003). The development of any universal
strategy applicable to all ventures or industries is impossible though specified
framework can be devised followed by a widespread study, reaction and
response to the changes in external environments (Sadlar, 2002). The
purpose of the external analysis is to identify what may affect the future of
the enterprise as a whole from outside itself (Macmillan and Tampoe, 2000).
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A theory of Lynch (2003) suggests that ‘Although there are no absolute
rules, it is usually the case that the customer comes first, the immediate
competition second and the broader environment surrounding the
organisation then follows behind this. Macmillan and Tampoe (2000),
Johnson, Scholes and Whittington (2005) and Global Management Consulting
(2007) consider external analysis at three levels:
The Remote Environment: General changes in macro‐environment;
Company Specific Industry: Changes within the industry;
The Operating Environment: Activities of immediate competitors, market
expectations, actions of strategic groups and other specific changes within
the firm’s immediate external environment.
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The range of analytical tools, techniques and frameworks available to support
external analysis is very large. The choice of appropriate tools depends on the
requirements of the context and the data available (Raisel and Friga,2001). It
may also depend to some extent on preferences for the schools of strategic
thought (Macmillan and Tampoe, 2000). Each of the schools of thought suggests
a different set of questions for strategic analysis to answer. Some of the most
commonly used tools for analysing the external environment are:
For Analysing the Macro Environment: PESTEL Analysis, Porter’s Diamond,
The Four Links Model, E‐S‐P Paradigm, etc.
For Analysing the Company Specific Industry: Porter’s Five Forces, Industry
Life Stage Analysis, Porter’s Model of Industry/ Market Evolution, Industry
Success Factors Analysis, etc.
For Analysing the Operating Environment: Competitor Analysis, General
Electric’s Multifactor Portfolio, BCG Matrix, Positioning Analysis, Market
Intelligence Model, Market Commitment Model, etc.
To Evaluate the Overall External Environment: Opportunity & Threat
Analysis, Strategic Gap Analysis, Scenario Planning Model, etc.
Strategic tools and frameworks should be effective at answering some
particular types of questions (Global Management Consulting, 2007):
Is there a market for our products? How many competitors will we face? Who are they? Is this industry growing? Declining? Which are the most important industry trends? Best practices? Which are the key strategic factors for success in this industry? Is the economic and political system stable? Who are our customers? Where are they? What do they need?
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PESTEL Analysis – Analysing the Macro Environment
The PESTEL Framework is a commonly used and immensely valuable
technique for analysing the external environment (Gregory, 2000). It is
particularly important to look at the future impact of environmental factors,
which may be different from their past impact (Lynch, 2003). It categorises
macro environmental influences into six major types and covers just about
everything that can affect the organisation from outside.
1. Political Factors ° International Trade Regulations ° Government Stability ° Foreign Trade Regulations ° Social Welfare Policies ° Taxation Policy ° Pressure Groups (E.G. Chamber Of Commerce) ° Special Interest Groups (E.G. Anti Smoking Society) ° Control Over Managerial & Marketing Autonomy
2. Economic Factors ° Economic Growth (GDP) ° Savings and Investment Availability ° GNP Trends ° Interest Rates ° Inflation ° Per Capita Income ° Business Cycles ° Disposable Income ° Taxation ° Exchange Rates ° Labor Cost ° Employment Levels ° Monetary Policies ° Growth Rates of Specific Industry ° Government Spending,
3. Social & Demographic Factors
° Population Demographics ° Income Distribution ° Social Mobility ° Lifestyle Changes ° Attitude Towards Work and Leisure ° Consumerism ° Societal Values ° Norms ° Customs
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° Education ° Fashion & Hypes ° Living Standards ° Health Consciousness ° Welfare & Safety Needs ° Leisure Attitudes ° Technological Skills ° Gender Roles ° History ° Institutional Network ° Social Organization & Structure ° Levels of Education ° Population Growth ° Population Age Mix ° Ethnic & Racial Makeup ° Educational Groups ° Household Patterns ° Geographical Shifts in Population
4. Technological ° Government Spending on Research ° Government And Industry Focus on Technological Effort ° Rates of Obsolence ° Industry Focuses on Technological Efforts ° New Inventions & Developments ° Access to Internet ° Rate of Technology Transfer ° Changes in IT ° Access to Cell Phones ° Adoption of New Technology.
5. Environmental ° Environmental Protection Laws ° Waste Disposal ° Energy Cost ° Availability Of Raw Materials ° Cost of Energy ° Anti Population Pressures & Green Movement
6. Legal ° Competition Law ° Employment Law ° Health and Safety ° Product Safety Regulations & Standards ° Company Law ° Import Barrier ° Consumer Protection ° Labor Law ° Taxation Law
Figure: A Combination of PESTEL Frameworks by Brooksbank (2002), Johnson, Scholes and Whittington (2005) and Kotler and Armstrong (1996) Source: (1) Brooksbank, R. (2002), Hot Marketing, McGraw‐Hill Professional, USA (2) Johnson, G., and Scholes K. and Whittington R. (2005). Exploring Corporate Strategy, 7th edn, Financial Times Prentice Hall, London. (3) Kotler, P. and Armstrong, G. (1996), Principles of Marketing, 7th edn, Prentice Hall, N.J., U.S.A.
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Porter’s Diamond – The Determination of National Advantage
Porter’s Diamond is another framework developed by Michael Porter to
understand the impact of macro environmental factors on the competitive
environment (Johnson, Scholes and Whittington, 2005). Michael Porter (1998)
suggests that there are inherent reasons why some nations are more
competitive than others and why some industries within nations are more
competitive than others.
Figure: Porter’s Diamond Source: Porter, Michael E. (1998), On Competition, Harvard Business School Press , USA
For Example, Korea has a national advantage in Information and
Telecommunication Technology. Current IT landscape in Korea indicated
various factors that can enhance Korea's competitive advantages. (National IT
Strengths & Weaknesses, 2002) The briefanalysis below is based on the
Porter’s Diamond Framework for determining national advantage.
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The Organisation
Informal co‐operative links and networks
Formal co‐operative links
Government links and networks
Complementors
Figure: The Four Links Model source: Lynch, R. (2003). Corporate Strategy, 3rd edn, Financial Times Prentice Hall, England.
The Four Links Model – Analysing Co‐operation
Lynch (2003) claims, ‘As well as competing with rivals, most organisations
also co‐operate with others, e.g. through informal supply relationships or
through formal and legally binding joint ventures. Until recently, such links
were rarely analysed in strategy development’. The four links model analyse
the informal co‐operative links and networks, formal co‐operative links,
complementors, government links and networks. The objective of such an
analysis is to establish the strength and nature of the co‐operation that exists
between the organisation and its environment.
Figure: Korea’s national advantage in Information and Telecommunication Technology source: National IT Strengths & Weaknesses (2002) [online] (cited 13 December, 2007 at 3:46 pm) <http://www.american.edu/initeb/hp2566a/National%20IT%20Strengths%20&%20Weaknesses>
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E‐S‐P Paradigm – Analysing the Role of Government
Koopman and Montias (1971) recommended a diagram named E‐S‐P
Paradigm which analyse the environment of the nation, its system of
government and its policies. Government can stimulate national economies,
encourage new research projects, impose new taxes and introduce many
other initiatives that affect the organisation and its ability to develop
corporate strategy; in order to analyse the effect E‐S‐P diagram can be used.
(Lynch, 2003)
COMPONENTS OUTCOMES
Figure: E‐S‐P Paradigm by Koopman and Montias (1971) Source: Adapted from Koopman, K and Montias, J.M. (1971) ‘On the description and comparison of economic systems’ in Lynch, R. (2003). Corporate Strategy, 3rd edn, Financial Times Prentice Hall, England.
Environment (E) Background Characteristics of a
country
Systems (S) The country’s system of government
Policies (P) The main Government Policies
° Human Resources ° Natural Resources ° Stage of Economic
Development ° Culture and History
° Level and structure of output: agriculture, industry, service
° Attitudes to work, wealth, etc.
° Structure of decision taking
° Role of free market in allocating resources
° Desire for international commerce
° Nationalisation Policy
° Capitalist: laissez‐faire
° Socialist: dirigiste ° Mixed
° Macroeconomic ° Microeconomic ° Education, Health,
Social ° FDI and Competition
° Extent and type of government intervention
° Controls exerted ° Performance expected
from industry
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To Understand Political Structure & Ideology: A firm’s functional decisions
need to be altered following the developments in political and legal
environment of the country. For example, the Chinese governments
decision to shift new investments away from overheated economic areas
specially Hong Kong and to limit foreign participation in the stock market
during 1997 affected the businesses those had a huge investment in China.
(Graham, 1997).
To Learn about Economic Dimensions of Market: Economic factors
provide stratigists with the knowledge of overall economic scenario of the
market and formulate their pricing strategy, consumer market
segmentation, take financial decisions and forecasting revenue. For
example, the UK government’s recent proposal (BBC ONE News, 2007,
November 25) of increasing capital gain tax from current 10% to 18% will
affect the small business and entrepreneurs if the new regime is taken into
action. According to a report (Duncan, 2007) the rising mortgages and
falling house prices in UK caused fall in number of people shopping for
Christmas in the capital and sales edged forward at their slowest rate
more than previous years. It had prompted chains such as Debenhams,
Oasis and Top‐shop to cut prices. Many other stores were sending out
thousands of online vouchers, with discounts up to 60% to win back
shoppers.
Assessing the Financial Policy of the Capital Market: In 1999 and the early
part of 2000 the world stock markets were driven higher and higher with
the investors love‐affair with the technology stocks. But, by early 2003 the
stock market lost some 50 % of their value and technology stocks lost far
more. The internet and telecommunications companies were the biggest
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victim many of which lost 90% of their market valuation which forced
them scale down their development plans and many smaller companies
went bankrupt (Johnson, Scholes and Whittington, 2005)
Gathering Knowledge about Socio‐cultural Background: Changes in
people’s tastes and preferences can influence purchasing power towards
certain goods and services. A survey of the Consumer Price Index has
looked at changes in peoples tastes over the last 30 years. Shopping
baskets today contains more fat‐free foods than in 1960s when
housewives were filling their baskets with fatty butter, sponge cakes and
high‐fat milk. (The Mirror, 2001)
Analysing Pace of Change in Technological Infrastructure: Technology is
the foundation of today’s fastest growing companies providing growth in
every major industrialized nation. (Couillard, 2006) Companies continue to
turn towards technology as they seek a competitive edge by becoming
more flexible and efficient. The role of technology is quite visible in many
service organisations where machines and technology have changed the
nature of work. A relevant example can be the introduction of Automatic
Teller Machines (ATMs) has replaced low skilled jobs and placed more
emphasis on high skilled jobs. (Khosrowpour, 1994)
To Consider the Legislative Boundaries & National Objectives: Some
legislative boundaries and the national economic goal affect the operation
of business. For example, the legal restriction on smoking in the public
places caused drop of sales of tobacco in UK (Financial Times, 2007).
To Study the Demographic Environment: ‘People make up markets’. So, a
potential marketer should look at the following demographic factors to be
successful in identifying needs and wants and satisfy them. These variables
are population growth, population age mix, ethnic & racial makeup,
educational groups, household patterns, geographical shifts in population,
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etc. For example, McDonald’s use age and life‐cycle segmentation
strategy to target children, teen, adult and seniors with different ads and
media. Its ads for teens feature dance‐beat music, adventure and fast‐
paced cutting from scene to scene; ads for senior are softer and more
sentimental (Kotler and Armstrong, 1996).
Identifying the Influences of Major Regulators: Organisations must have
strategy to encounter a lot of regulatory agencies and commissions set up
to enforce trade policies and regulations like trade commission, financial
regulatory agencies, Environmental Protection Agency, Consumer Affairs,
etc. For instance, TESCO, Britain’s biggest supermarket, sold alcohol below
cost price all the time. On the month of November, TESCO, Sainsbury’s and
ASDA offered lager at just 22p a can. Because of the health hazard of
alcohol consumption, the deep discounting promotions strategy of these
supermarkets were threatened by the British health minister Ben
Bradshaw who warned of imposing law to stop the supermarkets selling
alcohol below cost price (Blunden, 2007).
Understanding the Activities of Lobby Groups and their Impacts: The
activities of lobby groups are able to influence the values of customers and
thus change the ground rules within which an enterprise operates. For
instance, Following a declaration of The Global Islamic Community Forum
on February 12, 2007 that “McDonalds French fries are ‘HARAM’
(Prohibited by Islam) as they are fried in pig’s lard before they are brought
to McDonalds”, many Muslim customers of McDonalds in USA began to
avoid McDonalds fries. However, after some months McDonalds could
ascertain that there was no involvement of pig’s lard in their food
preparation process. (GICM, 2007). Since the loyalty of Muslim Customers’
towards French fries once lost, it is difficult for McDonalds in USA to regain
the lost popularity among Muslims.
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Environmental and R&D Policy of the Host Government & Pressure
Groups: Host government and environmental pressure groups sometimes
become threat to a company or industry concerning the damage of
environment caused by the factory or R&D. For instance, Ship breaking
industry in India and Bangladesh had undergone a red alert by Greenpeace
in 2005 for emission of deadly chemicals or due to the common explosions
caused by the torching of residual fuels from uncleaned vessels.
(Greenpeace, 2005)
Seeking the Environmental Resources and Support Required by the
Enterprise: Every company should evaluate the availability and cost of
natural resources required by it before starting a venture in any specific
geographic location.
Analyzing Home Demand Conditions: Home demand conditions provide
the basis upon which the competitive advantages of an organisation are
figured. For example, the Japanese customers’ high expectations of
electrical and electronic equipment have provided an impetus for those
industries in Japan leading to global dominance of those sectors.
(Johnson, Scholes and Whittington, 2005)
Labour Policy and Industrial Relations: Governments set the framework
for labor relations through legislation and regulation. Usually, employment
law would cover issues such as minimum wages and wrongful dismissal.
For example, in UK the government upholds labour rights through
Industrial Relations Act 1971.
To Identify Related and Supporting Industries: The presence of related
and supporting industries is advantegeous for the growth of a particular
industry (Inkpen and Ramaswamy, 2006). For example, In Germany, the
chemical industry, synthetic dyes industry, textile industry and textile
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machinery industry underpin them, benefit from one another. (Murmann,
2003)
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Porter’s Five Forces – Analysing the Sources of Competition
A number of years ago, the renowned business strategist and one of the
world’s best academic’s Michael E. Porter identified five competitive forces
that influence planning strategies in a model called ‘Porter’s Five Forces’
(Kurtz and Boone, 2005). ‘Porter’s framework remains useful tool for getting
an analytical grasp on the state of competition and the underlying economics
within an industry. It also encourages the strategists to look outside the small
circle of current competing rivals to other actors and influences that
determine potential profitability and growth (Harvard Business School, 2005)
Figure: Porter’s Five Forces by Michael E. Porter (Illustration) Source:http://www.usdoj.gov/atr/public/hearings/single_firm/docs/219395_8.gif
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Industry Life Cycle Analysis– Life Stage Analysis of an Industry
Macmillan and Tampoe (2000) claims ‘Analysis of life stages may give
useful insights in those industries where there is a discernible and predictable
life cycle pattern. Life cycle may form a useful basis for analysis if, for
instance, competition is based on the introduction of new products or if an
industry as a whole is moving from maturity towards decline.’ An industry
undergoes the following phases of life‐cycle (Wells, 1998)
° Development – Birth of the industry;
° Growth – The rate of sales growth is high all over the industry;
° Stakeout – Growth rate slows and firms fall under competitive pressure;
° Maturity – Minor growth but there are plenty of profitable opportunities,
so firms battle over share of a relative stable customer base;
° Saturation – Growth and Sales come from only demographic changes.
Companies are well established;
° Decline – Demand drops off. Cost control is critical. There are no real
attempts to make changes;
° Extinction – Most companies have left the industry. Some sales still
remain.
Figure: Industry Life Cycle Source: http://www.enotes.com/small‐business‐encyclopedia/industry‐life‐cycle
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Competitive Life Stage
Position Development Growth Maturity Decline/Aging
Dominant o Grow Fast o Grow fast o Attain Cost
Leadership
o Defend position
o Attain cost leadership
o Review
o Defend position
o Renew o Grow with
industry
Strong o Differentiate o Grow Fast
o Grow Fast o Catch up o Differentiate
o Reduce Cost o Differentiate o Grow with
industry
o Find and hold niche
o Grow with industry
o Harvest profit
Satisfactory o Differentiate o Focus o Grow Fast
o Differentiate o Focus o Grow with
industry
o Harvest profit o Find niche o Grow with
industry
o Consolidate o Cut costs
Weak o Focus o Grow with
industry
o Harvest, catchup
o Find and hold niche
o Turnaround
o Harvest profit o Turnaround o Find niche o Consolidate
o Divest
Very Weak o Find niche o Grow with
industry
o Turnaround o Consolidate
o Withdraw o Divest
o Withdraw
Figure: The A.D. Little Competitive Position/Industry Maturity Index Source:
Macmillan, H., and Tampoe, M. (2000). Strategic Management, Oxford University Press, New York.
Porter’s Model of Industry / Market Evolution – Identifying
Required Strategies at Different Stages of Evolution of an Industry
Michael Porter suggests three main stages in the evolution of an industry
market (Lancaster, Massingham and Ashford, 2002):
° Emerging Industry
° Transition to Maturity
° Decline
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According to Porter each of these stages has its own particular
characteristics, some of the more important of which are listed for each
stage:
° Emerging Industry
a. Uncertainity among buyers over:
‐ Product Performance ‐ Potential Application ‐ Likelihood of obsolence
b. Uncertainity among buyers over:
‐ Customer needs ‐ Demand Levels ‐ Technological Developments
° Transition to Maturity
a. Falling industry profits b. Slow‐down in growth c. Customers knowledgeable about products and competitive offerings d. Less product innovation e. Competition in non‐product aspects
° Decline
a. Competition from substitutes b. Changing customer needs c. Demographic and other macro‐environmental forces and factors
affecting markets
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Porter then uses the characteristics of each stage to suggest the following
strategies as being appropriate to each:
Growth Maturity Decline
Leader ‐ Keep ahead of the field ‐ Cost Leadership ‐ Raise Barriers ‐ Deter Competitors
‐ Refine Scope ‐ Direct Peripherals ‐ Encourage Departures
Follower ‐ Imitation at lower cost ‐ joint ventures
‐ Differentiation ‐ Focus
‐ Differentiation ‐ New opportunities
Figure: Industry Life Cycle and Strategic Positioning Source: Lancaster, G., Massingham L.,and Ashford R. (2002) Essentials of Marketing, 4th edn, McGraw‐Hill, Berkshire.
Industry Success factors Analysis – Identifying the Key Factors for
Success in the Industry
Key factors for success (KFS) are those resources, skills and attributes of
the organisation in the industry that are essential to deliver success in the
market place (Lynch, 2003). When undertaking an strategic analysis of
external environment, the identification of KFS for an industry may provide a
useful starting pont.
For example, in the steel industry ‘labour cost’ is a important factor
whereas in cosmetics and perfume industry it might be a less important factor
than other areas. Therefore, ‘low labour cost’ would be key a KSF for steel
industry. So, the steel KSF in the industry would require the following
environmental analysis (Lynch, 2003):
° General wage level in the country;
° Government Regulations and Attitudes to worker redundancy, because
high wage cost could be reduced by sacking labours
° Trade Union Strength
Stra
tegi
c Po
sitio
n of
O
rgan
isat
ion
Stage of Industry Development
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SSiiggnniiffiiccaannccee ooff AAnnaallyyssiinngg tthhee IInndduussttrryy EEnnvviirroonnmmeenntt
To Forecast New Entrants in the Industry and Create Barriers: When the
barriers to entry are low and the demand is high, the industry should
expect many new entrants (Alkhafaji, 2003) For example, Philips has got a
huge market share in all over the world and because of it mass production
it can achieve economies of scale which creates barrier for other
companies to enter in the lighting industry (Electro Pages, 2007).
To Evaluate Substitutes from Different Industry: Products can not only be
substitutes, but complements as well. For example, the introduction of
multimedia cell phoned had massively replaced the demand for Mp3
players. (Christensen and Maskell, 2003)
Analyzing the Rate of Industry Growth: If a firm maintains a growth rate
lower than the industry growth rate, it loses its market share. For example,
in a industry growing 5% a year, a firm starting with a 10% market share,
would need to raise its market to 13% share over a five year period to
maintain a 10% growth rate.( McDonald, 1979)
Understanding the Impact of Brand Image to cope up with Buyers’
Bargaining Power: In a highly competitive clothing industry ‘The House of
Gucci’, better known as simply ‘Gucci’ is an iconic fashion and leather
goods label based at Florence in Italy. with a luxury branding strategy
‘Gucci’ brand is considered one of the most famous, prestigious, and easily
recognizable fashion brands in the world (Adamson, 2007)
Identify the Stage of Industry Life Cycle: Most products, services and the
industries supplying them have a life cycle from birth, through growth,
then to maturity and eventual decline (Macmillan and Tampoe, 2000). A
simple example of these dynamics comes from the “typewriter” industry
(See Appendix 7). The advent of the manual typewriter was a true
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breakthrough. Then came IBM with a gigantic innovation strategy from
outside the industry displacing the manual technology and creating a new
‘electronic typewriter’ industry. The word processor followed, driving
IBM’s business into obsolescence. And then of course the computer,
Microsoft’s Word and desktop printing. (Kalpan, 2007)
Availability of Suppliers and their Bargaining Power: Sometimes
companies from different industry pose threat to the enterprise. For
example, steel is one of the secondary key inputs in the oil industry. In
terms of purchasing steel from the available suppliers, Venture
Production, one of the North Sea oil producers competes not only with
other regions in the oil industry, they have to compete with Toyota, the
Chinese, the aviation industry and the shipbuilding industry. Possible steel
crisis at the time of peak activity would severely dent the project
timetables and balance sheets of the sector. (Akilade, 2007 )
Evaluating Access to Distribution Channels: Access to low cost and well‐
organized distribution channels is one of the components of efficient
market characteristics. A study showed that 42% of the joint ventures
entered by the foreigners in US over 1971/83 period were for access to
suitable marketing and distribution channels and close to 60% of US joint
ventures in Japan were for marketing and distribution channels (Julian,
2005)
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STRATEGY How is the firm competing?
OBJECTIVES What are competitor’s current goals? Is performance meeting these goals? How are its goals likely to change?
ASSUMPTIONSWhat assumptions does the company
hold about the industry and itself?
RESOURCES & CAPABILITIESWhat are the competitor’s key
strength and weaknesses?
PREDICTIONS
What strategy changes will the competitor initate? How will the competitor respond to our strategic initiatives?
TToooollss ffoorr AAnnaallyyssiinngg tthhee OOppeerraattiinngg EEnnvviirroonnmmeenntt
Competitor Analysis: Competitor Intelligence – A Framework for
Analysing the Competitors
Competitor Intelligence (Grant, 2005) involves the systemic collection and
analysis of public information about rivals for informing decision making. It
has three main purposes:
° To forecast competitors’ future strategies and decisions
° To predict competitors’ likely reactions to a firm’s strategic initiatives.
° To determine how competitors’ behavior can be influenced to make it
more favourable.
Figure: Competitor Intillegence ‐ A Framework for Competitor Analysis Source: Grant, Robert M. (2002), Contemporary Strategy Analysis, 6th edn, Blackwell Publishing, Boston, USA
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McKinsey / General Electric’s Multifactor Portfolio Matrix –
Analysing and Evaluating Strategic Business Units
Working in conjunction with McKinsey & Co., General Electric (GE), USA
has developed this popular multiple factor screening method (Lancaster,
Massingham and Ashford, 2002). In the GE matrix, strategic business units
are evaluated using the two dimensions of market attractiveness and
competitive position.
In order to use this technique, the strategic marketing planner must first
determine the various factors contributing to market attractiveness and
business position.
GE’s Competitive Position
Factors:
° Market Share
° Share Growth Rate
° Product Quality
° Brand Reputation
° Distribution Network
° Promotional Effectiveness
° Productive Capacity
° Productive Efficiency
° Unit Costs
° R&D Performance
° Managerial Personnel
GE’s Product / Market Attractiveness
Factors:
° Size
° Growth Rates
° Competitive Diversity and Structure
° Historical Profit Margin
° Technological Requirements
° Social Impacts
° Environmental Impacts
° Legal Impacts
° Energy Requirements
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Compiling the GE matrix: The five steps in compiling the GE matrix are:
1. Identify strategic business units;
2. Determine factors contributing to market attractiveness;
3. Determine factors contributing to business position;
4. Establish ways of measuring market attractiveness and business position
5. Rank each strategic business unit according to whether it is high, medium
or low on business strength and again on market attractiveness.
HIGH
SBU 1
MEDIUM
SBU 3
LOW
SBU 2
SBU 4
STRONG MEDIUM WEAK
Figure: Illustrative Presentation of a GE Matrix Source: Lancaster, G., Massingham L.,and Ashford R. (2002) Essentials of Marketing, 4th edn, McGraw‐Hill, Berkshire.
Boston Consulting Group’s Growth Share Matrix –Assessing the
Need for Financing in Diversified Corporations.
‘The usefulness of BCG Matrix lay in using it to plot the relative positions
of business units within a portfolio. This made it possible to identify winners
(market leaders) and to determine whether a balance existed between units
in the four quadrants. The theory is that business units in fast growing
industries need a constant input of capital to enable them to expand their
capacity. Business units in slow growing industries on the other hand, are
expected to generate a positive cash flow’ (Karlof, 1993).
Competitive Position Score
Mar
ket A
ttra
ctiv
enes
s Sc
ore
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BCG matrix is used to assess the need for financing in diversed
corporations. The growth rate of a business unit’s market is plotted on one
axis (usually the vertical one) against the business unit’s share of that market
on the other axis. According to which cell of the matrix the products or
businesses are calculated to lie, they are classified as being ‘Dogs’ , ‘Cash
Cows’, ‘Problem Children/ Question Mark (?)’ or ‘Stars’:
Figure: BCG’s Growth Share Matrix Source: http://www.netmba.com/strategy/matrix/bcg/
° Business units with a large market share in growth sectors are called
‘Stars’
° Units with a high market share in well established industries are called
‘Cash Cows’
° Units with small market shares in fast‐growing industries are called
‘Question Marks (?)’
° Units with a low market share in a stagnant market are called “Dogs”
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Positioning Analysis – Analysing the Product or Service Features and All
Other Marketing Mix elements to Fit a Particular Segment
A positioning analysis is done to identify how important is price, service,
the technical features, etc are, to be successful in the market‐place (Karlof,
1993). The first is to try to identify the demands that the customer make on
company’s product or services and ask customers to rank them in order of
importance. Next, the customers are asked about the company’s
performance to meet their demand. Companies need to identify their strong
points as well as competitors’ weak points.
D A
C B
Figure: Four Quadrants of Positioning Analysis Source: Karlof, Bengt (1993), Key Business Concepts: A Concise Guide, Thomson Learning, London
° Quadrant A: Things which customers regard as important and which the
company does well are plotted in this quadrant‐those characteristics that
have established the company’s position and must be maintained.
° Quadrant B: Things that the company is good at, but which are not so
important are plotted in this quadrant. If the competition is just as good in
quadrant A and the company is better on some point in quadrant B, that
point may tip the scale in the customer’s choice of the product.
° Quadrant C: Things which the company does not do well but which do not
matter so much to customers.
Performance
Impo
rtan
ce
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Market Intelligence
Clarification of Objectives
Choosing the Enemy
The Four Main Attack Strategies
The Most Influential in Strategy Development, But Also the Most
Uncertain
Attack or Defend
° Quadrant D: Things which the company does not do well but needs to be
changed by product development and /or advertising are plotted in this
quadrant.
Market Intelligence Model– Analysing the Aggressive Strategies
Undertaken by Competitors
Market intelligence model helps to determine if any competitive new
products are ready for launch, what extent a competitor can hold out
against heavy discounting, if the competitor has the capability to roll out
its products on a national launch (Paley, 1999). Assessing reliable market
intelligence helps a company in the following ways:
° Developing defensive strategies to counter competitive moves, or
° Designing offensive ( a competitive attack ) strategies that move the
company into new market segments by feeding information to product
developers (R&D) or marketers about customer trends and problems.
Figure: Market Intelligence Model Source: Lynch, R. (2003). Corporate Strategy, 3rd edn, Financial Times Prentice Hall, England.
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Market Commitment Model– Analysing the Long‐term Commitment
to the Market Place as a Competitive Advantage
Market Commitment Model developed by Michael De Kare
‐Silver focuses on competitive advantage in performance, service, emotional
connection with customers, and price. It instructs companies on how to
develop a long term vision along with the necessary commitment to see it
through, and demonstrates the link between a company's ability to connect
with its customers and its ability to anticipate new opportunities (Kare
‐Silver, 1998)
At the centre of the model is the long term commitment to the
marketplace in which the company competes. Surrounding the central
commitment are the four ‘prime axes’ of competitive advantage: price,
emotion, service hustle and performance (Macmillan and Tampoe, 2000)
Figure: The Market Commitment Model source: Kare‐Silver, Michael De (1998), Strategy in Crisis, New York University Press, New York, USA
Commitment
Emotion
Performance
Price
Service Hustle
Low Value
Premium Shared
Recognition Design
Innovative Political
Comprehensive Available
Personalized Symbiotic
Functionality Realiability
Speed Convenience
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SSiiggnniiffiiccaannccee ooff AAnnaallyyssiinngg tthhee OOppeerraattiinngg EEnnvviirroonnmmeenntt
For Immediate Response to Changing Needs of Customers: An example of
Toyota, the ever successful automaker in the world can illustrate this
point. Toyota realized success lies not in managing inventory but in
eliminating it. It started thinking about pulling inventory based on
immediate customer demand rather than pushing inventory system that
anticipates customer demand. So Toyota introduced Just‐in‐Time
manufacturing system that gives its customers the right to choose what
they want, how and when they want it. This revolutionary system enabled
the company cutting its inventory cost at a nominal level and thus proving
Toyota‐ an operational excellence as a strategic weapon (Liker, 2004).
To Assess the Relative Competence of the Enterprise Against its
Competitors: A theory of Kay (1993) claims that organisational success
derives from competitive advantage of the firm which is based on
distinctive capabilities most often derived from the unique character of a
firm’s relationships with its suppliers, customers, or employees, and which
is precisely identified and applied to the relevant market. For example, in
1981 Honda and Yamaha both had 60 models of motorbikes. Honda held a
prestigious brand image for its superior quality. Suddenly, Yamaha
declared that it would be the world’s largest motorcycle manufacturer.
Honda counterattacked Yamaha using TQM as a competitive weapon.
Over the next 18 months Honda introduced 118 models of motorbikes. On
the other hand, Yamaha could mange only 37 changes to its productline.
Thus, implementing a product development and benchmarking strategy
Honda successfully captured two third of the market share (Zairi, 1998).
Grab a Large Share of the Market with a First Mover Advantage: The idea
of First Mover Strategy is that the initial occupant of a strategic
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position or niche gains access to resources and capabilities that a follower
has to work hard to gain. For example, the online auction site eBay was a
first mover that has proven to be successful with a first mover strategy
(Kurtz and Boone, 2005). Another example is First Direct motor insurance
company that grabbed the opportunity of motor insurance industry and
came out with successful market share. (Macmillan and Tampoe, 2000).
Saving Time and Money as an Efficient First Follower: Late starters can
avoid the mistakes of the leaders saving both time and money with
efficient launch. (Macmillan and Tampoe, 2000). For example, Apple which
had adopted the first mover strategy in personal computer failed terribly
in its Newton handheld computer project. Firm such as Microsoft thrive on
a second mover strategy, observing closely the innovations of first movers
and then improving on them to gain advantage in the (Kurtz and Boone,
2005)
Understanding the Leading‐edge Applications of Technology in the
Enterprise as well as in the Industry: Successful Firms all over the world
now invest a large amount in developing and implementing state of the art
technologies in their enterprise. They move toward real‐time technological
infrastructures so that they can adapt quickly to changing market
conditions and serve their customers better. For example, Shell has
officially launched the start of a new construction phase at the Shell
Eastern Petrochemicals Complex (SEPC) which is the largest‐ever chemical
investment in Singapore where the company has signed a deal with
Yokogawa Electric Corp. to provide the company with automation systems
for the project. By implementing a automation system Shell plans to
reduce construction cost and time through implementing an effective
process automation strategy. (Process Engineering, 2007)
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Adopting Best Practice Analysing the Competitors’ Strategy: In a highly
competitive industry, the key characteristics of a company’s external
environment are determined by the behavior of a few rivals possibly a
single firm. For example, in household detergents, Unilever’s strategies are
determined by the strategies of Procter & Gamble. The same happens to
Coke and Pepsi. (Grant, 2002)
Minimizing Product or Service Price Compared to the Market: Keeping
price lower at beginning to acquire market share is a common but most
effective strategy which is called penetration pricing strategy. After
developing portable compact disk player in 1980 Sony estimated that the
estimated cost per unit would be $500 per unit. But the company took a
penetration pricing strategy to introduce the product to the market
selling it at $250 per unit only. (Schlegelmilch, Keegan and Stoettinger,
2001)
Choosing the Best Alternative to Reduce Operation Cost: A firm could be
the lowest cost producer, yet not offer the lowest price product or
services. That firm would enjoy profitability above the average in the
industry. (Macmillan and Tampoe, 2000). For example, Implementing a
cost leadership strategy, Ford Motor Company launched “Model‐T” in
1918 as a standardized car and become market leader in USA. (Adcock,
Halborg and Ross, 2001)
To Attract the Market through Unique Offering: The value added by the
uniqueness of a product may allow the firm to charge a unique price for it
(Quick MBA, 2007). For example, after the successful launch of “Model‐T”,
General Motors Corporation counterattacked Ford in 1927 by introducing
the new model “La Salle” which was completely different from “Model‐T”.
There was a good response from the market and the company was able to
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beat Ford in sales with its successful differentiation strategy. (Adcock,
Halborg and Ross, 2001)
To Identify Quality & Cost Effective Suppliers: Good quality and cost
effective supply can reduce production cost. A long term relationship with
suppliers can help companies get raw materials at lower price and thus
achieve cost leadership. A better negotiation and control over the
suppliers can be formed. For example, Wal‐Mart can achieve cost
efficiency because of its long term relationship with suppliers and control
over them. (Wal‐Mart’s Cost Leadership Strategy, 2004)
Analysing Life Cycle of a Product to Introduce Innovation at the Right
Time: Life cycle can be a good foundation for analysis if competition is
based on innovation of product. A typical example can be Apple’s
innovation and design strategy that breaks the industry norm. Apple has
stayed ahead in the MP3‐player market since October 2001 by giving
customers more functionality and additional storage capacity at ever
lower prices. That has made it tough for competitors like Sony, Dell and
Creative to gain the holds. (D’Aveni, 2007)
Understanding Customer Perceived Value of Products or Services: The
ability of a company to provide superior value to its customers is regarded
as a successful competitive strategy. By adding more value to products and
services through either quality improvements or support services,
companies should improve customer satisfaction in order to strengthen
relationship and build customer loyalty (McIvor, 2005)
Anticipating Future Needs: Companies should try to figure out why
customers move from being happy to unhappy. They should try to predict
future needs of customers and bring appropriate changes in products and
services wherever needed. (Shiba and Walden, 2001)
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Outsourcing Business Functions to Secure Investment for Growth:
Organisations can outsource some business functions at which they are
not efficient at and invest more at which they are competent at. For
example, in early 2004 BT and HP announced an agreement of strategic
alliance as a part of their outsourcing strategy. As per the agreement BT
would manage HP's voice and data networks and product support
callcentres in Europe, Middle East and Africa (EMEA). On the other hand,
HP would manage the desktops and helpdesk for all BT's employees as
well as the company's mid‐range servers and those of its customers. The
deal will run for seven years and the approximate revenue generated of
$1.5bn is expected to be split 50/50. (The Register, 2004)
Reviewing the Probable Strategies and Chances of Success of each
Principal Competitor: In 2005, Beijing‐based computer maker Lenovo
acquired IBM Corporation’s personal computer division including the
brand name “Think” to form the third‐largest PC maker in the world. The
motive behind this acquisition strategy was to compete with Dell and
Hewlett‐Packard in US market (Musil, 2005) Companies like Dell and HP
have to understand all its competitors’ strategies and defense them
formulating new strategies.
Postulating Possible Future Scenarios: An assessment of the likely effects
of each possibilities within and outside the company should be done to
identify the actions necessary to survive and succeed. (Macmillan and
Tampoe, 2000)
Targeting a Lucrative Market Segment: Procter & Gamble was among the
first with secret, a brand specially formulated for a woman’s chemistry,
packed and advertised to reinforce the female image (Kotler and
Armstrong, 1996) . The company succeeded to market its brands targeted
to women with a keen advertising strategy.
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Effective Positioning of Product or Services: While positioning a product
or service for a target market, it should be kept in mind that the feature of
the product or service should be something important to the market. For
example, Volkswagen followed a positioning by feature strategy in its
advertising line which was “Think Small”. (Rogers, 2001)
To Recognize the Rapid Changing Cycle of Competition: Johnson, Scholes
and Whittington (2005) examined that some industries and sectors are
characterized by rapid pace of change to the extent that competitive
advantage on a particular basis will not last for any significant period of
time.
Exploit Opportunities to Increasing Market Share: An example of a joint
venture strategy by Nestlé and General Mills in ready to eat cereal market
in USA provides a good example of this. Kellogg (US) used to dominate the
world’s ready to eat breakfast cereal market. In 1989 Nestlé (Switzerland)
and General Mills (US) agreed a joint venture to attack the market. The
objective of the new company were to achieve by the year 2000 global
sales of US$1 billion and within this figure to take a 20% share of European
market. In 1997, Kellogg was the market leader worth US$9 billion at retail
selling prices. By 2002 the company could no longer survive as a market
leader. Its biggest rival General Mills had finally taken over with a share of
33% while Kellogg’s share dropped to 30%. GM had achieved this
important strategic breakthrough by a series of product launches in a 15‐
year period in a market that was growing around 2 percent p.a. (Lynch,
2003)
Analyzing the Co‐Operative Environment: Lynch (2003) proposed that co‐
operation between the organisation and others in the environment may
help achieve competitive advantage, produce lower cost, help deliver
sustainable relationship with those outside the organization.
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Considering the Role of Customer Service & Quality: A study claims that
future competitive advantage for UK retail banks will only be achieved
through quality and customer service ‐ such that everyone who works for a
bank will truly care about their customers and offer discretionary effort for
the fulfillment of customer needs. (Shepherd and Mookherjee, 2007)
AAnnaallyyssiinngg tthhee OOvveerraallll EExxtteerrnnaall EEnnvviirroonnmmeenntt
After a good deal of environmental scanning using the tools and
frameworks discussed above, the firm will be able to find out what important
factors lay in the macro, industry and operating environment that affect the
operation of the firm. Though external trends are not under the control of
management (Stahl and Grigsby, 1997), a good collection of these external
factors will guide the organisations to anticipate and respond to external
trends by:
° locating opportunities and threats in the environment;
° identifying strategic gap in the environment; and
° Realize the possible future of the organisation and draw strategic plans for
different scenarios;
Opportunity & Threats (OT) Analysis– Analysing the prospects and pressures in the environment
An opportunity is an issue or condition in the external environment of the
firm that may help it reach its goal. On the other hand, A threat is an issue or
condition in the external environment that may prevent the firm from
reaching its goals (Stahl and Grigsby, 1997). Factor under opportunity and
threats can be outlined as follows (Kotler and Armstrong, 1996; Stapleton and
Thomas, 1998; Johnson, Scholes and Whittington, 2005; Miller, 2000; Cateora
and Graham, 2005)
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Opportunities Threats
° High Demand of product or service ° Expansion to new geographic locations ° Down‐sizing of competitors ° Low interest rates ° New segment offer growth potential ° High Market Growth ° Government subsidiary ° Acquisition ° Takeover ° Joint venture or merger ° Technological Development ° Innovation ° Niche Markets ° Export / Import ° Strategic Alliances ° Product Development ° Partnerships ° New Efficient Distribution Network ° Seasonal Demand ° Diversification ° Development in e‐Commerce ° Loosening of regulations ° Removal of international trade barrier ° A market led by weak competitor ° Volumes production due to mass
demand (Economies of scale) ° Change in Lifestyle ° Customized production capability ° Just in time delivery ° Cost efficiency
° Expansions of competitors or substitutes° New Competitor in home market ° Price war with competitors ° High Interest Rates ° Market Decline ° Alternative Products /Substitutes ° Criticisms by outsiders ° Government Barrier ° New Entrants ° Joint venture or merger of competitors ° New Marketing Campaign of
Competitors ° Political Interruption ° New Legislation ° Competitor Intentions ° Economic Slowdown ° Substitute Technology ° Obstacles ° Supplier Shortage ° Lack of technological know‐how ° Foreign Economy ° Demand decrease ° Price Sensitive Market ° Intense Competition ° Competitor’s innovation ° Competitor’s brand image ° Competitor’s excess to superior
distribution channels ° Higher Tax ° New Regulations ° Increased trade barriers ° Change in lifestyle
Strategic Gap Analysis– Analysing growth opportunity in a new or existing market or industry
A strategic gap is an opportunity in the competitive environment that is
not being fully exploited by the competitors (Johnson, Scholes and
Whittington, 2005). For example, Apple launched the iPhone in June 2007,
carving out a new ultra premium niche. (See Appendix 5) That was short‐lived
though, as Apple quickly dropped the price by $200 in September (D’Aveni,
2007)
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By using the tools of external analysis managers can identify:
° opportunities In other strategic groups or strategic spaces: e.g.
deregulation of market, advances in IT, etc.
° opportunities In the chain of buyers: Customers can be motivated by some
other groups; e.g. students are influenced by their teachers, etc.
° Opportunities for offering complementary product or services: e.g. A book
retailer can have consultation service for book recommendation for
specific topic.
° opportunities New market segments: e.g. Air India attract customers by
low price offering.
Scenario Planning– Assessment of possible future difficulties and formulate alternative strategy to overcome them
By exposing line managers to alternative scenarios, organizations can reduce
the risk of ignoring the small environmental changes that are the advance
warning for major discontinuities (Ringland,2006). It is sometimes argued that
it is so difficult to forecast the future that it is better not to attempt
forecasting at all. The task is then to undertake an assessment of the likely
effects of each scenario on the company and to identify the actions necessary
to survive and succeed (Macmillan and Tampoe, 2000)
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OOtthheerr EExxtteerrnnaall CCoonnssiiddeerraattiioonnss iinn SSttrraatteeggyy DDeevveellooppmmeenntt
Ansoff’s Product‐Market Growth Matrix
Figure: Ansoff’s Product‐Market Growth Matrix Source Inkpen, A. and Ramaswamy, K. (2006), Global Strategy: Creating and Sustaining Advantage Across Borders, Oxford University Press, USA
Porter’s Generic Strategies
Figure: Porter’s Generic Strategies Source: Porter, Michael E. (1998), On Competition, Harvard Business School Press , USA
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Stakeholder Analysis
Figure: Stakeholder Analysis Source: http://www.stsc.hill.af.mil/CrossTalk/2000/12/smith.html
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OObbsseerrvvaattiioonnss && RReeccoommmmeennddaattiioonnss
It does require no more evidence that analysis of external forces is
obligatory irrespective of any business within any industry. The aim of external
analysis is to take into stock the current and conceivable future business
situation in the strategy formulation process. The analysis should not be limited
to examinations of past events and ways of thinking. It is essential to break out
the current mould and examine alternative routes and ideas.
The most useful tool recommendable for macro environmental analysis is
the ‘PESTEL Framework’ that can provide an overall picture of the variety of
forces at work around an organisation. This can give idea about the key drivers
of change within the macro environment and provide basis for examining the
future impact of environmental forces on both industries (or sectors) and
organisations within industries. A functional tool advisable for understanding
the competitive forces within the industry environment would be ‘Porter’s Five
Forces Analysis’, this will involve an examination of buyers, suppliers, new
entrants, substitutes and the competition in the industry. An effective model for
specific competitive advantage of rival companies is the ‘Competitor Analysis:
Competitor Intelligence’. Suggested tool for analysing product or service
features to fit a particular segment of the market is ‘Positioning Analysis’.
Although there is no absolute rules, it might be the case that the analysis of
customer comes first, the immediate competition second, the industry third and
the broader macro environment then follow behind this.
The process of strategy formulation should consider some other factors
like ‘Ansoff’s Product‐Market Growth Matrix’, ‘Porter’s Generic Strategies’,
‘Drivers of Globalisation’, ‘Stakeholder Analysis’ and ‘Distributor Analysis’. Thus
provided with a profound knowledge of the external business environment,
strategies for winning in the marketplace can be generated and adopted.
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CCoonncclluussiioonn
Revealing the above discussion, it is obvious that, no organisation can
succeed in the battle of competition if they do not hold a clear awareness and
understanding of the changing trends in external forces of business
environment. Opportunities can only be identified and upcoming threats can
only be defended with proper knowledge and acquaintance of the key factors
that dominates the external environment. Organisations should develop
strategies keeping the forthcoming opportunities, threats and other factors
into consideration. Such strategies will enable an organisation to match fit
between its capabilities and opportunities to serve the needs of customer
better than its competitors. Therefore, the statement can certainly draw up,
“Analysis of the external environment is crucial to the lasting success of
organisations.”
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Appendices
Appendix 1 Figure: A Model of the elements of the strategic management by Johnson, Scholes and Whittington (2005) Source: Johnson, G. and Scholes K. and Whittington R. (2005). Exploring Corporate Strategy. 7th edn. Prentice Hall, England, P.16.
The Strategic Position
Strategic Choices
Strategy into
Action
Corporate Level &
International
Business Level
Strategies
TheEnvironment
Strategic Capability
Expectations & Purposes
Organizing
Enabling
Managing Change
Developmen, Directions &
Methods
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Appendix 2 Figure: The Organisational Environment by Marketing Teacher (2000)Source: Marketing Teacher (2000) ‘The Organisational Environment’. [online] (cited 6 December, 2007 at 3:59 pm) <http://marketingteacheR.com/Lessons/lesson_marketing_environment.htm>
Appendix 3
Figure: The Business Environment by The Stairway Consultancy Source: The Stairway Consultancy, ‘Developing Strategy’ [online] (cited 10 December, 2007 at4:30 pm) Available From < http://www.thestairway.co.uk/developing‐strategy.html>
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Appendix 4
Figure: Building Leadership Brands by Ulrich and Smallwood Source: Ulrich, D. and Smallwood, N. (2007), ‘Building a Leadership Brand’, Harvard BusinessReview, July – August, 2007
Appendix 5
Figure: Mapping the Cell Phone Market by D’Aveni, R.A. Source: D’Aveni, R.A. (2007), ‘Mapping Your Competitive Position’, Harvard Business Review, November, 2007
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Appendix 6
Figure: How Apple Set the Pace with iPod Source: D’Aveni, R.A. (2007), ‘Mapping Your Competitive Position’, Harvard Business Review, November, 2007
Appendix 7
Figure: Replacement of Typewriter Industry by Modern Computer by Soren Kaplan Source: Kalpan S. (2007), ‘Innovation Lifecycles’, InnovationPoint, [online] (cited 10 December, 2007 at 3:59 pm) Available from <http://innovation‐ point.com/Innovation_Lifecycles.pdf>
Manual Typewriter
Electronic Typewriter
Word Processor
Microsoft Word & Desktop Printing
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Appendix 8
Figure: Porter’s Five Forces by Michael E. PorterSource: http://home.att.net/~nickols/five_forces.htm
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Appendix 9
How scenario planning can significantly reduce strategic risks and boost value in the innovation chain Source: Daum J.H. (2001), How scenario planning can significantly reduce strategic risks and boost value in the innovation chain, Juergen Daum, 08 Sep, 2001 [online] (cited 15 December, 2007) Available from <http://www.juergendaum.com/news/09_08_2001.htm>
Industrial value chain processes no longer dominate value creation in the developed economies. Today it is innovation, it is seeking new ways of meeting market demands, that is yielding the highest return on investment ‐ much more than improving incrementally a company’s existing production line. And that means that companies in nearly all industries have to invest into systematic innovation and related intangible assets like R&D. The problem with these investments is, that they generate a financial return only after a considerable amount of time has passed and that they are often much more subject to external influences, such as changes in the market or customer preferences, than investments in tangible assets. And these influences can have a dramatic impact on the value of these investments. Innovation investments are therefore usually associated with large inherent risks. When a pharmaceutical company starts to develop a new compound, it does not know, if these typically very large investments will generate any benefit in the future. Success often is dependent on many factors – internal factors such as the skills and knowledge of researchers and developers, and external influences such as technology trends, demand and price developments etc.. From stock options valuation we know, that the higher the risk, the higher the possible return. And the value of a stock option can be exponentially increased, if you are able to limit the downside, the inherent risk. There exists also a second value lever, which is the identification and leverage of sudden opportunities. And one very powerful technique to limit risks from external influences and to identify future opportunities is scenario planning.
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