Management, Organizational Policies and Practices

Lecture 3

Recap Lecture 2

• Intended Strategy Development Processes– Strategic Planning– Strategy Workshop– External Consultants– Externally Imposed Strategies

Recap Lecture 2• Emergent Strategy Development

Processes– Logical Incrementalism– Resource Allocation Routines– Cultural Processes– Political Processes

• Strategic Drift

• Learning Organization

• Multiple Strategy Development Processes

• Vision and Mission Statements

The External EnvironmentThe External Environment

Lecture 3

Dr Amna YousafPhD HRMMBA HRM

MSc Economics

Learning Outcomes (1)

• Analyze the broad macro-environment of organizations in terms of political, economic, social, technological, environmental and legal factors

• Identify key drivers in this macro-environment and use these key drivers to construct alternative scenarios with regard to environmental change

Learning Outcomes (2)

• Use five forces analysis in order to define the attractiveness of industries and sectors for investment and to identify their potential for change

• Identify strategic groups, market segments, and critical success factors, and use them in order to recognise strategic gaps and opportunities in the market

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” – Charles Darwin

External Assessment

“Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map.”– Wayne Calloway, Former CEO, PepsiCo

• Purpose of an External Audit• Develop a finite list of opportunities that

could benefit a firm threats that should be avoided

• Industrial/Organizational view -1960 through 1980’s

External Strategic Management Audit

2-9

Layers of the business environment

The Organisation

2-10

The Macro-Environment

PESTEL

Scenarios

Key drivers

2-11

PESTEL Framework

Political Economic

Technological

Environmental Legal

Social

The Demographic Segment (1)

• Phenomenon of graying population – increase in life expectancy rates – upto 100 or even 200 years in US– Workers aged 60-70 years increase from 4% to7%– 2025 = 18.5% population > 65 years– Numerous opportunities for firms to produce goods– Societal issues might emerge such as change of

pension plans– Glaksosmithkline provides drugs to elderly at 25%

discounts – increase in sales and services to important class

• Change in ethnic mix - Less White– 2075 = no ethnic or racial majority

The Demographic Segment (1)

• Move of people from non metropolitan to metropolitan areas– Societal challanges– Industry implications & Agricultural impact ;

mechanisation

• Work force diversity• Hethrogenous work teams more effective strategies, more

creative and innovative than homogenous– Conflict management may be a challenge

Economic Segment

• Interest Rates• Infation Rates• Monetary Policy• Income Levels/Buying power

– Widening gap between rich & poor

• Nations throughout the world affected by chinese economy

• 9/11 affected bilateral trade

Political Segment

– Privatizatoin of state owned firms – Labor training laws, taxation laws, trading laws affect

industries and firms– Debate over protectionism policies and free trade– As per IMF free trade when tarrifs low than 9; barriers

are restrictive when barriers exceed 25% of product price

• Firms often develop political strategies • Regulations may vary with change of governments

The sociocultural Segment

• Concerned with a society’s attitudes and cultural values– More women in jobs and businesses– Continuing growth of contingency workres– Breakdown of life time employment practices,

flexibity pressures

Technological Segment

• Transfer of Technology• Product Life cycles• Early adopters of new technology acheive

greatest market share and higher returns– Strategist must keep an eye on newly emerging

technologies– Fully automated plants, mechanisation of agriculture,

employees dont particpate in manufacturing process but in servicing part or maintaining machinery

• E-commerce

Technological Forces

Significance of IT

•Chief Information Officer (CIO)

•Chief Technology Officer (CTO)

Macro Environement-Sun Microsystems

• Different parties can have different reactions as to how to react to general environemnt– In Sun’s case analysists believe they should

cut costs in economic downturn while CEO of SUN believes it should invest heavily in R&D for survival

Macro Environment-Key Drivers of Change

• Market Globalization– Convergence of customer needs, lifestyles

and patterns• Soft drinks, jeans, electrical items such as audio

equipment, tastes– Opening of Mcdonlads world over

» Global operators; global markets also driven by international distributors, suppliers, global communication and distribution channels

Macro Environment-Key Drivers of Change

• Cost Globalization– Especially true for large scale industries,

standarized production, economies of scale• Components of electronics industry• Advantages from country specific costs

• Technical standardization– World trade order

2-22

What is a Scenario?

Scenarios are detailed and plausible views of how the business environment of an organisation might develop in the future based on key drivers for change about

which there is a high level of uncertainty.

Management Implications

• Firms can not directly control general environment’s segments and elements– Firms need to understand these mechanisms in

general environemnt while devising and implementing strategies

– Retailer more concerened with consumer tastes– Computer manufacturer with technological

devlopments, speed of change and obsolesence

Porter’s Diamond

• Certain factors make some countries more competitive– Legislations in Sweden and Japan not to lay off has encouraged

automation of industries– Home demand conditions- japnasee customers expectations of

high quality electrical and electronic equipment have provided imeptus to those industries in leading global dominance

– Advatages gained by related and supporting industries; Italy footware benefits italian leather working machinery and design services

– Competition must be encouraged at home rather than protecting from international competition

• Governments can enhance this by setting high standards of product performance, safety and environmental standards, encouraging cooperation between buyers anbd suppliers on domestic level

Industry Environment

• Industry refers to group of firms competing over close substitutes.

• Compared to general envirnment, industry environemnt has direct effect on firms strategic competitiveness

• Determines a firm’s profit margins in industry

Industry Environment

Convergence Boundaries of business blurred such as

automakers sell insurance and do financing Consumers start substituting products such

as TVs for PCS E commerce giving new dimensions to

manufacturers instead of traditional retailing – New business models

The Five-Forces Model of Competition

Threat of New Entrants

• Exisiting firms often not identify new competitors early– Can threaten market share

• Threat to entry– New firms enter industry where entry barriers are

small and potential profit margins high

Barriers to Entry (1) – Economies of scale

• Marginal improvements in efficiency that a firm experiences as it incrementally increases in size

• Increase in production quantity associated with lower per unit costs

• Enhances firm’s flexibility such as firm may reduce price and increase sales or keep price constant enhance profits

• Gives greater cash flows

Barriers to Entry (2)

• Product Differentiation– Companies spend heaviliy to win customer

loyalties through advertisements etc such as cocla cola, Pepsico

– Estabilishing value of new products by new firms is challange

• New entratnts may offer products at low prices to win customers but may end up in losses

Barriers to entry (3)

• Capital Requirements– Huge capital requirments such as in the case

of steel industry may impose entry barriers– Capital needed for physical facilities,

inventories, marketing activities and other capital functions

Barriers to Entry (4)

• Access to distribution and supplier channels– Exsisting competitors in good terms with

distributors; established long term relationship– Serve as barrier to new entrants

• May not be possible to cater products from new entrant for a grocery store

Barriers to Entry (5)

• Cost advantages independent of scale– Raw materials at low cost– Desirable locations– Government subsidies

Implications for New Entrants

– Small scale entry is costly– Large scale entry may invite competitive retaliation

– Locating market niches can be an option– May bypass retailor distribution channels and

sell directly to consumers through e-commerce

– Small enterprenual firms can cater ignored market segments

• Honda in US market – focus on small engine motor cycles – ignored before

Bargaining Power of Suppliers

• Supplier power increases– in case of concentration as to the firms– Non availability of (satisfactory) product substitutes– The firm(s) not significant customer for supplier(s)– Supplier goods critical to firm’s market success– Effectiveness of supplier goods creates high switching

costs for buyer products– Suppliers provide highly differentiated products

Bargaining Power of Consumers

• Firm’s objective – highest returns on capital– Customers want goods at lowest prices with high quality and

better services

• Customers are powerful when– They purchase large portion of industry’s total output– They could switch to another product with little cost, if at all– Industry products are undifferentaited or standarized– Greater amount of informtaion, internet, e-commerce,

distribution alternatives• Airline industry changing strategy to cut costs – individual buyer has

practically zero switching cost

Threat of Substitute Products

• When the products price is high, quality lower, customers look for substitutes outside the industry– Tea for coffee– Fax machine over overnight deliveries– Plastic container than glass jars

• Performance capabilities of such products are generally equal to or greater than competitor’s products

Intensity of Rivalry among Competitors (1)

• Numerous or equally balanced competitors– Airbus and Boeing competitive battle

• Slow Industry Growth invites fierce competition as – Firms competing to protect their customers– Rivalry reduces when market is growing and industry has

opportunbity to target new customers

Intensity of Rivalry among Competitors (2)

• High fixed cost and storage costs– Fixed costs large part of total costs –

comapnies want to produce at excess capacity to cut costs by large volume outputs

• Lower prices to attract customers – give rebates etc

– Perishable products lose value• Lack of differentiation

– Competition based on prices enhances rivalry• Dell, HP and other computer manufacturers

Exit Barriers

• Firms continue operating in an industry even in the event of low profitability when exit barriers are high– Specialized assets with values linked to

particular business– Government Restrictions (concerns for job

losses and regional economic effects)– Fixed costs of exit (such as labor agreements)

Industry Analysis: Management Implications

•Collection & evaluation of data on competitors is essential for successful strategy formulation

•General environemnt focused on future, industry environemnt focused on the factors and conditions influencing a firm’s profitability within industry, competitor analysis help understand their actions and intentions

•Which industries should we enter or leave?

•What influence can we exert?

•How are competitors differently affected?

Key Questions Concerning Competitors

• Their strengths• Their weaknesses• Their objectives and strategies• Their responses to external variables• Their vulnerability to our alternative

strategies• Our vulnerability to strategic counterattack

Key Questions Concerning Competitors

• Our product/service positioning• Entry and exit of firms in the industry• Key factors for our current position in industry• Sales/profit ranking of competitors over time• Nature of supplier and distributor relationships• The threat of substitute products/services

Strategic Groups

• Bases of groups could be– Market segments– Geographical– Technology (leader or follower)– Size– Product range

2-46

What is a Market Segment?

A market segment is a group of customers who have similar needs

that are different from customer needs in other parts of the market.