Strategic Management
Analysing the external environment (part 1)
Whats going on out there now and in the future?
Environmental influences in the broadest sense Macro/general environment: PESTEL Environmental influences related to the dynamics of the industry under question Competitive environment: Porters Five Forces (Porter, 1980)
Example PESTEL The automobile industry
Political
Climate change agenda Fuel prices Expansion of EU Are these issues.... local/global certain/uncertain simple/complex ? Who do they affect.... Customers Suppliers Competitors ? Do these issues represent opportunities or threats or both?
Economic
Changes in disposable income Exchange rates Taxation Economic growth around the world
Social
Demographic changes Attitudes to environmental issues
Example PESTEL The automobile industry
Social (cont.)
The ethical consumer Aging population
Environmental
Increased awareness of environmental issues concerning waste and carbon footprint
Technological
Demand for alternative fuels Advances in manufacturing The driverless car
Legal
Employment law Environmental regulations
Dont memorise this. Its just for illustration
PESTEL is it that simple?
How do you judge certainty? How do I know Ive thought of everything? What is most/least important? Does the organization have the power to control any of the PESTEL issues? The issues arent separate they are interconnected, but how?
What am I looking for in the PESTEL?
Current/future trends that look like
opportunities
Current/future trends that look like
threats
What does a pestel tell me?
Opportunities
Increasing markets
Threats
Declining markets
New ways of improving efficiency
Increasing costs
Obsolesense caused by new technology
Remember.. You decide.
PESTEL issues affect all organizations within a particular industry or sector, but.
Who is best equipped to deal with the environment??
Industry analysis
The intensity of competition in an industry is neither a matter of coincidence nor bad luck. Rather, competition in an industry is rooted in its underlying economic structure and goes well beyond the behaviour of current competitors. (Porter, 1980:3)
Industry analysis: Porters Five-Forces model
To help understand the attractiveness of an industry
Potential Entrants xxxxxx Barriers to entry Competitive Rivalry Bargaining power xxxxxx Substitutes
Porter (1980)
Suppliers Bargaining power
Will it be easy to make a profit?
Buyers
From the horses mouth....
The five competitive forces that shape strategy
Porters Five Forces: Threat of entry / Barriers to entry
Capital requirement / start-up costs Economies of scale Experience curve Access to distribution channels Government barriers High barriers to entry Likelihood of retaliation allows prices to go
higher
Porters Five Forces:
Bargaining Power of buyers/suppliers Relative concentration Relative importance of product Credible threat of vertical integration (backwards or forwards) Control of information Switching costs
High supplier power puts upwards pressure on costs High buyer power puts downwards pressure on prices
Porters Five Forces: Threat of substitutes
Product for product substitution
Existence of substitutes puts downwards pressure on prices
Substitution of need Does not include direct competitors Generic substitution or or
Porters Five Forces: Competitive Rivalry
Will be high if....
Several equally strong players Mature market High fixed costs High competitive Rivalry reduces Little differentiation profit High exit barriers
Porters Five Forces: general points
Use at business level NOT corporate level. You need a separate analysis for each industry. What is the industry? This is a particularly tricky issue. Where are the boundaries? Can be used by firms already in the industry or by firms deciding whether to enter an industry Assumes that the structure of an industry determines conduct , which determines performance (SCP). This view has been challenged by the resource based view of the firm.
Criticisms of Porters Five Forces
It assumes that structure determines conduct which determines performance This is assuming that positioning correctly within an industry is the key to success However, these positions are generic and therefore obvious to competitors It ignores the issue of complementors (the sixth force) There are many exceptions to the rule that industry matters more than resources
Widely debated can you find more Criticisms?
PESTEL practical tips
You dont have to fill all categories Some issues fit into more than one category Think about the potential impact Only include realistic issues On the other hand weak signals Be careful about technological issues
Five Forces practical tips
It is difficult to get insider information such as suppliers so you need to make inferences You need to look for clues to high competitive rivalry such as price wars, takeovers, falling sales, overcapacity....(supermarkets?) Are firms actually competing? sometimes they avoid each other on purpose. Look at airlines and banks.
Next lecture...
Analysing the external environment (part 2); Industry life cycle analysis Strategic group analysis Scenario planning
References
Carter, C., Clegg, S. & Kornberger, M. (2008). A very short, fairly interesting and reasonably cheap book about studying strategy. Sage Haberburg, A. & Rieple, A. (2008) Strategic Management: Theory and Application, OUP Johnson, R., Scholes, G. & Whittington, R. (2010). Exploring Corporate Strategy, 9th Edition, FTPH (or older editions) Useful reading Type resource based view into google scholar for the alternative approach to the competitive positioning approach See Henry (2008) p82 for summary of criticisms of Porters Five Forces Mintzberg, H. (1996). The Honda Effect. California Management Review. 38(4). 78-91. Ofek. E. & Wathieu, L. (2010). Are you ignoring trends that could shape your business? Harvard Business Review. 86(1):78-93. Porter, M. (2008). The five competitive forces that shape strategy. Harvard Business Review. Jan 2008. 79-93 (very important) Porter, M. (2001). Strategy and the internet. Harvard Business Review. Mar 2001. 1-18
