Local Lecturer Rodney GoonBUSM3200 - Strategic Manag.docx
SM Lecture Two : The Environment
1. Strategic Management BUSM 3200
These Lecture Slides summarize the key points covered in the respective chapters in your
recommended text; these slides do NOT substitute, at all, the required reading of the assigned
chapter from the text. These slides also may contain additional supplementary material extracted
from other texts and sources outside your text book.
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2. The Focus of part 1 of t he Text
The strategic position
• How to analyse an organisation’s position in the
external environment.
• How to analyse the determinants of strategic
capability – resources, competences and the
linkages between them.
• How to understand an organisation’s purposes,
taking into account corporate governance,
stakeholder expectations and business ethics.
• How to address the role of history and culture in
determining an organisation’s position.
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3. Strategic Position
Chapter 3
Chapter 2
Chapter 5
Chapter 4
See page 46: 4 chapters comprise analysis of the Strategic Position
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4. The Strategic Position Analysis
Essentially one of determining the answers to the
question “where are we now”
External analysis: opportunities and threats/
industry attractiveness
Internal analysis: strengths/weaknesses,
capabilities
TAKEN together we can do the SWOT and TOWS
analysis (discussed next lecture)
The Strategic Position Analysis guides the planner
on the type of STRATEGY/IES the company
should pursue: are they viable and attractive?
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5. Learning outcomes of Chapter Two:
• Analyse the broad macro-environment of
organisations in terms of political, economic,
social, technological, environmental (‘green’) and
legal factors (PESTEL).
• Identify key drivers in this macro-environment and
use these key drivers to construct alternative
scenarios with regard to environmental change.
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6. Learning outcomes of Chapter Two
• Use Porter’s five forces analysis in order to define
the attractiveness of industries and sectors and to
identify their potential for change.
• Identify successful strategic groups, valuable market
segments and attractive ‘Blue Oceans’ within
industries.
• Use these various concepts and techniques in order
to recognise threats and opportunities in the
marketplace.
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7. OPPORTUNITIES AND THREATS
Opportunities and Threats is one-half of the
SWOT analysis. We still need to cover the internal
factors (next lecture)
Lots of confusion between SWOT and PEST- do
NOT use these terms interchangeably!
Know this: PEST is part of SWOT PEST leads to the
identification of the O and T (opportunities and threats)
When you list the PEST factors:
+ factors are considered Opportunities
- factors are considered Threats
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8. OPPORTUNITIES AND THREATS
PESTEL analysis reveals
Opportunities and threats
Key drivers of change
Different scenarios
Porter Five Forces
Threats and opportunities arising from the specific set of
five forces in a given industry
Blue Ocean
Reveals where companies can create new market spaces
or identify new success factors
We will cover these concepts in detail in this lecture.
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13. The PESTEL framework (1)
The PESTEL framework categorises
environmental influences into six main types:
political, economic,
social, technological,
environmental legal
Thus PESTEL provides a comprehensive list of
influences on the possible success or failure of
particular strategies.
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14. The PESTEL framework (2)
• Political Factors: For example, Government
policies, taxation changes, foreign trade
regulations, political risk in foreign markets,
changes in trade blocks (EU).
• Economic Factors: For example, business cycles,
interest rates, personal disposable income,
exchange rates, unemployment rates, GDP
trends.
• Socio-cultural Factors: For example, population
changes, income distribution, lifestyle changes,
consumerism, changes in culture and fashion.
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15. The PESTEL framework (3)
• Technological Factors: For example, new
discoveries and technology developments, ICT
innovations, rates of obsolescence, increased
spending on R&D.
• Environmental (‘Green’) Factors: For example,
environmental protection regulations, energy
consumption, global warming, waste disposal and
re-cycling.
• Legal Factors: For example, competition laws,
health and safety laws, employment laws, licensing
laws, IPR laws.
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16. NOTE: it is important to do a PESTEL analysis with a specific
emphasis on the industry you are studying (see page 51)
Keep the
PESTEL
factors specific
to the industry
you are
studying; avoid
using broad
generic factors
that have no
relevance to
your analysis.
Important to
note for your
Group
Assignment on
Strategic
Analysis!
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17. Key drivers of change
Key drivers for change:
• The environmental factors likely to have a high
impact on the success or failure of strategy.
• For example, the birth rate is a key driver for
those planning nursery education provision in
the public sector.
• Typically key drivers vary by industry or sector.
• (in you Group Assignment, make sure you
identify the correct ‘key drivers’)
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18. Using the PESTEL framework
• Apply selectively –identify specific factors which
impact on the industry, market and organisation in
question.
• Identify factors which are important currently but
also consider which will become more important in
the next few years.
• Use data to support the points and analyse trends
using up to date information
• Identify opportunities and threats – the main point
of the exercise!
Note this well !!!
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19. Scenarios
Scenarios are detailed and plausible views of how the
environment of an organisation might develop in the
future based on key drivers of change about which
there is a high level of uncertainty.
• Builds on PESTEL analysis .
• Do not offer a single forecast of how the
environment will change.
• An organisation should develop a few alternative
scenarios (2–4) to analyse future strategic options.
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20. Carrying out scenario analysis (1)
• Identify the most relevant scope of the study – the
relevant product/market and time span.
• Identify key drivers of change – PESTEL factors that
have the most impact in the future but have
uncertain outcomes.
• For each key driver select opposing outcomes where
each leads to very different consequences.
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21. Carrying out scenario analysis (2)
• Develop scenario ‘stories’ - That is, coherent and
plausible descriptions of the environment that
result from opposing outcomes
• Identify the impact of each scenario on the
organisation and evaluate future strategies in
the light of the anticipated scenarios.
• Scenario analysis is used in industries with long
planning horizons for example, the oil industry
or airlines.
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22. Scenarios for the global financial
system, 2020
Illustration 2.2
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23. Moving from Macro to Industry- Specific Analyses
Once you complete
your Macro-
environment analysis,
you then move down
to study the forces
impacting specifically
on the industry that
you company
operates in.
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24. Industries, markets and sectors
An industry is a group of firms producing products
and services that are essentially the same. For
example, automobile industry and airline industry.
A market is a group of customers for specific
products or services that are essentially the same
(e.g. the market for luxury cars in Germany).
A sector is a broad industry group (or a group of
markets) especially in the public sector (e.g. the
health sector)
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27. The five forces framework (2)
The Threat of Entry & Barriers to Entry
• The threat of entry is low when the barriers to entry are
high and vice versa.
• The main barriers to entry are:
Economies of scale/high fixed costs
Experience and learning
Access to supply and distribution channels
Differentiation and market penetration costs
Government restrictions (e.g. licensing)
• Entrants must also consider the expected retaliation from
organisations already in the market
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29. The five forces framework (3)
Threat of Substitutes
Substitutes are products or services that offer a similar
benefit to an industry’s products or services, but by a
different process.
Customers will switch to alternatives (and thus the threat
increases) if:
• The price/performance ratio of the substitute is
superior (e.g. aluminium maybe more expensive than
steel but it is more cost efficient for some car parts)
• The substitute benefits from an innovation that
improves customer satisfaction (e.g. high speed trains
can be quicker than airlines from city centre to city
centre)
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31. The five forces framework (4)
The bargaining power of buyers
Buyers are the organisation’s immediate customers, not
necessarily the ultimate consumers.
If buyers are powerful, then they can demand cheap prices
or product / service improvements to reduce profits .
Buyer power is likely to be high when:
Buyers are concentrated
Buyers have low switching costs
Buyers can supply their own inputs (backward vertical
integration)
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33. The five forces framework (5)
The bargaining power of suppliers
Suppliers are those who supply what organisations need to
produce the product or service. Powerful suppliers can eat
into an organisation’s profits.
Supplier power is likely to be high when:
The suppliers are concentrated (few of them).
Suppliers provide a specialist or rare input.
Switching costs are high (it is disruptive or expensive to
change suppliers).
Suppliers can integrate forwards (e.g. low cost airlines have
cut out the use of travel agents).
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36. The five forces framework (6)
Rivalry between competitors
Competitive rivals are organisations with similar
products and services aimed at the same customer
group and are direct competitors in the same
industry/market (they are distinct from substitutes).
The degree of rivalry is increased when :
Competitors are of roughly equal size
Competitors are aggressive in seeking leadership
The market is mature or declining
There are high fixed costs
The exit barriers are high
There is a low level of differentiation
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40. Types of industry (1)
• Monopolistic industries - an industry with one firm and
therefore no competitive rivalry. A firm has ‘monopoly
power’ if it has a dominant position in the market. For
example, BT in the UK fixed line telephone market.
• Oligopolistic industries - an industry dominated by a few
firms with limited rivalry and in which firms have power
over buyers and suppliers.
• Perfectly competitive industries - where barriers to entry
are low, there are many equal rivals each with very similar
products, and information about competitors is freely
available. Few (if any) markets are ‘perfect’ but may have
features of highly competitive markets, for example, mini-
cabs in London.
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41. Types of industry (2)
• Hypercompetitive industries - where the frequency,
boldness and aggression of competitor interactions
accelerate to create a condition of constant
disequilibrium and change.
• Hypercompetition often breaks out in otherwise
oligopolistic industries (e.g. mobile phones).
• Organisations interact in a series of competitive
moves in hypercompetition which often becomes
extremely rapid and aggressive as firms vie for
market leadership.
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42. Implications of five forces analysis
Read Page 61 in detail !
• Identifies the attractiveness of industries – which
industries/markets to enter or leave.
• Identifies strategies to influence the impact of
the forces, for example, building barriers to
entry by becoming more vertically integrated.
• The forces may have a different impact on
different organisations e.g. large firms can deal
with barriers to entry more easily than small
firms.
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43. Key Issues in using the five forces
framework
• Apply at the most appropriate level – not necessarily
the whole industry. E.g. the European low cost
airline industry rather than airlines globally.
• Note the convergence of industries – particularly in
the high tech sectors (e.g. digital industries - mobile
phones/cameras/mp3 players).
• Note the importance of complementary products
and services (e.g. Microsoft windows and McAfee
computer security systems are complements). This
can almost be considered as a sixth force.
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49. Industry Life Cycles
Industries are not in a static state
Rather they evolve through different stages
In your strategic analysis, you need to find out
which stage your industry is in
Each stage creates different opportunities,
challenges and suits different types of business
strategies
See Figure 2.4
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50. The industry life cycle
Figure 2.4 The industry life cycle
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51. Comparative industry structure analysis
A mapping model used to mark the dimensions of
the various scores in the five forces model
Which force scores higher lower
Plot them down in a ‘radar map’
Analyze the implications of the ‘profile’
Compare plots over two or more periods
Analyze the implications of the ‘changes’
See Figure 2.5
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52. Comparative industry structure analysis
Figure 2.5 Comparative industry structure analysis
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53. Cycles of Competition (page 67)
Enables the planner to map out the competitive
moves of the firm versus its competitors
Show the chronology or sequence of strategic
actions
Sequence of ‘moves’ and ‘counter-moves’ = cycles
of competition (see Figure 2.6)
An analogy: remember your physics course we
learnt an important principle from Newton: “for
every action there is an equal and opposite
reaction” – seems also relevant in strategy.
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56. Strategic Groups
Strategic groups are organisations within an industry
or sector with similar strategic characteristics,
following similar strategies or competing on similar
bases.
• These characteristics are different from those in
other strategic groups in the same industry or
sector.
• There are many different characteristics that
distinguish between strategic groups.
• Strategic groups can be mapped on to two
dimensional charts – maps. These can be useful
tools of analysis.
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57. Characteristics for identifying strategic
groups
Figure 2.7 Some characteristics for identifying strategic groups
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62. Strategic groups in the Indian pharmaceutical industry
Figure 2.8 Strategic groups in the Indian pharmaceutical industry
Source: Developed from R. Chittoor and S. Ray, ‗Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis‘, Journal of International Management, vol. 13 (2009),
pp. 338–55
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65. Uses of strategic group analysis
• Understanding competition - enables focus on direct
competitors within a strategic group, rather than the
whole industry. (E.g. Tesco will focus on Sainsburys and
Asda)
• Analysis of strategic opportunities - helps identify
attractive ‘strategic spaces’ within an industry.
• Analysis of ‘mobility barriers’ i.e. obstacles to movement
from one strategic group to another. These barriers can be
overcome to enter more attractive groups. Barriers can be
built to defend an attractive position in a strategic group.
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66. Market segments
A market segment is a group of customers who have similar
needs that are different from customer needs in other parts
of the market.
• Where these customer groups are relatively small, such
market segments are called ‘niches’.
• Customer needs vary. Focusing on customer needs that
are highly distinctive is one means of building a secure
segment strategy.
• Customer needs vary for a variety of reasons -these
factors can be used to identify distinct market segments.
• Not all segments are attractive or viable market
opportunities – evaluation is essential.
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67. Bases of market segmentation (1)
Table 2.1 Some bases of market segmentation
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68. Who are the strategic customers?
A strategic customer is the person(s) at whom the
strategy is primarily addressed because they have
the most influence over which goods or services are
purchased.
Examples:
• For a food manufacturer it is the multiple retailers
(e.g. Tesco) that are the strategic customers not the
ultimate consumer.
• For a pharmaceutical manufacturer it is the health
authorities and hospitals not the final patient.
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75. Blue ocean thinking
• ‘Blue oceans’ are new market spaces where competition is
minimised.
• ‘Red Oceans’ are where industries are already well defined
and rivalry is intense.
• Blue Ocean thinking encourages entrepreneurs and
managers to be different by finding or creating market
spaces that are not currently being served.
• A ‘strategy canvas’ compares competitors according to
their performance on key success factors in order to
develop strategies based on creating new market spaces.
Check the website: http://www.blueoceanstrategy.com/
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77. Strategy canvas
Figure 2.9 Strategy canvas for electrical components companies
Source: Developed from W.C. Kim and R. Mauborgne, Blue Ocean Strategy, 2005, Harvard Business School Press
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78. Blue Ocean: Critical success factors (CSFs)
• Critical success factors are those factors that are either
particularly valued by customers or which provide a
significant advantage in terms of cost.
• Critical success factors are likely to be an important source
of competitive advantage if an organisation has them (or a
disadvantage if an organisation lacks them).
• Different industries and markets will have different critical
success factors (e.g. in low cost airlines the CSFs will be
punctuality and value for money whereas in full service
airlines it is all about quality of service).
Note this point well!!
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79. Blue Ocean Model
Value Curves: graphic depiction of how customers
perceive competitors’ relative performance across
the critical success factors.
Value Innovation: is the creation of a new market
space by excelling on established critical success
factors on which competitors are performing
badly and/or by creating new critical success
factors representing previously unrecognized
customer wants.
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80. The budget airline market
Blue Ocean market space for budget airlines
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84. Chapter summary (1)
• Environmental influences can be thought of as layers
around an organisation, with the outer layer making up the
macro-environment, the middle layer making up the
industry or sector and the inner layer strategic groups and
market segments.
• The macro-environment can be analysed in terms of the
PESTEL factors, from which key drivers of change can be
identified. Alternative scenarios about the future can be
constructed according to how the key drivers develop.
• Industries and sectors can be analysed in terms of Porter’s
five forces – barriers to entry, substitutes, buyer power,
supplier power and rivalry. Together, these determine
industry or sector attractiveness.
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85. Chapter summary (2)
• Industries and sectors are dynamic, and their changes
can be analysed in terms of the industry life cycle,
comparative five forces radar plots and hypercompetitive
cycles of competition.
• In the inner layer of the environment, strategic group
analysis, market segment analysis and the strategy canvas
can help identify strategic gaps or opportunities.
• Blue Ocean strategies characterised by low rivalry are likely
to be better opportunities than Red Ocean strategies with
many rivals.
• The most important reason for environmental analysis is to
identify OPPORTUNITIES AND THREATS
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86. PRACTICE ESSAY QUESTIONS
IMPORTANT NOTE: →
These questions are provided for your reference only – they are only
INDICATIVE of the standard of questions you might expect in the final exam.
DO NOT use these questions to “spot”
The RMIT examiner will post advice on the exam on the Learning Hub closer
to the exam; you are required to pay attention to that advise
The questions here show the range of topics that could be tested from this
lecture; they are NOT exhaustive
To score a high grade it is important to LINK the theory to applications and
examples. Where from?
You have been assigned specific cases to read from the text. Each case
study will show you the kinds of strategic decisions the case company
needs to make. You can draw from these examples.
You have selected a case company for your project; you may use
examples from there.
You are supposed to read widely from the business press about local,
regional and international companies strategies. You can use examples
from there as well.
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87. Sample Exam Question:
Why would you want to do an
environmental analysis? In answering the
question critically discuss the objectives
behind an environmental analysis as well as
discuss what two of the relevant tools will
tell the user and how they may collectively
contribute to achieving the desired
outcomes.
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88. Sample Exam Question:
Discuss the various elements of the
firm’s macro-environment. Give
examples of how two of these
elements might influence a firm’s
business level strategy.
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89. Sample Exam Questions:
Explain how Porter's Five Forces Analysis can be
used in the formulation of business level strategy.
Illustrate your answer with examples from any
case you have studied from the text or other
examples of your own.
NOTE: this question is not strictly on the five forces model
alone because it needs to be LINKED to a future topic to
be covered on “Business Strategies”
This however reminds us of the fact that exam questions
are often set with overlapping or linked themes. Be
prepared for this!
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90. Sample Exam Question:
Discuss the following two forces in the
industry environment: power of suppliers
and power of buyers. Use examples to
support your answer.
Note in this question, the examiner asks you to focus just
on two forces. It is therefore pointless to write about all
the five forces. Learn to be selective!
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