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External Analysis Strategic Management Ljmu

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This was one of the presentation given in the Strategic analysis class at Liverpool Business School

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External Analysis Strategic Management Ljmu

  1. 1. EXTERNAL ANALYSIS<br />AbhishekSrivastav<br />
  2. 2. LearningOutcomes<br />After studying this topic you should be able to:<br />Understand the role of external analysis in strategy formulation.<br />Use a range of tools to analyse an organisation’s external environment.<br />Explain the limitations of these analytical tools and the role of more subjective analytical approaches.<br />
  3. 3. Link to overall strategic management<br />“Strategic management includes understanding the strategic position of an organisation, strategic choices for the future and managing strategy in action (Johnson et al., 2008:12).”<br />Strategic position identifies the impact of<br />External environment<br />Strategic capability<br />Expectation and influence of stakeholders on strategy <br />
  4. 4. The Business Environment (Johnson et al. 2008: 54)<br />The macro-environment<br />Industry (or sector)<br />Competitors<br />The <br />Organisation<br />2-4<br />
  5. 5. External analysis stages<br />Analysing the external environment involves breaking a complex inter-related reality into sets of issues to make the analysis manageable. The main sets of issues are usually:<br /><ul><li>Macro-environment – these are broad trends shaping the national and international environment in terms of political, economic, social and technological trends (i.e. PESTEL factors, key drivers ).
  6. 6. Micro-environment – this is the operating environment or industry sector in which the firm competes. It addresses a range of issues such as suppliers, customers, competitive intensity, threat of new entry and of substitute products arising (i.e. the ‘five-forces’ analysis).
  7. 7. Competitor analysis – seeks to understand the rival offers from other firms seeking to serve the same customers and to out manoeuvre their managers with our innovation and competitive moves.
  8. 8. Market analysisseeks to evaluate the current needs of today’s customers and the emerging needs of tomorrow’s customers so new products can be anticipated. These will be different in different market segments. </li></li></ul><li>The Macro-Environment<br />Difficult for the firm to influence<br />Changes can be far-reaching<br />The media: rich source of both information and speculation<br />Tools for analysing the macro-environment<br />The PESTEL (Variants PEST/DEEPLIST) framework<br />Key drivers<br />Scenarios<br />
  9. 9. The PESTEL Framework<br />The PESTEL framework categorises environmental influences into six main types:<br />Political - <br />Economic<br />Socio-cultural<br />Technological<br />Environmental<br />Legal<br />PESTEL analysis evaluates the broad societal trends that affect many industries. It identifies current and future developments that will shape the micro-environments of each industry sector.<br />
  10. 10. Good PESTEL Analysis<br />Focuses on society wide.<br />Based on sound research of actual issues. <br />Provides evidence from the research to validate points made.<br />Future oriented.<br />Interpretive and not descriptive<br />
  11. 11. Major Risk <br />Like the old-fashioned SWOT technique, PESTEL helps us make lists<br />Lists can help us think, but…<br />A list should be the beginning, not the end of thinking<br />Harrison (2003: Ch 2) integrates this with industry and company analysis<br />Johnson et al. (2008:55-59) look at the way PESTEL factors combine…<br />then at key drivers and trends of business change<br />
  12. 12. Key Drivers and Scenarios Planning<br />Key drivers for change are environmental factors that are likely to have a high impact on the success or failure of strategy.<br />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.<br />
  13. 13. Industries and Sectors Analysis<br />An industry is a group of firms producing the same principal product or service. <br />The industry analysis involves identifying<br />Competitive forces <br />Industry life cycles<br />Competitive cycles<br />Porters five forces framework has two main aims:<br />To understand the drivers of competitive behaviour in the sector and;<br />To evaluate the long-run profit potential of the sector<br />
  14. 14. The Five Forces Framework (Johnson et al. 2008: 60)<br />Potential <br />entrants<br />Competitive <br />rivalry<br />Buyers<br />Suppliers<br />Substitutes<br />
  15. 15. Five forces model – Details<br /><ul><li>Capital requirements
  16. 16. Differentiation
  17. 17. Switching costs
  18. 18. Access to </li></ul> supply/distribution <br /> channels<br /><ul><li> Intellectual property
  19. 19. Expected retaliation
  20. 20. Legislation/Government </li></ul> action<br /><ul><li> Economies of scale</li></ul>Threats of Potential <br />entrants<br /><ul><li>Size of purchases
  21. 21. Differentiation in product
  22. 22. Few substitutes
  23. 23. A few big suppliers
  24. 24. Threat of backward integration</li></ul>Competitive rivalry<br /><ul><li>Competitor balance
  25. 25. Industry growth rate
  26. 26. High fixed costs
  27. 27. High exit barriers
  28. 28. Low differentiation</li></ul>Power of Suppliers<br />Power of Customers<br /><ul><li> Size of purchases
  29. 29. Undifferentiated product
  30. 30. Per cent of cost
  31. 31. Low margins (buyer)
  32. 32. Threat of forward </li></ul> integration<br /><ul><li> Impact on quality
  33. 33. Price performance is high
  34. 34. Degree of differentiation
  35. 35. Technological innovation
  36. 36. Price performance relationships</li></ul>Substitute<br />5<br />
  37. 37. Evaluation of the Five Force Model<br />DISADVANTAGES<br />ADVANTAGES<br />Firms industry environment is a small determinant of that firm’s profitability<br />Suppliers of complementary products are ignored<br />Highlights the need to disaggregate broad industry groupings and examine competition at segment or strategic group level Assumes all business relationships are competitive.<br />Assumes industry boundaries are stable over time, ignoring innovation and entrepreneurship. (Grant 2005)<br />Identifies drivers of competitive behaviour.<br />Indicates trends in profitability.<br />Highlights strategies to alter industry structure. (Lynch 2000)<br />
  38. 38. The IndustryLife Cycle<br />(Johnson et al. 2008: 68)<br />2-15<br />
  39. 39. Cycles of Competition<br />(Johnson et al. 2008: 69)<br />2-16<br />
  40. 40. Competitors analysis<br />This involves the analysis of strategic groups, market segments and strategic customers.<br />Strategic groups<br />Strategic groups are organisations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases.<br />Benefits identifying strategic group analysis<br />Understanding competition<br />Analysis of strategic opportunities<br />Analysis of mobility barriers<br />
  41. 41. Strategic Group Analysis (SGA)<br />“A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimensions1.”<br />Porter (1980), p.129.<br />Motor Industry<br />Broad<br />Narrow<br />Global full-line<br />producers<br />The key to the strategic group concept is that differences in profitability between groups persists because of the existence of mobility barriers that stop firms entering or moving between groups and thus competing away profit differentials.<br />Regional<br />Broad-line<br />Product<br />Range<br />Luxury<br />producers<br />National Niche-<br />specialists<br />High performance<br />sports<br />National Global<br />Geographic<br />Scope<br />1. “strategic dimensions” refers to any significant criteria for grouping firms, e.g. segments served, branding, cost position, etc.<br />
  42. 42. Characteristics for Identifying Strategic Groups<br />Scope of activities<br /><ul><li>Extent of product diversity
  43. 43. Extent of geographic coverage
  44. 44. Number of segments served
  45. 45. Distribution channels</li></ul>Resource commitment<br /><ul><li>Extent of branding
  46. 46. Marketing effort
  47. 47. Extent of vertical integration
  48. 48. Product quality
  49. 49. Technological leadership
  50. 50. Organisational size</li></ul>2-19<br />
  51. 51. Market Analysis<br /><ul><li>Determines attractiveness and competitive advantage
  52. 52. Key variables to determine:
  53. 53. Overall size
  54. 54. Market shares of key competitors
  55. 55. Growth rates/trends
  56. 56. Segments (relative growth rates)
  57. 57. Profitability
  58. 58. Existing/likely competitors
  59. 59. Accessibility issues</li></li></ul><li>Strategic customer and critical success factors<br />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.<br />What do our customers want? (basic source of profit in the industry, who are they, what are their needs and how do they make decisions?)<br />Critical success factors (CSFs) are those product features with which a organisation must outperform the competition because they are particularly valued by a group of customers. <br />“those factors within the firm’s market environment that determine its ability to survive and prosper” (Grant 2005, p92)<br />What does the firm need to do to survive competition? (how intense is competition and what are the key dimensions upon which competitors compete?)<br />How then can firms use their resources and capabilities to profit from KSF?<br />
  60. 60. Market segment analysis<br />A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.<br />Market segment analysis<br />Identify key segmentation variables<br />Construct a segmentation matrix<br />Analyse segment attractiveness<br />Identify KSFs in each segment<br />Choose between broad or narrow segment focus.<br />
  61. 61. Some Bases ofMarket Segmentation (Johnson et al. 2008:77)<br />2-23<br />
  62. 62. Summary<br />External analysis involves four main areas: PESTEL factors, Industry analysis, competitor profiling and market analysis.<br />The macro-environment can be analysed in terms of PESTEL factors.<br />Industries and sectors can be analysed using Porter’s Five Forces model. <br />Industry changes can be analysed through industry life cycle & hypercompetitive models of competition.<br />The inner layer of the environment can be analysed with strategic group analysis, market and segment analysis.<br />
  63. 63. Reading materials<br />Required reading:<br />Johnson et al (2008), chapter 2. <br />Recommended reading:<br />Porter, M.E. (1980). Competitive Strategy: Techniques for analysing industries and competitors. Free Press: New York. Chapters 1 & 3<br />Harvard Business Review (1991). Michael E Porter on Competition and Strategy. Harvard Business Press, pp3-11<br /> <br />
  64. 64. Assignment Case Study 1<br />Using the data from the case study assignment, carry out for the tourism industry:<br />A PESTEL analysis <br />A five force analysis and what do you conclude? <br />How does the changes in the PESTEL and five forces impact on TUI<br />What are the relative strengths and weaknesses of the TUI<br />