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Lecture 02:
Strategic Analysis I:The External Context
Niels-Erik Wergin
Strategic Management
Strategic Management © Niels Wergin 20092
Textbook - update Barney/Hesterly book sold out, but:
2nd-hand editions available on internet (e.g. Amazon.co.uk, AbeBooks.co.uk)
Alternatively: get Johnson et al. book (in bookshop)
Strategic Management © Niels Wergin 20093
Timetable - changes
Tutorial 7 (Niels Wergin): wrong room in timetable, tutorial takes place: Mon, 14:00-15:00, QA020, NOT QM020
Tutorial 5 (Niels Wergin): wrong time in timetable, tutorial takes place: 14:00-15:00, QA020, NOT 11:00-12:00
Tutorial 4 (Peter Reid): no change to timetable; tutorial takes place: Mon, 12:00-13:00, QA038
Strategic Management © Niels Wergin 20094
Strategic Analysis
Part 1: The External Context• Opportunities and Threats• Porter’s Five Forces
Part 2: Internal Strategic Capabilities• Stregths and Weaknesses• Next week
Taken together: SWOT Analysis• Basis of your presentations & case analyses
Strategic Management © Niels Wergin 20095
The external (business) environment
The Organisation
Why External Analysis?
Because it allows firms to:
analyse its position in the external environment
discover opportunities and threats
better understand the nature of competition in an industry
see if increased profits are likely in an industry
make more informed strategic choices
18/04/23Strategic Management © Niels Wergin 20096
Strategic Management © Niels Wergin 20097
Key Concepts
PESTeL
Scenarios
Key drivers
Porter’s 5 Forces
Strategic Management © Niels Wergin 20098
PESTEL Framework
Political Economic
Technological
Environmental Legal
Social
Strategic Management © Niels Wergin 20099
What Are Key Drivers for Change?
Key drivers for change
are environmental factors
that are likely to have a high impact
on the success or failure of strategy.
Strategic Management © Niels Wergin 200910
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.
Strategic Management © Niels Wergin 200911
Porter’s Five Forces Framework
Competitive rivalry
Potential entrants
Buyers
Substitutes
Suppliers
Strategic Management © Niels Wergin 200912
If all threats are high expect normal profits
If all threats are low expect above normal profits
Most industries are somewhere between the extremes
Porter’s Five Forces Framework
Strategic Management © Niels Wergin 200913
• if firms can easily enter the industry, any abovenormal profits will be bid away quickly
• barriers to entry lower the threat of entry
• barriers to entry make an industry more attractive
Threat of Entry
Strategic Management © Niels Wergin 200914
• Economies of scale — firm that can’t producethe minimum efficient scale will be at a disadvantage
• Product differentiation — entrants are forced toovercome customer loyalties to existing products
• Cost advantages independent of scale — incumbentsmay have learning advantages, etc.
• Government policies — governments may imposetrade restrictions and/or grant monopolies
Barriers to Entry
Strategic Management © Niels Wergin 200915
The Threat of Entry: Barriers to Entry
Scale and experience
Access to supply and distribution channels
Expected retaliation
Legislation or government action
Differentiation
Strategic Management © Niels Wergin 200916
Why Are Substitutes a Threat?
Substitutes can reduce demand for a particular class of products as customers switch to alternatives.
• Price/performance ratio
• Extra-industry effects
Strategic Management © Niels Wergin 200917
• substitutes fill the same need but in a different way
- Coke and Pepsi are rivals, milk is asubstitute for both
• substitutes create a price ceiling because consumersswitch to the substitute if prices rise
• substitutes will likely come from outside theindustry—be sure to look
Threat of Substitutes
Strategic Management © Niels Wergin 200918
• small number of buyers for firm’s output
• lack of a differentiated product
• the product is significant to the buyer
Conditions that facilitate buyer power
• buyers operate in a competitive market—they arenot earning above normal profits
• buyers can vertically integrate backwards
• many small buyers can be united around an issueto act as a block
Strategic Management © Niels Wergin 200919
The Power of Buyers
Are buyers concentrated?
What are the costs of switching?
Does backward vertical integration exist?
Strategic Management © Niels Wergin 200920
The Power of Suppliers
Are suppliers concentrated?
What are the costs of switching?
Does forward vertical integration exist?
Strategic Management © Niels Wergin 200921
• small number of firms in supplier’s industry
• highly differentiated product
• lack of close substitutes for suppliers’ products
• supplier could integrate forward
• focal firm is an insignificant customer of supplier
Conditions that facilitate supplier power
Strategic Management © Niels Wergin 200922
Degree of Competitive Rivalry
Competitor balance
Industry growth rate
High fixed costs
High exit barriers
Low differentiation
23
• high rivalry means firms compete vigorously — and compete away above average profits
Industry conditions that facilitate rivalry:
• large numbers of competitors
• slow or declining growth
• high fixed costs and/or high storage costs
• low product differentiation
• industry capacity added in large increments
Threat of Competitive Rivalry
Strategic Management © Niels Wergin 200924
Neutralizing Threats
• most firms cannot unilaterally change thethreats in an industry
• by altering relationships in an industry, firmsmay reduce threats and/or create opportunities, thereby increasing profits
Responding to Environmental Threats
Strategic Management © Niels Wergin 200925
Managerial Implications
Which industries should we enter or leave?
What influence can we exert?
How are competitors differently affected?
Strategic Management © Niels Wergin 200926
Types of Opportunity
In substituteindustries
In other strategicgroups
In targetingbuyers
For complementaryproducts
In new market segments
Over time
Strategic Management © Niels Wergin 200927
Key Debate: How Much Does Industry Matter?
Debate over whether strategy making should be externally or internally oriented
Porter’s work suggests that industry factors (i.e. external ones) influence profitability more than firm-specific factors (i.e. internal ones)
But - this varies by industry
Strategic Management © Niels Wergin 200928
Summary
Environmental influences can be thought of as layers around an organisation
External Analysis is crucial tool
The macro-environment can be analysed in terms of PESTEL factors
Industries and sectors can be analysed in terms of Porter’s Five Forces model
Strategic Management © Niels Wergin 200929
Case: The European Brewing Industry
Complete a PESTEL analysis of the European brewing industry
Complete a five forces analysis for the industry
How will the environment affect these companies?
What are the relative strengths and weaknesses of each?
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