Strategic management Lecture 2. Environmentalanalysis
Steps in environmental analysis Assess the nature of the environment Audit environmental influences Identify key competitive forces Identify competitive position Identify key opportunities and threats Strategic position Strategic position
Approaches to making sense of the environment ENVIRONMENTAL CONDITIONS Simple Complex Static Trend extrapolation Decentralisation or Delphy analysis Strategic analysis ENVIRONMENTAL CONDITIONS Experience and learning Scenario planning Dynamic
Determinants of profits in an industry • Value of the product or service to the customer • Intensity of competition • Relative bargaining power at different levels in the production chain
Five-plus forces of competition Deregulation Globalization Digitization / technology Other force/s
Five Forces Analysis (1) The threat of entry ... Dependent on barriers to entry such as: • Economies of scale • Capital requirements of entry • Access to distribution channels • Cost advantages independent of size (eg the “experience curve”) • Expected retaliation • Legislation or government action • Differentiation
Five Forces Analysis (2) Buyer power is likely to be high when: • There are many small operators in the supplying industry • There are alternative sources of supply • Components or materials are a high percentage of cost to the buyer leading to “shopping around” • There is a concentration of buyers • Switching costs are low • There is a threat of backward integration
Five Forces Analysis (3) Supplier power is high when: • There is a concentration of suppliers • Switching costs are high • The supplier brand is powerful • Integration forward by the supplier is possible • Customers are fragmented and bargaining power low
Five Forces Analysis (4) Threat of substitutes Substitutes take different forms: • Product substitution • Substitution of need • Generic substitution • Doing without
Pressure from substitute products Firms in an industry are also affected by competition from related markets. The availability of substitutes influences the ability of a firm to raise prices, or to change the attributes of its products • Identify possible substitute products by asking: “What set of products constrains the ability of firms in this industry to substantially increase prices ?“ • Substitute products become particularly important in times of rapidly increasing demand, and in industries with few competitors (making it difficult to increase supply quickly)
Five Forces Analysis (5) Competitive Rivalry is high when: • Entry is likely • Substitutes threaten • Buyers or suppliers exercise control • Competitors are in balance • There is slow market growth • Global customers increase competition • There are high fixed costs in an industry • Markets are undifferentiated • There are high exit barriers
Five Forces Analysis: Key Questions and Implications • What are the key forces at work in the competitive environment? • Are there underlying forces driving competitive forces? • Will competitive forces change? • What are the strengths and weaknesses of competitors in relation to the competitive forces? • Can competitive strategy influence competitive forces (eg by building barriers to entry or reducing competitive rivalry)?
The importance of the five force modell • In each of its businesses, the firm faces an industry structure that shapes the rules of competition it must respond to or try to influence, and that is the basis and motivation for a unique strategy • One way to organize information about an industry is the FIVE FORCES model that helps to explain why one industry is profitable while another is not • The strategist‘s goal is to find a place in the industry where the firm can best defend itself against the forces, and influence them in its favor.
1 Industry and Competitive Analysis - Questions Tasks : What is our business ? How do we create value ? What are our organizational and/or technological capabilities ? Who are we in business with ? How is our business/industry changing ? What drives this change ? What are our strengths and weaknesses ? What opportunities open up, and what threats exist ? Competitive & IndustryAnalysis("Where do we stand?") Strategy formulation("Where do we want to go ?") Implementation andControl("How do we get there?")
what to do …? 1. Positioning : accept competive structure as given and match yourself to it: .. build defenses against competitive forces .. identify positions where forces are weakest 2. Take the offensive: Influencing the Balance .. identify key factors driving competition that you can control .. influence those costs that yield the greatest payoff 3. Exploiting Change .. understand which trends affect the sources of competition, and forecast the magnitude of each trend and underlaying cause .. construct a picture of the likely profit potential of the industry 4. Set and evaluate diversification potential
Strategic Group Analysis Strategic Group Analysis is useful to: • Identify firms with similar strategic characteristics • Therefore identify the most direct competitors • Identify mobility barriers • Identify strategic opportunities (“strategic spaces”) • Strategic threats and problems
Mapping Strategic Groups in the U.S. Restaurant Chain Industry High Red Lobster, Olive Garden Perkins, Int. House of Panckake Pizza Hut, Wendy’s Price Shoney’s, Denny’s Country Kitchen Mc’Donald’s, Taco Bell, Burger King, Hardee’s K.F.C Low Full menu Product-Line Limited menu
Figure 3.10 Perceived value by customers: the luxury car market Competitor B's car Competitor A's car Car X 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Rating Styling Marque strengths Engineering innovations Performance Build quality Least important Most important Source: D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995.