Analyzing the Business Environment (The Strategic Position**)Prof Ashish K MitraAnalyzing EnvironmentA!areness of the environment is not a s"ecial "ro#ect to $e un%erta&en only !hen !arning of change $ecomes %eafening'( Kenneth ) An%re!sAnalysis is the critical starting "oint of strategic thin&ing'( Kenichi *hmae+t is not the strongest of the s"ecies that survive, nor the most intelligent, $ut the one most res"onsive to change' ( -harles .ar!in -om"any MissionE/ternal Environment*"erating+n%ustry)emote-om"any Profile()esources 0 ca"a1$ilities)Strategic Analysis an% -hoice2ong1term *$#ectives 3eneric 0 3ran% StrategiesAnnual Plans 0 Short term *$#ectives 4unctional 5 *"eratingStrategies5 tacticsPolicies that em"o!eraction+nstitutionalizationof StrategyStrategic -ontrol 0 continuous im"rovement6 Possi$le6 .esire%7888 vST)ATE3+-MA9A3EME9TP)*-ESS4ee% Bac&4ee% Bac&Analyzing Business EnvironmentBusiness Environment encom"asses :E/ternal EnvironmentMacro e/ternal environment1 Political, Economic, Social an% Technological (PEST) ( some call them asPESTEL)Micro e/ternal environment : imme%iate +n%ustry an% com"etitive environment :+nternal Environment)esources-om"etenciesThe*rganizationLayers of the External Business Environment**Strategic 3rou"Markets +n%ustry ( or Sector )Organizational FieldThe Macro1environmentTheFIRMOperatingEnvironment-om"etitors-re%itors-ustomers2a$orSu""liersIndustry Environment-om"etitive )ivalryThreat of ne! entrants5entry $arriersSu""lier Po!erBuyer Po!erThreat of su$stituteRemote EnvironmentPoliticalEconomicalSocialTechnologicalEcologicalLegalThe Firms External EnvironmentThe most general (outer) ;layer< is often referre% to as the macro1environment= Broa% factors that im"act to a greater an% lesser e/tent on almost all organizations=+t is im"ortant to i%entify these issues an% "articularly those that are li&ely to have a %ifferentially large im"act on a s"ecific organization Any s"ecific PESTE2 factor !ill affect some organizations more than others Also it !ill affect some organizations favorably , whilst osing a threat to others=+f the future is li&ely to $e very %ifferent from the "ast it is hel"ful to construct "ictures : or scenarios : of "ossi$le futures= This hel"s managers consi%er %ifferent !ays in !hich strategies might nee% to change %e"en%ing u"on ho! the $usiness environment might unfol%=9e/t ;layer; !oul% $e calle% in%ustry= This is a grou" of organizations "ro%ucing the same "ro%ucts or services= >o!ever, !e nee% to recognize that "reviously se"arate in%ustries might converge= The ;4ive forces< frame!or& (an% the conce"t of hyer cometition! can $e useful in un%erstan%ing ho! the com"etitive %ynamics !ithin an% aroun% an in%ustry are changing?ithin most in%ustries or sectors, there !ill $e many %ifferent organizations !ith different characteristics an% cometing on different bases" This interme%iate layer $et!een the in%ustry an% the in%ivi%ual organization is calle% ;strategic grou"o!ever some s"ecialty steel ma&ers en#oy $etter return than integrate% steel ma&ers $ecause of %ifferentiate% "ro%ucts= +n Pharma in%ustry no su$stitute !as availa$le for many "atente% %rug=Bargaining "o!er of $uyers ( customers)I=HSgovernmentisa$ig$uyerof"harmaceuticals throughitsme%icai%an%me%icare"rograms= >istorically ho!ever it has not e/ercise% "otential "o!er= )is&offailure,high"ersonalcostofanysu$stitute;s failure&ee"high"rice%$ran%e%%rugshareinthe mar&et=The interests an% incentives of all "layers involve% in the "urchasing%ecisionaffectsthe"ricesensitivityofthe %ecision=Many%octorsan%"atientstra%itionallylac&e% incentivestohol%%o!n"ricesof%rug=Becauseathir% "arty i=eC insurance com"any foote% the $ill Evaluating the Five ForcesBargaining Power of BuyersBargaining Power of BuyersThreat Opportunity *uyer purcases large #olumes *uyer purcases small #olumes+urcases are signi!icant part+urcases aren)t signi!icant part o! 'uyer,s costs+urcases standard or undifferentiated +urcases highly differentiated and uni"ue*uyer !aces few switcing costs *uyer !aces significant switcing costs*uyer,s pro!its are low *uyer,s pro!its are strong*uyer can manu!acture products*uyer can*t manu!acture productsIndustry,s products aren)t important Industry,s products are importantto $uality o! 'uyer,s products to $uality o! 'uyer,s products*uyers a#e full in!ormation *uyers a#e limited in!ormationThe "argaining po'er o( suppliers)upplier po'er is the mirror image of $uyer "o!er= As a result, the analysis of su""lier "o!er ty"ically focuses first on therelative sie and concentration of thesuppliers an%Secon% on the degree of differentiation in inputs su""lie%= The a$ility to charge customers %ifferent "rices in line !ith %ifferences in the value create% for each of those $uyers, usually in%icates high supplier po#er%4or Pharma in%ustries in"uts are usually from several commo%ity chemical com"anies= HS Steel in%ustry, in contrast, has $een ravage% $y highly unionize% HS Steel !or&ers ( a ma#or su""lierT)=Relationship #ith buyers and suppliers have im"ortant cooperative as #ell as competitive elements= Fa"anese car ma&ers committe% themselves to long1run su""lier relationshi"s that "ai% off in terms of higher @uality an% faster ne! "ro%uct %evelo"ment= ( +n contrast HS car manufacturers "ushe% their "art su""liers to the !all $y "laying them against one another) Re-uirement o( net-'or+ed economyI "artnershi" !ith su""liersEvaluating the Five ForcesBargaining Power ofSuppliersBargaining Power ofSuppliersThreat Opportunity Supplying industry as few companies Supplying industry as many companiesand is more concentrated and is fragmentedSupplier,s products don*t a#e su'stitutes Supplier,s products do a#e su'stitutesIndustry isn*t an important customer Industry is an important customerSupplier,s product is an important input Supplier,s product isn*t an important inputSupplier,s products are di!!erentiated Supplier,s products aren)t di!!erentiatedSignificant switcing costs %inimal switcing costs in supplier,s productsSupplier has a'ility to do Supplier doesn)t have a'ility to dowat 'uying industry does wat 'uying industry doesThe threat o( su"stitute productsA close su$stitute is a "otential threat to com"anyar%!are an% -om"uter Soft!areare the most a""arent e/am"les of com"lementarity ( eg=C %eman% of +ntel "rocessor an% increasing the %eman% of MS ?in%o!s)=-ar in%ustry an% Auto loan in%ustryB-) an% Bi%eo -assette recor%er in%ustry=TB Sho!s an% TB gui%es4a/ Machine an% Phone lines-atalogue Sale vs overnight %elivery serviceBi%eo 3ame consoles an% 3ame %evelo"ersMo$ile service "rovi%ers 0 -ell Phone in%ustryTB -hannels vs -ontent Pro%uction >ousesPlayers in analyzing com"etitive lan%sca"eIIISu""ly : .eman% analysis A focuse% attention on e/change relationshi" $et!een su""liers an% $uyers=4ive forces frame!or& e/ten%s the analysis to su""lier1U-om"etitor 1U $uyer an% to consi%er e/"licitly "ossi$ilities of su$stitution an% ne! entrants=Balue net %ra!s com"lementary relationshi"sinto the "icture an% accounts for the com"lication that com"limentor can also $ecome a com"etitor3hema!at says even more ty"es of "layers nee%e% to $e a%%e%, %e"en%ing on the conte/t' )e1ca" of analyzing $usiness environmentPortery"er com"etition-om"etition in the ne! in%ustry ( %igital technology)?hat are the key forces at !or& in the com"etitive environment6 These !ill %iffer $y ty"e of in%ustry=?hat are the $nderlying forces in the micro&environment thatare driving cometitive forces6 EgC lo!er cost 0 high availa$ility of soft!are s&ills in +n%ia is an o""ortunity 0 a threat to Hs 0 Eur"ean com"anies+s it li&ely to change, if so, how6 4or egC government action in re%ucing health care costs 0 "romotion of generics !oul% increase "ressure on $ran%e% %rugs in HS=8ow do cometitors stand in relation to com"etitive forces6 Their !ea&nesses 0 strengths=?hatcan managers %o to infl$ence the cometitive forces affecting an SBH6 -an they b$ild entry barriers, ower over s$liers or %iminish rivalry6-om"etitive a%vantage ero%es over time %ue toforces %iscusse% a$ovean% 5 or com"etitors !ill overcome a%verse forces= The rocess of erosion of is getting seeded $ $y changes in macro1environment such as ne! technologies, glo$alization or %eregulation=Though time scale %iffers, 6ometitive advantages is mostly becoming temorary"*rganizations res"on% to erosion of their com"etitive "osition $y creating cycles of cometition : various moves 0 counter moves on the $asis of cost 5 @uality : thus shifting the $asis of com"etition=*rganizations are increasingly o"erating in situation !here the s"ee% of the ;cycles of com"etition< is very fast : this has $een calle% hy"er com"etition=>y"er com"etition occurs !here the fre@uency, $ol%ness an% aggressiveness of %ynamic movements $y com"etitors accelerate to create a con%ition of constant %ise@uili$rium an% change=)hereas cometition in slower&moving environments is rimarily concerned with b$ilding and s$staining cometitive advantages that are diffic$lt to imitate,hyercometitiveenvironments advantageswill be temorary=&ompetition is about disrupting the status .uo so that no one is able to sustain long*term advantage on any given basis= So long term advantage is gained thro$gh a se4$ence of short lived moves=Mar&et Segments A A mar&et segment is a grou" of customers !ho have similar nee%s that are %ifferent from customer nee%s in other "arts of the mar&et= Theoretically %ifferent factors coul% $e use% to i%entify mar&et segments== .emogra"hy : age, se/, race, income, family size, life cycle stage, 2ifestyle, Size of "urchase, "ur"ose of use, "urchasing $ehaviour= +n%ustrial mar&ets classification coul% $e $ase% on classification of $uyers li&e %omestic in%ustry vs foreign $uyers=+%entifying strategic customer A Strategic customer is the "erson(s) !ho have the most influence over the goo%s or services that are "urchase%= >ence strategy must a%%ress them= +n many mar&ets the strategic customer acts as a ;gate&ee"er< to the en% user= Manufacturers have t!o ;customers< : the sho"s an% the sho"s< customers= So there has to $e an un%erstan%ing of !hat is value% $y that strategic customer as a starting "oint of the strategy= >o!ever the re@uirement of the other customer has also to $e met=+n many consumer goo%s, the retail outlet is the strategic customer as the !ay it %is"lays, "romotes 0 su""orts "ro%uctsin store is hugely influential on the final consumer "references=But internet sho""ing may change this "attern, "utting the final consumer $ac& as the strategic customer=Hn%erstan%ing !hat customer Balues==Hn%erstan%ing customer nee%s an% ho! they differ between segments is crucial to %evelo"ing a""ro"riate strategic ca"a$ility in an organization=>o!ever, value is multi*dimensional ! it should be seen through the eyes of thecustomers= Balue of "ro%uct or services is often !rongly conceive% of internally ( egC %esigners, engineers, teachers or la!yers) an% not teste% out !ith customers or clients= Thresholdre4$irements( "ro%uct features) are e/"ecte% from any "rovi%er in a given mar&et segment 6ritical S$ccess Factors 56SFs!are those "ro%uct features that are "articularly value% $y a grou" of customers an%, therefore, !here the organization must e/cel to out"erform com"etition= Hn%erstan%ing of the -S4s of a grou" of customers ( mar&et segment is very im"ortant=Strategic 3a"sThe frame!or& of PESTE2 ( macro environment factors), 4ive 4orces (+n%ustry environment factors) an% others li&e strategic grou"s, customer value hel" managers i%entifyan% 5 or create ;ne! mar&et s"ace< to gain com"etitive a%vantages=Kim 0 Mau$orgne in ; Blue *cean Strategy< have argue% thatif organizations concentrate on com"etinghea% to hea%, the environment !ill get very tough= They have encourage% managers to see& o""ortunities in $usiness environment !hich they call strategic ga"s=- strategic /ap is an oort$nity in the cometitive environment that is not being f$lly e#loited by cometitors=There may $e %ifferent o""ortunities to %o thisA2oo&ing across su$stitute in%ustries A %irect rivals ten% to trigger a stronger res"onse than "otential su$stitutes= Soft!are com"anies $ringing electronic $oo&s 0 atlases as su$stitute to "a"er versions=2oo&ing across strategic grou"sA "articularly if changes in micro environment ma&e ne! mar&et s"aces economically via$le=2oo&ing across chain of $uyersA a%#usting mar&eting strategy to ;most "rofita$le ; $uyer or influencer=2oo&ing across com"lementary "ro%ucts 0 service offeringA li&e ;"rovi%ing !holesome $oo& $uying e/"erience< instea%of #ust stoc&ing the right $oo&s=2oo&ing for ne! mar&et segmentA li&e no frills segment2oo&ing across 5 ahea% in timeStrategies to Alter +n%ustry Structure*""ortunity to change in%ustry structure in or%er to alleviate com"etitive "ressure 6+n 9orth America 0 Euro"e : Petroleum refining : earning $elo! cost of ca"ital)eason 1 many com"etitors, e/cess ca"acity 0 commo%ity "ro%ucts-onsoli%ation to increase concentration, ca"acity rationalizationC BP ac@uire% Amoco, then ArcoC E//on merge% !ith Mo$ilC +n Euro"e Total, 4ina 0 Elf merge%=HS Airlines1 mergers 0 alliances to re%uce com"etition=+n -hemical in%ustry : BAS4, .o!, +-+ 0 Bayer1 ca"acity s!a""ing 0 rationalizationMittal 0 Arcelor merger : consoli%ation of fragmente% glo$al steel in%ustryThe )ise of strategy consultantsB-3, foun%e% in NOLS, ha% a ma#or im"act$ya""lying -uantitativeresearchto"ro$lemsof$usinessan% cor"oratestrategy=+tsfoun%er,Bruce>en%erson $elieve%that0goodstrategym$stbebasedrimarilyon logic, not 9"" On e#erience derived from int$ition1";Economictheory!illeventuallylea%tothe %evelo"mentofasetofuniversalrulesforstrategy, ratherthanstrategy$einglargelyintuitivean%$ase% u"ontra%itional"atternsof$ehavior!hichhave$een successfulin"ast=($usinessofselling1"o!erfulover sim"lifications')B-3 came out !ith the concept of 0experience curve' inNOLG1LLtoe/"lainpriceandcompetitivebehavior ine/tremelyfastgro#ingsegmentsofindustriesfor its clients li&e Te/as +nstruments, Blac& an% .ec&er=Experience curveB-3,$ase%onclosestu%yoffastgro!ingin%ustries "ro"oun%e%thatasthetotalacc$m$latede#erienceofa firmintheind$stryincreases,itincurslesscostof rod$cing a rod$ct"B-3claime%thatforeachcumulativedoublingof e/"erience(accumulate%"ro%uctionovertime),total costs!oul%declineroughlyby123*423$ecauseof economieso(scale$organi#ationallearningand technological innovation=Accor%ing to B-3o! much %ecision ma&ing shoul% !e allo! at the level of in%ivi%ual $usiness unit6 ?hat activities !oul% $enefit from $eing organize% centrally6 8o' do 'e exploit the potential lin+s "et'een di((erent "ut related$ "usiness units6 >o! %o !e develop and re'ard "usiness unit managers6T!o 2evels of StrategyA diversified company has two levels of strategyA diversified company has two levels of strategy2. Business-Level trategy2. Business-Level trategy !"ompetitive trategy# !"ompetitive trategy#!ow to !ow to reate ompetitive advantagereate ompetitive advantage in in eah eah businessbusiness in whih the ompany ompetesin whih the ompany ompetes$. "orporate-Level trategy$. "orporate-Level trategy !"ompany-wide trategy# !"ompany-wide trategy#!ow to reate value for the orporation as a whole!ow to reate value for the orporation as a wholeKey Vuestions in -or"orate StrategyN= ?hat $usinesses shoul% the cor"oration $e in6N= ?hat $usinesses shoul% the cor"oration $e in6D= >o! shoul% the cor"orate office manage the D= >o! shoul% the cor"orate office manage the array of $usiness units6array of $usiness units6&orporate Strategy&orporate Strategy is is !hat ma&es the !hat ma&es the cor"orate !hole a%% u" cor"orate !hole a%% u" to to more than the sum of more than the sum of its $usiness unit "artsits $usiness unit "artsPortfolio analysis1orporate level A tools li&e B-3 3ro!th1Share Matri/, an% 3E 9ine1-ell"lanning 3ri% are use% to e/amine each b$siness as a se"arate entity an% as a contrib$tor to the organizationave strong b$siness osition ' negligi$le investment re@uirements= >ence returns from these $usinesses far outstri"s their investment re@uirements:;-ash co!s< are ta""e% for %ra!ing out resources re@uire% else!here in the organization=B-3 3ro!th1 Share Matri/IIIIII=)tars:These $usinesses have large mar&et share in gro!ing in%ustries:Since in%ustry is gro!ing, to maintain5 gro! the mar&et share, firm nee%s to invest:*ften investment re@uirements of Stars are greater than revenues:*nce the in%ustry reaches the stage of maturity, the stars har%ly nee%s any investment an% $ecome ma#or revenue generatorsB-3 3ro!th1 Share Matri/IIIIII=:uestion Mar+s:These $usinesses have a small mar&et share in a high growth market=:They %eman% significant investment $ecause their cash nee%s are high, a norm in gro!ing in%ustries:>o!ever, ac@uiring mar&et share is easier in high gro!th in%ustry than in a mature mar&et:>o!ever the chances of success has lot of uncertainties :*nly a fe! @uestion mar&s are finally a$le to gro! into starsB-3 3ro!th1 Share Matri/IIIIII=&ogs: These $usinesses have lo! mar&et share in an intensely com"etitive mature in%ustry: -haracterize% $y lo! "rofits: A %og %oes not nee% much ca"ital investment, $ut it ties u" ca"ital that coul% $e investe% in in%ustries !ith $etter returns: 4irms concentrate on recovering as much as "ossi$le from these an% un%erta&e ruthless cost cutting: Hnless there is an over ri%ing larger "ur"ose, an organization shoul% %ivest %ogs: 6ell managed dogs( eg; those having strong control over costs$ (ocus on niches) can"e relia"le revenue generator! 6et the possibility of being transformed into a cash co# does not exist"B-3 3ro!th1 Share Matri/IIIIII=B-3o!ever, there may $e o""ortunities to e/"loit core com"etencies in ne! mar&ets or ne! arenas=)ame as competitors orEasy to imitate Better than competitors an%&i((icult to imitateResources1ompetenciesThreshol% resourcesHni@ue resourcesThreshol%-om"etencies&ore &ompetencies.ifference in "erformance $et!een organizations in the same mar&et is rarely e/"laine% $y %ifferencesin their resource $ase since resource can $s$ally be imitated or traded= Su"erior "erformance !ill $e %etermine% $y the way in which reso$rces are deloyed to create cometences in the organization