lecture 02: strategic analysis i: the external context niels-erik wergin strategic management

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)


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 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


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


Key Concepts

PESTeL

Scenarios

Key drivers

Porter’s 5 Forces


PESTEL Framework

Political Economic

Technological

Environmental Legal

Social


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.


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.


Porter’s Five Forces Framework

Competitive rivalry

Potential entrants

Buyers

Substitutes

Suppliers


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


• 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


• 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


The Threat of Entry: Barriers to Entry

Scale and experience

Access to supply and distribution channels

Expected retaliation

Legislation or government action

Differentiation


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


• 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


• 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


The Power of Buyers

Are buyers concentrated?

What are the costs of switching?

Does backward vertical integration exist?


The Power of Suppliers

Are suppliers concentrated?

What are the costs of switching?

Does forward vertical integration exist?


• 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


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


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


Managerial Implications

Which industries should we enter or leave?

What influence can we exert?

How are competitors differently affected?


Types of Opportunity

In substituteindustries

In other strategicgroups

In targetingbuyers

For complementaryproducts

In new market segments

Over time


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


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


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?

lecture 02: strategic analysis i: the external context niels-erik wergin strategic management

Documents

strategic analysis

organisation slide

bookshop slide

qa038 slide

forces framework slide

informed strategic choices

timetable tutorial

external analysis