EXTERNAL ANALYSIS

STRATEGIC PLANNINGThree key stages

• Strategic analysis– Profiling the business– External and internal environment– Purpose

• Strategic development– Generation of strategic options– Evaluation and ranking of options (‘portfolio’)– Choice of strategies (Corporate, Business Unit

& Functional)• Implementation (‘Strategy in action’)

3 LAYERS = 3 AREAS OF ANALYSIS

External environment for all firms

“PESTEL” model Opportunities /threats

Competitive environment Industry structure 5 forces of competition

The Company itself Strengths /weaknesses Corporate resources

Source: Johnson & Scholes (2002)

EXTERNAL ENVIRONMENT

Macro-environment facing all firms:–Political trends–Economic trends–Socio-cultural & demographic trends–Technological trends–(Environmental) –(Legal)

And then - what do these trends mean for the company? What are the implications?

(PE)STEL frameworkPolitical• Government stability• Taxation policy• Foreign trade

regulations• Social welfare policies

Economic• Business cycles• GNP trends• Interest rates• Money supply• Inflation• Unemployment• Disposable income

(implies demand for products & services)

PE(ST)EL FRAMEWORKSocio-cultural• Population demographics• Income distribution• Social mobility• Lifestyle changes• Attitudes to work and

leisure• Consumerism• Levels of education

Technological• Government spending on

R&D• New discoveries/

technological developments• Speed of technology

transfer• Rates of obsolescence

PEST(EL) FRAMEWORK

Environmental• Environmental

protection laws• Waste disposal• Energy consumption• Re-cycling

Legal• Monopolies legislation• Competition law (in

USA: ‘Anti-trust’)• Employment law• Health and safety• Product safety

SWOT ANALYSIS: Opportunities & Threats

• O & T facing all firms in an industry sector• Some pointers

– be brief, punchy, specific– think hard– group sub-points under main heading

• Strong xyz means an opportunity to ....• DON’T put possible strategies in O&T!

INDUSTRY ANALYSIS

INDUSTRY ATTRACTIVENESS

For any company - profitability determines an industry’s attractiveness

DETERMINANTS OF INDUSTRY PROFITABILITY

• Profits for a firm are determined by:– The value of products to customers (i.e. how much they

will pay)– Competitive intensity /rivalry– Bargaining power of producers relative to their:

• Suppliers• Buyers (customers)

– And …the structure of the industry

Source: Grant p66

INDUSTRY ATTRACTIVENESS:DIFFERENT INDUSTRIES, DIFFERENT RETURNS

Household & Personal Products 22.7 Gas & Electric Utilities 10.4Pharmaceuticals 22.3 Food and Drug Stores 10.0Tobacco 21.6 Motor Vehicles & Parts 9.8Food Consumer Products 19.6 Hotels, Casinos, Resorts 9.7 Securities 18.9 Railroads 9.0Diversified financials 18.3 Insurance: Life and Health 8.6Beverages 18.8 Packaging & Containers 8.6Mining & crude oil 17.8 Insurance: Property & Casualty 8.3Petroleum Refining 17.3 Building Materials, Glass 8.3Medical Products & Equipment 17.2 Metals 8.0Commercial Banks 15.5 Food Production 7.2Scientific & Photographic Equipt. 15.0 Forest and Paper Products 6.6Apparel 14.4 Semiconductors &Computer Software 13.9 Electronic Components 5.9Publishing, Printing 13.5 Telecommunications 4.6Health Care 13.1 Communications Equipment 1.2Electronics, Electrical Equipment 13.0 Entertainment 0.2Specialty Retailers 13.0 Airlines (22.0)Computers, Office Equipment 11.7

Median return on equity (%), 1999-2005

INDUSTRY ATTRACTIVENESS:PROFITABILITY OF GLOBAL INDUSTRIES

% RETURN ON INVESTED CAPITAL, 1963-2003

Viability means: ROCE > Cost of capital

INDUSTRY ATTRACTIVENESS:Some conclusions

• The profitability of an industry is not random• It depends on influences on that industry’s structure

– Dominance of major players– Economies of scale & cost structures– Product differentiation & level of competition– Customer preferences & niche markets

• Industry structure drives competitive behaviour & ….industry profitability

THE SPECTRUM OF INDUSTRY STRUCTURES

Concentration

Entry and ExitBarriers

ProductDifferentiation

Information

Perfect Competition Oligopoly Duopoly Monopoly

Many firms A few firms Two firms One firm

No barriers Significant barriers High barriers

HomogeneousProduct Potential for product differentiation

PerfectInformation flow Imperfect availability of information

ACTIVITY

Identify one example of each:- perfect competition- oligopoly- duopoly- monopoly

PORTER’S 5 FORCES:

DRIVERS OF INDUSTRY PROFITABILITY

PORTER’S FIVE FORCES OF COMPETITION:DRIVERS OF INDUSTRY PROFITABILITY

SUPPLIERS

POTENTIALENTRANTS

POTENTIALSUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Competitive Intensity (rivalry)

Bargaining power of suppliers

Bargaining power of buyers

Threat ofnew entrants

Threat ofsubstitute products

NOTE: Competitive Intensity is determined by the other 4 forces + industry structure

THE 5 FORCESTHREAT OF SUBSTITUTES• Competitive pressure depends on:

– Price & performance characteristics of substitutes (petrol, diesel, hybrids)– Buyers’ propensity to substitute (e.g. train for car, plane for train)

THREAT OF NEW ENTRANTS• Barriers to entry:

– Capital requirements (new aircraft manufacturers)– Economies of scale– Absolute cost advantage (access to low-cost raw materials)– Product differentiation (brand loyalty built up over decades)– Access to channels of distribution (major distributors taken)– Legal and regulatory barriers (gov’t licences, patents)– Retaliation (power of key players to lower prices)

THE 5 FORCES

BARGAINING POWER OF SUPPLIERS •Key issues:

– Ease of switching between suppliers– Relative bargaining power

•Large customers have b/power over small suppliers– Suppliers form cartels to sustain margins (OPEC)

•Suppliers of high tech, high value added, sophisticated components may have high b/power (F1 sequential gearboxes, touch technology for SMART phones)

THE 5 FORCESBARGAINING POWER OF BUYERS (CUSTOMERS)• Buyer’s price sensitivity

– Commodity products: buyer can switch– Differentiated product /service: less likely to switch– Price rivalry on end-products (cars) implies buyer price

sensitivity on components (tyres, seats, windscreens)• Relative bargaining power

– Size & number of buyers versus suppliers (buyer concentration lowers margins of suppliers: supermarkets)

– Potential for vertical integration (bringing in-house)

THE 5 FORCES:COMPETITIVE INTENSITY

• Concentration of rivals– 4-firm concentration ratio (market share of 4 key players) indicates

market control– Dominance of a few large rivals implies non-price rivalry (Coca-cola

vs Pepsi)• Diversity of competitors

– Similar companies implies ‘cosy’ rivalry (US car market in 1970s)– Diverse companies, intense rivalry (EU car market)

• Product differentiation– Products largely indistiguishable(commodities) means price rivalry– If differentiated, price rivalry weak (BMW)

© 2013 Robert M. Grantwww.contemporarystrategyanalysis.com

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• Porter’s framework assumes:• Industry structure drives competitive behaviour• Industry structure is (fairly) stable

• But, competition also changes industry structure:• Schumpeterian Competition – A “perennial gale of creative

destruction” – market leaders overthrown by innovation• Hyper-competition – “Intense and rapid competition moves…

continuously creating new competitive advantages and destroying existing competitive advantages”

• Implications: • With 5 forces framework

INDUSTRY STRUCTURE COMPETITIVE STRATEGY

• Under dynamic competitionCOMPETITIVE STRATEGY INDUSTRY STRUCTURE

CRITIQUE ...

COMPETITIVE ADVANTAGE

‘Doing something that the customer values but …doing it better than competitors’

COMPETITIVE ADVANTAGE:IDENTIFYING KEY SUCCESS FACTORS

• We look at sources of competitive advantage…the key success factors

• What is the basis of competition? (BoC)• what is in the mind of customers in choosing

between you & your competitors?• Key Success factors (KSFs):

• given the BoC, what do you (and your competitors) have to do to be successful?

• also called Critical Success Factors (CSF)

BUILDING COMPETITIVE ADVANTAGE:KEY SUCCESS FACTORS

• ‘resources, skills and capabilities of companies (in an industry) ...that are essential to deliver success…. profitably’

• applies to all competitors

To identify KSFs, look at:• basis of competition• competitive environment