ECB3SM 2024-25 Lecture 02 PDF

Strategy and Management (2024-25) Lecture 02: External Analysis Wednesday, November 20,2024 Rajani Singh Lecturer: Utrecht University School of Economics Lecture 01 – Session Plan 1: Lecture 01- Quick 2:External Analysis 3: Case Focus: Fitness 4: Group project...

Strategy and Management (2024-25) Lecture 02: External Analysis Wednesday, November 20,2024 Rajani Singh Lecturer: Utrecht University School of Economics Lecture 01 – Session Plan 1: Lecture 01- Quick 2:External Analysis 3: Case Focus: Fitness 4: Group project 5: Q&A Review First What is Strategy? Conceptual frameworks Know Your Team Competitive Advantage Big picture First Steps to a 5 Force Analysis Stakeholder Analysis Segmentation comprehensive analysis Key Success Factors Learning objectives 1. Recall Week 01 : What is Strategy? 2. Generate a PESTEL analysis to evaluate the impact of external factors on the firm. 3. Differentiate the roles of firm effects and industry effects in determining firm performance. 4. Apply Porter’s five competitive forces to explain the profit potential of different industries. 5. Segment an industry into its constituent markets and appraise the relative attractiveness of different segments; 6. Analyse competition and customer requirements in order to identify opportunities for competitive advantage within an industry (Key Success Factors). Strategy and Management 3 Course Plan 1. What is 2. External 3. Internal 4. Business Strategy? Analysis Analysis Strategy - I Gaining and Pestel Framework Core Generic Business Sustaining Porter’s Five forces Competencies Strategies competitive Key Success Resource Based Cost leadership vs advantage Factors View differentiation VRIO framework 5. Business Strategy II 6. Corporate Strategy 7. Global Strategy Innovation, Diversification and Competing around the Entrepreneurship and Vertical integration world Platforms Strategic alliances, Integration – 4Is – Ideas, Invention, Mergers and acquisitions Responsiveness Innovation and Imitation framework Strategy and Management 4 Recall Lecture 01: What is Strategy? Role of strategy in a firm’s quest for competitive advantage What is competitive advantage? Have a better plan, and better execution! What is strategy Michael Porter - YouTube What is Strategy? What is not Strategy? Grand Statements = strategy High Efficiency = strategy The Strategic Decision-making process Mission, Vision and Values You can’t just have it; you need to know how to use it. Product-oriented vs customer-oriented vision statements! Strategy and Management 5 Stakeholder Impact Analysis Strategy and Management 6 Lecture 01 – Session Plan 1: Lecture 01- Quick 2:External Analysis 3: Case Focus: Fitness 4: Group project 5: Q&A Review First What is Strategy? Conceptual frameworks Know Your Team Competitive Advantage Big picture First Steps to a 5 Force Analysis Stakeholder Analysis Segmentation comprehensive analysis Key Success Factors Learning objectives 1. Recall Week 01 : What is Strategy? 2. Generate a PESTEL analysis to evaluate the impact of external factors on the firm. 3. Differentiate the roles of firm effects and industry effects in determining firm performance. 4. Apply Porter’s five competitive forces to explain the profit potential of different industries. 5. Segment an industry into its constituent markets and appraise the relative attractiveness of different segments; 6. Analyse competition and customer requirements in order to identify opportunities for competitive advantage within an industry (Key Success Factors). Strategy and Management 8 PESTEL analysis Looks at macro level influences including Political, Economic, Sociocultural, Technological, Ecological, and Legal The PESTEL framework helps us to understand how the environment affects a firm This is important for strategic planning because it helps us understand opportunities and threats that may be emerging from trends in the environment. https://www.youtube.com/watch?v=GFVKKTwkANY Strategy and Management 9 Summary Strategy and Management 10 Learning objectives 1. Recall Week 01 : What is Strategy? 2. Generate a PESTEL analysis to evaluate the impact of external factors on the firm. 3. Differentiate the roles of firm effects and industry effects in determining firm performance. 4. Apply Porter’s five competitive forces to explain the profit potential of different industries. 5. Segment an industry into its constituent markets and appraise the relative attractiveness of different segments; 6. Analyse competition and customer requirements in order to identify opportunities for competitive advantage within an industry (Key Success Factors). Strategy and Management 11 Firm and it’s Environment Strategy and Management 12 Variance in firm performance Strategy and Management 13 Variance in firm performance Strategy and Management 14 Learning objectives 1. Recall Week 01 : What is Strategy? 2. Generate a PESTEL analysis to evaluate the impact of external factors on the firm. 3. Differentiate the roles of firm effects and industry effects in determining firm performance. 4. Apply Porter’s five competitive forces to explain the profit potential of different industries. 5. Segment an industry into its constituent markets and appraise the relative attractiveness of different segments; 6. Analyse competition and customer requirements in order to identify opportunities for competitive advantage within an industry (Key Success Factors). Strategy and Management 15 The profitability of US industries, 2000-2010 Industry Median ROE Leading companies 2000-10(%) Tobacco 33.5 Philip Morris Int., Altria, Reynolds American Household and personal products 27.8 Procter & Gamble, Kimberly-Clark, Colgate-Palmolive Motor vehicles and parts 4.4 GM, Ford, Johnson Controls Entertainment 3.9 Time Warner, Walt Disney, News Corporation Airlines -11.3 AMR, UAL, Delta Airlines Source: Data from Fortune 1000 by industry. See Grant & Jordan 2e Table 2.1 for a more detailed list of US industries. Strategy and Management 16 What do firms compete for? Is competition a direct contest between rivals? Apple vs blackberry? Yamaha vs Steinway? BMW vs audi? Is competition about winning a sale, or… Is competition about earning profits? Competing for profits is more complex as it involves players other than rivals like customers, suppliers, buyers Strategy and Management 17 Porter’s Five Forces Model Industry Group of firms producing products or services that are perceived by customers as meeting the same needs E.g., Apple Inc. competes in the smartphone industry, as does Samsung Industry exists in an industry environment, which comprises various market participants – suppliers, buyers, rivals, substitutes, potential entrants Industry analysis is a tool that helps us understand how profits are distributed among these market participants Strategy and Management 18 Porter’s Five Forces Model Managers tend to view competition too narrowly Suppliers, buyers, rivals, substitutes, potential entrants are all competing with their share of profits Failure to consider all market participants puts your firm under risk Strategy and Management 19 1. Threat of Entry The risk that potential competitors will enter an industry In most industries, new entrants cannot enter on equal terms with those of established firms Lowers industry profit potential and increases spending among incumbent firms The threat of entry is high when: The minimum efficient scale to compete in an industry is low. Network effects are not present. Customer switching costs are low. Capital requirements are low. Incumbents do not possess: Brand loyalty. Proprietary technology. Preferential access to raw materials. Preferential access to distribution channels. Favorable geographic locations. Cumulative learning and experience effects. Restrictive government regulations do not exist. New entrants expect that incumbents will not or cannot retaliate Strategy and Management 20 2. Supplier Power Powerful suppliers can raise cost of production by asking higher price/lowering quality The ease with which firms can switch between different inputs suppliers determines supplier power The power of suppliers is high when: Supplier’s industry is more concentrated than the industry it sells to. Suppliers do not depend heavily on the industry for their revenues. Incumbent firms face significant switching costs when changing suppliers. Suppliers offer products that are differentiated. There are no readily available substitutes for the products or services that the suppliers offer. Suppliers can credibly threaten to forward-integrate into the industry. Strategy and Management 21 3. Buyer Power Powerful buyers demand lower price –reducing firm profit by lower revenue Powerful buyers demand better quality/more features –reducing profit by increasing costs The power of buyers is high when: There are a few buyers, and each buyer purchases large quantities relative to the size of a single seller. The industry’s products are standardized or undifferentiated commodities. Buyers face low or no switching costs. Buyers can credibly threaten to backwardly integrate into the industry. Strategy and Management 22 4. Threat of Substitutes Substitutes are products outside the industry that meet similar basic needs High availability of substitutes mean less demand and more pressure on prices The threat of substitutes is high when The substitute offers an attractive price-performance trade-off e.g. Zoom and business travel The buyer’s cost of switching to the substitute is low e.g.Tax software and Tax Consultant , Public transport and Taxi Buyer’s propensity to substitute is high e.g. Gym and outdoor running Cigarettes? Strategy and Management 23 5. Rivalry The intensity with which companies in the same industry jockey for market share and profitability. Can range from genteel to cut-throat. During periods of high growth, consumer demand rises, price competition among firms decreases, focus on capturing new customers, not focused on taking profitability away from each other During periods of negative growth:, Rivalry is fierce, Rivals can only gain at the expense of one another The other forces in the model pressure this rivalry, stronger forces lead to stronger competitive intensity The rivalry among existing competitors is high when: There are many competitors in the industry. The competitors are roughly of equal size. Industry growth is slow, zero, or even negative. Exit barriers are high. Incumbent firms are highly committed to the business. Incumbent firms cannot read or understand each other’s strategies well. Products and services are direct substitutes. Fixed costs are high and marginal costs are low. Excess capacity exists in the industry. The product or service is perishable. Strategy and Management 24 A 6th Force: Complements Complement: A product or service or competency that adds value to original product. When its performance increases or its price falls, industry demand increases. Paper for Xerox copiers iTunes for iPod music players Complementor: If customers value your product more when combined with another firm’s product or service. Complementors may be found outside the focal firm’s industry. Michelin tires for Ford & GM Strategy and Management 25 Porter’s Five Forces Model Profitability is a function of Willingness to pay Price Cost Strategy and Management 26 Complements Strategy and Management 27 Porter’s Five Forces Model Porter derived two key insights that form the basis of his seminal five forces model: Rather than defining competition narrowly as the firm’s closest competitors to explain and predict a firm’s performance, competition must be viewed more broadly, to also encompass the other forces in an industry: buyers, suppliers, potential new entry of other firms, and the threat of substitutes. The profit potential of an industry is neither random nor entirely determined by industry- specific factors. Rather, it is a function of the five forces that shape competition: threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among existing firms. As a rule of thumb, the stronger the five forces, the lower the industry’s profit potential—making the industry less attractive for competitors. the weaker the five forces, the greater the industry’s profit potential—making the industry more attractive. Strategy and Management 28 Applying industry analysis Industry analysis can be used to: Explain differences in profitability between industries and changes in the profitability of a given industry over time Assist managers in positioning the firm advantageously Predict possible changes in competition and profitability in the near future Identify opportunities for changing industry structures and alleviating competitive pressures. Strategy and Management 29 Applying industry analysis Industry analysis can be used to: Explain differences in profitability between industries and changes in the profitability of a given industry over time Assist managers in positioning the firm advantageously Predict possible changes in competition and profitability in the near future Identify opportunities for changing industry structures and alleviating competitive pressures. Strategy and Management 30 Applying the Five Forces: Soft Drinks vs Airlines 31  Supplier Power Bargaining Power of Suppliers Powerful labor unions Key Suppliers such as water and sugar are commodities Aircraft and engine producers are concentrated oligopolies with little to no pricing power Airports are local Monopolies The most valuable input Coco Cola’s ‘secret formula’ is inhouse (NO ONE KNOWS) Airport services are also concentrated 32  Buyer Power Customers have lots of choice among similar products Intermediate customers like botling facilities and Low switching costs distributors are locked into long term exclusive contracts Air travel perceived as standard product End customer market is highly fragmented; Individual custoemrs buy in such small quantitites that they are not Buyers are fragmented able to negotiate price discounts Customers are not brand sensitive 33  Threat of Substitutes Technology for web conferencing is improving Many substitutes –Water, Coffee, Fruit Juice etc. Most of Fast trains compete with airlines on short haul due to security these are free or cost less measures Substitutes not always conveniently available, soft drinks are impulse purchase, consumers are hooked to their choice of soft drinks Travel can be delayed, limited or be done with! Strong brand positions reduce the value of potential substitutes in the eyes of customers 34  Threat of New Entrants First Mover Advantages Limited incumbency advantages High barriers due to strong brand equity enjoyed by Coke and Pepsi, which ahs been Low switching costs built up over many decades Some demand side benefits of Limited shelf space, vending slots and fountains – difficult to displace the incumbents from scale these privileged positions Easy access to distribution Scale economies in R&D – new product, channels package instructions 35 Perils of poor industry analysis “When an industry’s underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance.” ~ Warren Buffet Strategy and Management 36 Strategy Smart: The Five competitive Forces that Shape Strategy Main idea: The five competitive forces that shape strategy. Link: https://www.youtube.com/watch?v=mYF2_FBCvXw Length: 13:11 minutes. Strategy and Management 37 Learning objectives 1. Recall Week 01 : What is Strategy? 2. Generate a PESTEL analysis to evaluate the impact of external factors on the firm. 3. Differentiate the roles of firm effects and industry effects in determining firm performance. 4. Apply Porter’s five competitive forces to explain the profit potential of different industries. 5. Segment an industry into its constituent markets and appraise the relative attractiveness of different segments; 6. Analyse competition and customer requirements in order to identify opportunities for competitive advantage within an industry (Key Success Factors). Strategy and Management 38 Segmentation Analysis The process of partitioning a market based on characteristics that are likely to influence consumers purchasing behavior Steps in segmentation analysis Identify possible segmentation variables Construct a segmentation matrix Analyse segment attractiveness Identify key success factors in each segment Select segment scope Strategy and Management 39 Key Success Factors Factors within the firm's market environment that determine the firm’s ability to survive and prosper Market survival is driven by two criteria Firm’s ability to supply what customer’s want – Requires analysis of demand Firm’s ability to survive competition – Requires analysis of competition Strategy and Management 40 Lecture 01 – Session Plan 1: Lecture 01- Quick 2:External Analysis 3: Case Focus: Fitness 4: Group project 5: Q&A Review First What is Strategy? Conceptual frameworks Know Your Team Competitive Advantage Big picture First Steps to a 5 Force Analysis Stakeholder Analysis Segmentation comprehensive analysis Key Success Factors External Analysis Threat from Substitutes – High Customer perspective Numerous ways of improving fitness that don’t involve health club membership –creating own fitness programme from advice in book or DVDs, joining a ‘bootcamp’ in a local park, becoming a member of a sports team and so on. Rivalry – Moderate to High Porter suggests that rivalry depends on: Concentration, Diversity of competitors, Product differentiation, Excess capacity and exit barriers, and Cost conditions Concentration appears to be relatively low given the large number of firms (public and private) in the market and (Refer data in Tables 2.3 and 2.4, you may be able to calculate a rough and ready 10-firm concentration ratio , based on number of clubs rather than market share). Competitors are very diverse (for-profit and not-for-profit; small and large; specialist and non-specialist) Excess capacity is emerging ‘the costs of operating a health club are much the same regardless of usage’ (page 74) Low concentration, high diversity and a tendency towards excess capacity are likely to depress industry profitability but, the offerings of existing players are differentiated. Strategy and Management 42 External Analysis Threat of Entry - High Porter’s framework highlights barriers to entry from capital requirements; economies of scale; absolute cost advantages; product differentiation; access to distribution channels; government and legal barriers General estimates of the costs of start-up (page 74) The barriers faced by new start-ups as opposed to those faced by cross entrants from other markets, for example, easyGym or the Hilton hotel groups. Overall, the barriers to entry appear relatively low so the threat of entry is high. The Bargaining Power of Suppliers – Moderate to Low Not much information on suppliers in case Only a passing reference to suppliers of gym and fitness equipment (page 74) What can be some other kinds of suppliers? The suppliers of capital, labour or land (the sites which health clubs occupy) - in all these arenas there are many suppliers in competition with each other. Strategy and Management 43 External Analysis Bargaining Power of Buyers – Moderate to Low Price sensitivity of customers Low switching costs In summary, whilst in the past the industry has been attractive because changes in the external environment have produced rapid growth, many new entrants have been drawn into the market and competition from substitutes, the threat of entry and rivalry between existing players has all led to the erosion of margins. Strategy and Management 44 Segmentation Analysis How could this industry be segmented? Is Fitness First right to move upmarket and offer an enhanced range of services to its members? Are there alternative strategies that Fitness First could pursue? There are numerous ways in which this market might be segmented On the customer side we might segment on the basis of gender, age, income, socio-economic group, attitudes to fitness. On the supply side we might segment the market on the basis of the range of services offered (specialist e.g. body building versus full service e.g. gym, swimming, swimming, sports); the sophistication of the offering (basic through to prestige); the provision of health and fitness advice; location. The Sport England web-site provides some illustrative examples of dominant market segments by population at http://segments.sportengland.org which could be adapted to fit this context. By combining different segmentation variables, a segmentation matrix can be constructed. For example: Budget Mid-market Specialist Prestige Professional male city dweller Female exercise class friends Young Mums Early Retirees Strategy and Management 45 Key Success factors What do customers want? How do firms survive the competition? Key success factors Diversity of customer preferences but clubs Low barriers to entry and exit, large Locating clubs at popular sites and need to be conveniently located – typically number of substitutes. providing extended hours of access. as close as possible to where customers live or work Costs do not vary significantly with Differentiation requires well qualified increased usage of facilities, so maintaining trainers, frequent updates to facilities and Customers willing to pay a premium for optimal membership level is important activity programmes and positive high quality facilities. endorsements from existing members Differentiation can lead to significant price Customers attracted by variety and novelty premiums. Building and maintaining membership in fitness programmes and by proven requires sophisticated pricing with results but increasingly seek ‘value for Competition based on special deals and packages that are tailored to different money’ waivers rather than reductions in published customer groups. membership fees Strategy and Management 46 Lecture 01 – Session Plan 1: Lecture 01- Quick 2:External Analysis 3: Case Focus: Fitness 4: Group project 5: Q&A Review First What is Strategy? Conceptual frameworks Know Your Team Competitive Advantage Big picture First Steps to a 5 Force Analysis Stakeholder Analysis Segmentation comprehensive analysis Key Success Factors Analyzing Firm strategy: Some Key considerations Evaluate many different elements of the situation at once. Differentiate between the factors that are influencing the situation. Understand that problems are often complex and multilayered. Need to dig deep. Don’t be too quick to accept an easy solution. Envision an explanation that might not readily be apparent. Imagine different scenarios. Contemplate the outcome of the decision. Deal with uncertainty and incomplete knowledge. Data may be missing. Information may be contradictory. Details & consequences may be unknown. 48 Analyzing Firm strategy: Some Key considerations Conducting Case Analysis Become familiar with the material Identify problems Conducting Strategic Analysis Determine which strategic issues are involved. Use strategic tools to conduct the analysis. Five Forces analysis Value-chain analysis Contingency frameworks, e.g. when to use related rather than unrelated diversification Financial analysis – using Financial Ratio Analysis. Test your own assumptions about the firm. 49 Analyzing Firm strategy: Some Key considerations Make recommendations. Make a set of recommendations supported by your analysis. Describe exactly what needs to be done. Explain why this course of action will solve the problem. Indicate how best to implement the proposed solution. Note: the solution you propose must solve the problem you identified 50 Decision making techniques Asking heretical questions can help challenge long-term beliefs about how things work. Ask disruptive questions about small and large things. Can we design travel routes with “no left turns”? Can we dye clothes without water? Does a toilet paper roll need a cardboard center? Don’t be afraid to make mistakes; instead encourage something new. Mistakes are opportunities for learning. 51 Decision making techniques Conflict inducing techniques can be very helpful in arriving at better solutions. Conflict can help avoid groupthink. Failure to critically evaluate alternatives The devil’s advocacy approach assigns someone the role of official critic. Ensures the group will take a hard look at its original proposal The Dialectical inquiry approaches a problem from two alternative points of view. 1. Formal debate using a thesis (a proposal) 2. Antithesis (a counterplan). 52 Analyzing organizational goals and objectives. Has the company developed short-term objectives that are inconsistent with its long-term mission? Has the company considered all of its stakeholders equally in making critical decisions? Is the company being faced with an issue that conflicts with one of its long- standing policies? 53 Analyzing the external environment. Does the company follow trends and events in the general environment? Is the company effectively scanning and monitoring the competitive environment? Has the company correctly analyzed the impact of the competitive forces in its industry on profitability? 54 Analyzing the internal environment. Does the company know how the various components of its value chain are adding value to the firm? Has the company accurately analyzed the source and vitality of its resources? Is the company’s financial performance as good as or better than that of its close competitors? 55 Assessing a firm’s intellectual assets. Does the company have underutilized human capital? Is the company missing opportunities to forge strategic alliances? Has the company developed knowledge-management systems to capture what it learns? 56 Formulating business-level strategies Has the company chosen the correct competitive strategy given its industry environment and competitive situation? Is the company using a strategy that is appropriate for the industry life cycle in which it is competing? 57 Formulating international-level strategies Is the company’s entry into an international marketplace threatened by the actions of local competitors? Has the company made the appropriate choices between cost reduction and local adaptation to foreign markets? Can the company improve its effectiveness by embracing one international strategy over another? 58 Creating effective organizational designs. Has the company implemented organizational structures that are suited to the type of business it is in? Has the company employed boundaryless organizational designs where appropriate, and do senior managers maintain appropriate control of lower- level employees? Does the company use outsourcing to achieve the best possible results? 59 Fostering corporate entrepreneurship Has the company resolved the dilemmas associated with managing innovation, and is it effectively defining and pacing its innovation efforts? Has the company developed autonomous work units that have the freedom to bring forth new product ideas and has it used product champions to implement new venture initiatives? Does the company have an entrepreneurial orientation? 60 A good analysis needs you to… Organise your thoughts Be thorough, avoid stating the obvious If possible, present information graphically Emphasize Strategic Analysis Background/ Problem statement : 10-20% Strategic Analysis : 60-75% Recommendation/action plan: 10-20% Be logical and consistent Exercise quality control 61 Key concepts and takeaways from today The concept of Strategic Management Integrative management field Combines analysis, formulation, and implementation in the quest for competitive advantage Strategy and Management enables you to View a firm in a holistic manner Take a general manager perspective Understand how to achieve superior performance for your organisation Strategy and Management 62 Key concepts and takeaways from today Porter’s Five Forces Model The Five Forces Model helps strategic leaders understand: The profit potential of different industries. How they can position their firms to gain and sustain competitive advantage. Two key insights about this model: Competition is viewed more broadly in the five forces model. Profit potential is a function of the five competitive forces. Strategy and Management 63 64