Introduction to Management - Chapter 3.1 PDF

CHAPTER 3 Evaluating a Company’s External Environment  LEARNING OBJECTIVES 1. Identify factors in a company’s broad macro-environment that may have strategic significance. 2. Recognize the factors that cause competition in an industry to be fierce, more or less normal, or...

CHAPTER 3 Evaluating a Company’s External Environment  LEARNING OBJECTIVES 1. Identify factors in a company’s broad macro-environment that may have strategic significance. 2. Recognize the factors that cause competition in an industry to be fierce, more or less normal, or relatively weak. 3. Map market positions of key groups of industry rivals. 4. Determine whether an industry’s outlook presents a company with sufficiently attractive opportunities for growth and profitability. 2  LEARNING OBJECTIVES 1. The Competitive Arena The chapter focuses heavily on the competitive environment, emphasizing the importance of understanding the dynamics of the industry in which a company operates. The competitive arena includes: Direct competitors: Companies offering similar products or services to the same target market. Analyzing direct competitors helps a firm position itself effectively. Market share analysis: Assessing how much of the market each competitor controls, which informs strategic positioning. Barriers to entry: Identifying factors that make it difficult for new competitors to enter the industry, such as high startup costs or regulatory hurdles. 3  LEARNING OBJECTIVES Porter’s Five Forces: This framework assesses competitive intensity and attractiveness within an industry by examining factors like the bargaining power of suppliers and buyers, threat of new entrants, threat of substitutes, and competitive rivalry. 4  LEARNING OBJECTIVES Technological Influences Technological changes can reshape industries rapidly, offering both opportunities and threats. New technologies may: Disrupt existing products or services: For instance, the rise of digital platforms disrupted traditional retail. Create new market opportunities: Technological advancements like AI, blockchain, or renewable energy create new product categories or enhance operational efficiency. 5  LEARNING OBJECTIVES Societal Influences Societal trends and values significantly affect consumer behavior and preferences, such as the increasing demand for sustainable and ethically produced products. Examples of societal influences include: Cultural shifts: Growing awareness of environmental issues may drive companies to adopt greener practices or products. Consumer activism: Movements demanding corporate responsibility may affect a company's reputation and sales. 6  LEARNING OBJECTIVES Regulatory Influences Government regulations and policies can have a profound impact on business operations. This includes: Industry-specific regulations: Laws governing safety, environmental standards, or labor practices. Trade policies and tariffs: International businesses may be affected by changing trade relations and tariffs. 7  LEARNING OBJECTIVES Demographic Influences Demographic trends, such as ageing populations, urbanization, or shifts in income distribution, can reshape markets over time. A company must analyze how demographic changes will affect: Customer needs and preferences: Different generations may prefer different products, necessitating adjustments in marketing or product design. Labor force availability: Shifts in population age or migration can affect the availability of skilled labor. 8  LEARNING OBJECTIVES Identify opportunities: By recognizing new technological trends, societal demands, or under-served markets, companies can innovate and grow. Mitigate risks: Awareness of regulatory changes, potential competitive threats, or disruptive technologies enables a company to take preventive measures. Adapt to changes: Staying informed about external influences allows a firm to adjust its strategies proactively rather than reactively. 9  COMPANY OR INDUSTRY? Difference Between Company and Industry The terms company and industry are closely related but refer to different concepts in the business world. Understanding the distinction between them is critical for analyzing markets, competitive dynamics, and business strategies. 10  COMPANY OR INDUSTRY? Definition Company: A company is a specific legal entity engaged in producing goods or providing services. It operates within a particular industry and has its own business strategy, brand, organizational structure, and financial goals. A company is also responsible for managing its own operations, employees, and financial outcomes. Industry: An industry refers to a broader collection of companies that are involved in similar business activities, producing related products, or offering similar services. Industries encompass multiple companies, often competing for the same customers and subject to the same market forces and regulations. 11  COMPANY OR INDUSTRY? 2. Scope Company: The scope of a company is limited to its individual operations, management, and products or services. Each company is responsible for its own profits, market share, and long-term sustainability. It makes decisions about its production processes, marketing strategies, and internal resources. Example: Apple Inc. is a well-known company that designs, manufactures, and sells consumer electronics, including iPhones, iPads, and MacBooks. Its scope is defined by the specific products it offers and the markets it serves. Industry: An industry encompasses all companies that provide similar products or services. It represents a broader category of economic activity, influenced by common technological developments, customer demands, and regulatory conditions. Example: The technology industry includes companies that produce electronic devices, software, and IT services. Companies like Apple, Samsung, and Microsoft are all part of the same industry, even though they produce different products. 12  COMPANY OR INDUSTRY? Examples Company: A specific company within an industry is an identifiable business entity that customers engage with. Examples of companies include: Coca-Cola Company: Known for producing soft drinks. Amazon: A global e-commerce giant. Pfizer: A pharmaceutical company that produces medications and vaccines. Industry: Industries group companies based on the nature of their business. Some examples of industries include: Beverage Industry: Includes companies like Coca-Cola, PepsiCo, and smaller beverage producers. E-commerce Industry: Includes major players like Amazon, eBay, and smaller online retail platforms. Pharmaceutical Industry: Encompasses companies like Pfizer, Johnson & Johnson, and Roche that produce healthcare products. 13  COMPANY OR INDUSTRY? The sector/industry from a business perspective The term "sector" is defined from a business perspective as a portion of the economic system. This is a grouping of enterprises that are similar to each other and are unified by a number of factors, including the goods they produce, the reference markets they serve, their inputs, their production technology, and/or their internal processes. 14 The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” Two facets of the company’s situation: Its external environment: industry and competitive environments in which it operates. Its internal environment: the company’s resources and organizational capabilities. 15 The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” Two facets of the company’s situation: Its external environment: industry and competitive environments in which it operates. A company's external environment encompasses all external factors and conditions that impact its operations, shaping its strategy and performance. These factors can be broadly categorised into two main groups. 16 The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” 1. The industry environment, which is specific to the competitive forces within the industry Porter’s Five Forces Framework This model, developed by Michael Porter, is a widely used tool for analyzing the competitive environment within an industry. It identifies five forces that determine industry profitability and competition levels 17 FIVE FORCES MODEL 18 The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” Threat of New Entrants: How easy is it for new competitors to enter the industry? Bargaining Power of Suppliers: This refers to how much power suppliers have over a company in terms of pricing and supply conditions. Bargaining Power of Buyers: This force measures the influence that customers have over pricing and service. Threat of Substitutes: Substitutes are products or services that meet the same need in a different way. Competitive Rivalry: This refers to the intensity of competition between existing firms in the industry. 19 The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” Two facets of the company’s situation: Its internal environment: the company’s resources and organizational capabilities. 20 The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” Two facets of the company’s situation: A company's internal environment includes its resources and capabilities. This helps them compete effectively and execute strategies. 21 The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” Resources Resources are assets used to implement strategies and achieve competitive success. Resources can be either tangible or intangible. Tangible resources are the company's physical and financial assets. Physical assets: Facilities, equipment and infrastructure needed for production. Money: Cash, access to capital and credit. Technological resources: Machinery and tech. 22 The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” Intangible resources are hard for competitors to copy and give a long- lasting competitive advantage. These include: Intangible resources Human Resources: The skills, experience, and knowledge of the company’s employees. In industries like consulting or technology, the expertise of the workforce can be the most critical resource. Brand and Reputation: A strong brand can create customer loyalty and allow companies to charge premium prices. Intellectual Property (IP): Patents, trademarks, and proprietary processes. Corporate Culture: The values, behaviors, and beliefs that shape how employees interact and work within the company. 23  The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” Organizational Capabilities Organizational capabilities refer to a company’s ability to effectively coordinate its resources and execute strategies. Capabilities are what the company does well, often in a way that sets it apart from competitors. These are usually derived from combining multiple resources and processes. Key types of organizational capabilities include: Core Competencies Core competencies are the unique strengths that allow a company to perform activities better than its rivals. These competencies are hard to imitate and are often a source of competitive advantage. Innovation Capabilities The ability to develop new products, services, or processes that meet market demands is a crucial capability in dynamic industries. The ability to quickly respond to changing market conditions, customer preferences, and technological advancements. 24  The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” Organizational Capabilities Operational Efficiency A company’s ability to optimize its processes to minimize costs and maximize productivity. Marketing and Sales Capabilities A company’s ability to effectively promote and sell its products to target markets. Customer Service and Support The ability to deliver excellent customer experiences, which can lead to customer loyalty and repeat business. Adaptability and Agility The ability to quickly respond to changing market conditions, customer preferences, and technological advancements. 25 The First Test of a Winning Strategy: “How Well Does the Current Strategy Fit the Company’s Situation?” The VRIO Framework VALUABLE RARE INIMITABLE ORGANIZED 26 27  Assessing the Company’s Industry and Competitive Environment 1. Do macro-environmental factors and industry characteristics offer sellers opportunities for growth and attractive profits? 2. What kinds and strengths of competitive forces are present in the industry? 3. How will forces driving change in the industry impact its competitive intensity and profitability? 4. Which rivals are strongly positioned in the market and which are not? 5. What strategic moves are rivals likely to make next? 6. What are the key factors of competitive success? 7. Does the industry outlook offer good prospects for profitability? 28  Question 1: What Are the Strategically Relevant Components of a Company’s Macro-Environment? Relevant factors: Play a significant role in shaping management’s decisions regarding the company’s long-term direction, objectives, strategy, and business model. Are on the immediate inner ring industry and competitive environment of the company—competitive pressures, the actions of rivals firms, buyer behavior, supplier-related considerations, and so on. 29 Figure 3.1 The Components of a Company’s External Environment 30 CORE CONCEPTS: Macro-Environment and PESTEL Analysis The macro-environment encompasses the broad environmental context in which a firm is situated and is comprised of six principal components: political factors, economic conditions, sociocultural forces, technological factors, environmental factors, and legal/regulatory conditions. PESTEL analysis can be used to assess the strategic relevance of the six principal components of the macro-environment: political, economic, social, technological, environmental, and legal forces. 33  The Six Components of the Macro-Environment Included in a PESTEL Analysis 1. Political factors. 2. Economic conditions. 3. Technological factors. 4. Sociocultural factors. 5. Environmental forces. 6. Legal and regulatory factors. 34 The Six Components of the Macro-Environment Included in a PESTEL Analysis The Six Components of the Macro-Environment Included in a PESTEL Analysis Question 2: How Strong Are the Industry’s Competitive Forces? State of competition: Where are we now? The dynamics of competition are not the same from one industry to another. The five forces model of competition: It is the most powerful and widely used tool for assessing the strength of the competitive forces that affect an industry’s attractiveness. 37  Question 2: How Strong Are the Industry’s Competitive Forces? How do these frameworks work together? By combining these frameworks, companies can evaluate: We can also see if the wider environment (using the PESTEL framework) is helping or hurting our long-term profitability. How competition and the way the industry is structured (using the Five Forces model) affect profit margins. What's driving change in the industry? (Using Driving Forces). We can also see how the firm compares to other competitors (via Strategic Groups and Competitor Analysis). Which key success factors are crucial for industry success. What are the most important things that will help the industry succeed? 38 Question 2: How Strong Are the Industry’s Competitive Forces? Finally, we need to bring all this together to see if the industry is a good place to make money. If the external conditions, competitive landscape and internal strengths all add up, there's a good chance of making a profit. But if the conditions are unfavourable, it could mean significant challenges or lower profitability. 39  KNOW-HOW The term "know-how" is used to describe the practical knowledge, skills, and expertise that individuals or organisations gain through experience and specialised training. It encompasses more than just theoretical understanding; it also focuses on the ability to perform tasks effectively and solve real-world problems. Know- how often relates to specific processes, techniques, or methods that are crucial for achieving desired outcomes. 40  Characteristics of Know-How In contrast to explicit knowledge, which can be readily documented and disseminated, know-how is frequently tacit, rendering it challenging to fully articulate or transfer to others. Such knowledge is acquired through experience and practical application. The term "know- how" is industry-specific. In the context of business, the possession of know-how can confer a competitive advantage. A company that possesses unique know-how in a specific production process or technology may be able to outperform its rivals or offer products or services that are not easily replicable by others. 41  Examples of Know-How The manufacturing process is a complex undertaking, encompassing a multitude of stages and intricate procedures. A car manufacturer may possess expertise in the optimisation of production processes, exemplified by the implementation of just-in-time (JIT) inventory systems, which serve to minimise waste and reduce costs. This knowledge is accumulated over time through a process of experimentation, process optimisation and problem-solving. Product development: In the technology sector, a company such as Apple has developed expertise in the design of user-friendly interfaces and the integration of hardware and software. This practical expertise, developed over decades, represents a significant competitive advantage for Apple in the market. The medical field is replete with examples of expertise. A surgeon's expertise in performing intricate surgical procedures is acquired through years of rigorous training and experience. Their expertise extends beyond mere theoretical knowledge of human anatomy; it encompasses the dexterity and decision-making abilities required during operations. 42  Know-How Know-how is of great value in any field of endeavour, as it drives innovation, problem-solving and the effective execution of tasks. It is frequently a pivotal element in the maintenance of a competitive advantage and operational excellence within business organisations. 43 THANK YOU 44