Environment PDF

THE ENVIRONMENT The big trade-off EXTERNAL APPROACH: INTERNAL APPROACH: an environmental factors are what organisation’s specific strategic matter most to success: strategy capabilities should drive strategy. development should be primarily It is from these i...

THE ENVIRONMENT The big trade-off EXTERNAL APPROACH: INTERNAL APPROACH: an environmental factors are what organisation’s specific strategic matter most to success: strategy capabilities should drive strategy. development should be primarily It is from these internal about seeking attractive characteristics that distinctive opportunities in the marketplace. strategies and superior performance can be built.  Strategic position Who am I? Who can I be? Thanks to what? Where am I? Who do I want to be? How do I judge things? Environment: what gives organisations their means of survival Davide Genta- Advanced Strategic management Layers of the business environment The macro-environment. Analysis tools. megatrends Forecasting Inflexion points PESTEL (prediction emphasys) -Market -Non market Scenario analysis Weak signals (Learning emphasys) From environmental analysis then we’ll move to industry analysis The PESTEL framework An exemple: PESTEL analysis of TESLA What additional environmental influences would you add to this initial list for TESLA? From your more comprehensive list, which of these influences would you highlight as likely to be the ‘key drivers for change’ for TESLA in the coming five years? https://www.edrawmax.com/article/tesla-pestel-analysis.html Key drivers for change environmental factors likely to have a high impact on industries and sectors, and the success or failure of strategies within them. Forecasting Scenario analysis possible environments which strategies have to deal with. S.A. is used in conditions of high uncertainty→ the environment could go in several highly distinct directions S.A. can be differentiated from alternative futures forecasting as scenario planners usually avoid presenting alternatives in terms of finely calculated probabilities. S.A. tend to extend too far into the future to allow probability calculations and besides, assigning probabilities directs attention to the most likely scenario rather than to the whole range.→ The point of scenarios is more to learn than to predict.→ Scenarios are used to explore SCENARIO CUBE: PWC EXAMPLE ON 2030 market labour Procedure to create a scenario Identifying Identifying Selecting Developing Identifying impacts of key drivers opposing key scenario the scope alternative for change drivers ‘stories’ scenarios Industries How much does industry matter? INDUSTRIES AND SECTORS An industry is a group of firms A market is a group of producing products and services customers for specific products that are essentially the same. or services that are essentially Automobile industry and the the same airline industry. the automobile industry has Industries are also often markets in North America, Europe and Asia described as ‘sectors’, especially in public services Industries and sectors are often made up of several specific markets. Competitive forces – the five forces framework Porter’s five forces framework5 helps identify the attractiveness of an industry in terms of five competitive forces: the threat of entry, the threat of substitutes, the power of buyers, the power of suppliers and the extent of rivalry between competitors. These five forces together constitute an industry’s ‘structure’ which is typically fairly stable. An attractive industry structure is one that offers good profit potential. Where the five forces are high, industries are not attractive to compete in. There will be too much competition, and too much pressure, to allow reasonable profits. useful starting point for strategic analysis even where profit criteria may not apply. once the degree of industry attractiveness has been understood, the five forces can help set an agenda for action on the various critical issues that they identify: what should be done to control excessive rivalry in a particular industry? The five forces framework The structural determinants of the five forces of competition The threat of entry The greater the threat of entry, the worse it is for incumbents (existing competitors) in an industry. Scale and experience Access to supply or distribution channels An attractive industry has high Expected retaliation barriers to entry in order to reduce Legislation or government action the threat of new competitors. Differentiation Barriers to entry are the factors that need to be overcome by new entrants if they are to compete in an industry. The threat of substitutes Substitutes are products or services The price/performance ratio is critical that offer a similar benefit to an to substitution threats. industry’s products or services, but A substitute is still an effective threat by a different process. even if more expensive, so long as it aluminium → steel in automobiles; offers performance advantages that customers value trains → cars; P(Aluminium)>P(steel) → D(aluminium)>D(steel) television and videogames are substitutes for each other. Extra-industry effects are the core of the substitution concept Managers often focus on their substitutes come from outside the competitors in their own industry, and incumbents’ industry and should not be neglect the threat posed by confused with competitors’ threats substitutes. BMW → Facebook The simple risk of substitution puts a cap on the prices that can be charged in an industry The power of buyers Buyers are the organisation’s Buyer power conditions: Concentrated buyers immediate customers, not few large customers account for the majority of necessarily the ultimate sales consumers. Low switching costs. buyers can easily switch between one supplier If buyers are powerful, then and another typically low switching cost when you sell they can demand cheap prices weakly differentiated commodities or product or service Buyer competition threat improvements → reduce profit the buyer has the capability to supply itself, or if it has the possibility of acquiring such a capability → Backward integral integration The power of suppliers Suppliers are those who supply The factors increasing supplier the organisation with what it power are the converse to those needs to produce the product for buyer power or service. Concentrated suppliers. Input sellers High switching cost Supplier competition threat Forward integral integration Competitive rivalry Competitive rivals are organisations with similar products and services aimed at the same customer group (i.e. not substitutes) The more competitive rivalry there is, the worse it is for incumbents within the industry. Forces affecting rivalry: Competitor balance. competitors equal size →danger of intensely rivalrous behaviour → i.e. price cuts Industry growth rate: low growth or decline phase→any growth is likely to be at the expense of a rival→fierce resistance. >price competition and low profitability High fixed costs. high investments in capital equipment or initial research→ costs spreading by increasing volumes→ cut their prices High exit barriers declining industries→ Excess capacity persists →incumbents fight to maintain market share→ cut their prices Low differentiation commodity market→ cut the price Netflix example Types of industry: Monopolistic industries. → monopoly an industry with just one firm and therefore no competitive rivalry→ Search engines/mainframes Oligopolistic industries.→ oligopoly → few firms dominate an industry, with the potential for limited rivalry and great power over buyers and suppliers→ Iron market/ airplanes (duopoly> Airbus vs Boeing) Hypercompetitive industries→ Hypercompetition →the frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change. → Smartphones / streaming platforms Perfectly competitive industries→ Perfect competition →barriers to entry are low + many equal rivals + very similar products+information about competitors is freely available→ few markets are absolutely perfectly competitive, but many are highly so Implications of five forces analysis Which industries to enter (or leave)? What influence can be exerted? How are competitors differently affected? Key issues in using the five forces framework Defining the ‘right’ industry. industries can be analysed at different levels, → different markets / different segments within them Converging industries Industry definition is often difficult → industry boundaries are continuously changing. Complementary organisations sixth force → organisations that are complementors rather than simple competitors An organisation is a complementor: (i) if customers value the product more when they have the other organisation’s product than when they have the product alone; (ii) if it’s more attractive for suppliers to provide resources to you when they are also supplying the other organisation than when they are supplying you alone. Microsoft / Mc Afee or Boeing and Ryanair Five forces, or six?  Value net (Brandeburger Nabluff) value net: a map of organisations in a business environment demonstrating opportunities for value-creating cooperation as well as competition Value net model for Air Traffic Management system The dynamics of industry structure:The industry life cycle Solar industry Example The dynamics of industry structure: Comparative industry structure analysis Cycles of competition sequences of move and counter-move are called cycles of competition. cycles of competition become very rapid and aggressive → industry structure becomes unstable→ hypercompetition, (low profitability for most competitors) Identifying key success factors