Introduction to Strategic Management - External Environment Analysis PDF

Introduction to Strategic Management External Environment Analysis Muge Ozman Strategic Management Model Environmental Scanning external environment General environme nt Sociocultural forces Economic forces Technological forc...

Introduction to Strategic Management External Environment Analysis Muge Ozman Strategic Management Model Environmental Scanning external environment General environme nt Sociocultural forces Economic forces Technological forces Political - legal Competitive environmen t competitorslabor unions FIRM creditors customers Interest groups  General Environment Economic forces Sociocultural forces Technological forces Political legal forces  Economic Forces Interest rates Exchange rates Inflation GNP and GDP Consumer income, spending, depth Unemplyment Workforce productivity  Demographic environment Gender Age Education Birth rates Income levels Ethnic make up Family composition  Socio-cultural environment Culture Traditions Values Attitudes Beliefs Tastes Patterns of behaviour  Political legal environment Laws Regulations Judicial decisions Political forces  Technological forces Portable Information devices and electronic networking Fuel cells and alternative energy sources Smart, mobile robots Genetically altered organisms Nanotechnology  Sociocultural Forces Increasing environmental awareness Growing health consciousness Expanding seniors market Declining mass market Changing pace and location of life Increasing diversity of workforce  Competitive environment Competitors Labour unions Customers Suppliers Buyers Creditors Interest groups  Scanning, Monitoring and Forecasting Changes in the environment Organizations must scan their external environment to discern weak signals Weak signals refer to barely perceptible changes in the external environment whose impact has yet to be felt Once weak signals are identified they must be monitored to see if they might coalesce into a trend that can impact the organization  Scanning, Monitoring and Forecasting Changes in the environment Nevertheless, taking into account the complexity and volume of information available these days, recent research highlights potential difficulties for managers to gain access to weak signals. HOW? Think of COVID19. Was it possible to read the signals?  Scanning, Monitoring and Forecasting Changes in the environment Monitoring allows an organization to understand how environment trends might influence its competitive environment.  Scanning, Monitoring and Forecasting Changes in the environment the purpose of scanning and monitoring is to aid the organization in developing viable forecasts about future trends. Reading: Anticipating crisis (available in english and french in Moodle/Readings)  PEST Analysis PEST analysis is useful for scanning the general environment PEST is political, economic, social, and technological factors PEST analysis can be used to identify weak signals that may point to a discontinuity shaping the environment PEST provides a link between the general and competitive environment Weak signals in the general environment can become forces for change in the competitive environment  Industry profitability Certain industries generate more profits than others Examples of industries with high ROE – Pharmaceuticals – Tobacco – Beverages – Petroleum refining  Industry structures In some cases very high profits are generated by monopoly Monopoly is a industry segment being dominated by a single firm Industry structure shapes competition, competition shapes rate of profits More is the competition, the more is consumer gain  Perfect competition Identical product Many firms No restrictions on entry or exit in the market In the real world industries fall in between these two extremes of monopoly and perfect competition  Industry Profitability How is the industry’s current level of profitability is a consequence of industry’s present structure What are the trends which change the structure of the indutry? – Consolidating? – New players? – Products becoming more differentiated or more commoditised? – Additions to industry capacity sufficient to outstrip demand? Identify how these structural changes will affect the five forces of competition?will competition intensify or weaken? Forecasting Industry Profitability We can use industry analysis to understand why profitability has been low or high in certain industries but this is not our aim Our aim is to predict the future In doing so, can we try to predict the structural trends in the industry so as to gain an insight into future profitability?  Industry Analysis Identify key elements of the industry structure – Who are the main players? Producers Customers Suppliers Producers of substitute goods – What are the key structural characteristics of these groups?  suppliers INDUSTRY COMPETITORS Potential substitutes entrants Rivalry among existing competitors buyers  Porter’s Five Forces suppliers INDUSTRY COMPETITORS Potential substitutes entrants Rivalry among existing competitors buyers  Opportunities and Threats Industry competition What are Threats? opportunities? Few competitors Numerous competitors Industry sales growing Little entry barriers Low fixed costs Industry sales slowing Low inventory storage costs High fixed costs Free exit High storage costs Significant differentiation No differentiation (Wherever there is a brand , High exit barriers there is a differenciation)  Opportunities and Threats Potential entrants (Potential competitors) What are Threats? opportunities? – – Little or no economies of Significant economies of scale (entry more difficult) – Strong product differentiation – scale Significant switching costs – Controlled access to distribution channels – No product differentiation – No switching costs – Open access to ditribution channels  Opportunities and Threats Bargaining Power of Buyers What are Threats? opportunities? – Purchases small volumes – Purchases highly differentiated and unique – Purchases large volumes – Buyer profits are strong – Buyer can’t manufacture products – Purchases standard products – Buyer profits are weak – Byer can manufacture product – Buyer has full information  Opportunities and Threats Bargaining power of suppliers What are Threats? opportunities? – Supplyin industry has a few – Supplier industry is fragmanted companies – – No substitutes Supplier products have substitutes – Supplier products are not differentiated – – Differentiated products Minimal switching costs in suppliers products – High switching costs  Opportunities and Threats Substitutes What are Threats? opportunities? – No substitutes for my – There are many products substitutes in the market  Opportunities and Threats Is global warming an opportunity or a threat for world automobile producers? May encourage governments to increase taxes on motor fuel and support public transport. So it is a threat….? It can also creat an opportunity to develop new fuel efficient cars  The Boundaries of an Industry What is an industry? Where to look? What is the difference between a market and an industry? Which are the group of firms that compete to supply a particular service?  What is a market? Who are Jaguar’s competitors? – Motor vehicle companies? – Luxury cars? – Automobiles? Key: substitutability on demand and supply side – What are the customers willing to sbstitute Jaguar with? – With what products can manufacturers substitue luxury cars? Is the Porter Framework Sufficient? Complements Dynamis nature of competition Game theory  Game Theory Structure for strategy Benefits: – Identity of players – Strategies available – Payoffs from each – Possible equilibrium outcomes – Incorporates both competition and cooperation  Prisoners Dilemma COKE Small advertising Big advertising budget budget 10 15 Small advertising budget 10 -2 PEPSI -2 4 Big advertising budget 15 4  Segmentation Analysis Because of the difficulty in drawing the boundaries of industries We use segmentation analysis Which is to segment the industry into various markets Purpose is to identify attractive segments, to select strategies for different segments, to determine how many segments to serve, where etc.  Stages in segmentation 1. Identify segmentation variables Characteristics of customers and products Partition into markets most distinctly in terms of limited limited demand and supply substitutability Identify the most strategically significant segments! Combine variables that are closely correlated  Stages in segmentation 2. Construct segmentation matrix 3. Analyse segment attractiveness Apply Porter’s framework on the basis of segments 4. Identify key success factors of the segment Buyers purchase criteria? Basis of competition? Some bases of Market segmentation  Key Success Factors Prerequisites for success What do the customers How does the firm want? survive competition Analysis of demand Who are our customers? Analysis of competition What drives competition? What do they want? What are the main dimensions of competiton? How intensive is competition? How can we obtain superior competitive position?