Henry: Understanding Strategic Management

The General & Competitive Environment

(Slides based on Chapters 2 and 3)

Key concepts we will cover:

Analysing the General Environment
PEST analysis Risk & Scenario Planning

Analysing the Competitive Environment

Porters 5 Forces model Porters Strategic Group Analysis Hypercompetition

The General Environment

The external environment facing the organization consists of: General environment Competitive environment The changes that occur in the general environment transcend organizations and industries The competitive environment consists of the industry and markets in which an organization competes

Some Interactions Between Businesses & Their Environment

Customers Suppliers Shareholders & Creditors National & Local Governments Media

Competitors
Business Support Groups

The Organisation

Foreign Governments Social Activist Groups

Local Communities Wholesalers

Public Opinion Employees

Adapted from K Davis & W C Frederick Business and Society: Management, Public Policy, Ethics, 5th Edition, McGraw-Hill, 1984

The General Environment

The figure shows the relationship between the organization and its external environment Other things being equal, it is the competitive environment that has the greatest impact on the organization
Figure 2.1

The General Environment

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

ESTEMPLE - expanding PEST

DRIVERS TIME
Health & direction of economy in which firm competes e.g. GDP, inflation, interest rates, unemployment Demographic variables - e.g. population size & age, geographic distribution, ethnic mix etc. Also tastes, fashions, attitudes and values. Primarily new products, processes and materials. Includes institutions and activities involved in knowledge creation and transfer.

Economic
Social Technological Ecological Media Political Legal Ethical

Reflects concern for sustainability of resource use. Issues include CO2, genetic engineering, waste disposal, energy consumption
Increasingly important influence on business, politics and society as opinion former and shaper Issues include government stability, alignment at international level, trade, social welfare, taxation and fiscal policies, state ownership Generally employment law, H & S at work, product safety, monopolies & mergers, etc. Specific laws often have commercial implications Codes rising in importance - affects operations internationally - can impact bottom line (in combination arguably with Media and Social factors)

The General Environment

Van Der Heijden (1996) identifies 3 types of uncertainty: 1. Risks - where past performance of similar events allows us to estimate the probabilities of future outcomes 2. Structural uncertainties - where an event is unique enough not to offer evidence of such probabilities 3. Unknowables - where we cannot even imagine the event

The Future ...

We will never be able to escape from the ultimate dilemma that all our knowledge is about the past, and all our decisions are about the future
Ian Wilson (2000) From Scenario Thinking to Strategic Action, Technological Forecasting and Social Change, Vol 65, pp23-29

The General Environment

Scenario planning is an internally consistent view of what the future might turn out to be
It is not a forecast but a tool of analysis to help the organization recognise weak signals Scenario planning helps managers to overcome biases and imperfect reasoning

Scenario planning helps managers to recognise change that may not fit their theory of business

The General Environment

Undertaking Scenario Planning [1]
1. 2. 3. 4. 5. Define the Scope Identify the Major Stakeholders Identify Basic Trends Identify Key Uncertainties Construct Initial Scenario Themes

The General Environment

Undertaking Scenario Planning [2]
6. 7. 8. 9. Check for Consistency and Plausibility Develop Learning Scenarios Identify Research Needs Develop Quantitative Models

10. Evolve Towards Decision Scenarios

Scenario Planning at BA
British Airways (BA) created two scenarios of possible change from 1995 to 2005.
Wild Gardens Asian markets grow rapidly US falls into long recession 1997 Election in UK won by Conservatives for fifth time EU enlarged but no single currency EC initiates an Atlantic Open Skies agreement New Structures Asias rise slower than expected and investment reduced 1997 Election in UK won by Labour who promote stronger European integration and a single currency This leads to EU integrated air traffic control and high speed rail expansion US commitment to environmental targets increases

K Moyer, Scenario Planning at British Airways - a case study, Long Range Planning, Vol 29, Iss 2, 1996

The Competitive Environment Porters five forces

An analysis of industry structure
The framework tries to capture the variation of competition while remaining pervasive and rigorous Generalizations are made to all industries on the basis of 5 core elements Undertaken from the perspective of incumbent organizations

The Competitive Environment Porters five forces

Undertaken at the level of an organizations strategic business unit (SBU)

Industry attractiveness (profit potential) determined by interaction of 5 competitive forces

Organizations should position themselves to mitigate prevailing industry structure (See Ch. 7) It is the combined strength of these 5 forces that determine an organizations return on investment

The Competitive Environment

Porters five forces

Porters Five Forces Framework of Industry Competition

Figure 3.1

The Competitive Environment

Porters five forces

The Threat of New Entrants The Bargaining Power of Buyers The Bargaining Power of Suppliers The Threat of Substitute Products and Services The Intensity of Rivalry among Competitors in an Industry

The Competitive Environment

Porters five forces

The Threat of New Entrants New competitors entering an industry and reducing its profitability New entrants will be attracted to industries that earn profits in excess of their cost of capital The threat of entry will depend on:
the existence of barriers to entry the reaction of existing competitors.

High barriers to entry make the threat of entry low Expected retaliation will deter firms entering the industry

The Competitive Environment

Porters five forces

The Bargaining Power of Buyers This reflects the extent to which their purchase represents a sizeable proportion of the organization's overall sales

Buyer power increases when:

- buyers are concentrated - the industry product is standard or undifferentiated - the costs of switching are low - buyers pose a credible threat of backward integration

The Competitive Environment

Porters five forces

The Bargaining Power of Suppliers NB The buyer is the firm in the industry and the supplier is the producer of that firms input Supplier power increases when:
- the supplier industry is dominated by a few companies - It is more concentrated than the industry it sells to - suppliers are faced with few substitutes - suppliers products are differentiated - suppliers pose a credible threat of forward integration

The Competitive Environment

Porters five forces

The Threat of Substitute Products and Services
The threat from products and services that can meet similar needs It does not refer to competition from new entrants Substitutes limit the potential returns of an industry The price/performance ratio of substitute products will determine the extent of their threat

The Competitive Environment

Porters five forces

The Intensity of Rivalry among Competitors This is affected by: Numerous or equally balanced competitors Slow industry growth High fixed costs Lack of differentiation or switching costs Extra capacity in large increments High exit barriers

Industry Lifecycle Analysis

Embryonic Growing Shakeout Mature Decline Stage

Users/ Buyers
Competitive Conditions

Few: trial of early users

Growing adopters: trial of product/ service Entry of competitors Attempt to achieve trial.

Growing selectivity of purchase

Saturation of users: Repeat purchase reliance

Drop-off in usage

Few competitors

May be many.
Likely price cutting for volume.

Fight to Exit of some maintain share. competitors.

Difficult to Selective gain/take share. distribution. Emphasis on efficiency and low cost

Fight for share. Shakeout of weakest Undifferentiated competitors. product/service.

G Johnson, K Scholes and R Whittington, Exploring Corporate Strategy, 7th Edition, Pearson, 2005, p86

The Competitive Environment

Criticisms of Porters Five Forces The five forces framework assumes a zerosum game It is static and assumes stable markets Many strategies are not deliberate but emerge (Mintzberg and Waters, 1985) The government might usefully constitute a sixth force The five forces need to approximate more closely a dynamic theory of strategy

The Competitive Environment Extending Porters Five Forces

Brandenburger and Nalebuff (1996) use of the value net The value net includes:
- a map of the competitive game - the players in the game - their relationship to each other

Complementors supply complements to an industry and thereby increase its value

The Competitive Environment

The Inclusion of Complementors within Porters Five Forces

Figure 3.4

The Competitive Environment Strategic Group Analysis

Strategic groups are: Firms in an industry following similar or identical strategies Strategic groups constitute a cluster within an industry Mobility barriers deter movement between strategic groups If strategic groups are moving further apart strategic space may exist that can be exploited

Strategic Group Analysis

European Airline Industry (Budget Sector) in 2001
G Johnson and K Scholes, Exploring Corporate Strategy, 6th Edition, Pearson, 2002, p870
Broad
Ryanair

Extent of Route System

easyJet

circle size indicates relative market share

Virgin Express Air One

Other axis options could be flight frequencies, profitability, ownership by another airline etc
A lucrative strategic space? Or is this cluster losing out to the mainstream carriers at the top end and the more budget carriers at the lower end?

Go

KLMuk

Buzz

Narrow Basic Many Added

Services

The Competitive Environment Hypercompetition

A relentless mode of competitive behaviour to force competitors out of the industry The market is characterised by constant disequilibrium An example is Microsoft in software application It requires competitors to constantly upgrade and innovate The effect is to erode any competitive advantage