External Environment Analysis & Globalisation

Lecture 2

SM Process: Strategic Position

Strategic position considers the current position of the firm in the light of future changes in the external global environment and its internal resource capabilities.

How to analyse an organisation’s position in the external, global environment (L2)

How to analyse the a firm’s internal resources, capabilities and core competencies (L3).

Learning Outcomes

1. Assess macro-environmental influences and the major drivers of change.

2. Understand how industry structure drives competition and determines the level of industry profitability

3. Analyse industry attractiveness by applying the 5 forces model and consider how changes to the forces can affect future profitability

4. Define international business, globalisation, and the multinational company (MNC)

5. Examine the impact of globalisation on the external macro-environment.

Strategic Position Analysis

Strengths Weaknesses

Opportunities Threats

External Environment

Internal Resources & Capabilities

External Environment Analysis O & T

Opportunity

A trend in the external environment which potentially has a positive impact on the organisation and, if exploited, will improve it’s performance.

Threat

A trend in the external environment which potentially has a negative impact on the organisation and, if not addressed, will hinder it’s performance.

Spheres of External Analysis

Macro-Environment

Industry Competitive Environment

Competitors

Organisation

Key Questions: Macro Environment

Identify external trends –

which are the most important environmental forces

affecting the organisation? Assess the impact of the trend on the industry and

the firm (+ opportunity or - threat) Evaluate trend and impact to derive key drivers from

the external environment - which forces are likely to have a significant influence on the organisation in the future?

Build alternative scenarios from key drivers.

Useful framework = PEST ANALYSIS

Building your Analysis

Identify the PEST factors affecting the organisation and monitor changes.

Forecast/project the trends into the future.

Impact analysis - anticipate the impact of the trends on the strategy of the organisation and the expected timing of events.

PEST

Identifies trends but remember your impact analysis, leading to

key drivers for change

P = Political and legal factors

E = Economic + globalisation

S = socio-cultural factors + environment

T = technological developments

Johnson et al expand the framework to PESTLE

They have a separate set of trends for legal factors (L) and a 2nd E for changes in the natural environment - green issues.

From Macro to Industry Analysis

The CompetitiveEnvironment

• Suppliers• Competitors• Customers

The Macro - Environment is difficult for the organisation to influence. The Macro Environment directly effects the Industry Competitive

Environment.

The national/ global economy

Political/Legal

Technology

Social -Cultural,

Environment

Porter’s Model

Use the 5 Forces Model to evaluate competiveness: Assess profitability – industry attractiveness Understand forces influencing competition Identify which forces are critical to future

competitiveness

Opportunities & Threats to support strategy choices:

Can the firm develop strategies to influence the key forces?

How can a firm develop a position against the forces & rivals to gain competitive advantage?

Porter’s Five Forces Model

Competition in an industry is more than the visible rivalry between competitors, you must in addition to competitive rivalry, consider 4 other forces:

Demand side (prices) – bargaining power of buyers Supply side (costs) – bargaining power of suppliers Potential for new entrants (more competitors) Threat from substitute products (less demand)

Suppliers Buyers

Bargaining power

Bargaining power

Threat ofsubstitutes

Substitutes

Potentialentrants

Threat ofentrants

COMPETITIVE

RIVALRY

Industry Structure and Profitability

Force Profitability Profitability

higher if lower ifBarg’ing power of suppliers weak suppliers strong suppliers

Bargaining power of buyers weak buyers strong buyers

Threat of new entrants high entry barriers low entry barriers

Threats from substitutes few substitutes many substitutes

Competitive rivalry little rivalry intense rivalry

Environment Attractive Unattractive

Analytical task: assess the influence of each force- weak/medium/strong

using the factors which influence each force. What are these factors?

The Threat of Entry

How easy it is for new potential competitors to enter the industry depends on the height of the barriers to entry:

Sources of barriers to entry are one or more of: Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to channels of supply & distribution Legal and regulatory barriers Expected Retaliation

Power of Buyers

Are the buyers concentrated v. the competitors?

Are the switching costs high or low?

High or low product differentiation?

Does the buyer purchase a large portion of industry output?

Is their a threat of vertical backwards integration?

Power of Suppliers Are the suppliers concentrated v. the competitors?

Are the competitors a significant customer to the supplier group?

Are the suppliers inputs critical to competitor’s success?

(high or low product differentiation?)

Are the switching costs high or low?

Is their a threat of vertical forwards integration?

Threat of Substitutes

Not to be confused with other competitor products, substitutes meet similar customer needs but are meet by players outside the industry. The threat depends on:

the buyers’ propensity to substitute the price-performance characteristics of

substitutes.

Visible Signs of Rivalry

Using price competition Advertising battles Making new product releases Increasing consumer service levels

Degree of Competitive Rivalry

Competitive Rivalry tends to be more intense when:

There are numerous competitors or a smaller number of equally balanced competitors

Industry growth is slowing and entering maturity There are high fixed costs to cover Products have limited differentiation (approaching

commodity status) and low switching costs There are high exit barriers.

Industry Structure and Profitability

Force Profitability Profitability

higher if lower ifBarg’ing power of suppliers weak suppliers strong suppliers

Bargaining power of buyers weak buyers strong buyers

Threat of new entrants high entry barriers low entry barriers

Threats from substitutes few substitutes many substitutes

Competitive rivalry little rivalry intense rivalry

Environment Attractive Unattractive

Analytical task: assess the influence of each force- weak/medium/strong

using the factors which influence each force. What are these factors?

Applying the Five Forces Model

Forecast Industry Profitability by: identifying and evaluating the key forces influencing the

future competitive environment and their impact on profitability

Review strategies to improve industry profitability: which key forces are lowering profitability which key forces can be changed in the future by

individual firm strategy or in collaboration between existing or potential competitors

Strategic Groups

Strategic Groups

A group of firms within an industry which compete on a similar bases and share similar characteristics – a subset of the industry ‘s 5 forces.

Examples of characteristics defining strategic groups are: Product range Geographic coverage – markets, production. Market segments Distribution channels Technology Organisation size

Industry examples:

Car industry, Airlines, Supermarkets

Global Environment:What’s Different?

Multiple Operating Environments Diverse PEST trends impacting value chain e.g.

consumer preferences, distribution channels Responding to diverse host governments and cultures Currency risks impacts on costs and revenues Organisational complexity and diversity

Integration of operating units across time zones, languages and cultures

Summary External environment analysis identifies future threats and

opportunities

There are 3 potential levels of analysis: macro-environment (PEST), industry competitive environment (5 Forces), intra-industry strategic groups (SGA).

In PEST: discuss trend, assess impact, identify key drivers of future change.

In 5 Forces: assess each force by analysing underlying factors then conclude on the attractiveness of industry and key forces impacting future structure of industry competition

Refine 5 forces analysis further through SGA.