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Session 3
EXTERNAL ANALYSIS
Market-based approach
As strategists, we need to
understand the external
environment in which a firm
operates
This has two components:
-The industry (MICRO-environment)
-The wider business environment
(the MACRO-environment)
COMPANY
INDUSTRY
Microeconomic
COMPANY
INDUSTRY
GEO-POLITICAL FRAMEWORK
MACRO-ECONOMIC CONTEXT
INDUSTRY
(Micro-economic)
COMPANY
INDUSTRY
(Competition)
MACRO-ECONOMIC CONTEXT
GEO-POLITICAL FRAMEWORK
Economic environment
including types of business activities and companies; also includes the
financial environment
Social environment
including cultural factors
Technological environment
including innovation levels and protection of intellectual property
Legal environment
pro or anti-business laws
Ecological environment
includes environmental protection and climate change
PESTLE:
Environmental Analysis to Industry Analysis
Industry size
Industry growth rate
No. of players
Concentration ratio
Example: UK FOOD
INDUSTRY
Size: Retail: 100bn, growth rate: 6-7%
No. of players
90,000 outlets, 50,000 businesses
Concentration ratio CR4
Top 4 have 80% market share
Average 20%...... But Tesco have 32%, so other 3 must
have 16% on average (so Tesco is twice size of next one)
Our share of market eg Aldi 3%
Sources of Industry Information:
Industry magazine
The Grocer
Industry trade body
IGD (Institute of Grocery Distribution)
NATURE Monopoly
of COMPETITION
Perfect competition
Polarisation
Oligopoly
Monopoly
Recommendations
1. Potential Entrants
Attractive if many entry barriers:
high sunk cost
high fixed cost
patents / know-how
access to distribution / sales channels
economies of scale and scope
need for experience benefits
access to raw materials
high buyer switching costs
Government subsidy
Also consider exit barriers, eg redundancies, leases and
long-term contracts which may lock-out entrants.
2. Suppliers
3.
Buyers
5.5. Substitutes
The fewer the substitutes, the more
attractive the industry is.
Consider impact of potential substitution
from outside the industry
e.g. fax machines substituted by email industry
caused obsolescence.
Structural Determinants of
Competition according to Grant:
Identify clusters
Waitrose, M&S?
Schumpeterian Competition:
Hyper-competition:
(a)
Implication:
INDUSTRY STRUCTURE affects COMPETITIVE STRATEGY
but also
COMPETITIVE STRATEGY affects INDUSTRY STRUCTURE
The business environment is complex, dynamic and interactive not static
as our strategy models might imply.