Abhishek Srivastav

Learning Outcomes
y After studying this topic you should be able to:

y Understand the role of external analysis in

strategy formulation.
y Use a range of tools to analyse an

organisations external environment.

y Explain the limitations of these analytical tools

and the role of more subjective analytical approaches.

Link to overall strategic management

y Strategic management includes understanding

the strategic position of an organisation, strategic choices for the future and managing strategy in action (Johnson et al., 2008:12).
y Strategic position identifies the impact of y External environment y Strategic capability y Expectation and influence of stakeholders on strategy

The Business Environment

(Johnson et al. 2008: 54)

The Organisation

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External analysis stages

Analysing the external environment involves breaking a complex interrelated reality into sets of issues to make the analysis manageable. The main sets of issues are usually:
y

Macro-environment these are broad trends shaping the national and international environment in terms of political, economic, social and technological trends (i.e. PESTEL factors, key drivers ). Micro-environment this is the operating environment or industry sector in which the firm competes. It addresses a range of issues such as suppliers, customers, competitive intensity, threat of new entry and of substitute products arising (i.e. the fiveforces analysis). Competitor analysis seeks to understand the rival offers from other firms seeking to serve the same customers and to out manoeuvre their managers with our innovation and competitive moves. Market analysis seeks to evaluate the current needs of today s customers and the emerging needs of tomorrow s customers so new products can be anticipated. These will be different in different market segments.

The Macro-Environment
y Difficult for the firm to influence y Changes can be far-reaching y The media: rich source of both information and

speculation
y Tools for analysing the macro-environment
y The PESTEL (Variants PEST/DEEPLIST) framework y Key drivers y Scenarios

The PESTEL Framework

y The PESTEL framework categorises environmental

influences into six main types:

y Political y Economic y Socio-cultural y Technological y Environmental y Legal

y PESTEL analysis evaluates the broad societal

trends that affect many industries. It identifies current and future developments that will shape the microenvironments of each industry sector.

Good PESTEL Analysis

y Focuses on society wide. y Based on sound research of actual issues. y Provides evidence from the research to validate

points made.

y Future oriented. y Interpretive and not descriptive

Major Risk
y Like the old-fashioned SWOT technique, PESTEL

helps us make lists y Lists can help us think, but

y A list should be the beginning, not the end of

thinking
y Harrison (2003: Ch 2) integrates this with industry

and company analysis

y Johnson et al. (2008:55-59) look at the way

PESTEL factors combine

y then at key drivers and trends of business change

Key Drivers and Scenarios Planning

y Key drivers for change are environmental

factors that are likely to have a high impact on the success or failure of strategy.
y Scenarios are detailed and plausible views of

how the business environment of an organisation might develop in the future based on key drivers for change about which there is a high level of uncertainty.

Industries and Sectors Analysis

y An industry is a group of firms producing the same

principal product or service.

y The industry analysis involves identifying y Competitive forces y Industry life cycles y Competitive cycles yPorters five forces framework has two main aims: y To understand the drivers of competitive behaviour in the sector and; y To evaluate the long-run profit potential of the sector

The Five Forces Framework (Johnson et al. 2008: 60)

Potential entrants

Suppliers

Competitive rivalry

Buyers

Substitutes

Five forces model Details

Capital requirements Differentiation Switching costs Access to supply/distribution channels Intellectual property Expected retaliation Legislation/Government action Economies of scale Power of Suppliers Threats of Potential entrants Size of purchases Differentiation in product Few substitutes A few big suppliers Threat of backward integration

Competitive rivalry
Competitor balance Industry growth rate High fixed costs High exit barriers Low differentiation Power of Customers

Size of purchases Undifferentiated product Per cent of cost Low margins (buyer) Threat of forward integration Impact on quality Price performance is high

Substitute

Degree of differentiation Technological innovation Price performance relationships 5

Evaluation of the Five Force Model

ADVANTAGES DISADVANTAGES
y Firms industry environment is a

y Identifies drivers of competitive behaviour. y Indicates trends in profitability. y Highlights strategies to alter industry structure. (Lynch 2000)

small determinant of that firm s profitability y Suppliers of complementary products are ignored y Highlights the need to disaggregate broad industry groupings and examine competition at segment or strategic group level Assumes all business relationships are competitive. y Assumes industry boundaries are stable over time, ignoring innovation and entrepreneurship. (Grant 2005)

The Industry Life Cycle

(Johnson et al. 2008: 68)

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Cycles of Competition
(Johnson et al. 2008: 69)

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Competitors analysis
y This involves the analysis of strategic groups,

market segments and strategic customers.

y Strategic groups
y Strategic groups are organisations within an industry with

similar strategic characteristics, following similar strategies or competing on similar bases.

y Benefits identifying strategic group analysis

y Understanding competition y Analysis of strategic opportunities y Analysis of mobility barriers

Strategic Group Analysis (SGA)

A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimensions1.
Porter (1980), p.129.
Broad

Motor Industry
Regional BroadBroad-line Global full-line fullproducers

Product Range

Luxury producers

National NicheNichespecialists Narrow National

High performance sports Global

Geographic Scope

The key to the strategic group concept is that differences in profitability between groups persists because of the existence of mobility barriers that stop firms entering or moving between groups and thus competing away profit differentials.

1. strategic dimensions refers to any significant criteria for grouping firms, e.g. segments served, branding, cost position, etc.

Characteristics for Identifying Strategic Groups

Scope of activities y Extent of product diversity y Extent of geographic coverage y Number of segments served y Distribution channels Resource commitment y Extent of branding y Marketing effort y Extent of vertical integration y Product quality y Technological leadership y Organisational size

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Market Analysis
Determines attractiveness and competitive advantage Key variables to determine:
Overall size Market shares of key competitors Growth rates/trends Segments (relative growth rates) Profitability Existing/likely competitors Accessibility issues

Strategic customer and critical success factors

y A strategic customer is the person(s) at whom the strategy is primarily

addressed because they have the most influence over which goods or services are purchased. y What do our customers want? (basic source of profit in the industry, who are they, what are their needs and how do they make decisions?) which a organisation must outperform the competition because they are particularly valued by a group of customers. y those factors within the firms market environment that determine its ability to survive and prosper (Grant 2005, p92)
y What does the firm need to do to survive competition? (how intense

y Critical success factors (CSFs) are those product features with

is competition and what are the key dimensions upon which competitors compete?) from KSF?

y How then can firms use their resources and capabilities to profit

Market segment analysis

y A market segment is a group of customers who have

similar needs that are different from customer needs in other parts of the market.
y Market segment analysis y Identify key segmentation variables y Construct a segmentation matrix y Analyse segment attractiveness y Identify KSFs in each segment y Choose between broad or narrow segment focus.

Some Bases of Market Segmentation (Johnson et al. 2008:77)

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Summary
y External analysis involves four main areas: PESTEL

factors, Industry analysis, competitor profiling and market analysis.

y The macro-environment can be analysed in terms of

PESTEL factors. y Industries and sectors can be analysed using Porter s Five Forces model. y Industry changes can be analysed through industry life cycle & hypercompetitive models of competition. y The inner layer of the environment can be analysed with strategic group analysis, market and segment analysis.

Reading materials
Required reading: y Johnson et al (2008), chapter 2. Recommended reading: y Porter, M.E. (1980). Competitive Strategy: Techniques for analysing industries and competitors. Free Press: New York. Chapters 1 & 3 y Harvard Business Review (1991). Michael E Porter on Competition and Strategy. Harvard Business Press, pp3-11

Assignment Case Study 1

y Using the data from the case study assignment,

carry out for the tourism industry:

y A PESTEL analysis y A five force analysis and what do you

conclude? y How does the changes in the PESTEL and five forces impact on TUI y What are the relative strengths and weaknesses of the TUI