external environment analysis & globalisation lecture 2
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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.
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