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Global Strategic Management

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NguynHipThe University of Danang, University of Economics

Chapter 2

Global Business Environment

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2. The Industry Environment


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Learning Outcomes

After this lecture you should be able to:

Understand the significance of the global industry

environment for the strategies of multinational firms

Apply Market Segmentation Analysis and Strategic Group

Analysis

Apply the Five Forces Model

Evaluate the importance of industry evolution and the

International Product Life Cycle for an industry

Advise a multinational firm on the techniques for

understanding the future of an industry

Understanding Your Industry

What industry are you in?

A focus on a broad industry may lead to aninaccurate understanding of the market and thenature of competition. Indeed, using the wordindustry may be unhelpful because it is very

broad.

Firms need to identify a precise market, which canbe achieved by conducting a market segmentationanalysisandstrategic group analysis.

Market Segmentation Analysis

Market segmentation analysis identifies similarities and

differences between groups of people who buy and use

your goods and services.

Doyle (1997) argued that strategists should ask three key

questions:

customer segmentation: which customer segments are

to be served by the strategy?

customer needs: what is the range of customer needs to

be met?

technology: which technologies are required in order to

pursue customers?


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Strategic Group Analysis

Strategic group analysis is about identifying firms with

similar strategies or those competing on similar bases.

It helps to understand the nature of competition and

profitability within an industry sub-group and provides

better information about where to invest or what type of

strategic action to expect from competitors.

A good predictor of strategic groups are mobility

barriers, which prevent other firms entering the strategic

group and threatening the existing members.

Strategic groups in the global car industry

The Five Forces Model

Michael Porter suggested that managers must understand

the underlying economic and technical characteristics of

the industry or strategic group in which their firms operate.

Porter believed that the key determinant of a firms

profitability was industry attractiveness. As a result of the

way a specific industry operates, some industries are

inherently more profitable than other industries.

The Five Forces Model assumes that industry

attractiveness and the firms competitive position in an

industry are influenced by five competitive forces.


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The Five Forces Model

The five forces are:

1. entry of new competitors

2. threat of substitutes

3. bargaining power of buyers

4. bargaining power of suppliers

5. rivalry amongst existing competitors

The Five Forces model can be used to analyse afirms competitive position in a specific marketsegment or similar market segments.

Barriers of Entry

Barriers to entry are obstacles, which potential newcomerswould encounter when entering the market.

High barriers to entry help maintain a firms profitability.

Barriers to entry include:

Capital Requirements

Economies of Scale

Product Differentiation

Access to Distribution Channels

Government Policy

Expected Retaliation

Bargaining Power of Buyers/Suppliers

Buyerspush firms to sell products at the lowest possibleprice. Supplierspush firms to buy at the highest possibleprice. So buyers and suppliers can reduce firmprofitability.

Their bargaining power depends on:

Buyer/Supplier Concentration

Buyer Switching Costs

Product Differentiation

Price/Total Purchases

Threat of vertical integration

Buyer information

Impact on Quality/Performance International expansion


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Threat of Substitutes

A substitute product is a good or service, which is regarded

as interchangeable by buyers. If substitutes are available,buyers will switch to substitutes when the price of theproduct increases.

The existence of substitutes provides a limit as to howmuch the seller can charge for a product, so the threat ofsubstitutes ultimately constrains the profitability of a firm.

The threat of substitutes depends on:

1) relative price performance of a substitute

2) switching costs for the buyer

3) buyers propensity to substitute

Rivalry

Rivalry encourages innovation, but it also reduces profits.In intensely competitive markets, firms are forced to lower

prices or invest in new R&D, just to keep up withcompetitors; so intense rivalry leads to lower profits.

The intensity of rivalry is influenced by:

Concentration

Diversity of Rivals Product Differentiation and Switching Costs

Industry Growth

Fixed Costs and Storage Costs

Exit Barriers

Excess Capacity

Industry Evolution

The five forces and market conditions change over

time as a result of industry evolution.

Industry evolution can make an industry more or

less attractive and it often forces firms to adjust

their strategies.

The Product Life Cycle Model helps to understand

the course of industry evolution.


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Product Life Cycle Model

TheProduct Life Cyclemodel suggests that every basic

product evolves through a cycle of roughly four stagesintroduction, growth, maturity and declinewhich

correspond to the rate of growth of industry sales.

TheInternational Product Life Cycle(IPLC) model

suggests that many manufactured products go through an

international life cycle, during which a developed country

is initially an exporter, but then loses its export markets

and finally could become an importer of the product from

developing countries.

Stages in the IPLC Model

Phase 1 Introduction in the Home Market: According to theIPLC Model, most new products are first introducedin rich developed countries

Phase 2 Export to Developed Countries: product market widensas demand develops in other high-income countries

Phase 3 Export by Developed Countries to DevelopingCountries: late movers begin to export and even

produce the new product in developing countries

Phase 4 Developed Countries Export to Home Country

Phase 5 Developing Countries Export to Developed Countries

Forecasting the Future

Understanding industry evolution and forecastingfuture change is crucial as the cost of changingstrategy increases as the need for change becomesmore obvious.

Forecasts are educated assumptions about futuretrends and events.

Strategic forecasts are used to understand thefuture changes in the industry environment whichmay require a change in the firms use of

resources.


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Forecasting Techniques

Forecasting is based on a set of assumptions

Faulty underlying assumptions are the most frequentcause of forecasting errors

Useful forecasting techniques

Extrapolation

Brainstorming

Expert opinion

Industry Scenario

Delphi technique

Statistical modeling

Prediction markets

Cross impact analysis

Forecasting Techniques

The most widely used form of forecasting istrend extrapolation which is the extension ofpresent trends into the future.

Delphi survey is a forecasting technique, whichhelps to forecast the future in uncertain business

environments or where new innovations mayemerge.

Internationalisation of markets is a challenge forcorporate forecasting in that it is difficult toforecast distant markets from central companyheadquarters.

Alternative: Scenario analysis

Scenario is a hypothetical sequence of eventsconstructed for the purpose of focusing attention oncausal processes and decision points.

Scenarios explore possible future events by looking atparticular causes and seek to understand and explainwhy certain events might or might not occur.

Scenario analysis does not try to predict what willactually happenit tries to identify several possiblefutures (typically, 2-4 scenarios), each of which isplausible but not assured.


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Main difference between a forecast and a

scenario analysis

3. The Internal Firm Environment

Learning Outcomes

After this lecture you should be able to:

Understand the significance of the internal environment and

core competencies for the strategies of multinational firms

Distinguish between the positioning perspective and the

resource-based perspective

Conduct a resource audit and apply the VRIO framework to a

firm

Conduct a value-chain and value system analysis

Conduct a comparative analysis for a multinational firm


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Internal Business Environment

Just as the externalbusiness environment is

important, managers need to understand the the

internalfirm environment: the unique strengths

and weaknesses of their firm relative to their

competitors.

Strategic Fit versus Strategic Stretch

Strategic fitis about developing strategy by

identifying opportunities in the business

environment and adapting resources and

competences so as to take advantage of these.

Strategic stretchis about identifying andleveraging the resources and competencies of the

organization to yield new opportunities or to

provide competitive advantage.

Positioning Perspective versus

Resource-Based Perspective

The contrast betweenstrategic fitandstrategicstretchexemplifies different views on how firmsshould compete in global markets.

ThePositioning Perspectivesuggests that thebusiness opportunity should be the starting pointfor developing successful strategies.

TheResource-Based Perspectivesuggests thatunique firm resources should be the starting pointfor developing successful strategies.


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SWOT Analysis

Managers can analyse both the internal and the

external environment by using SWOT Analysis.

SWOT is a simple analysis tool for managers forclassifying the various influences on the firmsstrategy into four categories:

Internal Strengths (S)

Internal Weaknesses (W)

External Opportunities (O)

External Threats (T).

Resources and Capabilities

Firms have resources and capabilities.

Resourcesare all assets, capabilities,

organizational processes, firm attributes,

information, knowledge, patents, real estate etc.

controlled by a firm. Capabilitiesare complex bundles of skills and

collective learning, exercised through

organizational processes, that ensure superior

coordination of functional activities.

Core Competencies

Core competencies refer to the combination of

individual technologies and production skills that

underlie a companys multiple production lines and

critically underpin the firms competitive

advantage.

Core competencies are about communication,

involvement and a deep commitment to working

across organizational boundaries.


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Competence as tree metaphor

VRIO framework

The VRIO framework, devised by Jay Barney (1997), asks fourquestions:

The question of value Do a firms resources and capabilitiesenable it to respond to environmental threats oropportunities?

The question of rareness How may rival firms already

possess particular valuable resources and capabilities? The question of imitability Do firms without a resource or

capability face a cost disadvantage in obtaining it comparedto firms that already possess it?

The question of organization Is a firm organized to exploitthe full competitive potential of its resources andcapabilities?

The Concept of Value Added

Managers must understand the economic value of

the different activities that a firm performs.

Value added is the difference between the cost of

inputs and the market value of outputs; it is the

value that a firm adds to its bought-in materials

and services through its own production and

marketing efforts within the firm.


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Value Chain Analysis

Value chain analysis depicts the main activitiesinside the firm and aims to reveal the relative

value added amongst the different parts of the

firms operations.

Undertaking a value chain analysis helps the firm

to understand its cost position and to identify its

competitive strengths.

Examples of value chains in global

petroleum industry

Value System Analysis

A value system is a wider system of creating value

which involves the value chains of the firms

suppliers, distributors and customers. Value

system analysis depicts the main activities inside

and outside the firm and aims to reveal the firms

linkages with its suppliers value chains, its

distributors value chains and its customers value-

chains.


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Example of value system in global

petroleum industry

Comparative Analysis

Resources and capabilities can only be judged to

be valuable or rare if a firm compares itself with

the competitors.

Therefore, an integral part of an internal firm

analysis must be a comparison with yourcompetitors.

Competitor intelligence and benchmarking can

help the firm to compare itself with its peers.

Competitor Intelligence

Competitor intelligence is the systematic collection

of information about rivals in order to assist the

development of firm strategies.

Competitor intelligence is aimed at both learning

about competitors strengths and weaknesses and

their likely future strategies and initiatives as well as

assessing the strengths and weaknesses of the firms

own resources and capabilities relative to other firms.


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Benchmarking

Benchmarking is the search for industry bestpractices that will lead to the superior performance

of a company. The aim of benchmarking is to find

better practice processes which show higher levels

of performance and which can be copied or

adapted internally by the organization.

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