Docstoc

L2%20 External%20 Environment

Document Sample
L2%20 External%20 Environment Powered By Docstoc
					L3: External Environment

Young-Chan Kim (Ph. D) ky06@gre.ac.uk

Niche market and strategy
UST Inc. (formerly US Tobacco) new strategy in chewing tobacco and snuff cigarette  End of film then, new printing  From market leader to niche marketers


Learning objectives
Firm as an economic value  Generic external environment  Mintzberg‟s emergent strategy  Porter‟s Five Forces


Determinants of Industry Profitability
  

The value of the product to customers The intensity of competition Relative bargaining power at different levels within the value chain

Industry spectrum
Perfect Competition Concentration Entry and Exit Barriers Product Differentiation Many firms No barriers Oligopoly Duopoly Monopoly

A few firms

Two firms

One firm

Significant barriers

High barriers

Homogeneous Product

Potential for product differentiation

Information

Perfect Information flow

Imperfect availability of information

Price within industry level

Perfect Competition

Imperfections

Generic industry life cycle

Success factors across cycle

Ford motor strategic development process

What is an External Analysis?

External Analysis is the process of scanning and evaluating an organization‟s external environment to determine the opportunities and threats facing the organization.

External analysis allows firms
Discover threats and opportunities  See if above normal profits are likely in an industry  Make more informed strategic choice  Better understand he nature of competition in an industry


Scanning the task environment

The Pace of Change

Alternative Change Paths

Strategic Changes

Operational Changes

Environmental influences surrounding the organisation I

Low

High

Turbulence level







Changeability: the degree to which the environment is likely to change Predictability: the degree to which such changes can be predicted When both factors are high, essential to use emergent processes.

Environmental influences surrounding the organisation II

Changeability: the degree to which the environment is likely to change. Changeability has two main elements:




Complexity: degree to which the organisation‟s environment is affected by such factors as internationalisation and technological, social and political issues Novelty: the degree to which the environment presents the organisation with new situations.

Environmental influences surrounding the organisation III

Predictability: the degree to which such changes can be predicted Predictability comprises two main elements:




Rate of change of the environment from slow to fast Visibility of the future in terms of availability and usefulness of information used to predict the future.

A model of a prescriptive strategy process

Advantages of prescriptive corporate strategy
Overview provided by the process Comparisons with objectives Summaries of demands made on resources Picture of choices to be made Ability to monitor what has been agreed.

    

Difficulties with prescriptive strategy process I
Mintzberg identified six assumptions of the prescriptive process that may be wholly or partially false:
1.

2.

3.

The future can be predicted accurately enough to make rational discussion and choice realistic. It is possible and better to forgo the short-term benefit in order to obtain the long-term good. The strategies proposed are, in practice, logical and capable of being managed in the way proposed.

Difficulties with prescriptive strategy process II

4.

5.

6.

The chief executive has the knowledge and power to choose between options. Any careful analysis, strategy decisions can be clearly specified, summarised and presented. Implementation is a separate and distinctive phase that only comes after a strategy has been agreed.

Emergent corporate strategy in practice I
„Emergent corporate strategy is a strategy whose final objective is unclear and whose elements are developed during the course of its life, as the strategy proceeds.‟

Emergent corporate strategy in practice II
Key points regarding emergent corporate strategy:
  



The process is one of experimentation to find the most productive route forward. Strategy develops over time. In fast-developing markets, the time period may be short; in slow developing markets, the time period may be long. Testing emergent strategy requires examining how the strategy has developed over a defined time period.

A model of an emergent strategic process

Advantages of emergent corporate strategy
Consistent with actual practice in organisations Considers people issues such as motivation Allows experimentation about the strategy to take place Opportunity for inclusion of culture and politics of organisation Flexibility to respond to market changes.



 





Difficulties with emergent strategy process I







Unrealistic to expect board members to allow business to function without objectives. Group resources need to be allocated between demands of competing operating companies. Abdicates responsibilities for final decisions by involving political groups and individuals.

Difficulties with emergent strategy process II







Experimentation may not be effective for lengthy projects. Removes aspects of rational thinking from decision making. Management control becomes unclear as actions to be undertaken are not planned in advance.

Deliberateness vs. Emergence Strategy

Deliberate Strategizing

Direction
Commitment Coordination

Without plans and objectives organizations would be adrift
Plans enable early commitment to a course of action

Plans have the benefit of coordinating all strategic initiatives within a firm to cohesive pattern
Plans facilitate optimal resource allocation

Optimization
Programming

Plans are a means for programming all organizational activities in advance

Strategy Emergence

Opportunism
Flexibility Learning

Organizations must keep an open mind to grab unforeseen opportunities
Organizations must keep their options open and not commit themselves to early The best way to find out what works is to give it a try Different people in the firm will have different ideas Getting things done in firms includes understanding political and cultural dynamics

Entrepreneurship
Support

Deliberateness and Emergence

Deliberate Strategizing
The ability of acting intentionally; so thinking before acting

Strategy Emergence
The ability of thinking and acting at the same time and letting strategy emerge

Strategic Planning vs. Strategic Incrementalism

STRATEGIC PLANNING PERSPECTIVE
Deliberateness over emergence Intentionally designed Figuring out

STRATEGIC INCREMENTALISM PERSPECTIVE
Emergence over deliberateness Gradually shaped Finding out Partially unknown and unpredictable Postpone commitments, stay flexible Unstructured and fragmented Thing and acting intertwined Dispersed Experimentation and parallel initiatives Learning Requires broad cultural and cognitive shifts

Forecast and anticipate
Make commitments, prepare Formally structured and comprehensive First think, then act

Hierarchical
Optimal resource allocation and coordination Programming Implemented top-down

Product portfolio analysis
Form of analysis used for identifying strong, weak, old and new products Methods include Growth-share/Boston matrix (BCG matrix) Directional policy matrix (GE matrix).





Growth-share matrix I






Basic logic: many companies are involved with products in many markets. Each market will bring its own strategic opportunities and problems. Assumed that the two most important factors in such analysis are  market growth: high growth is attractive for the company, but needs to be supported by investment – uses cash  market share: high share is usually associated with high profitability – generates cash.

Growth-share matrix II

Directional policy matrix

Difficulties with product portfolio matrices








Assumption – competitors will allow organisation freedom to make changes Perceived desirability of growth and industry attractiveness Difficult to define where new products fit onto a matrix Difficult to define market growth as growth rates vary with industry.

Porter‟s Five Forces Model
Porter‟s Five Forces Model assesses the organization‟s specific environment and assumes that some industries are more attractive than others with more profit potential by considering:
1.

2.
3. 4.

5.

Current Rivalry Among Existing Firms Threat of Potential Entrants Bargaining Power of Buyers Bargaining Power of Sellers Threat of Substitute Products

Five Forces Model
Potential Entrants Threat of New Entrants Industry Competitors

Bargaining Power of Suppliers Suppliers

Bargaining Power of Buyers Buyers

Rivalry Among Existing Firms
Threat of Products Substitute or Services

Substitutes

Porter‟s Five Forces Model: BMW










Threat of new entrants  Very low Threat of substitutes  Medium Power of suppliers  Medium Power of buyers  Medium Rivalry among existing firms  Very High

Evaluating the Five Forces I

Evaluating the Five Forces II

Evaluating the Five Forces III

Evaluating the Five Forces IV

Summary Comments

External environment:

Is layers around the organisation  Is analysed in terms of emergent strategy  Is to be explained by Porter’s Five Forces Model


Current Rivalry Among Existing Firms
Current Rivalry Among Existing Firms includes firms in your industry producing similar products. The level of rivalry can be affected by 8 conditions:
1.

Porter‟s Five Forces Model

2. 3.

4.

Numerous equally balanced competitors. Slow industry growth. High fixed or storage costs. Lack of differentiation or switching costs.

5.

6. 7.

8.

Capacity must be added in large increments. Diverse competitors. High strategic stakes. High exit barriers.

Current Rivalry Among Existing Firms

Porter‟s Five Forces Model

Numerous equally balanced competitors: refers to an industry where some competitors think they can take competitive actions and others will not notice, promoting industry rivalry.

Slow industry growth: occurs when consumer demand has leveled off and companies attempt to steal market share, increasing rivalry.

Current Rivalry Among Existing Firms

Porter‟s Five Forces Model

High fixed or storage costs: causes companies to spread cost out over a larger volume, leading to price cutting to attract customers.
Lack of differentiation: occurs when the industry‟s product is perceived to be a commodity and customers make buying decisions based on price and service.

Current Rivalry Among Existing Firms

Porter‟s Five Forces Model

Capacity must be added in large increments: creates rivalry as a result of overcapacity from competitors, adding large increments to be economically feasible. Diverse competitors: creates rivalry when competitors differ in strategic approaches, philosophies, or circumstances due to the fact that it is hard to judge how competitors will act and react.

Current Rivalry Among Existing Firms

Porter‟s Five Forces Model

High strategic stakes: creates rivalry when competitors have strong reasons to want to succeed, even sacrificing short-term profitability. High exit barriers (economic, strategic, and emotional factors): creates rivalry by keeping companies competing even though they may be earning low or even negative returns on investment.

Current Rivalry Among Existing Firms

Porter‟s Five Forces Model

It is important for managers to answer the question “Who are our current competitors?”
One solution is to evaluate companies that are currently in your organization‟s strategic group.

Current Rivalry Among Existing Firms

Porter‟s Five Forces Model

Strategic group is a group of firms competing within an industry that have similar strategies, resources, and customers.

Porter‟s Five Forces Model

Threat of Potential Entrants

Threat of Potential Entrants refers to opportunities and threats presented by other companies moving into the organization‟s industry, and depends on barriers to entry and reactions by current competitors.

Porter‟s Five Forces Model

Threat of Potential Entrants

Barriers to entry are obstacles to entering an industry. Porter describes 7 major barriers to entry: 1. Economies of scale 2. Cost disadvantages from other than scale 3. Product differentiation 4. Capital requirements 5. Switching costs 6. Access to distribution channels 7. Government policy

Porter‟s Five Forces Model

Threat of Potential Entrants

Economies of scale are cost savings achieved as volume increases because fixed costs are spread out over a larger volume, which reduces cost per unit. Industries with high economies of scale create a disadvantage to potential entrants.

Porter‟s Five Forces Model

Threat of Potential Entrants

Cost disadvantages from other than scale are cost savings achieved by current competitors that new entrants can‟t duplicate, such as:  Protected technologies  Access to raw materials  Favorable locations  Government subsidies  Human resource advantages

Porter‟s Five Forces Model

Threat of Potential Entrants

Product Differentiation refers to unique product identification and associated customer loyalty, which causes potential entrants to spend heavily on marketing.

Porter‟s Five Forces Model

Threat of Potential Entrants

Capital Requirements refers to the investment of significant financial resources by potential entrants. Switching costs are the one-time costs facing a buyer who switches from one supplier to another, and can include monetary and non-monetary costs. Current customers may be reluctant to change suppliers.

Porter‟s Five Forces Model

Threat of Potential Entrants

Access to Distribution Channels creates a barrier to entry if existing companies have already secured the logical distribution sources. Government Policy creates a barrier to entry when government imposes laws and regulations such as licensing requirement, access to raw materials, product safety standards, and product testing. Potential entrants would have to invest in time and money to meet existing laws and regulations.

Porter‟s Five Forces Model

Bargaining Power of Buyers

Bargaining power of buyer influences price, quality, and service when: 1. Buyer purchases large volumes of the seller‟s product. 2. Products purchased by the customer represent a significant portion of its costs or purchases. 3. Products purchased are standard or undifferentiated. 4. Buyer faces few switching costs.

Porter‟s Five Forces Model

Bargaining Power of Buyers

5. 6. 7. 8.

Buyer earns low or has low income levels. Buyer has the ability and resources to manufacture the products they purchase. Industry‟s product isn‟t important to the quality of the buyer‟s products. Buyer has full information.

Porter‟s Five Forces Model

Bargaining Power of Buyers

Buyer purchases large volumes of the seller‟s product: provides power to the buyer because it implies that the customer is more important to the seller than the seller is to the customer.


Wal-Mart

Porter‟s Five Forces Model

Bargaining Power of Buyers

Products purchased by the customer represent a significant portion of its costs or purchases: provides power to the buyer because customers are looking for the best price and are willing to compare sellers‟ prices.

Porter‟s Five Forces Model

Bargaining Power of Buyers

Products purchased are standard or undifferentiated: provides power to the buyer because customers are willing to comparison shop and play one supplier against the other to find the most attractive deal.

Porter‟s Five Forces Model

Bargaining Power of Buyers

Buyer faces few switching costs: provides power to the buyer because customers do not feel obligated to remain loyal to the original supplier.

Porter‟s Five Forces Model

Bargaining Power of Buyers

Buyer earns low or has low income levels: provides power to the buyer because buyers will seek ways to lower costs of purchases.

Porter‟s Five Forces Model

Bargaining Power of Buyers

Buyer has the ability and resources to manufacture the products they purchase: provides power to the buyer because buyers can now become their own source of supply and seek concessions from original suppliers.

Porter‟s Five Forces Model

Bargaining Power of Buyers

Industry‟s product isn‟t important to the quality of the buyer‟s products: provides power to the buyer because buyers do not need the industry‟s product to get desired levels of quality in their products. The opposite is true if the industry‟s product is important.

Porter‟s Five Forces Model

Bargaining Power of Buyers

Buyer has full information about product demand, actual market prices, and supplier costs: provides power to the buyer because buyers now have ammunition to negotiate the most attractive prices from suppliers.

Porter‟s Five Forces Model

Bargaining Power of Sellers

Bargaining Power of Sellers refers to when sellers can raise prices, reduce the number of services provided, or the quality of products that your industry purchases, and occurs when  Domination by a few companies and concentration within the industry.  Substitute products exist.  Industry is not an important customer.

Porter‟s Five Forces Model

Bargaining Power of Sellers

Bargaining Power of Sellers  Supplier‟s product is an important input in your industry.  Suppliers‟ products are differentiated.  There are high switching costs.  Suppliers have the ability to provide the products your industry is currently providing.

Porter‟s Five Forces Model

Bargaining Power of Sellers



When an industry is dominated by a few companies and concentration than the industry, then suppliers will be able to influence price, quality, and sales terms. When there are substitute products, then the supplier will not have much powerthe opposite if true if there are few or no substitute products.



Porter‟s Five Forces Model

Bargaining Power of Sellers



When the industry is not an important customer, then the supplier has little incentive to negotiate on price, quality, or sales terms. When the supplier‟s product is an important input in your industry, the supplier will have more bargaining power.



Porter‟s Five Forces Model

Bargaining Power of Sellers



When the suppliers‟ products are differentiated or if there are high switching costs, the supplier will have more bargaining power. When the suppliers have the ability to provide the products your industry is currently providing, or they do it cheaper, they will have more bargaining power.



Porter‟s Five Forces Model

Substitute Products



The threat of substitute products occurs when there are other industries that can satisfy the consumer need that your industry is satisfying.



No or Few substitutes= low threat Few substitutes or several not-sogood substitutes= threat increases


				
DOCUMENT INFO
Shared By:
Stats:
views:111
posted:1/20/2010
language:English
pages:74
Mohit Gupta Mohit Gupta Director http://www.marketdhara.com
About I am a Technical Analyst & Stock Trainer. I am running an Equity Research company named MARKETDHARA GLOBAL RESEARCH SERVICES (R). We mainly deal in providing technical and trading calls in stocks and commodities via SMS and Yahoo Msngr channel alongwith Daily Newsletter on our Website. An MBA Grad from University of Greenwich (London). I am looking forward to hear from like minded people interested in stock markets, forex, currency, commodity, equity trading, charting softwares, trading calls, trading tips, breakout stocks, fundamental analysis, banks, technical analysis etc.