Strategic Management: Environments (know your enemy) Dr David R Moore SU3001 Strategic Management: Environments (know your enemy) Dr David R Moore

Analysing the Environment ‘Environment’ has increasingly taken on a specialised meaning involving ‘green’ issues and sustainability. In this module, a much wider meaning is used, and is closer to the systems theory meaning of the term. In systems theory, the environment has a boundary established by PAC and/or ICE.

External Environment Planning Import Conversion Control Export Analysis Internal Environment

Before carrying out any strategic analysis, consideration must be given to the dynamics of the environment. Some industries experience a rapid rate of change, but this may not be consistent. When forces are turbulent, they may make it difficult to use some of the analytical tools available.

Environmental forces around an organisation (external environment) can be assessed according to: Predictability: the degree to which change can be predicted. Changeability: the extent to which the environment is likely to change Economic: GDP, Interest rates, etc. Technological: Government spending on research, Patents, etc. Ecological: Legislation on emissions, waste disposal, etc. PESTE Political, Economic, Social, Technological, Ecological

Vital to be selective from the factors available, and explore most relevant factors in detail. Long lists of factors are counter-productive (contingency / prescriptive thinking) – apply the KISS principle! Porter’s Five Forces model provides structured analysis of industry’s environment Identifies the 5 basic “forces” (both ‘external’ and ‘internal’) that can act on an organisation. Competition exists at several levels.

INDUSTRY STRUCTURING AND COMPETITION

PORTER’S FIVE FORCES

Rivalry will be high if: Concentration ratio is high Diversity of competitors is high Product differentiation is high Excess capacity and exit barriers are high Cost conditions (scale economies and ratio of fixed to variable costs) Bargaining power of suppliers is high if: Only a few suppliers relative to buyers No substitutes for supplies they offer Supplier’s prices form a large part of an organisation’s total costs Supplier’s level of information The supplier can potentially integrate forward

Threat of new entrants - new entrants join a market when: Profit margins are attractive and entry barriers are low Porter suggests 7 barriers to entry: Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Bargaining power of buyers is high if: They are concentrated and few in number The product produced by a company is undifferentiated from competitors If backward integration is possible

In highly competitive markets, companies engage in regular and extensive monitoring of key competitor companies: Price changes and matching significant moves Product changes and attempting new initiatives Investments in new plant and drives to reduce costs Attempts to identify and “poach“ key staff Threat of substitutes should be considered in terms of: Possible threat of obsolescence Ability of customers to switch Cost of providing some extra service that will prevent switching Likely reduction in profit margin if prices come down

Certain industry conditions may increase competitor rivalry: Extra production capacity is created in large increments Difficult to differentiate products or services Difficult or expensive to exit the industry Entrant intention to achieve a strategic market stake Competitors are roughly of equal size and one decides to gain market share Market is growing slowly and one competitor seeks dominance Fixed and/or storage costs of a product are high

Summary: Suppliers strong when commanding a price premium and their delivery schedules / quality affect final product Buyers strong when able to negotiate on price, quality, and service New entrants are threat when able to enter market and compete strongly through lower costs Substitutes are a threat when they result from technological or low cost breakthrough Competitive rivalry is essence of industry analysis and it is necessary to build defences against competitive threat

Strategic Management: Environments (know your enemy) Dr David R Moore SU3001 Strategic Management: Environments (know your enemy) Dr David R Moore