NBS Strategic Management Division 2004/5 1 SM352 Strategy External Analysis 3 Near Environment

NBS Strategic Management Division 2004/5 2 The Strategic Process External Analysis Internal Analysis SWOT Current Objectives Current Strategies Key Issues Strategic Options Strategy Implementation

NBS Strategic Management Division 2004/5 3 Reminder 1.Industry and Market Features 2.Factors which affect the industry now and in the future - the Far Environment 3.The Nature of the Business Environment 4.Industry structure - the Near Environment

NBS Strategic Management Division 2004/5 4 Near Environment 1  Also known as the micro- or competitive environment  The part of the business environment which the industry can influence  Michael Porter: –“The state of competition within an industry depends on five basic forces, the collective strength of which determines the ultimate profit potential of the industry”  Theory developed from Industrial Economics

NBS Strategic Management Division 2004/5 5 Near Environment 2 Competitive Rivalry Supplier Bargaining Power Buyer Bargaining Power Threat of Entrants Threat of Substitutes Porter’s “Five Forces” framework (1980)

NBS Strategic Management Division 2004/5 6 Near Environment 3  By determining the relative importance of each of these forces we can: –identify the controlling forces and trends –explain and predict the profitability of the industry –identify an organisation’s competitive position within the industry –suggest ways to improve the competitive position (e.g. vertical integration)

NBS Strategic Management Division 2004/5 7 Threat of New Entrants 1  New entrants are businesses that enter the marketplace with the same product as the current members of the industry  Includes imports from firms seeking economies of scale  If it is easy to enter the industry this will tend to force industry prices down  Threat depends on the height of barriers to entry

NBS Strategic Management Division 2004/5 8 Threat of New Entrants 2  Examples of entry barriers: –Economies of scale - entrant must either enter on a large scale or accept a cost disadvantage –Differentiation - brand identification and customer loyalty has to be overcome –Capital requirements - how much finance is needed to enter and compete? –Cost disadvantages independent of size - the learning curves, access to cheap labour, patents etc. –Access to distribution channels - are they closed to new entrants? –Government policy - legislation, tariff and non-tariff barriers

NBS Strategic Management Division 2004/5 9 Supplier Bargaining Power 1  Includes suppliers of raw materials, components, labour, power, plant and equipment, finance  High supplier power means that firms in the industry will have to pay high prices for whatever is being supplied

NBS Strategic Management Division 2004/5 10 Supplier Bargaining Power 1  Suppliers have high bargaining power if: –there is a concentration of suppliers –the costs of switching between suppliers are high, e.g. the item supplied is unique or highly differentiated –there is the possibility of forwards integration by the supplier if it does not get the prices it seeks –the industry is not an important customer to the supplier

NBS Strategic Management Division 2004/5 11 Buyer Bargaining Power 1  Customers include manufacturers, service businesses, retailers, wholesalers, distributors and consumers  High buyer power means that firms in the industry are unable to charge high prices for their products/services

NBS Strategic Management Division 2004/5 12 Buyer Bargaining Power 2  Buyers are powerful if: –there is a concentration of buyers and they purchase large quantities of the product –they can easily switch to alternative sellers –the products purchased represent a large portion of the buyer’s costs or expenditure (buyer is likely to shop around) –there is a credible threat of backward integration by the buyer –the products of the industry are unimportant to the quality of the buyers’ products or services

NBS Strategic Management Division 2004/5 13 Threat of Substitutes 1  Direct substitutes meet the same customer needs as the industry’s product –e.g. Le Shuttle vs Cross-Channel Ferries  Indirect substitutes compete for discretionary expenditure –e.g. new car vs holiday vs new cooker  If substitutes are readily available industry prices tend to be forced down  NOTE: The same products offered by other members of the industry are NOT substitutes

NBS Strategic Management Division 2004/5 14 Threat of Substitutes 2  The magnitude of the threat depends on: –the relative price and performance of the substitute –the switching cost to the buyer –the propensity of the buyer to switch to a substitute

NBS Strategic Management Division 2004/5 15 Intensity of Competitive Rivalry 1  Between the members of the industry seeking to maintain or increase market share through price competition, product features or advertising.  High intensity of rivalry tends to result in competition based on low prices

NBS Strategic Management Division 2004/5 16 Intensity of Competitive Rivalry 2  Rivalry tends to be high if: –the number of competitors is increasing and they are becoming more equal in size –the market is mature and subject to shake-out –the products or services are difficult to differentiate –buyer switching costs are low –exit barriers are high –competitors are diverse in terms of strategy, countries of origin and compete in different ways

NBS Strategic Management Division 2004/5 17 Oil Industry 1  Low threat of entry because: –existing players very large with economies of scale and smaller players are at a cost disadvantage –huge capital investment required –technological know-how possessed by established companies –Oil companies own refineries, distribution and outlets –UK Government favours UK based companies

NBS Strategic Management Division 2004/5 18 Oil Industry 2  Supplier power: –Most oil companies are vertically integrated so do not depend on suppliers > low power –Oil producing countries have substantial power if they act together > high power

NBS Strategic Management Division 2004/5 19 Oil Industry 3  Buyer power: –Demand for oil products is price inelastic > low power –End users are small and fragmented > low power –Low brand loyalty > high power –Difficult to differentiate product > high power –Low switching costs > high power

NBS Strategic Management Division 2004/5 20 Oil Industry 4  Threat of substitutes: –alternative fuels for electricity generation but switching costs are high > low threat –alternative fuels for cars but high switching costs > low threat –indirect threat of public switching to public transport and abandoning cars - but propensity to substitute is low > low threat

NBS Strategic Management Division 2004/5 21 Oil Industry 5  Competitive Rivalry –Few major competitors (oligopoly) and they tend to avoid price competition –Compete through differentiation of outlets (e.g. wider range of products in petrol stations –Much collaboration through joint operating agreements >Moderate rivalry

NBS Strategic Management Division 2004/5 22 Oil Industry 6  Summary (the important bit!!!) –5 Forces suggests the industry should be quite profitable –However public seems to be showing some resistance to price increases –Companies claim that petrol retailing is barely profitable –Other activities are highly profitable

NBS Strategic Management Division 2004/5 23 Summary of Near Environment 1  The Five Forces can be used to: –compile a checklist of how the different parts of the industry structure relate to each other –help identify and understand the forces which have the greatest impact on the industry –understand how the STEP factors are affecting the 5 Forces –the trends in the forces

NBS Strategic Management Division 2004/5 24 Summary of Near Environment 2  A more detailed analysis examines: –the relative position of each industry member with respect to the forces –how the organisation can influence the competitive forces –whether other industries are more attractive  Success depends on competitive strategy as well as the nature of the industry

NBS Strategic Management Division 2004/5 25 Summary of External Analysis 1  An external analysis should cover: –Industry and market features –The far environment (STEP) –The near environment (5 Forces) –The nature of the business environment  The discussion may be summarised as a set of key Opportunities and Threats

NBS Strategic Management Division 2004/5 26 Summary of External Analysis 2  A good analysis allows the reader to see influences and trends which may require a change in strategy  The analysis forms part of the assessment of the match between the organisation’s capabilities and the business environment  The organisation’s capabilities are assessed by internal analysis