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

2. 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.

3. External Environment
Planning
Import
Conversion
Control
Export
Analysis
Internal Environment

4. 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.

5. 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

6. 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.

7. INDUSTRY STRUCTURING AND COMPETITION

8. PORTER’S FIVE FORCES

9. 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

10. 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

11. 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

12. 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

13. 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

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