1. FORMULATING STRATEGY: LOOKING OUTSIDE

2. Lecture Aims By the end of this lecture you will:
Understand the importance of the external environment to strategic management
Have been introduced to and had a play around with Porter’s Five Forces Model

3. The I/O MODEL OF ABOVE AVERAGE RETURNS
THE EXTERNAL ENVIRONMENT
The general environment
The industry environment
The competitive environment
An attractive industry
Strategy Formulation
Assets and skills requirement to implement the chosen strategy
Selection of actions linked with effective implementation of strategy
Superior returns

4. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

5. The External Environment
COMPETITIVE ENVIRONMENT
Competitors
Customers
Suppliers
The External Environment
GENERAL ENVIRONMENT
COMPLEX
UNCERTAIN
UNDERGOING RAPID CHANGE

6. The general environment: segments and elements
POLITICAL
Commitment to infrastructure development
ECONOMIC
Budget deficits/surpluses
SOCIO-CULTURAL
Workforce diversity
TECHNOLOGICAL
Product innovations
LEGAL
Competition/monopoly laws
ENVIRONMENTAL
Bleaching coral on Barrier Reef

7. Reading the External Environment
Competitive Intelligence Is …
Information that has been analyzed to the point where you can make a decision.
A tool to alert management to early recognition of both threats and opportunities.
A means to deliver reasonable assessments.
A process.
Scanning
Monitoring
Forecasting
Assessing

8. The five forces model INSERT FIGURE 3.1 p71 The Five Forces Model
Source: Adapted from ME Porter, ‘How competence forces shape strategy’, Harvard Business Review, March–April Adapted and reprinted by permission of Harvard Business Review. © 1979 by the Harvard Business School Publishing Corporation; all rights reserved.

9. From Michael Porter himself
To succeed a company must fit its strategy to the industry’s environment in which it operates or must be able to shape the industry’s environment to formulate and implement strategies to its advantage through its chosen strategy.
From Michael Porter himself

10. Threat of New Entrants Barriers to Entry Economies of Scale
Product Differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government Regulation

11. The Bargaining Power of Buyers
A buyer group is powerful if:
They purchase a large portion of the industry’s output
The sales of the product being purchased account for a significant portion of the seller’s annual revenues.
They could switch to another product at little, if any, cost.
The industry’s products are undifferentiated or standardised
Buyers can integrate backwards

12. Bargaining Power of Suppliers
A supplier group is powerful if:
When there are few suppliers as opposed to buyers
Satisfactory substitute products are not available
When industry firms are not a significant customer for supplier groups
Supplier’s goods are critical to buyers’ market place success
When differentiation makes it costly for buyers to switch suppliers – they can’t pay one supplier off against another.
The supplier group poses a credible threat of forward integration

13. The Threat of Substitute Products
MILK

14. Rivalry Amongst Established Companies
Industry Competitive Structure
Consolidated
One firm or one
dominant firm.
(monopoly)
Fragmented
Many firms.
No dominant
firm
Few firms,
Shared
dominance
(Oligopoly)

16. STARBUCKS and THE FIVE FORCES MODEL
Barriers to entry
Existence of substitutes
Bargaining power of buyers
Bargaining power of suppliers
Intensity of competition

17. LESSONS FROM STARBUCKS
Importance of an awareness of external environment
Threat to physical environment
Corporate social responsibility and link with bottom line
Guaranteeing suppliers
Promoting itself to its customers
Valuing employees

18. ADDITIONAL TOOLS
COMPLEMENTORS
STRATEGIC GROUPS

19. The sixth force

20. Strategic Groups within Industries
Two unassailable assumptions in industry analysis
No two firms are totally different
No two firms are exactly the same
Strategic groups
Organizations' in a strategic group occupy similar positions in the market, offer similar goods to similar customers and may also make similar choices about production technology and other organisational features.
Additional analytical tool

21. The concept of strategic groups is valuable for determining mobility barriers across groups, identifying groups with marginal competitive positions, charting the future directions of firm strategies and assessing the implications of industry trends for the strategic group as a whole.
Draw strategic groups for the coffee industry.
Adapted from Exhibit 2.8 The World Automobile Industry: Strategic Groups

23. Globalization of Markets (Wiersema and Bowen 2007)
RESULT OF:
Reductions in multilateral and regional trade barriers
Reduced costs of international transport and communications
Reform and greater integration of capital markets
CONSEQUENCES:
Widespread industry rationalisation
Heightened competition at national, regional and global levels
Increases both cross-border mergers and acquisitions
Increases in number of multi-national firms

24. Why Expand Internationally?
Provide opportunities for competitive advantage through:
Fully capturing of economies of scale and experience curve effects
Optimizing the physical location for every activity in the value chain
Transferring competitively valuable resources from one business to another and/or from one country to another
Leveraging use of a competitively powerful brand name

25. Why go global?

26. Porter’s Diamond of Competitive Advantage

27. MAJOR CRITICISM IGNORES INTERNAL WORKINGS OF THE FIRM
THE EXTERNAL ENVIRONMENT
The general environment
The industry environment
The competitive environment
An attractive industry
Strategy Formulation
Assets and skills requirement to implement the chosen strategy
Selection of actions linked with effective implementation of strategy
Superior returns

28. The ideas in this lecture come from
Hanson, Dowling, Hitt, Ireland and Hoskisson (2013) Strategic Management Competitiveness and Globalisation, Thompson, Melbourne.
Porter, M E (2008) “The Five Competitive Forces that Shape Strategy” in Harvard Business Review, January, pp
White, C (2004) Strategic Management, Sydney Palgrave.