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FORMULATING STRATEGY: LOOKING OUTSIDE
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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
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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
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Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall
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The External Environment
COMPETITIVE ENVIRONMENT Competitors Customers Suppliers The External Environment GENERAL ENVIRONMENT COMPLEX UNCERTAIN UNDERGOING RAPID CHANGE
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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
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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
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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.
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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
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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
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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
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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
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The Threat of Substitute Products
MILK
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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)
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STARBUCKS and THE FIVE FORCES MODEL
Barriers to entry Existence of substitutes Bargaining power of buyers Bargaining power of suppliers Intensity of competition
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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
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ADDITIONAL TOOLS COMPLEMENTORS STRATEGIC GROUPS
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The sixth force
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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
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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
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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
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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
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Why go global?
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Porter’s Diamond of Competitive Advantage
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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
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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.
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