1. Lecture 02: Strategic Analysis I: The External Context Niels-Erik Wergin Strategic Management

2. Strategic Management © Niels Wergin 20092 Textbook - update  Barney/Hesterly book sold out, but: 2 nd -hand editions available on internet (e.g. Amazon.co.uk, AbeBooks.co.uk)  Alternatively: get Johnson et al. book (in bookshop)

3. Strategic Management © Niels Wergin 20093 Timetable - changes  Tutorial 7 (Niels Wergin): wrong room in timetable, tutorial takes place: Mon, 14:00-15:00, QA020, NOT QM020  Tutorial 5 (Niels Wergin): wrong time in timetable, tutorial takes place: 14:00-15:00, QA020, NOT 11:00-12:00  Tutorial 4 (Peter Reid): no change to timetable; tutorial takes place: Mon, 12:00-13:00, QA038

4. Strategic Management © Niels Wergin 20094 Strategic Analysis  Part 1: The External Context Opportunities and Threats Porter’s Five Forces  Part 2: Internal Strategic Capabilities Stregths and Weaknesses Next week  Taken together: SWOT Analysis Basis of your presentations & case analyses

5. Strategic Management © Niels Wergin 20095 The external (business) environment The Organisation

6. Why External Analysis? Because it allows firms to:  analyse its position in the external environment  discover opportunities and threats  better understand the nature of competition in an industry  see if increased profits are likely in an industry  make more informed strategic choices 23/05/2015Strategic Management © Niels Wergin 20096

7. 7 Key Concepts PESTeL Scenarios Key drivers Porter’s 5 Forces

8. Strategic Management © Niels Wergin 20098 PESTEL Framework PoliticalEconomic Technological EnvironmentalLegal Social

9. Strategic Management © Niels Wergin 20099 What Are Key Drivers for Change? Key drivers for change are environmental factors that are likely to have a high impact on the success or failure of strategy.

10. Strategic Management © Niels Wergin 200910 What is a Scenario? Scenarios are detailed and plausible views of how the business environment of an organisation might develop in the future based on key drivers for change about which there is a high level of uncertainty.

11. Strategic Management © Niels Wergin 200911 Porter’s Five Forces Framework Competitive rivalry Potential entrants Buyers Substitutes Suppliers

12. Strategic Management © Niels Wergin 200912 If all threats are high expect normal profits If all threats are low expect above normal profits Most industries are somewhere between the extremes Porter’s Five Forces Framework

13. Strategic Management © Niels Wergin 200913 if firms can easily enter the industry, any above normal profits will be bid away quickly barriers to entry lower the threat of entry barriers to entry make an industry more attractive Threat of Entry

14. Strategic Management © Niels Wergin 200914 Economies of scale — firm that can’t produce the minimum efficient scale will be at a disadvantage Product differentiation — entrants are forced to overcome customer loyalties to existing products Cost advantages independent of scale — incumbents may have learning advantages, etc. Government policies — governments may impose trade restrictions and/or grant monopolies Barriers to Entry

15. Strategic Management © Niels Wergin 200915 The Threat of Entry: Barriers to Entry Scale and experience Access to supply and distribution channels Expected retaliation Legislation or government action Differentiation

16. Strategic Management © Niels Wergin 200916 Why Are Substitutes a Threat? Substitutes can reduce demand for a particular class of products as customers switch to alternatives. Price/performance ratio Extra-industry effects

17. Strategic Management © Niels Wergin 200917 substitutes fill the same need but in a different way -Coke and Pepsi are rivals, milk is a substitute for both substitutes create a price ceiling because consumers switch to the substitute if prices rise substitutes will likely come from outside the industry—be sure to look Threat of Substitutes

18. Strategic Management © Niels Wergin 200918 small number of buyers for firm’s output lack of a differentiated product the product is significant to the buyer Conditions that facilitate buyer power buyers operate in a competitive market—they are not earning above normal profits buyers can vertically integrate backwards many small buyers can be united around an issue to act as a block

19. Strategic Management © Niels Wergin 200919 The Power of Buyers Are buyers concentrated? What are the costs of switching? Does backward vertical integration exist?

20. Strategic Management © Niels Wergin 200920 The Power of Suppliers Are suppliers concentrated? What are the costs of switching? Does forward vertical integration exist?

21. Strategic Management © Niels Wergin 200921 small number of firms in supplier’s industry highly differentiated product lack of close substitutes for suppliers’ products supplier could integrate forward focal firm is an insignificant customer of supplier Conditions that facilitate supplier power

22. Strategic Management © Niels Wergin 200922 Degree of Competitive Rivalry  Competitor balance  Industry growth rate  High fixed costs  High exit barriers  Low differentiation

23. 23 high rivalry means firms compete vigorously — and compete away above average profits Industry conditions that facilitate rivalry: large numbers of competitors slow or declining growth high fixed costs and/or high storage costs low product differentiation industry capacity added in large increments Threat of Competitive Rivalry

24. Strategic Management © Niels Wergin 200924 Neutralizing Threats most firms cannot unilaterally change the threats in an industry by altering relationships in an industry, firms may reduce threats and/or create opportunities, thereby increasing profits Responding to Environmental Threats

25. Strategic Management © Niels Wergin 200925 Managerial Implications  Which industries should we enter or leave?  What influence can we exert?  How are competitors differently affected?

26. Strategic Management © Niels Wergin 200926 Types of Opportunity In substitute industries In other strategic groups In targeting buyers For complementary products In new market segments Over time

27. Strategic Management © Niels Wergin 200927 Key Debate: How Much Does Industry Matter?  Debate over whether strategy making should be externally or internally oriented  Porter’s work suggests that industry factors (i.e. external ones) influence profitability more than firm-specific factors (i.e. internal ones)  But - this varies by industry

28. Strategic Management © Niels Wergin 200928 Summary  Environmental influences can be thought of as layers around an organisation  External Analysis is crucial tool  The macro-environment can be analysed in terms of PESTEL factors  Industries and sectors can be analysed in terms of Porter’s Five Forces model

29. Strategic Management © Niels Wergin 200929 Case: The European Brewing Industry  Complete a PESTEL analysis of the European brewing industry  Complete a five forces analysis for the industry  How will the environment affect these companies?  What are the relative strengths and weaknesses of each?