Topic 2 Revision Notes
STRATEGIC POSITION
Topic 2 Revision Notes The Environment: The industrial organisations (I/O) Paradigm: •Is a theory based around the belief that organisations either succeed or fail depending upon their fit with their industry and external environment (ie rather than internal operations). That is, they succeed based upon the nature of the industry. Therefore it is extremely important that organisations understand the dynamics of the environment and industry they operate in.
The External (Macro) Business Environment: The PESTEL Framework: •PESTEL helps to provide a list of potentially important environmental issues that influence an organisations strategy •PESTEL analysis looks at the key drivers for change; ie it looks at the trends and opportunities in the business environment •It categorizes environmental factors into six key types: Political Factors:
Economic Factors:
Social Factors:
Technological Factors:
•Examples include: -Taxation changes -Foreign trade regulations •Examples include: -Interest rates -Personal disposable income -Exchange rates -Unemployment rates •Relates to changing cultures and demographics •Examples include: -Changes in culture and consumption patterns -Lifestyle changes -Ageing population •Relates to new discoveries and technological developments •Examples include: -Developments on the internet
STRATEGIC POSITION Ecological Factors:
Legal Factors:
•This refers to ‘green’ environmental issues •Examples include: -Pollution -Waste & Recycling -Energy consumption •Includes legislative and regulatory constraints or changes •Examples include: -Competition law -Trade law -Employment law
•When using the PESTEL analysis it is important to identify factors which are important currently, but it is also important to consider which factors will become more important in the next few years •External Factor Evaluation Matrix (EFE Matrix) – Steps to a structured PESTEL Analysis: 1. List key external factors – the key drivers for change 2. Weight from 0-1 in terms of strategic importance 3. Rate effectiveness of firm’s current strategies in addressing external factors (1. Poor to 4. Superior) 4. Multiply weight by rating 5. Sum weighted scores 6. The total weighted score will range between 1-4. 1=poor response, 4=very effective response to environmental factors.
STRATEGIC POSITION Scenarios: •Scenarios are plausible views of how the environment of an organisation might develop in the future based on the PESTEL Analysis •An organisation will typically develop a few alternative scenarios (2-4) to explore and evaluate strategic options. This should include both potential positive outcomes and consequences that may arise from each scenario.
Industries/Sectors/Competition & Markets: Industries, markets & sectors defined: •An industry is a group of firms producing products and services that are essentially the same -EG Automobile industry •A market is a group of customers for specific products or services that are essentially the same -EG Market for luxury cars •A sector is a broad industry group. It is used often in the public sector. -EG Health sector Competitive Forces in an Industry – Porter’s Five Forces Framework: •Porter’s five forces framework helps identify the attractiveness of an industry in terms of five competitive forces: Competitive •Competitive rivals are organisations with similar products and services aimed at the Rivalry: same customer group and are direct competitors in the same market -EG Coca Cola & Pepsi •The degree of rivalry increases when: -Competitors are aggressive -The exit barriers are high -There is a low level of differentiation Threat of •Barriers to entry are the factors that new to be overcome by new entrants if they are to New compete. The threat of entry is low when the barriers to entry are high. Entrants: •The main barriers to entry include: -Economies of scale & Fixed costs -Experience and learning -Legislation or government restrictions (eg licensing) -Access to supply and distribution channels Threat of •Substitutes are products or services that offer a similar benefit to consumers Substitutes: •Customers will switch to alternatives if: -The price or performance of a substitute are superior -The substitute benefits from an innovation that improves customer satisfaction Buyer •If buyers are too powerful, then they can demand cheap prices or product/service Power: improvements which may reduce the organisations profits •Buyer power is likely to be high when: -Buyers have low switching costs (eg ease of switching from mac to pc) -Buyers can supply their own inputs (eg buy own water) -The buyers are concentrated (ie few of them)
STRATEGIC POSITION Supplier Power:
•Powerful suppliers can reduce an organisation’s profits •Supplier power is likely to be high when: -The suppliers are concentrated (ie few of them) -Suppliers provide a specialist or rare input -Switching costs are high
•Implications of Five Forces Analysis: -Identifies which markets are attractive to enter, or which markets the organisation should leave -The five forces have different impacts on different organisations. That is, large firms can deal with barriers to entry more easily than small firms •Issue in Five Forces Analysis: -Converging industries: EG High tech organisations, where industries overlap (eg mobile phones, cameras, etc) -Complementary organisations: may enhance the attractiveness of a business to customers or suppliers (eg Microsoft and McAfee computer security systems) Types of Industries: Monopolistic Industry:
Oligopolistic Industries:
The Industry Life-Cycle:
-An industry with one firm and therefore no competitive rivalry -It is a firm with a dominant position in the market -EG Google -An industry dominated by a few firms with limited rivalry and in which the firms have power over buyers and suppliers (eg Boeing & Airbus, Windows & Mac, Woolworths & Coles, Internet Explorer & Firefox & Chrome, IPhone & Samsung)
STRATEGIC POSITION
Strategic Groups: •Strategic Groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases •Strategic group analysis helps understand strategic opportunities; that is identify attractive strategic spaces within an industry. It also helps understand direct competitors within a strategic group, rather than the whole industry.
Market Segments: •A market segment is a group of customers who have similar needs -Where these customer groups are relatively small, such markets are called ‘niches’ -Not all segments are attractive or viable market opportunities – evaluation is essential Bases for market segmentation:
STRATEGIC POSITION
Critical Success Factors (CSFs): •Critical success factors are those factors that are particularly valued by customers and/or provide a significant advantage in terms of cost •Critical success factors are likely to be an important source of competitive advantage if an organisation has them (or a disadvantage if an organisation lacks them) Blue Ocean Thinking: •Blue Oceans are new market spaces where competition is minimized •Blue ocean thinking involves management thinking outside of the square to be different by finding or creating market spaces that are not currently being served Red Oceans: •Red Oceans are where industries are already well defined and rivalry is intense.
Topic 2 Revision Notes The Environment: The industrial organisations (I/O) Paradigm: •Is a theory based around the belief that organisations either succeed or fail depending upon their fit with their industry and external environment (ie rather than internal operations). That is, they succeed based upon the nature of the industry. Therefore it is extremely important that organisations understand the dynamics of the environment and industry they operate in.
The External (Macro) Business Environment: The PESTEL Framework: •PESTEL helps to provide a list of potentially important environmental issues that influence an organisations strategy •PESTEL analysis looks at the key drivers for change; ie it looks at the trends and opportunities in the business environment •It categorizes environmental factors into six key types: Political Factors:
Economic Factors:
Social Factors:
Technological Factors:
•Examples include: -Taxation changes -Foreign trade regulations •Examples include: -Interest rates -Personal disposable income -Exchange rates -Unemployment rates •Relates to changing cultures and demographics •Examples include: -Changes in culture and consumption patterns -Lifestyle changes -Ageing population •Relates to new discoveries and technological developments •Examples include: -Developments on the internet
STRATEGIC POSITION Ecological Factors:
Legal Factors:
•This refers to ‘green’ environmental issues •Examples include: -Pollution -Waste & Recycling -Energy consumption •Includes legislative and regulatory constraints or changes •Examples include: -Competition law -Trade law -Employment law
•When using the PESTEL analysis it is important to identify factors which are important currently, but it is also important to consider which factors will become more important in the next few years •External Factor Evaluation Matrix (EFE Matrix) – Steps to a structured PESTEL Analysis: 1. List key external factors – the key drivers for change 2. Weight from 0-1 in terms of strategic importance 3. Rate effectiveness of firm’s current strategies in addressing external factors (1. Poor to 4. Superior) 4. Multiply weight by rating 5. Sum weighted scores 6. The total weighted score will range between 1-4. 1=poor response, 4=very effective response to environmental factors.
STRATEGIC POSITION Scenarios: •Scenarios are plausible views of how the environment of an organisation might develop in the future based on the PESTEL Analysis •An organisation will typically develop a few alternative scenarios (2-4) to explore and evaluate strategic options. This should include both potential positive outcomes and consequences that may arise from each scenario.
Industries/Sectors/Competition & Markets: Industries, markets & sectors defined: •An industry is a group of firms producing products and services that are essentially the same -EG Automobile industry •A market is a group of customers for specific products or services that are essentially the same -EG Market for luxury cars •A sector is a broad industry group. It is used often in the public sector. -EG Health sector Competitive Forces in an Industry – Porter’s Five Forces Framework: •Porter’s five forces framework helps identify the attractiveness of an industry in terms of five competitive forces: Competitive •Competitive rivals are organisations with similar products and services aimed at the Rivalry: same customer group and are direct competitors in the same market -EG Coca Cola & Pepsi •The degree of rivalry increases when: -Competitors are aggressive -The exit barriers are high -There is a low level of differentiation Threat of •Barriers to entry are the factors that new to be overcome by new entrants if they are to New compete. The threat of entry is low when the barriers to entry are high. Entrants: •The main barriers to entry include: -Economies of scale & Fixed costs -Experience and learning -Legislation or government restrictions (eg licensing) -Access to supply and distribution channels Threat of •Substitutes are products or services that offer a similar benefit to consumers Substitutes: •Customers will switch to alternatives if: -The price or performance of a substitute are superior -The substitute benefits from an innovation that improves customer satisfaction Buyer •If buyers are too powerful, then they can demand cheap prices or product/service Power: improvements which may reduce the organisations profits •Buyer power is likely to be high when: -Buyers have low switching costs (eg ease of switching from mac to pc) -Buyers can supply their own inputs (eg buy own water) -The buyers are concentrated (ie few of them)
STRATEGIC POSITION Supplier Power:
•Powerful suppliers can reduce an organisation’s profits •Supplier power is likely to be high when: -The suppliers are concentrated (ie few of them) -Suppliers provide a specialist or rare input -Switching costs are high
•Implications of Five Forces Analysis: -Identifies which markets are attractive to enter, or which markets the organisation should leave -The five forces have different impacts on different organisations. That is, large firms can deal with barriers to entry more easily than small firms •Issue in Five Forces Analysis: -Converging industries: EG High tech organisations, where industries overlap (eg mobile phones, cameras, etc) -Complementary organisations: may enhance the attractiveness of a business to customers or suppliers (eg Microsoft and McAfee computer security systems) Types of Industries: Monopolistic Industry:
Oligopolistic Industries:
The Industry Life-Cycle:
-An industry with one firm and therefore no competitive rivalry -It is a firm with a dominant position in the market -EG Google -An industry dominated by a few firms with limited rivalry and in which the firms have power over buyers and suppliers (eg Boeing & Airbus, Windows & Mac, Woolworths & Coles, Internet Explorer & Firefox & Chrome, IPhone & Samsung)
STRATEGIC POSITION
Strategic Groups: •Strategic Groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases •Strategic group analysis helps understand strategic opportunities; that is identify attractive strategic spaces within an industry. It also helps understand direct competitors within a strategic group, rather than the whole industry.
Market Segments: •A market segment is a group of customers who have similar needs -Where these customer groups are relatively small, such markets are called ‘niches’ -Not all segments are attractive or viable market opportunities – evaluation is essential Bases for market segmentation:
STRATEGIC POSITION
Critical Success Factors (CSFs): •Critical success factors are those factors that are particularly valued by customers and/or provide a significant advantage in terms of cost •Critical success factors are likely to be an important source of competitive advantage if an organisation has them (or a disadvantage if an organisation lacks them) Blue Ocean Thinking: •Blue Oceans are new market spaces where competition is minimized •Blue ocean thinking involves management thinking outside of the square to be different by finding or creating market spaces that are not currently being served Red Oceans: •Red Oceans are where industries are already well defined and rivalry is intense.
