lecture 7 external analysis the near environment_2

Newcastle Business School

SM0374: Strategic Management and Leadership

Lecture Seven External Analysis (2): the near environment and market and

industry features


The Strategic Management Process

External Analysis

Internal Analysis

SWOTStrategic Options

Evaluation + Choices

Current Strategy

Key Issues

CurrentObjectives


External Environment

Source: Adapted from JSW, 2008, p.54

TheNear Environment – subject to some influence from the organisation, e.g.

M&As

The Far Environment –

beyond the organisation’s

control e.g. failed states


Industry / Market

How do you define a market?– By consumer needs; markets reflect consumer

demand How do you define an industry?

– Porter (1980): group of firms producing products or services that are close substitutes (output)

– Kay (1993): the industry is defined by related firm capabilities and based on supply technologies (output/supply)


Industry / Market

The simplest case:

Collection of Sellers Collection of Buyers

Marketplace

Industry Market

Goods

Money


The Business

The market + industry define the business What business are we in?

Wine

Whisky

Beer

Squash

Cider

Alcopops

Consumers


Industry

A group of businesses which share similar products, processes, technologies, suppliers, customers.

Examples: – Tea Packing Industry: Apeejay International Tea (Typhoo),

Nestlé (Nestea), Tata (Tetley), etc.– Automobile manufacturing: Toyota, GM, Ford, VW Group, etc.– Diamond mining: De Beers, Rio Tinto, Alrosa, BHP Billiton, Harry

Winston Diamond– Beer manufacturers: SAB Miller, Inbev, Heineken, Anhueser Busch, etc.– Drinks manufacturers?

/Explore: http://www.computerwire.com/companies/lists/ http://www.statistics.gov.uk/methods_quality/sic/downloads/SIC2007explanatorynotes.pdf


Market

A group of customers with a specific set of requirements or needs

How do you define a market?– By consumer needs; markets reflect consumer

demand– Examples: The Hot Drinks Market


Importance of Definitions & Boundaries

You must attempt to draw industry and market boundaries as this helps to determine competition and profit potential

Too wide a definition will yield poor results because the analysis will not give us useful information about the environment our organisation faces

Too narrow a definition restricts awareness of opportunities and threats e.g. railways threatened by airlines; bus companies running railways

The firm must understand with whom it is competing


Industry and Market Analysis – What this Involves:

Definitions – what industry/ies, market/s? Market (demand/consumption)

– size, growth rate, stage in lifecycle, geographic location, segmentation

Industry (supply/output)– size, main activities, key players, geographic location,

trends Marketplace

– Nature of competition (Oligopoly? Monopoly? Fragmented competition?)


Market Segmentation

How is the market segmented?– Need to identify customer groups that respond

differently to other customer groups to competitive strategies

– Divide a market into sub-markets with their own distinct sets of customers who can be targeted all together


Market SegmentationSource: JSW, 2008, p.77


Marketplace

What sort of marketplace are we in?

Pure competition?

Monopolistic competition?

Oligopoly? Monopoly?

AlcopopsBeers

Squash

18-25yr olds

Goods

Money

Industry MarketMarketplace


Analysing Industry Attractiveness

Industry attractiveness depends on factors or forces within the industry and influences on those forces from the macroenvironment– E.g. Bargaining power of trade unions

– E.g. Entry to the industry of foreign competitors

Before analysing industry attractiveness, we need to understand the macroenvironment

Industry and market are sometimes referred to as the “near environment”

The macroenvironment is also known as the “far environment”


Analysing Industry Attractiveness

“The state of competition within an industry depends upon five basic forces, the collective strength of which determines the ultimate profit potential of the industry”

Michael Porter (1980)


Porter’s Five Forces framework (1980)(JSW, 2008, p.60)


Porter’s Five Forces framework (1980)

Supplier Bargaining Power: Includes suppliers of raw materials, components, labour, power, plant and equipment, finance

Buyer Bargaining Power: Who buys from the industry? – general consumer or other industries/ organisations? High buyer power means that firms in the industry are unable to charge high prices for their products/services

Suppliers may merge or otherwise combine to increase their power (e.g. workers may be unionised; farmers may form a cooperative)



Threat of New Entrants: New entrants are businesses that enter the marketplace with the same product as the current members of the industry

Threat of Substitutes: – Direct substitutes meet the same customer needs as the industry’s

product• e.g. Eurostar vs Cross-Channel Ferries vs Air Travel

– Indirect substitutes compete for discretionary expenditure• e.g. new car vs holiday vs home refurbishment

– NOTE: the same products offered by other members of the industry are NOT substitutes in this sense



Intensity of Competitive Rivalry:- Between the members of the industry seeking

to maintain or increase market share through price competition, product features or advertising.

- High intensity of rivalry tends to result in competition based on low prices


Why Use the Five Forces Analysis

Explain and predict the profitability of the industry Identify and understand the forces which have the greatest impact on

the industry Identify potential threats Identify trends in the forces Assess the significance to the industry of changes in the macro-

environment (for e.g. de-regulation significantly affected threat of entry & competitive rivalry in Airline industry)

Identify an organisation’s competitive position within the industry Suggest ways to improve the competitive position (e.g. vertical

integration) Assess the attractiveness of investing in an industry (either as a

shareholder or new entrant)


The Five Forces Model and International Competitiveness

The Five Forces model implies that industry attractiveness can be increased by reducing the strength of the forces

HOWEVER, Porter’s (1990) National Diamond model holds (among other things) that the international competitiveness of a domestic industry can be enhanced by competitive domestic rivalry and sophisticated and demanding home customers

Read JSW (2008) Ch. 8 (8.3) Success in any industry ultimately depends on the firm and

its strategies


External Analysis: Summary 2

A good analysis allows the reader to see influences and trends which may require a change in strategy

The analysis forms part of the assessment of the match between the organisation’s capabilities and the business environment

The discussion may be summarised as a set of key factors & trends

Opportunities and threats (OT) identified from the external analysis should be considered in relation to the strengths and weaknesses (SW) of the firm drawn from an internal analysis


Internal Analysis

lecture 7 external analysis the near environment_2

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