Download defence economic trends in the pacific

STRATEGIC MANAGEMENT
CONCEPTUAL FRAMEWORK: EXTERNAL
OPERATING ENVIRONMENT
Professor Stefan Markowski
WYŻSZA SZKOŁA
INFORMATYKI I ZARZĄDZANIA
z siedzibą w Rzeszowie
Conceptual Framework: External
Operating Environment
CONCEPTUAL FRAMEWORK: BUSINESS OPERATING
ENVIRONMENT
• INDUSTRIES AND MARKETS
• SWOT ANALYSIS: OPPORTUNITIES AND THREATS
Conceptual Framework: External
Operating Environment
Content
Business (External) Operating Environment
• Technology
• Socio-economic and Institutional Factors
• Market Structures
• Natural Environment
• SWOT: Opportunities and Threats
• Segmentation and strategic group analysis
Business (External) Operating
Environment
Business Operating Environment
The Natural Environment
Technology
Input
Markets
Inputs
Input-output
Transformation
Outputs
Socio-economic and Institutional Factors
Market Conditions
Output
Markets
Business (External) Operating
Environment
 How industry structure and its environment
influence firms’ behavior and determine industry
performance?
 Determinants of firm’s profit
 Value of product to customers
 Intensity of competition
 Bargaining power of producers relative to their
suppliers
 Industry structure and environment drive
competition, which in turn determines industry
profitability and performance
Business (External) Operating
Environment
Key dimensions of business operating
environment:
 technology
 socio-economic
and institutional
framework
 market structures
 the natural environment
The key dimensions of the business environment are those
that impact on the firm’s ability to produce, source its inputs,
and sell its outputs
Technology

Technology concepts
process and/or product focus
 invention vs innovation
 technology (industry) life cycle: start up, growth,
maturity and decline

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Technological change
incremental/ evolving/ frame bending
 radical/ fundamental/ frame breaking
 adaptive vs innovative

Technology appraisal determines the choice of products to
make and production processes
Technology
Output capability and capacity:
capability (potential max. output, in part
unknown)
 capacity (max. quantity of a particular output)
 new capability formation (investment)
 capacity utilisation (a key cost driver)

Service x
t
Capacity
utilisation
(approaching
Capability frontier (x,y,z) at time
New capability formation
(shifting the frontier)
Good y
the frontier)
Good z
logy
Technology
Sources of technological intelligence
(forecasts and surveys as well as own R&D
activities/learning by doing):
Expert opinion
 Delphi exercises (consensus expert view)
 Competitor monitoring
 R&D monitoring
 Demonstrator/concept products and
technologies (own R&D)
 Collaborative research

Technology
Example: British Technology Foresight
Project (www.foresight.gov.uk)
(government-business
initiative to enhance
future competitiveness of the UK economy)
 Key questions (terms of reference):
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What are the likely social, economic, environmental and
market trends over the next 10-20 years?
Which areas of R&D and underpinning science,
engineering and technology best address those future
trends?
How best can public funds be used to sustain an
innovative science base to support future national
prosperity and quality of life?
To what extent should regulation, skills, educational
facilities and other factors be taken into account?
Technology

Sectoral coverage (Sector Panels):
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agriculture, natural resources and environment
chemicals
communications
construction
defence and aerospace
energy
financial services
food and drink
health and life sciences
IT and electronics
leisure and learning
manufacturing, production and business processes
marine
materials
retail and distribution
transport
Technology

Implementation:
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Steering Committee held a series of awareness seminars to push
the concept, seek views on program structure and determine
sectoral panel membership
Sectoral Technology Foresight Panels (15) performed analysis,
consultation and network building. They were assisted by
subject groups and working parties
Delphi Study involving 10,000 respondents, coordinated by
mail, responding to the panel findings
Regional workshops (60), conferences, etc. to fine-tune and
disseminate findings
Another foresight exercise

For the past 40+ years, the Japanese Science and Technology Agency
has conducted technology foresight-type exercises every 5 years
Socio-economic and institutional
factors

Socio-economic domain:
economic trends (growth, macroeconomic,
international, microeconomic/sectoral)
 social and demographic trends (census of
population, household surveys, census

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Institutional and political domain:
laws and the legal system (corporate
governance, contracting, taxation)
 political institutions (stability, corruptibility)
 government policies (electoral trends, special
interest groups)

Socio-economic appraisal is critical for activity location
Socio-economic and institutional
factors

Sources of socio-economic intelligence:
economic outlook publications
 economic forecasts
 census of population
 demographic forecasts
 consumer surveys and market studies
 investment (market) sentiment studies
 opinion polls
 country profiles
 international competitiveness studies
 Internet, social media

Socio-economic and institutional
factors

Sources of institutional and political
intelligence:
constitution and legislation
 major court determinations
 expert opinion
 published country profiles
 published sovereign risk assessments
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opinion polls
lobbyists
government inside sources
Socio-economic and institutional
factors
Example - WEF Global Competitiveness
Report (www.weforum.org)
(produced by a private Swiss group organising
the annual World Economic Forum in Davos,
Switzerland)
 Coverage:
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Over 50 countries
‘Hard’ (quantitative) and ‘soft ’(3000 people executive
survey) data
the assembled data is converted into nearly 300 performance
indices
with the latter aggregated into 8 factors of competitiveness
final country ranking in terms of weighted competitiveness
factors
Socio-economic and institutional
factors
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IMD Factors of Competitiveness
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openness to foreign trade and investment
government - the role of the state in the economy
finance - the efficiency of financial intermediation
infrastructure - the quality of physical infrastructure
technology - the diffusion of new technologies and R&D
management - the quality of commercial management
labour - the competitiveness of domestic labour market
institutions - the quality of legal institutions, the extent of
corruption and criminality, the degree of business
competition
Weights (eg, competitiveness quantitative data 75% and
survey data 25%)
Market structures
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Focus on the firm’s ability to market its
products and source its inputs (market
power)
Market power depends on:
market concentration (competitor numbers)
barriers to entry and exit (latent competition or
contestability)
 product differentiation (availability of substitutes
and complements)
 information (availability and cost of market
intelligence)
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Understanding of market structures is a key determinant of
competitive strategy
Market structures
Structural
Features
Market Structures
Competition
Oligopoly
Oligopsony
many
a few
one
Entry & exit
barriers
none
significant
high
Product
differentiation
none
some
possible
Information
available
Concentration
(no. of firms)
Monopoly
Monopsony
restricted
Market structures
Porter’s Five Forces Model
Supplier
Power
Threat of
Entry/Exit
Other forces:
Globalisation
Digitisation
Deregulation
Interindustry
Rivalry
Buyer
Power
Complementary
products
increase
dependence
Threat of
Substitutes
Market structures
Porter’s Five Force Model
 Horizontal competition
 Rivalry among existing firms
 Threat of new entrants
 Threat of substitutes
 Vertical competition
 Bargaining power of suppliers
 Bargaining power of buyers
 Bargaining power of buyers/ suppliers
 Buyer’s price sensitivity
 Relative bargaining power
Market structures
 Threat of entry (entry barriers)
 Capital requirement
 Economies of scale
 Absolute cost advantage
 Product differentiation
 Access to channels of distribution
 Government and legal barriers
 Retaliation
 Rivalry between established competitors
 Concentration
 Diversity of competitors
 Product differentiation
 Excess capacity and exit barriers
 Cost conditions: Scale economies and ratio of fixed to variable costs
Market structures
 Industry boundary defined by group of
companies that compete to serve the same
market
 A market’s boundary is defined by
substitutability
 Demand side
 Supply side
 Key success factors of a firm
 What do customer want?
 What does the firm need to do to survive competition?
Market structures
 Critique of Porter’s Model
 Complementary relationships?
 Impact of technology on rate of change
 Competition as dynamic, personalized process
 Levels of competition
 Porter’s Model of Predicting competitors’
behavior
 Competitors'’ current strategy
 Competitors’ objectives
 Competitors’ assumptions about the industry
 Competitors’ resources and capabilities
Market structures
• ‘Industry’ is the focal structure for Porter’s Five Forces
Approach
– general presumption that an entry into a strong
‘industry’ provides a platform for successful
performance
• But ‘Industry’ as a focus of external analysis is
– too narrow; and
– too autoregressive
• Alternative approach: Kenichi Ohmae’s Strategic
Triangle approach
Market structures
Ohmae’s Strategic Triangle
Value
Customers
Customers
Customer
Focal Firm
Cost
Value
Competitors
Competitors
Competitor
Market structures
• In the Strategic Triangle Model, focal company and its
rivals compete on cost of production (process) and
value for customers (product)
• Customer demands are heterogeneous and
fragmented
• Four strategies for competitive advantage:
– intensifying functional differentiation (by identifying Key
Success Factors and investing in business functions that
matter most)
– building on relative product superiority, where
appropriate
– pursuing aggressive initiatives
– defining and exploiting strategic degrees of freedom
(exploring technological synergies and customer
functional requirements)
Market structures
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Sources of market intelligence:
price and quantity movements
 direct competitor/market monitoring
 interpretation of competitor behaviour
 monitoring of cross-product competition
(potential substitutes and complements)
 supply chain analysis
 customer surreys (purchasing power, tastes)
 competition laws and their interpretation
 direct government intervention (eg, changes in
tariffs, subsidies, marketing arrangements)
 market analysis (demand/supply studies)
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Natural environment
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Understanding of natural environment is
important for the assessment of
 availability of and access to natural
resources
 positive and negative externalities (external
costs and benefits)
 barriers to entry/exit
 product differentiation (eg, environmentfriendly products)
Natural environment is another critical factor determining the
choice of location and production technology
Natural environment

Sources of ecological and (natural)
environmental intelligence
environmental impact studies and statements
 legislation and court determinations
 literature
 government policies
 international agreements and cases
 customer surreys (environmental preferences
and tastes, contingent valuation of
environmental amenities)
 competitor monitoring

SWOT: Opportunities and threats

SWOT: Opportunities and Threats
relevant environment
 immediate, operating, distant
 industry, market, sectoral/strategic group,
main competitor(-s)
 key environmental characteristics
(attractiveness factors)
 competitor/contestant analysis (competitor
objectives, capabilities, resources, strategies,
responses)
 key success (failure) factors (modes and
criticality of success/failure)
 environmental score card (opportunities and
threats)

Segmentation and strategic group
analyses
 Segmentation analysis (stages)
 Identify key segment variables (partition the markets most
distinctly)
 Construct a segment matrix
 Analyze segment attractiveness (apply Five Forces Model)
 Identify segment’s key success factors
 Select segment groups (specialist vs generalist)
 Strategic groups (similar broad strategies, but
may not compete)
CONCEPTUAL FRAMEWORK:
EXTERNAL OPERATING
ENVIRONMENT
Readings
Grant, chs. 3-4
Pearce & Robinson, chs. 3 and 5
Questions for review and discussion
• Describe the business environment of the firm and outline
how to analyse it.
• What do you understand by the term “competitive
environment of the business firm” and how should we
analyse it?
• Explain Porter’s “five forces” model. Describe briefly each
force. What other factors should be considered in this
framework?
• Explain how the competitive position of the firm depends
on:
– the impact of suppliers and customers?
– the entry of new competitors?
– intrasectoral competition?
– the availability of substitute and complementary products?