Download `Five Forces` Framework

The Strategic
Environment
International Business
Strategy
LON301BUS
Unit: 3 Knowledgecast: 2
Module Learning Outcomes
• Communicate an in-depth understanding of the
complexity of the environment and its applications on
decision-making process
• Assess current developments in the organisational
environment and alternative responses related to
strategy
• Demonstrate the ability to construct and present
quantitative and qualitative data effectively by the
application of IT skills and methodological techniques
The External Business Environment
Layers of the business environment
•The organisation
•Competitors (or market)
•Industry (or sector)
•The macro environment
The micro
environment
Macroenvironment
“Consists of the forces at work in the general
business environment which will shape the
industries and markets in which the
organisation competes”... “Is the part of the
environment over which the business can
rarely exert any direct influence but to which it
must respond ” (Stonehouse, Hamill, Campbell and
Purdie, 2000: pp 73 and 104).
(far, remote, mediate, general)
Strategic Management
Microenvironment
“Is the competitive environment facing a
business and it consists of the industries
and markets in which the organisation
conducts its business” (Stonehouse,
Hamill, Campbell and Purdie, 2000: 73).
(near, immediate, competitive, operating)
Strategic Management
The Business Environment
The
Company
Buyer
Substitut
e
Technological
Internal
Political
New
Entrants
Supplier
Economi
c
Competitor
s
Microenvironment
SocioImage Copyright
www.librarian.net/talks/nyl
cultural
ink/nylink
Industry Life Cycle
M84 Strategic Management
Gerry Johnson & Kevan Scholes: Exploring Corporate Strategy, Sixth Edition, © Pearson Education Ltd 2002
PEST Analysis
• Political
• Economic
• Socio-cultural
• Technological
Strategic Management
PEST Analysis - Political
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Government stability
Taxation, employment and safety law
Social welfare policies
Foreign trade regulations
Relations between government and the
organisation
Government ownership of industry and attitude to
monopolies and competition policy
‘Green’ issues that affect the environment
Level and type of energy consumed – renewable
energy?
Rubbish, waste and its disposal
Strategic Management
PEST Analysis - Economic
• Total GDP and GDP per head growth rates
(trends)
• Inflation
• Consumer expenditure and disposable income
• Interest rates
• Currency fluctuations and exchange rates
• Investment, by the state, private enterprise and
foreign companies
• Business cycles
• Unemployment
• Energy costs, transport costs, communications
costs, raw materials costs
Strategic Management
PEST Analysis - Sociocultural
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Shifts in values and culture
Change in lifestyle
Consumerism
Attitudes to work and leisure
‘Green’ environmental issues
Education and health
Demographic changes
Distribution of income
Social mobility
Strategic Management
PEST Analysis - Technological
• Government and EU investment policy on
research
• Government and industry focus on
technological effort
• New patents and products
• Speed of change and adoption of new
technology
• Rates of obsolescence
• The impact of the Internet
Strategic Management
Five Forces Framework
M84 Strategic Management
Gerry Johnson & Kevan Scholes: Exploring Corporate Strategy, Sixth Edition, © Pearson Education Ltd 2002
Five Forces Framework (cont.)
Threat of new entrants (entry barriers)
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Economies of scale
Differentiation
Brand loyalty
Start-up capital requirements
Switching costs
Access to supply and distribution channels
Legislation or government action
Retaliation (e.g. price cuts and advertising
campaigns)
• Entry deterring price
Strategic Management
Five Forces Framework (cont.)
Determinants of substitution threat
1. Product-for-product substitution (e.g. post mail and e-mail)
2. Substitution of need (more reliable transports reducing the
need for cars)
3. Generic substitution (disposable income:
boats/homes/furniture/holidays, etc.)
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Relative price/performance of substitutes
Switching costs
Effectiveness in meeting specific customer needs
Willingness of buyers to substitute
Product differentiation
Brand loyalty
Strategic Management
Five Forces Framework (cont.)
Determinants of supplier power
• Concentration (number and size of the firms)
• Importance of suppliers’ sales that an industry
represents
• Importance of the buyers in the industry as
customers of the suppliers
• Differentiation of the product/service and
alternative sources
• Switching costs
• The threat of backward integration by the buyer
(the company in analysis)
• The threat of forward integration by the supplier
Strategic Management
Five Forces Framework (cont.)
Determinants of buyer power
• Concentration (number and size of the firms)
• Importance of buyers’ purchases to the total
volume sold by the company
• Differentiation of the product/service and
alternative sources
• Switching costs
• The threat of backward integration by the buyer
(the company in analysis)
• The threat of forward integration of buyers by the
company
• Access to information
Strategic Management
Five Forces Framework (cont.)
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Competitive rivalry determinants
Market growth rates (life cycle)
Overcapacity
Fixed costs
Number of competitors in the industry
Similarity of the size and power of the competitors
Differentiation of the products/services provided (switching
costs for buyers)
• Brand loyalty among consumers
• Barriers to exit (fixed costs of exit, emotional attachment,
government restrictions, etc)
Strategic Management
Five Forces Framework (cont.)
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Key questions arising from the ‘Five Forces’
Framework
What are the key forces at work in the competitive
environment?
What are the underlying forces in the macroenvironment
that are driving competitive forces?
Is it likely that the forces will change, and if so, how?
How do particular competitors stand in relation to these
competitive forces?
What can managers do to influence the competitive
forces affecting the company?
Are some industries more attractive than others?
Strategic Management
External Changes and Value
Creation
• Creating value is contingent on industry and market
conditions
• The relation between the growth of market demand
and the growth of industry capacity is central to value
creation analysis
• Two possibilities exist:
 Market demand outruns industry capacity
 Industry capacity outruns market demand
Knowledgecast Summary
• Communicate an in-depth understanding of the complexity of the
environment and its applications on decision-making process
 If different management functions, such as marketing and finance were to undertake
the analysis using the same tool would the ‘output’ differ? What are the implications
of this?
• Assess current developments in the organisational environment
and alternative responses related to strategy
 How valuable are tools such as PESTEL or Porter’s Five Forces to
businesses?
• Demonstrate the ability to construct and present quantitative and
qualitative data effectively by the application of IT skills and
methodological techniques
 Tools such as these can be used to analyse and present both
quantitative and qualitative data.
Seminar
Environmental Audit – Part One
• Carry out an analysis of the internal business environment of your
case study organisation using one of the tools/methods covered in
this unit.
• Bring your preparatory research to the seminar. On the whiteboard
your tutor will ‘populate’ the tool/method chosen drawing on your
research.
Group Activity
Environmental Audit – Part Two
• Assessment Preparation – Research
• You have an opportunity to use this time to continue to gather
information regarding the business environment of your case study
organisation, which will be invaluable in preparing you for the first
assignment.
• Assessment Preparation – Presentation Design
• You will also have an opportunity to use this time to design your
presentation regarding the business environment of your case study
organisation, which will be invaluable in preparing you for the first
assessment. Ensure each member of the group understands and
accepts their role and responsibilities.