BUSINESS STRATEGY MKT3002 51110

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BUSINESS STRATEGY MKT3002 / 51110

• LECTURE THREE
• Topic 3 Strategic analysis

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Module 3Strategic analysis Analysing the
environment

• Learning outcomes
• Describe the components of the external
  environment within which an organisation operates
• Carry out a full PEST analysis
• Appropriately conduct a Porters 5 forces
  analysis to assess industry attractiveness
• Explain the significance of segmentation in
  strategic planning
• Undertake a competitor analysis and
• Undertake a directional policy matrix to consider
  the portfolio of a business

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Key words and concepts

• Environmental uncertainty
• PEST analysis
• Environmental drivers of change
• Porters diamond
• Scenario planning
• Five forces analysis
• Life-cycle model
• Exit barriers

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Key words and concepts

• Strategic group analysis
• Market segmentation analysis
• Perceived value
• Market attractiveness
• Directional policy matrix

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Introduction

• The external analysis may be viewed as a process
  which
• Identifies trends and future events,
  opportunities and threats and strategic
  uncertainties
• Analyses the impacts of these on organisations
  and
• Ultimately suggests ways or strategies to cope
  with such impacts.
• Aaker 1999

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Steps in the environmental analysis
Assess the nature of the environment
Audit environmental influences
Identify key competitive forces
Identify competitive position
Identify key opportunities and threats
Strategic position
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Differences between external internal
environments

• External environment
• The management has no control over most of its
  components.
• React to the changes in the environment.
• Internal environment
• The management has varying degree of influence of
  its components.
• Seeks to change the environmental influence
  itself.

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Understanding the nature of the environment

• Environmental uncertainty increases the more that
  environmental conditions are dynamic or the more
  they are complex.
• Environmental conditions
• Simple / static conditions
• Dynamic conditions
• Complex situations

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Auditing environmental influences

• The importance of environmental forces differ
  from organisation to organisation.
• Three auditing technique
• PEST analysis
• Porters diamond
• Scenario Planning

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PEST analysis

• It involves identifying factors that influence
  the organisation. These factors include
• Political / legal
• (eg. Taxation policy, foreign trade regulations,
  government stability)
• Economic
• (eg. unemployment, disposable income)
• Sociocultural
• (eg. Lifestyle change, levels of education)
• Technological
• (eg. Government spending on research, speed of
  technology transfer)

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Porters diamond

• Porters Diamond suggests that there are
  inherent reasons why some nations are more
  competitive than others and why some industries
  within nations are more competitive than others.

Firm strategy, structure and rivalry
Demand conditions
Factor conditions
Related and supporting industries
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Environmental drivers of change
Drivers of globalisation
Global market convergence

• Similar customer needs
• Global customers
• Transferable marketing

• Scale economies
• Sourcing efficiencies
• Country-specific costs
• High product development costs

• Trade policies
• Technical standards
• Host government policies

Govt influence
Cost advantages
Global strategies

• Interdependence
• Competitors global
• High exports / imports

Global competition
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Scenario planning

• builds plausible views of different possible
  futures for an organisation based on grouping of
  key environmental influences and drivers of
  change about which there is a high level of
  uncertainty.
• Limited number of logically consistent.
• Examine strategic options against the scenarios.
• Implications of scenarios.

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External factor evaluation matrix (EFE)

• The EFE matrix allows strategies to summarise
  and evaluate economic, social, cultural,
  demographic, environmental, political,
  governmental, legal, technological, and
  competitive information.
• David 2001, p. 113

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External factor evaluation matrix (EFE) (Cont)

• Steps in developing the EFE matrix
• Identify a list of KEY external factors (critical
  success factors).
• Assign a weight to each factor, ranging from 0
  (not important) to 1.0 (very important).
• Assign a 1-4 rating to each critical success
  factor to indicate how effectively the firms
  current strategies respond to the factor. (1
  response is poor, 4 response is extremely good)
• Multiply each factors weight by its rating to
  determine a weighted score.
• Sum the weighted scores.
• Average total weighted score is 2.5.

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External factor evaluation matrix (EFE) (Cont)
Developing the EFE matrix - Example

• Key external factors
• Opportunities
• Global markets are practically untapped by
  quality wool.
• Increased demand caused by a raised in wool
  products.
• Threats
• Legislation against the wool industry.
• Increased competition.

Weight 0.35 0.2 0.3 0.15
Rating 4 2 1 2
Weighted Score 1.4 0.4 0.3 0.3
Total 1.00
2.4
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Competitive profile matrix (CPM)

• The CPM identifies a firms major competitors
  and their particular strengths and weaknesses in
  relation to a sample firms strategic position.
• David 2001, p. 115
• Key success factors (KSFs)
• Technology related
• Distribution related
• Marketing related
• Skills related
• Organisational capability
• Other types of KSFs

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Competitive profile matrix (CPM) (Cont)
Developing the CPM - Example
Company A
Company B
Company C
Key success factors Advertising Product
quality Customer loyalty Financial
position Global expansion Market share
Weight 0.1 0.3 0.2 0.2 0.1 0.1
Rating 3 4 3 3 2 3
Score 0.3 1.2 0.6 0.6 0.2 0.3
Rating 3 2 2 2 2 2
Score 0.3 0.6 0.4 0.4 0.2 0.2
Rating 4 3 2 4 1 2
Score 0.4 1.2 0.4 0.8 0.1 0.2
Total 1.00 3.2
2.1 3.1
Rating 1major weakness, 4major strength
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The competitive environment Five forces analysis

• Five forces analysis is a means of identifying
  the forces which affect the level of competition
  in an industry.
• Johnson Scholes 1999, p.115.

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Porters Five forces industry analysis
Potential entrants
Threat of entrants
Bargaining power
Competitive rivalry
Buyer
Supplier
Bargaining power
Threat of substitutes
Substitutes
Adapted from M. E. Porter, Competitive Strategy
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Competitive rivalry
The life cycle model
Development
Growth
Shakeout
Maturity
Decline
Few trial of early adopters
Growing adopters trial of product/service
Growing selectivity of purchase
Saturation of Users Repeat purchase reliance
Drop-off In usage
Users/ buyers
Entry of competitors Attempt to achieve
trial Fight for share Undifferentiated
products/services
May be many Likely price cutting of
Volume Shakeout of weakest competitors
Fight to maintain Share Difficulties in
gaining/taking share Emphasis on
efficiency/low cost
Exit of some competitors Selective distribution
Few competitors
Competitive conditions
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Competitive rivalry (Cont)

• Other forces that affect competitive rivalry
• Competitors balance
• Market growth rates
• Global customers
• High fixed costs
• Extra capacity
• Differentiation
• Acquisition of weaker companies and
• High exit barriers.

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Identifying the organisations competitive
position

• Strategic group analysis
• Market segmentation
• Perceived value (customer )
• Boston consulting group matrix (BCG)
• Market attractiveness business strength
• Competitor analysis

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1. Strategic group analysis

• aims to identify organisations with similar
  strategic characteristics, following similar
  strategies or competing on similar bases.
• David 2001, p. 127

• The strategic group analysis is useful in the
  following ways
• Identify direct competitors.
• Identify the possibility for an organisation to
  move from one strategic group to another.
• Identify opportunities.
• Identify significant strategic problems.

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2. Market segmentation

• seeks to identify similarities and differences
  between groups of customers or users.
• David 2001, p. 129

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3. Analysing perceived value by customers

• The development of competitive strategy needs to
  be based on a good understanding of dimensions of
  strategy valued most by customers. This can be
  achieved through
• Identify the relevant market segments.
• Identify the characteristics of the
  product/service that customers value most.
• Rate the importance of these dimensions.
• Identify the relative strengths of competitors.
• Review organisations competitive strategy.

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4. The BCG
?
Sales growth
Market share
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5. Market attractiveness and business strength

• Directional policy matrix
• It seeks to position SBUs according to
• (a) how attractive is the relevant market in
  which they are operating, and
• (b) the competitive strength of the SBU in that
  market.

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6. Competitor analysis

• Obtain information about competitors.
• Identification of appropriate criteria.
• Eg. Goals and objectives, culture, financial,
  target market, and etc.

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Environmental analysis in practice

• Simplify the complexity.
• Selective attention.
• Prototypes.
• Contribute to collective know-how.
• Threats rather than opportunities.
• Difficulty in building up an overall strategic
  view of the environment.

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Lecture 3 review

• Strategic analysis
• Understanding the nature of the environment
• Audit environmental influences
• Identify key competitive forces
• Identify competitive position
• Identify key opportunities and threats
• Environmental analysis in practice

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Next week lecture

• Module 4
• Resources, competencies, strategic capability.
• (Study book Module 4 - Text Chapter 4)

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Next weeks tutorial

• Prepare by going over the case questions at end
  of module
• Read article from BRW 23/07/99 Grooving in a new
  Mood p 84 7
• Do a porters five forces analysis
• Will environmental changes affect the way the
  retail music stores look like in the future?
• If you were to invest money in a business, would
  you consider a music retailer?