S1 2016

MKT3002 Business strategy

in a Global Environment
Lecture 3 Strategic analysis
(Grant, Butler, Orr & Murray 2014 Chapter 4)

Dr Peng Zhou (Joe)

School of Management & Enterprise

Lecture 3 learning objectives

Explain why an understanding of industry

environment is critical to strategic analysis

Understand how to use PESTEL as a tool in

strategic analysis

Use of Porters five forces to conduct

industry analysis

Develop scenarios and explain their uses

Identify key success factors (KSFs) and

strategic groups

2016 by Dr Peng Zhou

Introduction

This session focuses on one the most important

aspects of effective strategy a good
understanding of the external environment

In particular, a range of analytical tools and

techniques that strategic planners can deploy to
gain better understanding of external
environments will be explained in this second
lecture

2016 by Dr Peng Zhou

Macro environmental influences

Macro environment refer to the

environment external to the organisation,
its operations and its industry
Macro environment factors influence the
medium and long term features of the
strategy
These factors are usually independent of
the organisation and its activities
An organisation has limited influence on
these factors

2016 by Dr Peng Zhou

PESTEL analysis

PESTEL analysis is one of the most popular

and useful tool (or perspective) for
analysing the external macro environment

It includes the analysis of political, economic,

social, technological, environmental and
legal environments of an organisation

PESTEL involves an evaluation framework

that helps to identify the features of the
macro environment that may affect the
organisation

2016 by Dr Peng Zhou

Six elements of PESTEL analysis

2016 by Dr Peng Zhou

Using a PESTEL analysis

PESTEL analysis should provide detailed

understanding of the key forces and trends

Two key questions should drive the analysis:

1.

Which environmental factors are currently affecting the

organisation?

2.

Which of these factors are more important now and in

future?

. The

result of PESTEL analysis often leads to the

identification of key success factors (KSFs), which
are characteristics defined by industry conditions
that are important for the success of an organisation

2016 by Dr Peng Zhou

National competitive advantage

Also known as Porters diamond is an influential
tool of assessing country competitiveness

2016 by Dr Peng Zhou

Micro external environment analysis

Micro external environment refers to the

conditions in the organisations industry (i.e.

in the environment immediately surrounding
the organisation)

Micro external environmental conditions

result from the behaviours of other

organisations in the industry, suppliers to
the industry, customers of the industry and
organisations attempting to enter the
industry

2016 by Dr Peng Zhou

Porters five forces of competition

framework

2016 by Dr Peng Zhou

Competition from substitutes

The customers perception of the value of a

product or service depends, in part, on the
availability of substitute products

Three aspects of this type of competition

relate to factors such as:

Presence of substitutes
Price elasticity
Differentiation

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10

Threat of entry

Threat of entry is present in industries

that provide an attractive environment

in which to achieve a good return on
investment

The threat of entry itself may keep

pricing within competitive levels

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Creating Barriers

Many organisations can create barriers to

entry by maintaining high levels of competition

While price is the most common mechanism

used to create barriers to entry, other
measures including negotiation to create
licensing and regulatory constraints is often
used as well

Other forms of barriers to entry can result

from large economies of scale

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Capital requirements

Capital requirements can also act as a

market entry barrier

Where the costs of entering an industry

is large, it only allows companies with

huge financial resources to enter and act
as a deterrent

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Economies of scale

Economies of scale refers to a situation

where the greater the volume of activity,

the lower the set up and operating costs
per unit of activity

Achieving efficiency in industries that are

capital, research or advertising intensive
requires large-scale operations and
therefore act as a barrier to entry

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Other barriers to entry

Other barriers to market entry include factors
such as:

Absolute cost advantages

Product differentiation
Access to channels of distribution
Governmental and legal barriers
Retaliation

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The effectiveness of barriers to entry

The effectiveness of barriers to entry depends

on the resources and capabilities that potential

entrants possess

Research shows industries protected by high

entry barriers tend to earn above average rates
of profit

Capital requirements and advertising appear to

be particularly effective impediments to entry

Barriers that are effective against new companies

may be ineffective against established organisations
that are diversifying from other industries

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Rivalry between established

competitors

The major determinant of the general

level of competition attractiveness of

an industry is the competitive stance of
the organisations operating within the
industry

The intensity of competition between

established organisations is the result

of interactions between six factors

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17

Rivalry: concentration

Concentration is the number and size

distribution of organisations competing
in an industry.

Concentration is most commonly

measured using the concentration ratio
(CR) the combined share of the
market held by the largest
organisations.

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Rivalry: diversity of competitors

Diversity of competitors refers to the

extent that a group of organisations
avoids aggressive price-based
competition depends on the similarity of
their strategies, objectives and costs.

It will also be affected by the maturity of

the industry.

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Rivalry: product differentiation

Organisations offering very similar

products will often compete aggressively

using price based competition

In industries where products are highly

differentiated price competition tends to

be weak

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Rivalry: excess capacity &

exit barriers

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Bargaining power of
customers
In output markets, customer influence
depends upon two distinct factors:
1.

Importance of product to customers

2.

Relative bargaining power of customers

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Bargaining power of suppliers

According to Porter, bargaining power of

suppliers can influence the attractiveness of
an industry

The key factors in determining the power of

suppliers is the importance of what they are
supplying, the cost to the organisation of
switching between different suppliers and
the relative bargaining skills of each party

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Applying Porters analysis

Porters model can provide two very
important results to an organisation of a
five forces analysis:
1.

Identification of industry attractiveness

2.

The industry conditions that an organisation

strategy should focus on

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Porters extended five forces

framework

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Describing industry structure

It is important to understand and identify

the principal features of the industrys
structure: competitors, customers,
suppliers and producers of substitute
goods

The key structural characteristics of each

of these groups determine the overall
level of competition and relative strength
of each group

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Industries and markets

Economists define an industry as a group of

organisations that supplies a market.

The principal difference between analysing

industry structure and analysing market
structure is that industry analysis looks at
industry attractiveness as a reflection of
competition between specific markets, such
as suppliers, customers and substitutes.

Market analysis focuses predominantly on

the customers alone.

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Competitor analysis

Analysis of the strategies through which

competitors in an industry create a competitive

advantage refers to competitor analysis

The main purpose of competitor analysis is to:

Forecast competitors future strategies and
decisions,
Predict competitors likely reactions to an
organisations strategic initiatives,
Determine how competitors behaviour can
be influenced to make it more favourable.

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Porters framework for

competitor analysis

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Network Environment Analysis

In recent times, networks have become an

important feature of the competitive
landscape
It is important to assess the characteristics
and scope of networks that affect the
conditions in the external environment
Some key factors include:
Level of trust
Network membership
Longevity

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Scenario planning

Scenario planning is a relatively new analytical

tool in the armoury of strategic planners

Scenario planning is the process of

identifying one or more likely and major
environmental changes against which to
test the organisations ability to respond

Scenario planning is a particularly useful

tool for organisations that face significant
environmental uncertainty and complexity

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Identifying Key Success Factors

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Strategic groups

Strategic group refers to a group of

organisations in an industry that adopt a
similar strategy

Strategic group analysis refers to an

analysis of the organisations in a particular
industry on the basis of two key variables
selected for that industry, indicating how
organisations group on the basis of the
strategies they have adopted

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The SWOT analysis

A commonly used and familiar concept is the

SWOT (strengths, weaknesses,
opportunities, threats) analysis

The purpose of an external environmental

analysis is closely linked with the
opportunities and threats component of
SWOT

As a tool it has limitations

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Environmental analysis &

strategic plans

That environment is the principal

determinant of organisational success is
dominant view amongst many strategist

Environmental analysis has relevance at two

strategic levels of thinking:
Corporate level
Business level

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Classroom exercises
Read Case Study 2: The grounded kangaroo? An
analysis of Qantas on pages 427 to 431 of the
textbook.

Watch the video clip Whats behind Qantas

trouble? via the link
http://www.abc.net.au/7.30/content/2014/s395303
0.htm
.

Which macro-environmental forces have

influenced the profitability of Qantas?
Explain your reasoning.

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Summary

This session introduced the concepts of

external environmental analysis.
The tools of external environmental analysis
are designed to improve decision making by
reducing uncertainty about the external factors.
These tools are very useful in providing
insights into the key factors that can influence
success of an organisation.
No analytical tool is capable of eliminating
uncertainty about the future only of
reducing it to some extent.

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Summary (Cont.)

Although every industry is unique, competition

and profitability are the result of the systematic
influences of the structure of that industry.

The Porter framework provides a simple, yet

powerful organising framework for classifying
the relevant features of an industrys structure
and predicting their implications for competitive
behaviour.

With the addition of the sixth complementary

products force, many of the critical conditions of
the industry can be identified.

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