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strategic management- unit 2, Apuntes de Finanzas Empresariales

Universitat Pompeu Fabra (UPF)Finanzas Empresariales

Asignatura: Direcció Estratègica I, Profesor: , Carrera: Ciències Empresarials-Management, Universidad: UPF

Tipo: Apuntes

2015/2016

Subido el 02/02/2016

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Manuel Martínez Martínez
2.C.EMP.-MNG.
Strategic Management I
Strategic management I. Unit 2: the environment
Layers of the business environment
The PESTEL framework!
The PESTEL framework categorises environmental factors into six key types:!
- Political factors: The role of the state (e.g. as an owner, costumer or supplier of
businesses). Other political factors include government policies, taxation changes, foreign
trade regulations, political risk in foreign markets, changes in trade blocks (e.g. expansion
of EU).!
- Social factors: including changing cultures and demographics. (e.g.: are the ageing
population in Western societies, income distribution, lifestyle changes, consumerism,
changes in culture and fashion).!
- Ecological factors: This refers to ‘green’ environmental issues, such as pollution waste
and climate change. (e.g.: are environmental protection regulations, energy problems,
global warming, waste disposal and re-cycling).!
- Economic factors: The role of macro-economic factors. This includes business cycles,
interest rates, personal disposable income, exchange rates, unemployment rates,
differential growth rates around the world.!
- Technological factors: New discoveries and technology developments (e.g.: Include
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Strategic management I. Unit 2: the environment

Layers of the business environment The PESTEL framework The PESTEL framework categorises environmental factors into six key types:

  • Political factors: The role of the state (e.g. as an owner, costumer or supplier of businesses). Other political factors include government policies, taxation changes, foreign trade regulations, political risk in foreign markets, changes in trade blocks (e.g. expansion of EU).
  • Social factors: including changing cultures and demographics. (e.g.: are the ageing population in Western societies, income distribution, lifestyle changes, consumerism, changes in culture and fashion).
  • Ecological factors: This refers to ‘green’ environmental issues, such as pollution waste and climate change. (e.g.: are environmental protection regulations, energy problems, global warming, waste disposal and re-cycling).
  • Economic factors: The role of macro-economic factors. This includes business cycles, interest rates, personal disposable income, exchange rates, unemployment rates, differential growth rates around the world.
  • Technological factors: New discoveries and technology developments (e.g.: Include

developments on the internet, nano-technology or the rise of new composite materials).

  • Legal: legislative and regulatory constraints or changes (e.g.: are Internet Property Rights (IPR), competition law, health and safety law, liberalisation of trade law). PESTEL helps to provide a list of potentially important issues influencing strategy. It is important to assess the impact of each factor Key drivers for change Key drivers for change:
  • The environmental factors likely to have a high impact on the success or failure of strategy.
  • Typically key drivers vary by industry or market.
  • For example, retailers are concerned with social changes and costumer behaviur which have driven a move to ‘out of town’ shopping. Personal disposable income also drives demand for retailers. Using the PESTEL framework Megatrends: large-scale changes that are slow to form but influence many other activities over decades to come. Examples include ageing populations and increased economic growth in Asia. Inflexion points: When trends shift sharply upwards or downwards. (e.g. sub-Saharan Africa may have reached and inflexion point after decades of stagnation (and may embark on a period of rapid growth). Weak signals: advanced signs of future trends that may help to identify inflexion points — often unstructured and fragmented bits of information. (e.g. mortgage failures in California in 2007 wew a weak signal for the financial crisis that hit the global economy in 2008).
  • Apply selectively — identify specific factors which impact on the industry, market and organisation in question.
  • Identify factors which are important currently but also consider which will become more important in the next few years.
  • Use data to support the point and analyse trends using up-to-date information.
  • Identify opportunities and threats — the main point of the exercise! Scenarios Scenarios are plausible views of how the environment of an organisation might develop in the future based on key drivers of change about which there is a high level of uncertainty.
  • Build on PESTEL analysis and drivers of change.
  • Offer more than a single view. An organisation will typically develop a few alternative scenarios (2-4) to explore and evaluate future strategic options.
  • Scenario analysis is used in industries with long planning horizons, for example the oil industry or airlines industry. Carrying out scenarios analysis
  • Identify the most relevant scope of the study — the relevant product/ market and time span.
  • Identify key drivers of change — PESTEL factors which will have the most impact in the future but which have uncertain outcomes and are mutually independent.
  • For each key driver select opposing outcomes where each leads to very different consequences.
  • Develop scenario ‘stories'. That is, coherent and plausible descriptions of the environment that result from opposing outcomes.
  • Identify the impact of each scenario on the organisation and evaluate future strategies in

Competitive forces: The five forces Framework Porter’s Five Forces Framework helps identify the attractiveness of an industry in terms of five competitive forces:

  • The threat of entry.
  • The threat of subtitutes.
  • The bargaining power of buyers
  • The bargaining power of suppliers
  • The extent of rivalry between competitors. The five forces constitute an industry’s ‘structure’. Rivalry between existing competitors Competitive rivals are organisations with similars products and services aimed at the same customer group and are direct competitors in the same industry/market (distinct from substitutes). The degree of rivalry increases when:
  • Competitors are of roughly equal size.
  • Competitors are aggresive in seeking leadership.
  • The market is mature or declining.
  • There are high fixed costs.
  • The exit barriers are high.
  • There is a low level of differentiation. The threat of entry Barriers to entry are the factors that need to be overcome by new entrants if they are to compete. The threat of entry is low when the barriers to entry are high and vice versa. The main barriers to entry are:
  • Economies of scale/high fixed costs.
  • Experience and learning.
  • Access to supply and distribution channels.
  • Differentiation and market penetration costs.
  • Legislation or government restrictions.
  • Expected retaliation from incumbents.

Threat of substitutes Substitutes are products or services that offer a similar benefit to an industry’s products or services but have a different nature i.e. they are from outside the industry. Customers will switch to alternatives (and thus the threat increases) if:

  • The price/performance ratio of the substitutes is superior (e.g. Aluminium is more expensive than steel but it is more cost efficient for car parts).
  • The substitute benefits from an innovation that improves customer satisfaction (e.g. high speed trains can be quicker than airlines from city centre to city centre on short haul routes). The bargaining power of buyers Buyers are the organisation’s immediate customers, not necessarily the ultimate consumers. If buyers are powerful, then they can demand cheap prices or products/service improvements to reduce profits. Buyer power is likely to be high when:
  • Buyers are concentrated.
  • Buyers have low switching costs.
  • Buyers can supply their own inputs (backward vertical integration). Suppliers are those who supply what organisations need to produce the product or service. Powerful suppliers can reduce an organisation’s profits. Suppliers power is likely to be high when:
  • The suppliers are concentrated (few of them).
  • Suppliers provide a specialist or rare input.
  • Switching costs are high (it is disruptive or expensive to change suppliers).
  • Suppliers can integrate forwards (e.g. low-cost airlines have cut out the use of travel agents). Types of industry - Monopolistic industries — an industry with one firm and therefore no competitive rivalry. A firm has ‘monopoly power’ if it has a dominant position in the market. For example, Google in the US search engine market.
  • Oligopolistic industries — an industry dominated by a few firms with limited rivalry and in which firms have power over buyers and suppliers. E.g. Boeing and Airbus dominate the market for civil aircraft.
  • Perfectly competitive industries — where barriers to entry are low, there are many equal rivals each with very similar products, and information about competitors is freely available. Few markets are ‘perfect’ but many may have features of highly competitive markets, for example, mini-cabs in London. All of them can compite with the same conditions.
  • Hypercompetitive industries — where the frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change (e.g. mobile phones: tarifas de teléfonos). Implications of Five Forces Analysis
  • Which industries/ markets to enter or leave — it helps identify the attractiveness of industries.
  • What influence can be exerted? Identifies strategies that can influence the impact of the five forces. E.g. building barriers to entry by becoming more vertically integrated.
  • The forces may have a different impact on different organisations. E.g. large firms can deal with barriers to entry more easily than small firms.

Strategic group Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases.

  • These characteristics are different from those in other strategic groups in the same industry or sector.
  • There are meny different characteristics that distinguish between strategic groups.
  • Strategic groups can be mapped on to two- dimensional chart —maps. These can be useful tools of analysis. Uses of strategic group analysis
  • Understanding competition — enables focus on direct competitors within a strategic group, rather than the whole industry. (E.g. Tesco will focus on Sainsburys and Asda.)
  • Analysis of strategic opportunities — helps identify attractive ‘strategic spaces’ within an industry.
  • Analysis of ‘mobility barriers’ — i.e. obstacles to movement from one strategic group to another. These barriers can be overcome to enter more attractive groups. Barriers can be built to defend an attractive position in a strategic group.

Market segments A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.

  • Where these customer groups are relatively small, such market segments are called ‘niches’.
  • Customer need vary. Focusing on customer needs that are highly distinctive is one means of building a secure segment strategy.
  • Not all segments are attractive or viable market opportunities — evaluation is essential. Who are the strategic customers? A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased. Examples:
  • For a food manufacturer it is the multiple retailers (e.g. Tesco) that are the strategic customers, not the ultimate consumer.
  • For a pharmaceutical manufacturer it is the health authorities and hospitals, not the final patient. This is in macro and microlevel. Critical success factors (CSFs)
  • Critical success factors are those factors that are either particularly valued by customers or which provide a significant advantage in terms of cost.
  • Critical success factors are likely to be an important source of competitive advantage if an organisation has them (or a disadvantage if an organisation lacks them).
  • Different industries and markets will have different critical success factors (e.g. in low- cost airlines the CSFs will be punctuality and value for money whereas in full-service airlines it is all about quality of service)