SU3001
Strategic Management: Environments
(know your enemy)
Dr David R Moore
Analysing the Environment
‘Environment’ has increasingly taken on a
specialised meaning involving ‘green’ issues and
sustainability.
In this module, a much wider meaning is used, and is
closer to the systems theory meaning of the term.
In systems theory, the environment has a boundary
established by PAC and/or ICE.
Planning
External
Environment
Import
Conversion
Analysis
Control
Internal
Environment
Export
Before carrying out any strategic
analysis, consideration must be given
to the dynamics of the environment.
• Some industries experience a rapid
rate of change, but this may not be
consistent.
• When forces are turbulent, they
may make it difficult to use some
of the analytical tools available.
Environmental forces around an organisation (external
environment) can be assessed according to:
• Predictability: the degree to which change can be
predicted.
• Changeability: the extent to which the environment
is likely to change
Economic: GDP, Interest rates, etc.
Technological:
PESTE
Government spending on research, Patents,
etc.
Political, Economic,
Social, Technological, Ecological:
Legislation on emissions, waste disposal, etc.
Ecological
Vital to be selective from the factors available, and explore most
relevant factors in detail.
Long lists of factors are counter-productive (contingency / prescriptive
thinking) – apply the KISS principle!
Porter’s Five Forces model provides structured analysis of industry’s
environment
Identifies the 5 basic “forces” (both ‘external’ and ‘internal’) that can
act on an organisation.
Competition exists at several levels.
INDUSTRY STRUCTURING AND COMPETITION
PORTER’S FIVE FORCES
Rivalry will be high if:
• Concentration ratio is high
• Diversity of competitors is
high
• Product differentiation is high
• Excess capacity and exit
barriers are high
• Cost conditions (scale
economies and ratio of fixed
to variable costs)
Bargaining power of suppliers is
high if:
• Only a few suppliers relative to
buyers
• No substitutes for supplies they
offer
• Supplier’s prices form a large part
of an organisation’s total costs
• Supplier’s level of information
• The supplier can potentially
integrate forward
• Bargaining power of
buyers is high if:
• They are concentrated and
few in number
• The product produced by a
company is undifferentiated
from competitors
• If backward integration is
possible
Threat of new entrants - new
entrants join a market when: Profit
margins are attractive and entry
barriers are low
Porter suggests 7 barriers to entry:
•Economies of scale
•Product differentiation
•Capital requirements
•Switching costs
•Access to distribution channels
•Cost disadvantages independent of scale
•Government policy
Threat of substitutes should
be considered in terms of:
• Possible threat of
obsolescence
• Ability of customers to
switch
• Cost of providing some extra
service that will prevent
switching
• Likely reduction in profit
margin if prices come down
In highly competitive markets,
companies engage in regular and
extensive monitoring of key competitor
companies:
• Price changes and matching
significant moves
• Product changes and attempting new
initiatives
• Investments in new plant and drives
to reduce costs
• Attempts to identify and “poach“ key
staff
Certain industry conditions may increase competitor rivalry:
Extra production capacity is created in large increments
Difficult to differentiate products or services
Difficult or expensive to exit the industry
Entrant intention to achieve a strategic market stake
Competitors are roughly of equal size and one decides to gain
market share
• Market is growing slowly and one competitor seeks dominance
• Fixed and/or storage costs of a product are high
•
•
•
•
•
Summary:
• Suppliers strong when commanding a price premium and their
delivery schedules / quality affect final product
• Buyers strong when able to negotiate on price, quality, and
service
• New entrants are threat when able to enter market and compete
strongly through lower costs
• Substitutes are a threat when they result from technological or
low cost breakthrough
• Competitive rivalry is essence of industry analysis and it is
necessary to build defences against competitive threat
SU3001
Strategic Management: Environments
(know your enemy)
Dr David R Moore