NBS Strategic Management Division 2004/5 1 SM352 Strategy External Analysis 3 Near Environment.
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Transcript of NBS Strategic Management Division 2004/5 1 SM352 Strategy External Analysis 3 Near Environment.
NBS Strategic Management Division 2004/5 2
The Strategic Process
ExternalAnalysis
InternalAnalysis
SWOT
CurrentObjectives
CurrentStrategies
KeyIssues
StrategicOptions
StrategyImplementation
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Reminder
1. Industry and Market Features
2. Factors which affect the industry now and in the future - the Far Environment
3. The Nature of the Business Environment
4. Industry structure - the Near Environment
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Near Environment 1
Also known as the micro- or competitive environment
The part of the business environment which the industry can influence
Michael Porter:– “The state of competition within an industry
depends on five basic forces, the collective strength of which determines the ultimate profit potential of the industry”
Theory developed from Industrial Economics
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Near Environment 2
CompetitiveRivalry
Supplier Bargaining Power
Buyer BargainingPower
Threat of Entrants
Threat of Substitutes
Porter’s “Five Forces” framework (1980)
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Near Environment 3
By determining the relative importance of each of these forces we can:– identify the controlling forces and trends– explain and predict the profitability of the
industry– identify an organisation’s competitive
position within the industry– suggest ways to improve the competitive
position (e.g. vertical integration)
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Threat of New Entrants 1
New entrants are businesses that enter the marketplace with the same product as the current members of the industry
Includes imports from firms seeking economies of scale
If it is easy to enter the industry this will tend to force industry prices down
Threat depends on the height of barriers to entry
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Threat of New Entrants 2
Examples of entry barriers: – Economies of scale - entrant must either enter on a large
scale or accept a cost disadvantage– Differentiation - brand identification and customer loyalty
has to be overcome– Capital requirements - how much finance is needed to
enter and compete?– Cost disadvantages independent of size - the learning
curves, access to cheap labour, patents etc.– Access to distribution channels - are they closed to new
entrants?– Government policy - legislation, tariff and non-tariff barriers
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Supplier Bargaining Power 1
Includes suppliers of raw materials, components, labour, power, plant and equipment, finance
High supplier power means that firms in the industry will have to pay high prices for whatever is being supplied
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Supplier Bargaining Power 1
Suppliers have high bargaining power if:– there is a concentration of suppliers– the costs of switching between suppliers are high,
e.g. the item supplied is unique or highly differentiated
– there is the possibility of forwards integration by the supplier if it does not get the prices it seeks
– the industry is not an important customer to the supplier
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Buyer Bargaining Power 1
Customers include manufacturers, service businesses, retailers, wholesalers, distributors and consumers
High buyer power means that firms in the industry are unable to charge high prices for their products/services
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Buyer Bargaining Power 2
Buyers are powerful if:– there is a concentration of buyers and they
purchase large quantities of the product– they can easily switch to alternative sellers– the products purchased represent a large portion of
the buyer’s costs or expenditure (buyer is likely to shop around)
– there is a credible threat of backward integration by the buyer
– the products of the industry are unimportant to the quality of the buyers’ products or services
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Threat of Substitutes 1
Direct substitutes meet the same customer needs as the industry’s product– e.g. Le Shuttle vs Cross-Channel Ferries
Indirect substitutes compete for discretionary expenditure– e.g. new car vs holiday vs new cooker
If substitutes are readily available industry prices tend to be forced down
NOTE: The same products offered by other members of the industry are NOT substitutes
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Threat of Substitutes 2
The magnitude of the threat depends on:– the relative price and performance of the
substitute– the switching cost to the buyer– the propensity of the buyer to switch to a
substitute
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Intensity of Competitive Rivalry 1
Between the members of the industry seeking to maintain or increase market share through price competition, product features or advertising.
High intensity of rivalry tends to result in competition based on low prices
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Intensity of Competitive Rivalry 2
Rivalry tends to be high if:– the number of competitors is increasing and they
are becoming more equal in size– the market is mature and subject to shake-out– the products or services are difficult to differentiate– buyer switching costs are low– exit barriers are high– competitors are diverse in terms of strategy,
countries of origin and compete in different ways
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Oil Industry 1
Low threat of entry because:– existing players very large with economies of scale
and smaller players are at a cost disadvantage– huge capital investment required– technological know-how possessed by established
companies– Oil companies own refineries, distribution and
outlets– UK Government favours UK based companies
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Oil Industry 2
Supplier power:– Most oil companies are vertically integrated
so do not depend on suppliers > low power– Oil producing countries have substantial
power if they act together > high power
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Oil Industry 3
Buyer power:– Demand for oil products is price inelastic >
low power– End users are small and fragmented > low
power– Low brand loyalty > high power– Difficult to differentiate product > high power– Low switching costs > high power
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Oil Industry 4
Threat of substitutes:– alternative fuels for electricity generation but
switching costs are high > low threat– alternative fuels for cars but high switching
costs > low threat– indirect threat of public switching to public
transport and abandoning cars - but propensity to substitute is low > low threat
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Oil Industry 5
Competitive Rivalry– Few major competitors (oligopoly) and they
tend to avoid price competition– Compete through differentiation of outlets
(e.g. wider range of products in petrol stations
– Much collaboration through joint operating agreements
> Moderate rivalry
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Oil Industry 6
Summary (the important bit!!!)– 5 Forces suggests the industry should be
quite profitable– However public seems to be showing some
resistance to price increases– Companies claim that petrol retailing is
barely profitable– Other activities are highly profitable
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Summary of Near Environment 1
The Five Forces can be used to:– compile a checklist of how the different parts of the
industry structure relate to each other– help identify and understand the forces which have
the greatest impact on the industry– understand how the STEP factors are affecting the
5 Forces– the trends in the forces
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Summary of Near Environment 2
A more detailed analysis examines:– the relative position of each industry member with
respect to the forces– how the organisation can influence the competitive
forces– whether other industries are more attractive
Success depends on competitive strategy as well as the nature of the industry
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Summary of External Analysis 1
An external analysis should cover:– Industry and market features– The far environment (STEP)– The near environment (5 Forces)– The nature of the business environment
The discussion may be summarised as a set of key Opportunities and Threats
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Summary of External Analysis 2
A good analysis allows the reader to see influences and trends which may require a change in strategy
The analysis forms part of the assessment of the match between the organisation’s capabilities and the business environment
The organisation’s capabilities are assessed by internal analysis