STRM043 Session 3 External Market Based Approach(3)

7/18/2019 STRM043 Session 3 External Market Based Approach(3)

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Session 3EXTERNAL ANALYSIS

Market-based approach

STRM043COMPETITIVE STRATEGY & INNOVATION



Business does not operate in avacuum

As strategists, we need tounderstand the externalenvironment in which a frmoperates

This has two components:

- The industry (MIC!-environment"

- The wider #usiness environment(the MAC!-environment"



COMPANY



COMPANY

INDUSTRY

INDUSTRY

Micro-

economic



COMPANY

INDUSTRY

(Micro-economic)

INDUSTRY

(Copetition!

MACRO-ECONOMIC CONTEXT

MACRO-ECONOMIC CONTEXT

"EO-POLITICAL #RAME$OR%

"EO-POLITICAL #RAME$OR%



The PESTLE analysis

The PESTLE analysis is a tool to think ao!t an in"!st#y$se%te#nal eni#on'ent ()hat$s in the ne)s* that )ill e a +o#,e

+o# ,han-e in the in"!st#y. an" takes in the/

•Politi,al eni#on'ent• s!,h as st#!,t!#es an" #o,esses o+ -oe#n'ent

•E,ono'i, eni#on'ent• in,l!"in- tyes o+ !siness a,tiities an" ,o'anies1 also in,l!"es the

+inan,ial eni#on'ent

•So,ial eni#on'ent• in,l!"in- ,!lt!#al +a,to#s

•Te,hnolo-i,al eni#on'ent• in,l!"in- innoation leels an" #ote,tion o+ intelle,t!al #oe#ty

Le-al eni#on'ent• #o o# anti2!siness la)s

•E,olo-i,al eni#on'ent• in,l!"es eni#on'ental #ote,tion an" ,li'ate ,han-e



PESTLE:

Environmental Analysis to Industry Analysis



INDUSTRY & !"PETITI#E$N$LYSIS

Imagine it’s a Monday morning

and you are a managementconsultant dropped into a newclient in a new industry –

what would you want to knowasap?



INDUSTRY & !"PETITI#E$N$LYSIS

• Industry si$e

• Industry growth rate

• %o& o' players

• Concentration ratio• eg maret share o' top ) players (C)"

• *hare o' maret o' company in +uestion

• elative si$e o' our company to #iggest in sector

• %ature o' competition (theory o' the frm"

%ood sources o data

- Industry maga$ines trade #odies

- Mintel .eynote reports (accessi#le in /ni

li#rary"



E'ample( U) *!!DINDUSTRY

Si+e( Retail( ,-../n0 1ro2th rate( 3456

No7 o players• 01,111 outlets, 21,111 #usinesses

oncentration ratio R8

• Top ) have 314 maret share• Average 514&&&&&& 6ut Tesco have 754, so other 7 must

have 894 on average (so Tesco is twice si$e o' next one"

!ur share o mar9et e1 $ldi :6

Sources o Industry Inormation(Industry maga$ine The rocer

Industry trade #ody I; (Institute o' rocery ;istri#ution"



The industry lie cycle

So!#,e/ A"ate" +#o' ohnson & S,holes. E%lo#in- St#ate-y

NATRE Monooly Pe#+e,t ,o'etition Pola#isation Oli-ooly Monoolyo+ COMPETITION



Determinants of Industry Profitability



Recommendations

Research & read a/out

T;E!RY !* T;E *IR"*or insi1hts into the nature o competition

/ased on industry structure



Porter<s *ive *orces

Yet another tool rom "ichael Porter=

2 <orces is a#outP!>ER

in

?

$TTR$TI#ENES*

o' an industry



Porter’s Five Forces

om!etition Frame"or#



1. Potential Entrants

5 Attractive if many entry barriers:

• high sunk cost

• high fixed cost• patents / know-how

• access to distribution / sales channels

• economies of scale and scope

• need for experience benefits

• access to raw materials

• high buyer switching costs

• Government subsidy

Also consider exit barriers, eg redundancies, leases and

long-term contracts which may lock-out entrants.



2. Suppliers

• Attractive if supplier-power low:

• little differentiation / commodity supplies

• low switching costs

• lots of substitutes

• suppliers not concentrated

• supplier is small part of firm costs

• supplier is not a crucial cost component

• supplier does not affect uality of firm product

• supplier cannot easily forward integrate !buy the firm"• industry/firm is important to supplier

• much product !supplies" information available



• 3. Buyers

• Attractive if buyer power low:

• buyers not concentrated

• products are differentiated• uality important to buyer

• few substitute producers

• small purchase si#es

• firm product not a significant part of buyer$s total costs

• buyers cannot easily backward integrate



$%. !irm "ivalry

5 %he more intense the rivalry, the more attractive theindustry is for

5 extant firms as entrants deterred from entry consider

impact of :

• &ligopolies/concentration ratio

• fast industry growth

• a history of few acuisitions

• few perishables

• low fixed costs

• few capacity indivisibilities

• competitive reactions



#.#. Su$stitutes

5 %he fewer the substitutes, the more

attractive the industry is. 5 'onsider impact of potential substitutionfrom outside the industry 5 e.g. fax machines substituted by email industry

caused obsolescence.



Structural Determinants of

om!etition & accordin' to (rant:



Strate'ic (rou! ) om!etitor Set

%A strategic group is a group of firms in an industry t&atfollow t&e same or similar strategies' ()rant*

+dentifying strategic groups:

( )dentify principal strategic variables

( *osition each firm in relation to these variables.

( )dentify clusters

,&at is esco's competitor set

- +ainsbury$s, Asda, orrison$s

aitrose, 0+

- Aldi, 1idl, 2etto

- )ndependent delis, farms shops etc

+t all depends on t&e decision to $e made



Strate'ic (rou! ) om!etitor Set

Porter framewor/ assumes:(a* industry structure drives competitive $e&aviour

($* +ndustry structure is sta$le.

But, according to Grant, competition also changes industry structure:

( Sc&umpeterian 0ompetition:

( A “perennial gale of creative destruction”( market leaders overthrown by innovation

( yper-competition:

!a" 3intense and rapid competitive moves4. continuously creating newcompetitive advantages and destroying existing competitiveadvantages5

Implication:

)267+%89 +%87'%78 affects '&*%)%); +%8A%G9

but also

'&*%)%); +%8A%G9 affects )267+%89 +%87'%78

&e $usiness environment is comple dynamic and interactive 4 not staticas our strategy models mig&t imply.

STRM043 Session 3 External Market Based Approach(3)

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