Strategic analysis 2: Environment - micro level DSGM (Lecture 2.2) Dr Elvira Bolat C113, Christchurch House, Talbot campus ebolat@bournemouth.ac.uk @Elvira_Mlady
This week: Outline Lecture 2.1: Strategic Analysis 2: Macro-environmental analysis – Understand the various approaches used to analyse the external market environment – Understand the importance and application of PESTEL in determining key factors impacting on marketing strategy
Lecture 2.2: Strategic Analysis 2: Micro-environmental analysis – Understand the use of Porter’s five forces analysis to define attractiveness of industries and sectors for investment – Understand how to disaggregate an industry into a range of competing companies using the concept of Strategic Groups – Understand relevance of industry lifecycle – Understand the importance of market segments in marketing strategy
Summary for the week Next week’s seminar preparation
Layers of the environment
External market - micro environment
External market - macro environment
Industry • A group of products of services associated by common technology or service delivery • Supply factors determine the industry • Concerned with the ‘players’ i.e the competitors in the industry
4
Industry analysis – Rationale! • Organisation performance is determined by industry choice • Profitability levels will vary per industry • Industry attractiveness may be eroded over time or may only be temporary • Gives an organisation greater understanding of their wider environment allowing better analysis and choice 5
Tools for industry analysis • Examination of the industry forces influencing the organisation – Porters Five Forces Model • Identification of what Strategic Group the organisation is in • Consideration of the Industry Lifecycle
6
Five Forces framework
7
Five Forces framework
Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright Š 1980, 1998 by The Free Press. All rights reserved
Potential entrants Example: Banking
Scale and experience Access to supply and distribution channels Expected retaliation Legislation or government action Differentiation e.g Brand
The threat of Substitutes Substitutes can reduce demand for a particular class of products as customers switch to alternatives. • Price/performance ratio • Extra-industry effects Example: ‘planes, trains & automobiles’
The Power of Buyers Are buyers concentrated?
What are the costs of switching?
Does backward vertical integration exist?
The Power of Suppliers Are suppliers concentrated?
What are the costs of switching?
Does forward vertical integration exist?
Airline engines
Degree of Competitive Rivalry Factors affecting rivalry include:
– Competitor balance – size, number of competitors – Industry growth rate – life cycle model applies – High fixed costs – High exit barriers – Low differentiation – can customers switch easily? – Players after a strategic stake in the market
Competitor analysis 6 step approach (Kotler) 1. 2. 3. 4. 5. 6.
Identify competitors Determine objectives (or goals) Determine current (or past) strategies Determine capabilities Determine future strategies or responses Select competitors to avoid or attack
Competitor analysis: Challenges Internal factors:
- Poor quality data - Poor manipulation of data - Inadequate systems - non- cumulative data - managerial culture
External factors:
- lack of information synergy - legal constraints - speed of change - technology
Issues affecting competitor identification & analysis
16
Identification of competitors Resource similarity
High Potential competitors
Direct competitors
Low
High Incipient competitors
Indirect competitors
Low
Market commonality
Bergen and P’eteraf (2002)
Summarising the power of the five forces Competitive rivalry Substitute threat
Entry threat low high
Buyer power
Supplier power
Adapted from Johnson and Scholes
Implications of five forces analysis • Identifies the attractiveness of industries – which industries/markets to enter or leave. • Identifies strategies to influence the impact of the forces, for example, 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.
The five forces model: Critique! • The framework is static, whereas the competitive environment in practice is not. Forces may move more rapidly than the model can show • It assumes that the organisations own interests come first – this maybe an incorrect assumption for some charitable or government organisations • It assumes that buyers (customers) have similar importance than any other aspect of the environment – Aaker, Baker & Harvey-Jones are some notable commenters that would fundamentally agree • Needs to apply at the most appropriate level – not necessarily the whole industry. E.g. the European low cost airline industry rather than airlines globally. • Porters analysis ignores the resource aspect of an organisation • Mintzberg would argue that Porters analysis follows a very Prescriptive route and does not fully consider the emergent approach • Note the convergence of industries – particularly in the high tech sectors (e.g. digital industries - mobile phones/cameras/mp3 players). • Note the importance of complementary products and services (e.g. Microsoft windows and McAfee computer security systems are complements). This can almost be considered as a sixth force.
Industry / competition analysis: Additional models
Defining the industry The ‘media industry’ Broader definitions point to the convergence of the media and communication industries, suggesting that telecommunications and internet organisations should be included, as well as the entertainment sector (gaming, theme parks, social media) and the performing arts sector broadcasting (TV and radio), print (newspapers, magazines and books), film (cinema and DVD) and recorded music (Albarran et al, 2006: Küng, 2008). So……thinking about this, is it really useful to analyse the ‘media industry’. What else can we do?
22
Strategic Groups Strategic groups are organisations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases.
Johnson et al (2014)
Characteristics for identifying Strategic Groups • • • •
Scope of activities Extent of product diversity Extent of geographic coverage Number of segments served Distribution channels
Resource commitment • Extent of branding • Marketing effort • Extent of vertical integration • Product quality • Technological leadership • Organisational size
Strategic Groups
Beverage industry
Geographic reach
??????????????? Possible groups Who would be in the groups
Product quality
Benefits of Identifying Strategic Groups Understanding competition
Focus on direct competition rather than wider industry
Analysis of strategic opportunities Identify attractive ‘spaces’ or ‘black holes’
Analysis of mobility barriers
Obstacles to movement from one group to another
Johnson et al (2014 p.54)
The Industry Lifecycle
Johnson et al (2014 p.52)
What is a Market Segment? A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.
Role of market segmentation in strategic marketing Creates value opportunities – Allows an organisation to match its resources to customers requirements – May identify new segments not identified by customers Segments Value opportunities Capabilities/segment match Targets Source: Cravens & Piercy (2006)
Positioning
Strategic analysis of segments Determine attractiveness of each segment – Customers, competitors, positioning, financial & market attractiveness: Segment
Sales Costs Margin Market share Future growth Business strength Segment attractiveness
X
Y
Z
ÂŁ10mill 4 5 60% 10% H
15 10 6 20 -5% M
5 3 8 10 25% L
H
L
M
From market segments to Strategic segments • Strategic segments require distinct value networks to deliver differentiation • 3 V’s model (Value): 1/ Valued customers – who should we serve 2/ Value proposition – what to offer 3/ Value network – how to deliver the value proposition to the customer (Hwang et al. 2004)
Summary • Environmental influences can be thought of as layers around an organisation • There are a range of approaches used to analsye the external market environment • The macro-environment can be analysed in terms of PESTEL factors • Industries and sectors can be analysed in terms of Porter’s Five Forces model • The inner layer of the environment can be analysed with strategic group analysis, industry lifecycle, market segment analysis.
Seminar prep! Reminder • You are to start up a luxury lingerie brand in the UK. Your task is to evaluate luxury lingerie industry attractiveness. • Within your allocated teams YOU are to analyse global luxury lingerie industry by:
–Conducting 5 Forces industry analysis –Conducting PESTEL macro-environment analysis –Conducting global consumer analysis (trends, segmentation) –Conducting positioning of lingerie brands in the UK market (perceptual mapping & resources/capabilities analysis using template below):
Capabilities Market share Financial stability Brand recognition Distribution levels After sales service Advertising spend/recognition
Competitor 1
Competitor 2
Competitor 3
Competitor 4
Competitor 5