UNIT 4 EXTERNAL ENVIRONMENT

Tools to analyse the external environment to assist in identifying opportunity and threat are:
Pest analysis and derivates of PEST Porters five forces Life cycle analysis Competitor analysis Porters Diamond international competitive advantage

PEST Analysis
P E S T Political and legal Economic Social Technological Social Demography Culture & lifestyle Education Income Consumerism

Political Change of government New laws Political union War Tax Global political moves

Economic Interest rates Exchange rates Inflation Unemployment Balance of payments Business cycle

Technological Rate of development & transfer Innovation Obsolescence Changing cost base

A simple, cheap easily deployed model that provides headings for management to list items under. It acts as a starting point for more detailed discussion and assists in developing an understanding of the external environment. Can be developed into PESTLE, SLEPT, Le Pest & co all of these are models that develop the basic PEST principle and provide a series of headings to act as the starting point for the team to analyse the environment.

Porters Five Forces Analysis

Inherent within the idea of strategy is the search for the opportunity to identify bases of advantage over the competition. The model is aimed at examining the competitive environment at the level of the individual SBU and seeks to assess the potential for profit.

Threat of new entrants

Bargaining power of suppliers

Competitive rivalry

Bargaining power of buyers

Threat of substitutes

Threat of new entrants

This will depend upon the extent to which there are barriers to entry. High barriers are a drawback if you are attempting market entry but an asset if you in the market already. Low barriers are good new if you are attempting entry but not so good if you are in the industry already Examples Economies of scale The scale of operation allows economies of scale to be reaped which new entrants may not be able to match e.g. UK supermarkets with bulk purchasing, the computer industry and the steel industry. Capital requirement for entry This could be high for capital intensive industries such as chemicals, power and mining but low for High Street retailers who would be able to lease premises. Pharmaceutical industry has large R&D costs and long lead times. Access to distribution channels For decades brewing firms have invested in bars and pubs which has guaranteed distribution of their product and made it difficult for competitors to break into the marketplace. Effectively the new entrant is prevented from reaching the customer.

Cost advantages independent of size Access to cheap labour, raw materials, expertise or funding can convey significant cost advantage as potential competitors cannot match the cost. Expected retaliation If you expect a competitor to retaliate on your entry then this may act as a deterrent to enter the market they may enter a price war and drive down margins in response to your entry. Legislation Legal conditions may exist for entry e.g. licences and personal guarantees for telecommunications and financial services. Differentiation Branding may create customer loyalty and inelastic demand for their product which may take longer to break down for the new entrant. Switching costs Customers may have to invest in the trading relationship via contractual arrangements or an investment in IT. To switch supplier would entail substantial costs and therefore the new entrant would have a challenge on their hands.

Bargaining power of buyers

This is likely to be high when there are few buyers. Also if the volume purchases of the buyers are high e.g. grocery retailing. This is likely to be further accentuated when the selling industry comprises a large number of small firms and the product is standard with little or no switching costs involved.

Bargaining power of suppliers

Supplier power is likely to be high when: The input is important to the buying company; The supplier industry is dominated by a few suppliers who have secure market positions and are not subject to competitive pressure; Supplier products are branded or involve switching costs; Supplier customers are highly fragmented with little buying power.

Threat of substitutes
The more substitutes there are, the less potential for profit exists

Competitive rivalry
Refers to the aggressive nature of strategic approach. Rivalry If you are not used to it, it can pose a significant barrier to entry If you are used to it, it can offer potential for profit Factors affecting level of rivalry: The extent to which competitors are in balance roughly equal sized firms in terms of market share or finances often leads to highly competitive marketplaces; Stage of the life cycle. During market growth stages all companies grow naturally whilst in mature markets growth can only be obtained at the expense of someone else; Difficulty in differentiating product or process leaves the basis for competition on price or augmentation High exit barriers means that some companies must stay in the market.

PRODUCT LIFE CYCLE ANALYSIS

Product life cycle

Products & industries are thought to have a finite life which goes through stages. It can be used to predict competitive conditions and identify key issues for management in corporate appraisals and strategic choice. Demand sophistication refers to the level of experience that demand has of consuming the product. The more experience it has, the fussier it becomes and the more difficult it becomes to delight the customer The number of competitors will increase as we go through the life cycle as well as the extent of rivalry. Strategies will need to adjust to allow for this. Consider:

Price

Product

Place

Promotion

Process

Introduction stage Market is unaware and the organisation needs to create awareness. Promotion is key in this and needs to be extensive. Demand is relatively unsophisticated. Competition and rivalry are virtually non-existent Companies often looking for first mover advantage

Growth stage During this stage the market grows rapidly. Key points are: New competitors attracted by the prospects Demand becomes more sophisticated Competitive rivalry increases

The market becomes profitable and cash flows increase to recover the initial investment in development and launch costs. There are many new consumers with no preference who they buy from. It will become more difficult in later stages to persuade people to switch from their existing brand. It is important to build brand during this stage if possible to ease the traumas at the later stages via defensive strategy. Prices often fall due to economies of scale and increasing competitive pressure, and evidence of differentiation will become apparent e.g. branding develops. Maturity stage During this stage, market growth slows or even halts. Key points are: Fully sophisticated demand; High levels of competition; Price becomes more sensitive; Demand reaches saturation. The only way to increase market share is to gain business from competitors or from late adopters or laggards It would be desirable to have a high market share at this stage or to have successfully developed a niche; Large market share changes can be difficult to achieve at this stage and most companies would concentrate on defensive strategies to protect their current position and compete hard for the new customers coming into the marketplace; Over time the company must be vigilant to detect and anticipate changes in the market and be ready to undertake product or market modifications with a view to lengthening the life.

Decline During this stage the number of customers falls. Key points are: Competition reduces as players leave; Price falls to attract business as sophisticated customers expect cheap prices; Slow harvesting must be balanced with straight divestment;

Investment kept to a minimum to take up any market share that may be left by departing competitors; There may be profitable niches remaining after industrial death.

Key points
Demand will become more sophisticated as the company progresses along the life cycle Competition and rivalry will become more intense as progression is made Thus the strategy will need to be adjusted to fit the environmental changes. Multi product firms should offer a range of products at various stages of the life cycle mature products will fund the development of new products; Competencies need to change at the early stages, creativity and innovation are key whilst at later stages efficiencies and low costs become important; Life cycles are difficult to predict, can change quickly and will vary from one product to another. Turning points are very hard to predict Life cycles can be resurrected Management anticipation of decline can cause decline! Reduction in investment and advertising can cause the appropriate market response;

Consider
Calculators started with scientists and engineers and then moved to business before moving to higher education students. Finally it ended up with the market of schoolchildren which proved to be the largest segment of all. A pioneer wishing to stay the course would experience radical change as they move from the organisational markets to the mass consumer version.

COMPETITOR ANALYSIS
This technique involves a team, a budget and substantial amount of research into one or more identified competitors. It seeks to fully understand the mindset of a specific competitor who currently threatens our market position or who maybe standing in our way. It seeks to: Provide an understanding of the companys competitive advantage/disadvantage relative to its competitors position. Help generate insights into competitor strategies past, present and potential Give an informed basis for developing future strategies to sustain/establish advantage over the competitor. Show areas where they may be vulnerable so that we may exploit Highlight areas of their strength so that we may build defences

Grant highlights three purposes: To forecast competitor future strategies and decisions - pro-act not react To predict competitors likely reactions to our firms strategic initiatives To determine how competitor behaviour can be influenced to make it more favourable for our organisation.

A framework for competitor analysis

OBJECTIVES What are the competitors current goals? Is performance meeting those goals? How are its goals likely to change?

STRATEGY How is the firm competing? Where is the firm competing?

PREDICTIONS What strategy changes will the competitor initiate? How will the competitor respond to our strategic initiatives?

ASSUMPTIONS What assumptions does the competitor hold about the industry and itself?

RESOURCES & COMPETENCIES What are the competitors key strengths and weaknesses? What resources does it have and not have? What competencies does it have and not have?

INTERNATIONAL BUSINESS
The lowering of trade barriers and changing political environments have seen significant opportunities arising in markets around the world.

Risks arising
Marketing mix adaptations are needed and questions must be addressed as to how these modifications should be made and when. Consideration must be given to the cultural implications and the potential costs involved. Cultures vary more dramatically when national boundaries are traversed and the cultural environment needs full evaluation. Varying cost structures will exist from one country to another as will factor quality there may not be sufficient skilled labour and management to enable a global strategy. Different competitive levels will exist in different markets and the level of rivalry will need to be determined. Exchange rate volatility can substantially erode profits and remove opportunities and so this requires the deployment of control systems. Different economic situations will alter the demand for the product and the availability of factors of production. Inflation, unemployment and levels of disposable income are amongst many economic variables that need to be considered. Political involvement as governments will seek to be involved in decisions in some cases. Careful planning will be needed to ensure that no conflict arises. The allocation of responsibility to a suitably qualified team to minimise the risk by appropriate stakeholder management techniques. Political situation should be considered with regard to war, terrorism and government stability. What are the risks to our personnel and our organisation? Entry requirements? What do we have to do to get in? Is it legal and ethical?

Much of the above could be picked up under LePEST&Co

Benefits of entering global markets

Economies of scale are possible as research and development can now be spread over wider production volumes. Bulk-buying discounts may be available as the volume of our purchases and our reputation increase. Management opportunity is increased and this may prove motivational to certain types of managers whilst at the same time allowing those managers to experience a wider range of cultural situations. This in turn allows the challenge to the traditional home cultural perspective. Items can be viewed from a different perspective with cultural benchmarks being developed. Cheaper sources of raw materials and labour may allow the development of a competitive advantage which could be sustainable for a period of time. Market development as the emerging markets bring a whole new range of consumers who will be embarking on their first buy and so may not be as fussy as consumers in a saturated market. Risk reduction via portfolio spread will arise when different markets are combined into a portfolio. Political sponsorship will be possible as national governments, keen to boost or maintain home employment, offer attractive packages to global companies to invest in that country. Political power becomes possible as the company grows in size and is seen to be contributing to wealth creation as opposed to exploitation of the nation concerned.

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COMPETITIVE ADVANTAGE OF NATIONS PORTERS DIAMOND

Porters questions were:

1 2 3

Why do certain nations house so many successful international firms? How do they sustain superior performance in a global marketplace? What are the implications for government policy and strategy?

Thus there are two perspectives for the Diamond: From a company viewpoint how can we use national identity as a basis for competitive advantage

From a government viewpoint how can we make our country more attractive to foreign investor companies and how can we improve the brand of our country.

Porters Diamond was aimed at explaining possible sources of advantage and provide a framework for understanding how to develop it. There are four basic components:

1. Demand conditions 2. Strategy, structure and rivalry 3. Related and supporting industries 4. Factor conditions

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1. Demand Conditions demand side

Sophisticated home demand can lead to the company developing significant advantages in the global marketplace. Fussy consumers set high standards for products whilst past experience of the products progress through the life cycle in the home market can provide valuable input to new strategic initiatives. This acquisition of knowledge i.e. the gaining of experience of demand development can offer significant benefits e.g. Japanese customers have high expectations of their electrical products which forces producers to provide a technically superior product for the global marketplace. They are so used to dealing with sophisticated customers that when they come across unsophisticated markets, they excel way beyond the competition. e.g. Nokia A Finnish Telecoms company that for many years was used to satisfying fussy consumers. This lead to substantial advantage when the went into the global markets Having got used to delivering advanced product to sophisticated home demand, the company can use this knowledge asset as a basis to assault new foreign markets.

The home market will have indigenous competitors but our advanced product would allow an entry and securing of a positional share.

Government view
Act to ensure that your population has access to information (e.g. Internet) and ensure that any barriers to purchase are lowered or even removed Promote education, travel and open media to create awareness and increase the possibility of consumption experience

2. Strategy, structure and rivalry the competition element

Different nations have different approaches to business in terms of structure and the intensity of rivalry that can take place. If a company is used to dealing with strong competition then it will have experience of rivals attacks and how to deal with them. This experience of dealing with competition provides a different basis of knowledge. With this new expertise, the companies concerned will be better able to fight for market share overseas. Domestic rivalry can keep the organisations lean and mean so that when they go out into the global marketplace they can compete more successfully with the less capable foreign competition e.g. Nokia and Finlands approach to the regulation of telecoms.

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Government view
Governments can promote this knowledge by promoting rivalry and competition at home. Aiming to deregulate markets, lower entry barriers and actively encouraging competition via legislation and government policy can all have significant effect.

3. Related and supporting industry the value chain and system

Advantage conveyed by the availability of superior supplier industries, e.g. Italy has a substantial leatherwear industry which is supported by leather working plants and top fashion and design companies. The aim is to create a value chain effect whereby all of the components have the same national identity. Thus the product becomes an Italian product.

Government view
Governments can aim to create technology parks where clusters of the same type of industry can be encouraged. They can at the same time promote the country brand.

4. Factor conditions supply side

Control over the availability of a supply of a factor of production that convey advantage. They provide initial advantage which is then subsequently built upon to develop more advanced factors. Basic factors are unsustainable as they are easily copied (unskilled labour) whilst advanced factors can convey the advantage as they are less easy to emulate (scientific expertise). They include human, physical, knowledge, capital and infrastructure: e.g. linguistic ability of the Swiss has provided advantage in the banking industry e.g. financial expertise within the UK.

N.B. Research the important factor

This is the critical factor! Before entry into a foreign market research. Then on a regular basis more research and set up the systems to ensure that it is continually updated and monitored.

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