Finance Strategic

College of Accounting Sciences

Department of Management Accounting
University of South Africa, Pretoria

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 PART B:

Analysing the organizational

ecosystem

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CONTENTS

PART B: Analysing the organisational ecosystem (23%) ..…………................. 4

TOPIC 1: The organizational ecosystem: External environment analysis .......... 5

LEARNING UNIT 1: Introduction .............................................................................................. 5

LEARNING UNIT 2: Environmental analysis – the drivers of change ........................................ 5
LEARNING UNIT 3: PESTEL analysis ......................................................................................5
LEARNING UNIT 4: Porter’s Five Forces analysis ................................................................... 6
LEARNING UNIT 5: Industry life cycle analysis ………………………………………..…………. 7
LEARNING UNIT 6: Competitor analysis (competitor intelligence) ......................................... 7
LEARNING UNIT 7: The nature of global competition .............................................................. 9
LEARNING UNIT 8: Competitive advantage of nations – Porter’s Diamond.............................. 9
LEARNING UNIT 9: Summary................................................................................................ 11

TOPIC 2: Strategic networks and platform ……………………….. ...................... 13

LEARNING UNIT 1: Introduction ............................................................................................ 13

LEARNING UNIT 2: What is a supply chain? ......................................................................... 13
LEARNING UNIT 3: Upstream supply chain management ..................................................... 14
LEARNING UNIT 4: Downstream supply chain management................................................. 15
LEARNING UNIT 5: Summary ............................................................................................... 16

References............................................................................................................................. 17

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PART B: Analysing the organizational ecosystem (23%)

Introduction

The purpose of this part is to provide you with an understanding of the dynamics of the
ecosystem (both the wider and the smaller more deliberate ones formed by organisations) and
how it affects the strategy of the organisation.

It is important that you go through all the “Test your understanding” exercises in the prescribed
book.

Learning outcomes

After studying this topic, you should be able to do the following:

• Analyse markets and competition.

• Analyse society and regulation.
• Discuss the following drivers of change; social, market, technology and sustainability.
• Discuss the impact of strategic networks and platforms on organizational strategy.
• Conduct stakeholder analysis in networks.

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TOPIC 1: The organizational ecosystem: External environmental

analysis

This topic consists of the following study units:

LEARNING UNIT 1: Introduction

LEARNING UNIT 2: Environmental analysis – the drivers of change
LEARNING UNIT 3: PESTEL analysis
LEARNING UNIT 4: Porter’s Five Forces analysis
LEARNING UNIT 5: Industry life cycle analysis
LEARNING UNIT 6: Competitor analysis (competitor intelligence)
LEARNING UNIT 7: The nature of global competition
LEARNING UNIT 8: Competitive advantage of nations – Porter’s Diamond
LEARNING UNIT 9: Summary

LEARNING UNIT 1: Introduction

In order to formulate a suitable strategy, the organisation must first undertake a detailed appraisal of
its ecosystem. This section looks at the external perspective; the organisation must understand what
is happening in the outside world (its business environment) that could impact on its future strategies .

LEARNING UNIT 2: Environmental analysis – the drivers of change

In trying to understand or analyse the ecosystem in which an organization operates it is worth noting
that the business environment has become volatile and there is greater rate of change in global
markets.

The following are the number of factors contributing to the above:

➢ changing technology – e.g. AI, cloud computing

➢ unpredictable demand – due to weakness in the global economy
➢ globalisation – global companies are affected by different issues in different markets e.g. UK
and Brexit
➢ development of high-growth, emerging economies – e.g. India and China
➢ geopolitical impact – e.g. the US relationship with China
➢ changing demographics – e.g. increasing urbanization
➢ customer empowerment – customers want more choice
➢ automation – in all sectors, not just manufacturing
➢ sustainability – increased awareness and demands from customers

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 LEARNING UNIT 3: PESTEL analysis
From your early studies you will remember the PESTEL analysis. In your prescribed textbook, study
the information on PESTEL analysis to refresh your memory, and do the “test your understanding”
exercises.

This is a key strategic model, used to analyse the macro environment in which an organisation
operates. (The macro environment consists of the external factors that exist outside of an
organisation’s control.)

It is useful to apply this model when generating ideas for a SWOT analysis.

It can identify whether a market is growing or declining, identify risks in the market and therefore
trigger change in the organisation.

Activity:

The following are examples of how factors in the external environment can have a negative effect
on the profits of organisations and therefore should be considered in the development of strategy.
Link each example to the specific external environment from which it originates.

a. An increase in the inflation rate

b. Exposure of unethical behaviour of organisations
c. An increase in minimum wages
d. Advances in the use of alternative energy resources
e. Demands from consumers regarding the use of bio-degradable (environmentally friendly)
packaging material

Solution :

a. Economic environment
b. Social environment
c. Political environment
d. Technological environment
e. Social environment

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LEARNING UNIT 4: PORTER’S five force analysis

This is another key strategic model. Porter’s Five Forces Model assumes that the competitive
environment within an industry depends on five forces that have an impact on the organisation’s
success, namely, threat of new entrants, threat of substitute products or services, bargaining power
of suppliers and bargaining power of buyers and the strength of rivalry among existing competitors.

The potential influence of these forces differs from industry to industry. Together, these forces
determine the profitability of the industry. They influence the prices that can be charged as well as the
cost that can be endured. It also affects the size of the investment that is required to compete in
the industry. Managers should use the Five Forces Framework to assist them in determining the
competitive structure of their industry before making strategic decisions. Note that strong collective
forces will give low overall profitability.

In your prescribed textbook, study the information on Porter’s Five Forces Model and do the
“Test your understanding” exercises.

Activity:

From the list below, select only those factors that serve as barriers to entry:

• brand loyalty
• established distribution channels (ease in distribution for current competitor, meaning that new
entrants will have to set up their own distribution channels)
• extent of exit barriers
• absolute cost advantage
• government regulations
• competitive structure of the industry
• customer switching costs
• strong capital base

Solution:

Factors that serve as barriers to entry in an industry:

• brand loyalty
• established distribution channels
• absolute cost advantage
• government regulations

LEARNING UNIT 5: Industry life cycle analysis

This is a theory relating to the different stages an industry will go through, from the first product entry
to its eventual decline. This model can be used to analyse the position of a particular product or an
entire industry. A different set of strategies can be selected depending on where the product or industry
is in its life cycle.

In your prescribed textbook, study the information on this topic and do the “Test your understanding”
exercises.

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LEARNING UNIT 6: Competitor analysis (Competitor intelligence)
This is another key strategic model. Before managers can develop an effective strategy for
achieving a competitive advantage, they need to carefully analyse the organisation’s competitors.
It’s not just about collecting information but also developing an understanding of the key players in
the industry. This analysis is not just a once-off exercise but a continual process, as organisations
are subject to change all the time.

In your prescribed textbook, study the information on this topic and do the “Test your understanding”
exercises.

Competitor analysis steps:

1. Identify competitors – existing and potential

➢ Brand – sell similar products to the same customers as us.

➢ Industry – sell similar products but to a different market segment to us.
➢ Form – sell products that satisfy the same needs but are different to ours.
➢ Generic – compete for the same income as our products.

2. Analyse competitors

➢ What drives the competitor? What are their objectives and assumptions?
➢ What is the competitor doing or capable of doing? What is their strategy?

3. Develop competitor response profiles

➢ Laid back – won’t respond.

➢ Selective – will respond to attacks on selected markets only.
➢ Tiger – always responds aggressively.
➢ Stochastic – no predictable pattern exists.

Activity:

Halo-tech is a manufacturer of specialist portable communications equipment, which is designed

for use in hazardous and dangerous conditions. The development of new technology in recent years,
such as wireless mobile telephony, infra-red thermal imaging and global positioning has allowed Halo-
tech to create new products. The market for such equipment has grown significantly over the past five
years and the customer base includes fire services, oil and chemical companies and the government.
Halo-tech now recognises that, during this period of rapid growth, the market has attracted a number
of new entrants and may even be reaching a level of overcapacity.

The directors feel that they do not know as much as they should about the existing, and new,
companies in the industry. The market is now maturing and, although Halo-tech is managing to
maintain its margins and leading market share (45%), it is likely that the characteristics of the industry
will change.

Required:

As Halo-tech 's management accountant you are required to advise the Board of the advantages of
adopting a formal approach to competitor analysis.

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Solution:

Competitor analysis can be defined as ‘the systematic review of all available information (marketing,
production, financial, etc.) on the activities of competitors in order to gain a competitive advantage’.

The advantages of adopting a formal approach to competitor analysis are as follows:

Understanding relative competitive advantage

A detailed analysis of the value chains of existing competitors will allow Halo-tech to assess the basis
of competitive strategy used by itself and its competitors. This will enable Halo-tech to assess
whether its existing competitive strategy is sustainable and which aspects of the value chain need
addressing to improve it.

Identifying potential new competitors

As well as analysing existing competitors, competitor analysis will help Halo-tech identify potential new
entrants to the industry and act accordingly – for example, by reviewing how barriers to entry can
be strengthened.

Understanding competitors’ current and potential strategies

By analysing competitors’ past and current strategies, it may be possible for Halo-tech to anticipate
likely future moves and plan in advance, rather than having to react to competitor actions. This
should reduce future levels of risk and uncertainty.

Understanding how competitors may react to Halo-tech’s actions

Halo-tech will want to know which strategies to avoid because a particular competitor’s response may
be very aggressive.

Developing future strategies

Competitor analysis should allow Halo-tech to decide with whom it should ‘pick a fight’ in the industry
and in what way. This should increase the chances of success of such strategies.

Influencing competitors’ future actions

By understanding how competitors assess whether particular market segments are worth targeting,
Halo-tech may be able be able to deter them from entering its markets – for example, by lowering
prices.

Forecasting

An understanding of competitor behaviour will improve the accuracy of Halo-tech’s forecasts.

LEARNING UNIT 7: The nature of global competition

Globalisation and advances in technology have hugely changed the competitive environment in which
businesses operate. The internet and multinational companies have opened up the choices of
investors and customers. This has led to greater competition for services and products as well as
international competition for the money that potential shareholders are planning to invest.

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Nowadays, shareholders have access to information regarding the returns that overseas companies
deliver. They can sell the shares they have in low return companies and put their investment in
companies that deliver a higher return because of the improved information and a greater choice of
companies internationally. Companies should therefore offer competitive rates of return in order to
attract shareholder investment and demonstrate that they can create sustainable wealth for investors.

In your prescribed textbook, study the information on this topic.

LEARNING UNIT 8: Competitive advantages of nations – Porter’s diamond

Porter's Diamond is a key strategic model used where competitive advantage is linked to geographical
location. The model can be used to analyse why an organisation would or does perform well in a
particular country.

The four key factors identified by Porter are:

Factor conditions
A country creates its own important factors such as skilled resources.

Demand conditions
When the demand for a product is mainly the local market, the local organisation will devote more
attention to that product than a foreign organisation would, which will in turn lead to a competitive
advantage when the local organisation begins to export their product.

Related and supporting industry

When local suppliers are competitive, the organisation will enjoy more cost-effective and innovated
inputs/raw materials. If the suppliers themselves are strong global competitors, the factor is
strengthened even more.

Firm strategy, structure and rivalry

An organisation’s strategy is affected by local conditions, for example Italian organisations tend to be
smaller and are run more like a family business, while German companies are inclined to be more
hierarchical.

More local rivalry puts pressure on organisations to innovate and improve.

(Van Raaij, Vernooij & van Triest, 2003)

In your prescribed textbook, study the information on this topic and do “Test your understanding”
exercises.

Activity:

A political party has recently been elected to govern the island nation of Madura after a long period of
being the official opposition. The new government wishes to bring about lasting change within
an economy that suffers from high unemployment. It has established a “think tank” in which
government advisers, specialists and experts explore implications of ideas and advise on various
alternative courses of action.

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Madura is a multi-cultural country with free elections and a mixed economy. Its industrial base is
relatively well established, but it has no truly world-class industry or experience. Past government
policies mean there is little in the way of product safety legislation. Spending on education and
training for those aged over 16 years old is low. In addition, Madura has traditionally discouraged
foreign competition in home markets with threats of tariffs, quotas and other protectionist measures.
As a consequence, a few American and Japanese companies have set up high technology
manufacturing plants on the island.

The government is keen to consider ways in which they can make the country’s industry more
competitive internationally. In particular, they wish to identify the policies they should pursue over
the next ten years to make this happen.

Required:

For each element of Porter’s Diamond, discuss potential government policies that might help
encourage Madura’s industries to compete more effectively abroad. Provide an explanation for the
suggestions you make.

Solution:

Policy options

In looking to encourage national competitive advantage, it might be sensible to look at what Madura
already has available. It currently has a few American and Japanese companies operating in high
technology, which might provide the basis of a cluster of similar companies along with their support
industries. Alternatively, it could use its island status to look at key industries in shipping and ports.

Looking at each factor in turn:

Factor conditions

The government clearly needs to concentrate on developing factor conditions. Training in key areas
and enhancing skills, coupled with ensuring that transport infrastructure and communications are
reliable, will help enormously. To encourage research and innovation, tax incentives could be offered
to firms, this could be extended to incentives for taking on more staff, thus alleviating
unemployment, and for providing training.

Domestic demand

The government can introduce a number of measures to increase and stimulate domestic demand.
In addition, the government could legislate to ensure that products produced will satisfy
international requirements. This might mean introducing wide-ranging product safety legislation and
advising companies on how to build these requirements into products.

Lastly, they could develop trade links with countries whose culture and society most closely match
that of Madura, so that products produced domestically can succeed internationally.

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Related and support industries

It will be important for Madura to encourage support industries for any clusters it identifies, and to
encourage the quality levels needed by the main companies. This may mean initially reducing the
protectionist measures so that companies can access the supplies they need.

Firm strategy, structure and rivalry

The government needs to encourage competition domestically so that firms can develop their
competitive advantage. They should consider relaxing some of the restrictions on foreign competition
in the home market as such competition could force the domestic companies to improve and
strengthen.

LEARNING UNIT 9: Summary

There are major factors outside the organisation that can have a significant influence on the
success of products and services offered by the organisation. Therefore, it is important to be able
to identify these factors and take them into account when developing future strategies. The above are
all key strategic models for this subject. It is important that you know these models and also know
how to use and apply them to a given scenario.

Relevant articles:

CIMA website:

Business Strategy on Porter’s Five Forces by Srikant Parthasarathy.

http://www.cimaglobal.com/Documents/Student%20docs/Studyresources/TechIndiaJun.pdf

Financial Management February 2005, Business Strategy article (if a question requires you to analyse
a given industry, you have several dissection instruments at your disposal. But tools such as
Pest(el) and Porter’s five forces model must be handled with care.)
http://www.cimaglobal.com/Documents/ImportedDocuments/fm_feb05_p33-34.pdf

E2: Enterprise management, competitive advantage of nations. Velocity e-magazine. October

2010.
http://www.cimaglobal.com/Thought-leadership/Newsletters/Velocity-e-magazine/Velocity-
2010/Velocity-October-2010/E2-enterprise-management-competitive-advantage-of-nations/

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TOPIC 2: Strategic networks and platforms

This topic consists of the following study units:

LEARNING UNIT 1: Introduction

LEARNING UNIT 2: What is a supply chain?
LEARNING UNIT 3: Upstream supply chain management
LEARNING UNIT 4: Downstream supply chain management
LEARNING UNIT 5: Summary

LEARNING UNIT 1: Introduction

Customers and suppliers are often key stakeholder groups in an organizational ecosystem. In this
section the practicalities of managing the relationships with suppliers and customers within the
organizational ecosystem is considered and the role of technology in supply chain management.

LEARNING UNIT 2: What is a supply chain?

A supply chain encompasses all activities and information flows necessary for the transformation
of goods from the origin of the raw material to when the product is finally consumed or discarded.
Supply chains can be either push or pull in nature.

In your prescribed textbook, study the information on this topic and do the “Test your
understanding” exercises.

http://www.slideshare.net/praveensureshpai/om-assignment-supply-chain-management
(Accessed on 16 January 2015)

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LEARNING UNIT 3: Upstream supply chain management

Upstream supply chain management involves the activities that the organisation undertakes to
manage its relationships with its chain of suppliers.

3.1. Managing supplier relationships

There are several general issues that an organisation needs to consider in relation to its
suppliers;

➢ Sources – what suppliers are available and are they larger or smaller than us?
➢ Number of suppliers – a single supplier may give bulk-buy discounts but can make the
business over-reliant on the supplier.
➢ Cost, quality and speed of delivery – these factors are closely related and
compromises may be needed between these factors.
➢ Make or buy/outsourcing – is it in the organisation’s best interests to outsource internal
functions to third parties?
➢ Antagonism or partnership – how should the organisation manage its relationship with
its suppliers?

3.2. Use of technologies in managing the upstream supply chain

E-procurement

The term e-procurement is used to describe the electronic methods used in every stage of the
procurement process, from the identification of the organisation’s requirements through to
payment.

E-procurement can therefore have several main applications;

➢ Electronic Data Interchange (EDI) – link the organisation’s systems to those of its
suppliers.
➢ Use of the Internet – to shop around for suppliers.
➢ Disintermediation – buy from suppliers further up the supply chain to reduce costs.

3.3. Other uses of IT within the upstream supply chain

➢ Communication – email and other IT-based communication can speed up the flow of
information between the organisation and its suppliers.
➢ Information gathering – gathering and processing of information relating to the
upstream supply chain.
➢ Extranets – allow the organisation to grant suppliers access to information to aid
collaboration.
➢ Big data – collecting and interrogating data up the supply chain can help differentiate
the product.
➢ Blockchain – gathering creates much greater security over the entire supply chain.
➢ Cloud computing – makes liaising with suppliers quicker and easier.

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LEARNING UNIT 4: Downstream supply chain management

Downstream supply chain management involves the activities that the organisation undertakes
to manage its relationship with its chain of customers.

http://www.tesisqua re .co m/en/ControlTo we r (Accessed 16 January 2015)

4.1. Customer behaviour analysis

Industrial vs. consumer – both types of customer will have different motivations that need to be
understood in order to maximise the organisation’s ability to sell to them.

4.2. Marketing

Models include the following:

Six markets model (Payne)

Suggests that there are six groups that an organisation needs to market to:

➢ customer markets – our direct customers and consumers of our products

➢ referral markets – the people or organisations that refer customers to us
➢ supplier markets – suppliers we partner with
➢ recruitment markets – providers of staff
➢ influence markets – public relations
➢ internal markets – internal departments.

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Relationship marketing

Transaction marketing Relationship marketing

Concentrates on products Concentrates on customer retention and loyalty
Focus on product quality Emphasis on quality of service
No effort to retain customers Focus on building long-term relationships

4.3. Managing the ongoing relationship with customers

Customer Relationship Management (CRM)

This is a method used by the organisation to track and organise its contacts with current and
prospective customers. It will involve building a strong relationship with customers as well as
gathering, storing and sharing information, typically using information systems.

4.4. Uses of technology in the downstream supply chain management

➢ Electronic data interchange (EDI) – link our sales system to the purchasing system of major
customers.
➢ Cloud computing – keep customer updated in real time.
➢ E-commerce – sell online to customers. May also allow disintermediation.
➢ Intelligence gathering – through monitoring of online transactions, online surveys.
➢ Communication – email and other IT systems will allow us to keep in touch with customers.
➢ User communities – allow users to support each other.
➢ The use of intranets and extranets – to share information within the organisation as well
as allowing partnerships with suppliers and customers.

4.5. The impact of IT on the structure of the downstream supply chain

➢ Disintermediation – remove intermediate stages from the supply chain

➢ Reintermediation – the creation of new intermediaries in the supply chain.
➢ Countermediation – creation of new intermediaries in the supply chain in response to rivals
doing the same.

LEARNING UNIT 5: Summary

Customers are critical to the survival of any organisation and developing good long-term
relationships with them is essential.

There are several stages involved in getting the final product to the customer. Therefore, supply
chain management is essential to an organisation’s success and customer satisfaction.

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Relevant articles:

CIMA website:

Supply Chain management by Bob Scarlett (July/Aug 2007)

http://www.cimaglobal.com/Documents/ImportedDocuments/fm_julyaug07_p45-46.pdf

8 ways to reduce supply chain risk (Financial management e-magazine, posted 15/02/2011)
http://www.fm-magazine.com/feature/list/8-ways-reduce-supply-chain-risk

References
http://www.cimaglobal.com/

http://www.quickmba.com/strategy/global/diamond/ (accessed on 27 January 2015).

Van Raaij, EM, Vernooij, MJA & Van Triest, S. 2003. The i mp l e me n t a t i o n of customer
profitability analysis: A case study.

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