LECTURE 2

GLOBAL STRATEGY: EXTERNAL ENVIRONMENT

LECTURE OVERVIEW

1. Industries, SBUs, external analysis

2. Porter's Five Forces Model: what it is, why does it matter, criticisms

3. Value Net

4. Competitor profiling

5. Customer and market segmentation

6. Blue Ocean Strategy

 1 - Why is competition among business good for the consumers?

INDUSTRIES AND STRATEGIC BUSINESS UNITS

An industry (sector) is a group of firms producing products and services that are essentially the
same. For example, the automobile industry and the airline industry.

Industries and sectors are often made up of several specific markets or market segments. A market
is a group of customers for specific products and services that are essentially the same (e.g. a
particular geographical market). For example, the automobile industry has markets in North
America, Europe and Asia, and so forth.

WHAT IS A STRATEGIC BUSINESS UNIT (SBU)?

According to the Wiley Encyclopedia of Management (2014), "A strategic business unit (SBU) is an
organizational sub-unit that acts like an independent business in many major respects, including
the formulation of its own strategic plans and its own marketing strategy." SBUs operate in a
competitive market space that is separate from other divisions in the corporation. For example, the
long haul passenger airline business, the short haul passenger airline, and the carrier freight business
can be separate SBUs for British Airways.

The advantage of operating through an SBU is that it creates a strategically focused management
structure that is not distracted by the wider product portfolio of the corporation, and thus products
and product lines are given specialized focus in otherwise large, diversified organizations and
multinational companies.

WHAT IS THE PURPOSE OF EXTERNAL ANALYSIS?

2 - Performance gap

Carmen explains the definitions of industries and SBUs, and why analysing the external
environment of a company matters
 https://sway.office.com/0csMgzQ4g8XESCI7#content=ZYfld7MhBPI77X

3 - Click the play button

PORTER'S FIVE FORCES MODEL

Porter's Five Forces model is a model of analysis applicable only to an industry or, better yet, a
market segment.

Defining the industry correctly before proceeding with the analysis is essential. Please see section
3.2.1 in your textbooks for a detailed discussion on defining the industry (p. 65).

THE FIVE FORCES ARE

1. THE THREAT OF NEW ENTRY

2. COMPETITIVE RIVALRY

3. THE BARGAINING POWER OF BUYERS

4. THE BARGAINING POWER OF SUPPLIERS

5. THE THREAT OF SUBSTITUTES

Please see section 3.2.2 in your textbook (p.66) for a detailed discussion of each force.

Carmen talks about each of the five forces.

https://sway.office.com/0csMgzQ4g8XESCI7#content=K8zHavsTX6cWJg
 4 - PART 1 - Click the play button

https://sway.office.com/0csMgzQ4g8XESCI7#content=2TfHJWRyalZ8i9

5 - PART 2 - Click the play button

Porter's Five Forces model aims to establish the nature of competition in an industry. This means it
allows a business to understand the drivers of competitive behaviour in the sector and to evaluate
the long-run profit potential of the sector.

• This is important because the nature of competition can determine:

- how attractive the industry might be now and in the future

- how profitable an industry is and can be in the future

• This will also affect decisions as to:

- whether to stay in or exit an industry

- what new industries should a firm enter?

• A host of factors external to the industry (political, economic, social, technological,

environmental, legal) can change the balance of forces in the industry causing firms to
review their positioning and develop competitive strategies to cope with such changes.
Analysis must therefore be ongoing and dynamic.
WHY DOES IT MATTER?
The analysis itself is not the crucial part. What really matter are the implications for the
organisation’s future strategy.

How is the industry changing? What are the implications for your strategy, how can you position
yourself in the industry against/exploit these forces?

Should the organisation seek strategic partnerships/alliances with suppliers?

Should the organisation seek strategic partnerships/alliances with large buyers?

Watch the video below to see Michael Porter explaining how to apply his analytical model to the
airline industry

6 - Interview with Michael Porter

Criticism of Porter’s Five Forces

Often with any theoretical model, further research discovers aspects that are incomplete or partially
incorrect. For Porter's Five Forces model, some of the most frequent criticism include:

• Understating the importance of customers

• Static in nature (however, Porter's own discussion raise the question of how industries
change over time)

• Heavily directed to business rather than public sector or charities

• Neglecting the option of cooperation and focusing entirely on competition

• Neglecting culture, management skills and ‘people’ in organisations

Other research asks if there are only five forces?

• Complementary products (Brandenburger and Nalebuff, 1995; Grant, 2015)

• Government and pressure groups (Groupe Bull, 1995)

Food for thought: Are these pressures on the Five Forces or extra forces? What do you think?
Watch the video below for another example of performing a five forces analysis - this time on the
sportswear industry.

7 - Application for Porter's Five Forces to the sportswear industry

THE VALUE NET

• A value net is a map of organisations in a business environment demonstrating opportunities
for value-creating cooperation as well as competition.

• An organisation is a complementor if:

- Customers value your product more when they have the other organisation’s
product than when they have your product alone (e.g. sausages and mustard)

- It is more attractive for suppliers to provide resources to you when it is also

supplying other organisation than when it is supplying you alone (e.g. Boeing and
airlines).

Carmen explains why a value net matters for strategy.

https://sway.office.com/0csMgzQ4g8XESCI7#content=qQVnkqdfmhoLyx

8 - Click the play button

Competitor profiling
Competitor profiling is used to find characteristics of high performers that low performers in a
market do not have.

It involves identifying the competitive advantages and disadvantages of the organisation against its
competitors

Companies usually select two or three rivals for detailed examination – those that pose the most
direct threat.

WHAT TO LOOK FOR IN COMPETITOR PROFILING

• Scope of Activities

- Extent of product or service diversity

- Extent of geographical coverage

- Number of market segments served

- Distribution channels used

• Resource Commitment

- Extent of branding

- Marketing effort

- Extent of vertical integration

- Product or service quality

- Technological leadership

- Size of organisation

Whilst time-consuming, it provides a useful way of judging an organisation’s position relative to

existing organisations. However, it needs to be done on an ongoing basis to keep being relevant.

Watch Michael Porter explaining how to understand and deal with your competition

Customer and market segmentation

Carmen explains market segmentation
 https://sway.office.com/0csMgzQ4g8XESCI7#content=dWmyBPRk7wqpeq

9 - Click the play button

Why segment the market?

• Dominating a market segment can be profitable

• Allows an organisation to meet highly distinctive needs that others would find it hard to
meet

• Allocation of resources more effectively

• Enables specialisation

- Experience, lower costs, relationships

- However, it may limit ability to compete on a broader basis

How to segment the market?

• Identify current and future customers.

• Identify specific groups (segments) of customers who respond to competitive strategies

differently from other groups.

• Can segment on any basis, only useful if:

- Can distinguish between customers

- The criteria are relevant to purchasing

- The segment is big enough to justify the resources needed to reach it

- The segment is reachable

How to position your company in the market?

• How does the organisation compete and survive in the market segment?

• Identify gaps in the segments?

- Segments not served

- Segments poorly served by current products

 • Useful when devising a strategy to investigate:

- Which segments are profitable

- Which segments are difficult for others to compete against your organisation

- What strategic customers value most

NEXT WEEK we are talking about Porter's generic positioning strategies that SBUs may employ to
deal with the competitive forces in the market and to gain a competitive advantage.

BLUE OCEAN STRATEGIES

Carmen discusses Blue Ocean strategies - why competition may be irrelevant and some examples.

https://sway.office.com/0csMgzQ4g8XESCI7#content=uxf2auffuBCZg7

10 - Click the play button

 Watch the two videos below to learn more about Cirque du Soleil's impact on its industry, and its
current financial problems.

What do you you think is the reason for their current difficulties? Has their Blue Ocean Strategy
become irrelevant?

As we have seen from Porter's model, most industries are already well defined and rivalry is intense
- these can be called 'Red Oceans'.

On the other hand, Blue Ocean thinking (the viewpoint put forward by W. Chan Kim and Renee
Mauborgne) encourages entrepreneurs and managers to be different by finding or creating market
spaces that are not currently being served

Blue Ocean Strategic thinking is exemplified in Cirque du Soleil and Uber, for example

11 - Is Cirque du Soleil bankrupt?

12 - How Cirque du Soleil revolutionized the circus industry

Some more food for thought: Where do blue oceans exist?

Is it outside a red ocean, or could they exist inside red ocean?

 13 - A good example of this is Nintendo

14 - Five Forces compared to Blue Oceans

15 - Renee Mauborgne talking about Blue Oceans

STRATEGY CANVAS
A ‘strategy canvas’ compares competitors according to their performance in order to establish the
extent of differentiation.
The horizontal axis on the strategy canvas captures the range of factors that an industry competes
on and invests in, while the vertical axis captures the offering level that buyers receive across all of
these key competing factors. A value curve or strategic profile is the graphic depiction of a
company’s relative performance across its industry’s factors of competition.

The strategy canvas allows your organization to see in one simple picture all the factors an industry
competes on and invests in, what buyers receive, and what the strategic profiles of the major players
are. It exposes just how similar the players’ strategies look to buyers and reveals how they drive the
industry toward the red ocean. Importantly, it creates a commonly owned baseline for change.

The strategy canvas serves two purposes:

• It captures the current state of play in the known market space, which allows users to clearly
see the factors that an industry competes on and invests in, what buyers receive, and what
the strategic profiles of the major players are.

• It propels users to action by reorienting their focus from competitors to alternatives and
from customers to noncustomers of the industry and allows you to visualize how a blue
ocean strategic move breaks away from the existing red ocean reality.

This is excerpted from Kim & Maurbogne's website, Blue Ocean Strategy.

16 - Strategy canvas for electrical components companies

Source: Developed from W.C. Kim and R. Mauborgne, Bl ue Ocean Strategy, Harvard Business School Press, 2005.

WANT TO KNOW MORE?

Henry Stuart Talks are carefully curated collections of lectures on Business and Management topics,
The lecturers are leading world experts and practitioners, including Nobel Laureates, drawn from
academia, research institutes, commerce, industry, the professions and government.

If you want to know more about Blue Ocean Strategy, click the link below to open the talk on an
external site. The talk is given by Dr. Ashok Kurtkoti from MIT SOB, Pune, India.

Also listen to your textbook authors explain the role of the external environment.

CLICK TO OPEN: BLUE OCEAN STRATEGY

 17 - Your textbook authors explain the role of the external environment

YOUR WEEKLY TASKS

TASK 1: PREPARE

TASK 2: DISCUSS

TASK 3: REFLECT

TASK 1: PREPARE

On Moodle there are compulsory readings for this week's tutorials, and essential materials for your
assessment preparation. We expect you to have read all the materials before your tutorials. You
can access them from the MMU library OR in PDF format on Moodle.

Your tutor will facilitate discussions to develop the concepts introduced in the lecture and develop the
topic, as well as focus on case studies. In assessment clinics we will help consolidate the week's topic
for the assessment. Please check your timetable for sessions.

TASK 2: DISCUSS

Synthesizing the key takeaways of this week's topic, answer the following question (200 words) on
Moodle in the Microsoft Form provided. Your answers are can only be seen by the tutors. We
recommend saving your answers via email as well, as they can be used in preparation for your exam.

TASK 3: REFLECT

Reflect on your learning this week by completing the short survey on Moodle. This will enable tutors
to make adjustments to further sessions based on your feedback. If most of you feel like we need to
return to a particular concept, we will accommodate this in our assessment clinics. Your answers are
anonymous.

Your tutor will monitor your engagement with the tasks and their completion.

RECOMMENDED READING

THIS LECTURE IS ALSO AVAILABLE WITH CAPTIONS FOR THE AUDIO RECORDINGS.

CLICK THIS LINK TO ACCESS: GLOBAL STRATEGY LECTURE 2

Whittington, R., Regnér, P., Johnson, G., Angwin, D. and Scholes, K., 2020. Exploring Strategy: Text
and Cases. Pearson.

Hill, C.W., Jones, G.R. and Schilling, M.A., 2014. Strategic management: Theory & cases: An
integrated approach. Cengage Learning.

Barney, J.B. and Hesterly, W.S., 2015. Strategic management and competitive advantage. Global
Edition. New Jersey: Pearson Education.

Bach, D., & Allen, D. 2010. What Every CEO Needs to Know About Nonmarket Strategy. MIT Sloan
Management Review, 51(3), 41.

Brandenburger, A. and Nalebuff, B. 1995. The Right Game, Harvard Business Review, July-August, pp.
57-64.

Christensen, C. M. 2001. Competitive Advantage. MIT Sloan Management Review, 42(2). 105
D’Aveni, R. 1994. Hypercompetition: Managing the Dynamics of Strategic Manoeuvring. Free Press.

Doh, J. P., Lawton, T. C., & Rajwani, T. (2012). Advancing nonmarket strategy research: Institutional
perspectives in a changing world. The Academy of Management Perspectives, 26(3), 22-39.

Grundy, M. 2006. Rethinking and Reinventing Michael Porter’s Five Forces Model. Strategic Change,
15, pp. 213-229.

Kim, W. C., & Mauborgne, R. 2009. How strategy shapes structure. Harvard Business Review, 87(9),
72-80.

Malhotra, A. and Gupta, A. 2001. An Investigation of Firms’ Responses to Industry Convergence.

Academy of Management Proceedings, pp. G1-G6.

McGahan, A. 2000. How Industries Evolve. Business Strategy Review, 11 (3), pp.1-16.

Porter, M.E. 1980. Competitive Strategy: Techniques for Analysing Industries and Competitors. Free
Press.

McGahan, A.M. and Porter, M.E. 1997. How much does Industry Matter, Really? Strategic
Management Journal, 18 (Summer Special Issue), pp. 15-30.

Mendonça, S., Cardoso, G., & Caraça, J. 2012. The strategic strength of weak signal analysis. Futures,
44(3), 218-228.

Rumelt, R.P. 1991. How much does Industry Matter? Strategic Management Journal, 12 (3), pp. 167-
185.

Schoemaker, P. J., & Day, G. S. 2009. How to Make Sense of Weak Signals. MIT Sloan Management
Review, 50(3), 81.

Thomas, H. 2007. An analysis of the environment and competitive dynamics of management

education. Journal of Management Development, 26 (1), pp. 9-21.

NEXT WEEK: CORPORATE AND BUSINESS STRATEGY