Strategic Management

Unit - II
Strategic Analysis
Learning outcomes
• Describe the external environmental analysis and its
components
• Evaluate the role of scanning, monitoring, and forecasting to
detect changes in the environment
• Analyze the external environment of organizations using
the PEST framework
• Examine the industry of an organization using Industry Life
Cycle and Five forces models
• Study the competitors for strategic planning
• Assess the competitive position of the organization applying
VRIO and Value Chain frameworks.
 The External Environment

Anthony Henry (2018). Understanding Strategic Management, Oxford University Press, Pg. 36
The External Environment
• Consists of:

• General environment and competitive environment

• Competitive Environment

• Industry and markets where organisation competes

The External Environment

• General Environment

• Often referred to as the macro environment

• Why?

• Changes in this environment will transcend markets and

industries
The Organisation and its External Environment

Scenario Economic
Planning
Political
PEST
Analysis

The General Environment

Social Technological
The Organisation and its External Environment

Industry Power of Buyers

Analysis
Power of suppliers

Potential Entrants

The Competitive Environment

Competitive Rivalry

Substitute Products/Services
Analytical Tools for the External Environment

Scenario
Planning
PEST

Porter’s 5
Forces SWOT
Analysis
Searching for Weak Signals

• Barely perceptible

• Difficult to find

• Difficult to monitor

• Massive impact on your industry

Scanning
Scanning the Environment

• Looking for weak signals are difficult:

1. The organisation may fail to identify these signals

2. The organisation may see a pattern that is simply not

there

Recall, Drucker (1995)

Bias?
Monitoring
Monitor the Environment

• Having identified weak signal:

1. Track these signals. Why?

2. See if they develop into a discernible pattern

Inputs to Forecasting
• Having identified a pattern of environmental change:

1. Develop viable forecasts of future trends in the environment

2. Use forecast to develop robust strategies

Environmental
Scanning

Forecasts

Environmental
Monitoring
PESTEL Analysis

Political

Legal Economic

Strategy
Success

Environ-
Social
mental

Techno-
logical

Political factors
• Government policies
• Taxation policy (change)
• Trade regulations
• Political risks
• Trade blocks
PESTEL
Economic factors
• Business cycles
• Unemployment
• Disposable incomes
• Interest rates
• Exchange rates
 PESTEL

Social- cultural factors

• Demographics
• Income distribution
• Lifestyle changes
• Social mobility
• Consumerism
• Culture and fashion
Culture
• Culture is a system of values and norms that are shared
among a group of people and that when taken together
constitute a design for living (Hill, 2012)
Impact of Cultural Differences on
Business Situations

• Managing joint ventures

• Negotiating internationally

• Managing relationships with suppliers/customers

• Dealing with host country governments

• Motivating the local work force

 PESTEL

Technological factors
• Technological advances
• R&D activity
• Government spending
• Rates of obsolescence

Video
PESTEL
Environmental factors
• Environmental protection
• Energy consumption
• Global warming
• Waste disposal
• Re-cycling
Legal factors
• Competition laws
• Health and safety
• Employment laws
• Licensing laws
• IPR laws
Using the PESTEL framework
When using the PESTEL it is important to:

1. Specify how, and to what degree, the factors you identify are
likely to impact your industry/company
2. Identify factors important today, but also consider those
which will become important in the future
3. Be mindful that many factors transcend the categories, i.e.
can be included in more than one
4. Know you can leave some of the categories blank – only
include legitimate influences on a particular industry
5. Identify opportunities and threats – the point of the
exercise!
The Industry Life Cycle

Anthony Henry (2018). Understanding Strategic Management, Oxford University Press, Pg. 70
 Industry structures

Industry types Industry attributes Examples

Perfect • Large number of competing firms • Stock market

Competition • Homogeneous products • Auctions
• Low-cost entry and exit
Monopolistic • Large number of competing firms • Shampoos, golf
competition • Heterogeneous products balls, shoes, pens
• Low-cost entry and exit
Oligopoly • Small number of competing firms • Steel industry
• Homogeneous or heterogeneous • Oil Industry
• Costly entry and exit • Breakfast cereals
Monopoly • One dominant firm • State utilities
• No close substitutes • Microsoft
• Costly entry and exit
Why Are Some Markets More Profitable Than Others?

Porter’s 5 Forces

Buyer power drives down price

Supplier power drives up costs

Competitive rivalry erodes industry profits

Substitutes limit industry profits by providing cheaper

alternatives

Threat of New entrants (barriers to entry)

More for less – sell at a discount
A different or better proposition – sell at parity or a
premium
Porter’s Five Forces Framework
 Threat of entry

Barriers to entry?
Economies of scale
Capital requirement of entry
Access to distribution channels
Switching Costs
Incumbency advantages
Differentiation
Expected retaliation
Government restrictions

Key question: If barriers to entry are low what strategies can

we adopt to scare off new entrants?
 What Protects Markets
From the Threat of New Entrants?

Entry Barriers – Porter (1980); Porter (1996)

Economies of scale e.g. automobile, aerospace

Capital requirements e.g. oil industry
Product differentiation e.g. Coca-Cola
Switching costs
Access to Distribution e.g. groceries, Ben & Jerry's
Cost advantages independent of size e.g. patents, first mover
advantages
Expected retaliation
 Power of buyers

Buyer power is high when:

Concentration of buyers
Low switching costs
Industry product is standard or undifferentiated
Buyer poses a threat of backward integration

Key question: If buyer power is high what strategies can we

adopt to increase our bargaining power?
 Power of suppliers

Supplier power is high when:

Concentrated suppliers
Suppliers faced with few substitutes e.g. Intel
Difficult to switch suppliers
Suppliers have a powerful brand
Supplier poses a threat of forward integration

Key question: If supplier power is high what strategies can we

adopt to increase our bargaining power?
 Competitive rivalry

Rivalry is greatest among existing firms when:

Competitors are of a similar size
Low levels of differentiation
Low growth (mature or declining market)
Excess capacity
High fixed costs
High exit barriers
 Threat of substitutes

Products or services that offer similar benefits to an

industry’s products or services, but by a different process

Substitutes place a ceiling on prices

– The absence of close substitutes (e.g. petrol, cigarettes)
means that consumers are less sensitive to price

Can be a major competitive threat when:

– Consumer switching costs are low
– The substitute can offer superior quality or performance
 Rivalry “generally” varies with the industry life cycle

© Johnson, Whittington, Scholes: ‘Exploring Strategy’ (9th ed.)

The Inclusion of Complementors within Porter’s
five forces
 Strategic Groups
Definition
Industry
A group of firms producing a similar product or service e.g.
car industry

Strategic Group
A group of firms in an industry following the same or a similar
strategy, Porter (1980)

Can help organisations to:

Understand their direct competition
Spot attractive strategic space
Highlight mobility barriers i.e. obstacles to movement
A map of strategic groups within the world
automobile industry
Mobility Barriers Prevent Equal Profits Across Industries

Strategic
Strategic
Group 3
Group 2
Strategic
Group 1
Using the five-forces analysis
Forecast industry profitability
If we can forecast changes in industry structure we might predict
likely impact on competition and profitability
Strategic positioning
We can choose a favorable position within the industry or exit the
industry
Strategies to improve industry profitability
Which of the five forces can we change by our strategies?
Using the five-forces analysis
Apply at the most appropriate level
not necessarily the whole industry e.g. the European low cost
airline industry rather than airlines globally

Note importance of complementary products/services

(e.g. Microsoft windows and McAfee).
This can almost be considered as a sixth force
Criticisms of Porter’s Five Forces

Assumes competitors can only succeed at the expense of other

competitors in the industry. What about Honda and Toyota?

The five forces framework is a static analysis which assumes relatively

stable markets. Therefore, it doesn't take account of change in the
environment

Why are there are only five forces? Some have argued that the
government should be a 6th force
Competitor Analysis
Studying competitors’ past behavior and preferences help in
anticipating what moves rivals are likely to make next and
outmaneuvering them in the marketplace.
Gathering competitive intelligence about the strategic
direction and likely moves of key competitors allows a
company
― to prepare defensive countermoves
― to craft its own strategic moves with some
confidence
― to exploit any openings that arise from
competitors’ missteps

Source: Crafting & Executing Strategy - The Quest for Competitive Advantage: Concepts and
Cases by Thompson et.al., McGraw-Hill Education, New York, 2018, 21st Edition, Pg. 74
Competitor Analysis

Michael Porter’s Framework for Competitor

Analysis
Competitor Analysis
Market Commonality
Market commonality is concerned with the number of
markets with which the firm and a competitor are jointly
involved and the degree of importance of the individual
markets to each.
Firms compete across several product markets as well as
geographic markets, e.g., Coca-Cola and PepsiCo
The competitive actions or responses a firm takes create a
complicated mosaic.
Source: Strategic Management - Concepts and Cases, Competitiveness and Globalization by
Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Cengage Learning, Boston, 12th Edition,
Pg. 147-48
Competitor Analysis
Resource Similarity
Resource similarity is the extent to which the firm’s tangible
and intangible resources are comparable to a competitor’s in
terms of type and amount.
These firms are likely to have similar strengths and
weaknesses and use similar strategies to pursue equal
opportunities in the external environment.
With market commonality and resource similarity, the rivalry
between firms is intense. e.g., FedEx and DHL
Source: Strategic Management - Concepts and Cases, Competitiveness and Globalization by
Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Cengage Learning, Boston, 12th Edition,
Pg. 148-49
Competitor Analysis
Market Commonality & Resource Similarity Framework
Competitor Analysis
Competitive Intelligence
Competitive intelligence (CI) is a formal program of gathering
information on a company’s competitors.
Research indicates a strong association between corporate
performance and competitive intelligence activities. (C. H.
Wee and M. L. Leow)
The more information and knowledge a firm can obtain
about its competitors, the more likely it can formulate and
implement effective strategies.
Remember, major competitors’ weaknesses can represent
external opportunities; major competitors’ strengths may
represent critical threats.
Competitor Analysis
Various legal and ethical ways to obtain competitive
intelligence include:
Hire top executives from rival firms
Reverse engineer rival firms’ products
Use surveys and interviews of customers, suppliers, and
distributors
Conduct drive-by and on-site visits to rival firm operations
Search online databases
Contact government agencies for public information about rival
firms
Systematically monitor relevant trade publications, magazines,
and newspapers
Include gathering competitive intelligence in the job description of
salespersons
Competitor Analysis
Monitoring Competitors for Strategic Planning
To understand a competitor, it is important to answer the
following 10 questions:
1. Why do your competitors exist? Do they exist to make profits or
just to support another unit?
2. Where do they add customer value—higher quality, lower price,
excellent credit terms, or better service?
3. Which of your customers are the competitors most interested
in? Are they cherry-picking your best customers, picking the
ones you don’t want, or going after all of them?
4. What is their cost base and liquidity? How much cash do they
have? How do they get their supplies?
5. Are they less exposed to their suppliers than your firm? Are
their suppliers better than yours?
Competitor Analysis
Monitoring Competitors for Strategic Planning
6. What do they intend to do in the future? How committed are
they to growth? Are there any succession issues?
7. How will their activity affect your strategies? Should you adjust
your plans and operations?
8. How much better than your competitor do you need to be in
order to win customers? Does either of you have a competitive
advantage in the marketplace?
9. Will new competitors or new ways of doing things appear over
the next few years? Who is a potential new entrant?
10. If you were a customer, would you choose your product over
those offered by your competitors? What irritates your current
customers? What competitors solve these particular customer
complaints?
Resource-Based View

Resource-Based View
 Organisation Analysis and Competitive Advantage

Source: Strategic Management - Concepts and Cases, Competitiveness and Globalization by

Hitt, Ireland, Hoskisson, Cengage Learning, Boston, 12th Edition, Pg. 80
Resources

 A firm’s resources (defined as inputs/assets to the firm’s

production process) are tangible while others are
intangible.
 Tangible resources are assets that can be observed and
quantified.
 Intangible resources are assets that are rooted deeply in
the firm’s history, accumulate over time, and are relatively
difficult for competitors to analyze and imitate.
 The firm combines individual tangible and intangible
resources to create capabilities.

Source: Strategic Management - Concepts and Cases, Competitiveness and Globalization by

Hitt, Ireland, Hoskisson, Cengage Learning, Boston, 12th Edition, Pg. 84
Resources

Tangible Resources

Source: Strategic Management - Concepts and Cases, Competitiveness and Globalization by

Hitt, Ireland, Hoskisson, Cengage Learning, Boston, 12th Edition, Pg. 86
Resources

Intangible Resources

Source: Strategic Management - Concepts and Cases, Competitiveness and Globalization by

Hitt, Ireland, Hoskisson, Cengage Learning, Boston, 12th Edition, Pg. 86
Capabilities

 The firm combines individual tangible and intangible

resources to create capabilities.
 Capabilities are used to perform the tasks required to
produce, distribute, and service the goods or services the
firm provides to customers to create value for them.
 capabilities are often developed in specific functional areas
(such as manufacturing, R&D, and marketing) or in a part of
a functional area (e.g., advertising)

Source: Strategic Management - Concepts and Cases, Competitiveness and Globalization by

Hitt, Ireland, Hoskisson, Cengage Learning, Boston, 12th Edition, Pg. 88
Capabilities

Source: Strategic Management - Concepts and Cases, Competitiveness and Globalization by

Hitt, Ireland, Hoskisson, Cengage Learning, Boston, 12th Edition, Pg. 88
Core Competencies
Prahalad and Hamel (1990)

Critical task of management is to create an organization

capable of creating products which customers need but
have not yet even imagined

To achieve this management must successfully operate

across organisational boundaries rather than focus on
discrete individual strategic business units (SBUs)
Core Competencies

Prahalad and Hamel (1990, p82):

‘The skills that together constitute core competence must

coalesce around individuals whose efforts are not so narrowly
focused that they cannot recognize the opportunities for
blending their functional expertise with those of others in new
and interesting ways’
Core Competencies
Organisations with Core Competencies:

Dell and Benetton clothing have achieved core competence in the way
they configure their respective value chains

Japanese motor manufacturer Toyota has achieved a core competence

in the production of petrol-and-electric hybrid cars

First-mover advantages
VRIO Model
Identifying Sustainable Competitive Advantage

Resources must have 4 attributes to provide the potential for

a sustainable competitive advantage:

1) it must be valuable
2) it must be rare
3) it must be difficult to imitate
4) there should be no strategic substitute for this resource
Identifying Sustainable Competitive Advantage

1) Valuable resources

Organizational resources can only be a source of competitive

advantage or sustainable competitive advantage when they
are valuable

• enable a firm to formulate and implement strategies that

improve its efficiency and effectiveness
Identifying Sustainable Competitive Advantage

2) Rare resources

• If valuable organizational resources reside within a large

number of the competitors then they cannot be a source of
sustainable competitive advantage

• The reason is that each competitor would have the

capability to exploit that resource in the same way
Identifying Sustainable Competitive Advantage

3) Can the resource be imitated?

• Where resources can easily be imitated, competitors will

simply compete away an organization’s ability to generate
above-average returns.
Identifying Sustainable Competitive Advantage

Resources will be difficult to imitate if they embody:

• a unique location
• path dependency
• causal ambiguity
• and social complexity
Identifying Sustainable Competitive Advantage

• French wines are an example of competitive advantage

through unique location
Identifying Sustainable Competitive Advantage

• Path dependency can be seen as the unique experiences

an organization has acquired to date as a result of its
tenure in business

• Causal ambiguity when the link between an organization

resources and its sustainable competitive advantage is not
understood e.g. Dell, Ryanair
 Identifying Sustainable Competitive Advantage

• Complex social interactions may exist between managers

in an organization, in an organization’s culture, and in its
reputation with its suppliers and customers
Identifying Sustainable Competitive Advantage

4) Organised (Substitutability)

• There must be no strategically equivalent valuable

resources that are themselves not rare or that can be
imitated

• Different firms’ resources are strategically equivalent

when they can be exploited separately to implement the
same strategies
Porter’s Value Chain
Value Chain Analysis

• Devised by Porter (1985)

• Assess organization's resources – strengths and
weaknesses
• Ascertains how much value each activity adds
• With this analysis, you can take steps to create a
competitive advantage, improve efficiency, and increase
profit margins.
 Value Chain Analysis Steps

• Determine the business' primary and support activities.

• Analyze the value and cost of the activities.
• Identify opportunities to gain a competitive advantage.
 Summary of the Unit

• Industry attractiveness can be analysed using Porter’s five forces

framework.

• Organisations should seek to position themselves against and influence the

five forces

• Complementors can be used to extend Porter’s five forces

• Strategic group analysis can identify competitors in a market and strategic

gaps or mobility obstacles

• Industries and markets are dynamic, and their changes can be analysed in
terms of the industry life cycle