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STRM043

COMPETITIVE STRATEGY & INNOVATION

Session 3
EXTERNAL ANALYSIS
Market-based approach

Business does not operate in a


vacuum

As strategists, we need to
understand the external
environment in which a firm
operates
This has two components:
-The industry (MICRO-environment)
-The wider business environment
(the MACRO-environment)

COMPANY

INDUSTRY
Microeconomic

COMPANY

INDUSTRY

GEO-POLITICAL FRAMEWORK
MACRO-ECONOMIC CONTEXT

INDUSTRY
(Micro-economic)
COMPANY
INDUSTRY
(Competition)
MACRO-ECONOMIC CONTEXT

GEO-POLITICAL FRAMEWORK

The PESTLE analysis


The PESTLE analysis is a tool to think about an industrys
external environment (whats in the news) that will be a force
for change in the industry, and takes in the:
Political environment
such as structures and processes of government

Economic environment
including types of business activities and companies; also includes the
financial environment

Social environment
including cultural factors

Technological environment
including innovation levels and protection of intellectual property

Legal environment
pro or anti-business laws

Ecological environment
includes environmental protection and climate change

PESTLE:
Environmental Analysis to Industry Analysis

INDUSTRY & COMPETITIVE


ANALYSIS

Imagine its a Monday morning


and you are a management
consultant dropped into a new
client in a new industry
what would you want to know
asap?

INDUSTRY & COMPETITIVE


ANALYSIS

Industry size
Industry growth rate
No. of players
Concentration ratio

eg market share of top 4 players (CR4)

Share of market of company in question


Relative size of our company to biggest in sector
Nature of competition (theory of the firm)
Good sources of data
- Industry magazines / trade bodies
- Mintel & Keynote reports (accessible in Uni
library)

Example: UK FOOD
INDUSTRY
Size: Retail: 100bn, growth rate: 6-7%
No. of players
90,000 outlets, 50,000 businesses
Concentration ratio CR4
Top 4 have 80% market share
Average 20%...... But Tesco have 32%, so other 3 must
have 16% on average (so Tesco is twice size of next one)
Our share of market eg Aldi 3%
Sources of Industry Information:
Industry magazine
The Grocer
Industry trade body
IGD (Institute of Grocery Distribution)

The industry life cycle

NATURE Monopoly
of COMPETITION

Perfect competition

Polarisation

Oligopoly

Source: Adapted from Johnson & Scholes, Exploring Strategy

Monopoly

Determinants of Industry Profitability

Recommendations

Research & read about


THEORY OF THE FIRM
For insights into the nature of competition
based on industry structure

Porters Five Forces

Yet another tool from Michael Porter!


5 Forces is about
POWER
in
+
ATTRACTIVENESS
of an industry

Porters Five Forces


Competition Framework

1. Potential Entrants
Attractive if many entry barriers:
high sunk cost
high fixed cost
patents / know-how
access to distribution / sales channels
economies of scale and scope
need for experience benefits
access to raw materials
high buyer switching costs
Government subsidy
Also consider exit barriers, eg redundancies, leases and
long-term contracts which may lock-out entrants.

2. Suppliers

Attractive if supplier-power low:


little differentiation / commodity supplies
low switching costs
lots of substitutes
suppliers not concentrated
supplier is small part of firm costs
supplier is not a crucial cost component
supplier does not affect quality of firm product
supplier cannot easily forward integrate (buy the firm)
industry/firm is important to supplier
much product (supplies) information available

3.

Buyers

Attractive if buyer power low:


buyers not concentrated
products are differentiated
quality important to buyer
few substitute producers
small purchase sizes
firm product not a significant part of buyers total costs
buyers cannot easily backward integrate

4.4. Firm Rivalry


The more intense the rivalry, the more attractive the
industry is for
extant firms as entrants deterred from entry consider
impact of :
Oligopolies/concentration ratio
fast industry growth
a history of few acquisitions
few perishables
low fixed costs
few capacity indivisibilities
competitive reactions

5.5. Substitutes
The fewer the substitutes, the more
attractive the industry is.
Consider impact of potential substitution
from outside the industry
e.g. fax machines substituted by email industry
caused obsolescence.

Structural Determinants of
Competition according to Grant:

Strategic Group / Competitor Set


A strategic group is a group of firms in an industry that
follow the same or similar strategies
(Grant)
Identifying strategic groups:

Identify principal strategic variables

Position each firm in relation to these variables.

Identify clusters

What is Tescos competitor set?


- Sainsburys, Asda, Morrisons?
+

Waitrose, M&S?

- Aldi, Lidl, Netto?


- Independent delis, farms shops etc?
It all depends on the decision to be made

Strategic Group / Competitor Set


Porter framework assumes:
(a) industry structure drives competitive behaviour
(b) Industry structure is stable.
But, according to Grant, competition also changes industry structure:

Schumpeterian Competition:

A perennial gale of creative destruction

market leaders overthrown by innovation

Hyper-competition:
(a)

intense and rapid competitive moves. continuously creating new


competitive advantages and destroying existing competitive
advantages

Implication:
INDUSTRY STRUCTURE affects COMPETITIVE STRATEGY
but also
COMPETITIVE STRATEGY affects INDUSTRY STRUCTURE
The business environment is complex, dynamic and interactive not static
as our strategy models might imply.