Strategic Management

UNIT 3: Lecture 4: Analysing the Business

Environment
August 2023
LESSON STRUCTURE
 3.1 Learning Objectives
 3.2 Introduction
 3.3 Concept of External Environment and its influences
 3.4 Company and its External Environment
 3.5 Technological Environment/Advances
 3.6 The Competitive Environment
 3.7 The Generic Competitive Strategies
 3.8 Lets Sum it Up
 3.9 Model Questions
SESSION OBJECTIVES

At the end of the session you should be able to:

 Explain the different external factors that can impact a firm’s success.
 Describe the potential opportunity that a firm can capitalize on and
threats that might hinder success.
 Explain how to conduct a competitive analysis to evaluate the strengths
and weaknesses of current and potential competitors.
 Discuss how the firm’s analysis of the external environment can inform
decisions about market selection, regulatory compliance, competitive
positioning, and adaptation to cultural differences.
Reflective Questions?

What are the three business environments? Give examples

What is the significance of the business environment on strategy.
The Company and its External Influences

The essence of strategy is to guide a company to success. In the process of

guiding the company to success, it encounters the external environment.
Environmental influences play a crucial role in shaping the business landscape
and directly impact the success and sustainability of the businesses. These
influences come from various external factors that can significantly affect how a
business operates, its strategic decisions, and its overall performance.
The scanning of the external environment is therefore essential in the
formulation of an effective strategy.
Key reasons why environmental influences are important in the business context:
 Market Opportunities and Threats: Changes in consumer preferences,
technological advancements, and regulatory shifts, can create new market
opportunities or pose threats to existing operations
 Regulatory and Legal Factors: Government regulations and laws have a huge
impact on how business operate. For example environmental regulations,
labour laws, taxation policies, and industry specific regulations can influence
a company’s operations, compliance costs, and overall business strategy
 Economic Conditions: Economic factors such as inflation, interest rates,
exchange rates, GDP growth population growth significantly affect operations.
A strong economy can drive consumer demand while economic downturns can
drive inflationary pressures and financial challenges for businesses.
 Technological Advances: Businesses that fail to adopt or adapt new
technology may become obsolete or lose their competitive edge.
 Social and Cultural Trends: Changes in societal attitudes, preferences, and
cultural norms can impact consumer behaviour and demand for goods and
services
 Competitive Landscape: Environmental influences do shape the
competitive landscape. The entry of new competitors, changes in
competitor strategies impact on existing businesses
 Environmental Sustainability: Increasing awareness of environmental
issues is leading to increasing demand for sustainable and eco-friendly
products or services. Companies that incorporate sustainability into their
operations attract environmentally conscious consumers and improve their
reputation.
 Supplier Relationships: Changes in the external environment can affect a
company’s relationship with its suppliers, partners and other stakeholders.
For example disruptions in the supply chain due to pandemics, wars, natural
disasters or economic downturns can impact production and distribution.
 Globalisation and International Markets: Globalisation refers to a
country’s relationships with other countries of the globe.
 Opportunities and threats may emerge from interactions with other
nations.
 Globalisation has exposed businesses to global competition, diverse
consumer preferences and geopolitical risks.
 Reputation and Brand Image: How a business responds to
environmental influences can have material impact on its reputation
and brand image. Positive responses for example Trade Kings during
COVID can enhance reputation and brand loyalty
Key Influences toward Globalisation
 Convergence of needs and preferences: Consumer needs are
becoming increasingly similar than dissimilar. For example, global
food preferences, cuisines, seafood, and healthy foods.
 When the functional utility of a product is the same rather than
different among nations, a global market is created.
 Firms can more easily export their products or service across various
borders.
 The demand for the following goods and services are universal, for
example, electronic/ electric gadgets, consumer good and services,
professional services, military equipment, machinery and equipment
etc.
Key Influences toward Globalisation
(cont’d)
 Route to Growth: Trade between countries is perceived as the direct
route to trade. The principle of comparative advantage is that an
economy’s ability to produce a particular good or service at a lower
opportunity cost than its trading partners has facilitated trade between
countries. For example, Zambia produces copper and exports it other
countries that are not endowed with the precious metal.
 To seek efficiency through economies of scale: Globalisation offers
opportunity for companies to access global markets for any excess
production beyond domestic demand. Economies of scale can lead to
efficiency by spreading costs over large volume, thus reducing unit cost.
Economies of scale enhances competitiveness in global markets.
Economies of scale can occur in manufacturing, product research, and
marketing.
 Easing of political tensions: The easing of political tensions has
resulted in economic cooperation . For example, the end of Apartheid
opened trade with South Africa and the rest of the global economy.
The Strategic Impact of Globalisation
 Market growth opportunities: It creates new opportunities in other
markets
 The threat of competition: Globalisation has meant reciprocal trade
between countries
For example, the textile industry in Zambia collapsed due to cheap
imports.
Technological Environment
The technological environment refers to innovations and developments that are
generated through the application of science and technology. Rapid technological
advancements can disrupt industries and markets.
For example:
 The advent of 3D printing technology has revolutionised manufacturing
processes, allowing companies to create prototypes and products with greater
speed and customisation.
 Improvement in communication with customers
 Invention in electric cars
 With technology, employees can communicate far more quickly and conveniently,
no matter where they are. Tools like online chat rooms and phone services allow
employees to work from home regardless of location; no need for work permits.
Opportunities Created by Technological Advances

 Increased transportation capability: Has resulted in market development.

 Fresh flowers – Exports of fresh roses to Europe.
 African food stuff in Europe and Australia
 Increased ability to extend the shelf life of food, reduce food waste,
improve food quality and safety
 Advances in food preservation technologies such as refrigeration, freezing,
canning, and drying have helped to increase the availability and diversity of
food products.
 Increased ability to modify characteristics of materials:
 For example product development from reverse engineering, innovation or
market development. For example, Swiss watch imitations.
Growing mechanisation of physical activity
 Mechanisation refers to the process of substituting human labour with
machines. For example, combine harvesters in cane harvesting.
 Mechanisation has resulted in increased productivity and efficiency
and led to increased growth/profitability. For example, ATMs in
banking, packaging, and loading.
 Mechanisation has transformed production, distribution and
communication.
COMPETITIVE ENVIRONMENT
 THE COMPETITIVE ENVIRONMENT

 Introduction
Competition is yet another factor in a company’s environment that can
present an opportunity or a threat to a firm.
Competition is an opportunity when a company has a competitive
advantage over its rivals.
A company is said to have a competitive edge over its rivals when its
profitability is greater than the average profitability of all companies in its
industry.
Competition is a threat to a firm when its rivals have the ability to erode a
firm’s profitability base.
 THE COMPETITIVE ENVIRONMENT
(Cont’d)
 From an industry perspective, competition is the fight for
market share.
 An industry is a group of firms that offer goods or services
for which there is a high cross – elasticity of demand
 An analysis of the competitive environment attempts to
achieve the following:
 An understanding of the nature of competition
 To formulate an appropriate competitive strategy
Competitive Advantage
A sustainable competitive advantage refers to a set of unique
attributes such as cost leadership, product differentiation,
operational efficiency, innovation capabilities, customer service or
brand reputation, resources, or capabilities that allow an
organization to outperform its competitors consistently over an
extended period. Developing sustainable competitive advantages is
fundamental to a successful business strategy
Competitive advantage leads to superior profitability. Profitability in
turn depends on three factors:
 The value customers place on a product or service.
 The price that a company charges for its product, and
 The costs of creating the product.
Competitive Advantage
Competitive Advantage
To be considered sustainable, a competitive advantage must meet the following
five criteria:
1. Valuable: The advantage must add significant value to the organisation’s
products, services or operations. It should enable the organisation to enhance
overall performance in a way that competitors cannot easily replicate. For
example patents, intellectual properties
2. Rare: The advantage should be rare or relatively scarce in the industry or
market. For example, highly skilled workforce, organisation culture
3. Inimitable: Difficult to imitate, due to time, significant effort, or resources,
intellectual protection
4. Non-substitutable: Should not have easy substitutes or alternatives
5. Exploitable and Organisational fit: Should fit well with the organisation’s
core competencies, business model, and overall strategy
Competitive Forces

 Competition is viewed in the narrower sense as the

existence of economic rivalry among firms.
 Michael Porter identified five forces that constitute
competitive forces to the extent that they can potentially or
actually reduce a company’s profitability.
 These have become to be known as Porter’s Five
Competitive Forces.
 Porter’s Competitive Model
Potential
New Entrants

Bargaining Industry Bargaining

Power Rivalry Power
of Suppliers of Buyers

Substitute
Products
and Services

Source: Michael E. Porter

“Forces Governing Competition in
Industry Figure 3-1
Harvard Business Review, Mar.-Apr. 1979
1. The Threat of New Entrants
 The threat of new entrants refers to the risk of entry posed
by companies that are not currently in the industry but
have the capability to enter the industry if they should
choose to do so.
 Potential entrants to an industry pose a threat by seeking
to gain market share, or by bringing into the industry
better valued or lower priced products.
 This has the effect of shifting customers and profitability
away from firms in the industry to the new comer.
Possible Barriers to Entry

Some of these barriers include:

 Economies of scale: They refer to unit costs of a firm falling as volume
increases.
 The capital requirements of entry: These refer to investment needed to set up
the requisite plants, machinery or distribution outlets.
 Access to distribution channels: This refers to the ease or difficulty of
establishing customer contacts, either directly or through intermediaries.
 Expected retaliation from existing firms through e.g. price cuts
 Government policy: Policies enacted by government that may inhibit entry into
the industry e.g. licensing requirements, work permits etc.
 2. The Bargaining Power of Suppliers

 Suppliers refer to providers of inputs to an industry. Inputs include raw

materials, components, services or labour.
 Suppliers may become powerful under the following circumstances:
1. When the product is unique and switching costs to the buyer are high.
2. When profitability of suppliers is not significantly affected by the purchases
of buyers in the industry e.g. the buyers are not important customers to
the supplier.
3. When suppliers can threaten to enter the buyers’ industry and use their
inputs to produce products that would compete with products of their
buyers.
4. When the supplier’s customers are highly fragmented
Strategies Against a Powerful Supplier

 Explore cheaper alternative sources of supply to lower exit barriers.

 Enter into the supplier’s business through acquisition, merger, JVs,
strategic alliances, or backward integration. For example, Zambeef
entered Suppliers’ business by having its own ranches.
 Negotiate long term supply agreements
 Engage in strategic Supplier development agreements
 Political intervention/Regulators such CCPC
3. Bargaining Power of Buyers

 Buyers consist of consumers, users or distributors of a product.

 Bargaining power of buyers refers to the ability of buyers to
bargain down prices or to raise the costs of suppliers by
demanding better quality and service.
 This has the effect of squeezing the profits of the supplier.
 The power of buyers manifests itself when:
 The buyers are few, concentrated and buy in large volumes.
 The products bought are standard or undifferentiated.
 The industry’s product is unimportant to the quality of the
buyer’s products or services
Strategies Against Powerful Buyers

 Market development: continually look for new buyers in new markets

to avoid dependence on a few buyers in the same market.
 Differentiate the products: Invest in brand equity . When a product
brand is strong it will retain customer loyalty. Further, make the
product unique to ensure sustainability of competitive advantage.
 Increase switching costs to the buyer: Invest in customer retention
activities that will foster brand loyalty.
4. The Threat of Substitutes

Substitutes are products of different industries or businesses

that can potentially satisfy similar customer needs.
Product substitution can take the following forms:
 Product-for-product substitution e.g. postal service,
fax and email, Online shopping
 Substitution of a need by a new product e.g. maize
meal, cassava, rice and potatoes.
 Doing without/lifestyle changes as might be the case
with drinking alcohol, smoking or dieting.
The Threat of Substitutes (cont’d)
Generic Substitution:
 Generic substitution occurs when different products compete for the same
expenditure/budget. For example, in a household, different items required in
the home from different suppliers compete for the same household budget.
Competition in the pocket will result in generic substitution.

Strategies against substitutes:

 Product improvement: Modify a product by making product improvements so
that the product continuously appeals to the customer and the company is
constantly ahead of the customer.
 Product Innovation: it is imperative that the firm invests in R&D and market
research in order to anticipate consumer behaviour, preferences and trends.
 5. Industry Rivalry

 Rivalry among existing firms in the same industry refers to

the competitive struggle for market share through
 price competition
 after sales service
 product design
 product differentiation, innovation
 advertising and sales promotion
 Strategic Implications of Competition

In coping with competition, a firm must search out a market

position and a competitive approach that will:
 Insulateit as much as possible from forces of
competition;
 Influence the industry’s competition rules in its favour;
and
 Give it a strong position from which to “play the game”
of competition.
 Alternative Strategic Responses to Competition

1. Strategic Cost Analysis

An assessment of the relative cost position of a firm.
It involves showing the make-up of costs all the way from
purchase of raw materials to the end product paid for by the
customer (activity cost analysis).
 Strategic Cost Analysis

Manufacturing-related activities
Supply related Forward channel
activities Wholesale/Distribution
Production Marketing

Raw materials Processing Sales force Dealer/distributor

Component parts Labour Advertising Management and
Energy
Maintenance relations
Marketing
In-bound transportation
Process design research
In-bound materials
Quality and
handling
inspection
Inspection/warehousing

Inventory
management
2. Competitor Analysis
This involves a careful assessment of a company’s relative competitive
standing and an understanding of the firm’s relative strengths and
weaknesses in say, the following areas:
 product design – convenience, comfort
 product innovation
 pricing strategies
 distribution network
 advertising/sales promotion
 customer service
Objective of the Competitor Analysis
 The objective of this analysis is to explore ways in which
the firm might retain or improve its standing on the
competitive ladder. The rungs on the ladder can be broadly
categorized by:
Dominant leader-who usually has the largest
market share and is therefore the acknowledged
leader in innovation and sales.
One of the industry’s top leaders-this is
characterized by a few firms dominating the
industry.
Middle-of-the-pack- this category comprises a
large group of firms who are basically followers.
Firms on the fringe-these are firms whose
individual market share is small and insignificant .
 3. Product differentiation
This involves creating a difference from rivals and the
difference being valued by customers. The difference could be
in:
 Procurement of materials; for instance, firms place a
value on whether or not an input is original or from a
secondary source.
 Production process and product design.
 Marketingprocess, e.g. product branding, product
appearance and packaging.
 Improved quality.
 Perceived Value

Perceived value will entail any of the following:

 Greater convenience and ease in use of product
 More economy
 The design and availability of extras to meet occasional
needs, e.g. packaging for picnics and outdoor recreation
 Non-economic wants
status

prestige

image

 comfort
Pitfalls of differentiation

Pitfalls (caveats) of differentiation include the following:

 Buyers must quickly see the intended value implicit in the
difference.
 Product attribute easily copied by rivals
 The danger of competitors copying new features/innovation,
including pricing.
 The risk of over-differentiation, that is, the resultant quality
being needlessly superfluous or the investment being too
high for the perceived value.
 Cost of differentiation
 Lifestyle or taste changes
 4. Market Focus

This entails concentrating on catering to a narrower and limited segment

(or niche) of the market rather than going after the whole market with a
“something-for-everyone” approach.
Segmentation of the market may be based on:
 Demographic/socioeconomic characteristics (Top of the pyramid or
bottom of the pyramid, age, gender, education etc.)
 Purchase (Size, application i.e. industrial, consumer, government etc.)
 Geographic (territories, cities, regions etc.)
 Risks of using a focus approach

 Buyers may shift their preferences away from the focuser’s

special product attributes.
 The possibility that broad-range competitors will find
effective ways of serving the narrow target markets.
 The risk that competitors will find smaller segments within
the target segment and thus “outfocus” the focuser. This
often happens in the electronics industry.
Industry & Market perspective of competition

 Industry perspective of competition is a fight for market

share among industry participants.
 Intensity of industry competition is generally driven by:
 power & number of industry participants, slow, stagnant
or declining growth.
 The product is homogeneous – mineral water, cement,
steel
 The product is perishable – tomatoes at Soweto market
 High fixed costs
Industry & Market perspective of competition
(Cont’d)

 In market perspective of competition, competition is

market driven. Demand is driven by consumer choice for
various reason such as affordability, technological
changes, new innovations, lifestyle changes etc.
 Spread of technology – landline phones, electronic media
 Globalisation – lower costs for products, access to new
talent, global supply chains
Model Questions……
Model Questions
 Explain the importance of analysing and understanding the firm’s external
environment?
 Explain Porter’s five forces model and how it helps in assessing a firm’s
competitive environment. Apply this model to analyse the competitive
landscape of the retail chain Shoprite, facing increasing competition from
other retail giants such as Jumbo and Choppies.
 Discuss the significance of Industry analysis in strategic management. Choose
an industry of your choice and perform a comprehensive analysis of its
attractiveness and competitive dynamics
 Explain how a firm can leverage its external environment analysis to make
informed strategic decisions. Apply this concept to a manufacturing company
considering international expansion.
Model Questions

 Examine the differentiation strategy and its potential benefits for a FMCG
company such as Trade Kings . Provide examples of specific product features
or marketing efforts that contribute to the company’s differentiation
strategy
 Compare and contrast the cost leadership and differentiation strategies.
Choose any two companies operating in the same industry and discuss how
each company’s chosen strategy has shaped its competitive advantage and
market position.
 Identify the five competitive forces and explain how they determine an
industry’s profitability potential