EXTERNAL ANALYSIS

STRATEGIC PLANNING
Three key stages
Strategic analysis
Profiling the business
External and internal environment
Purpose

Strategic development
Generation of strategic options
Evaluation and ranking of options (portfolio)
Choice of strategies (Corporate, Business Unit
& Functional)

Implementation (Strategy in action)

3 LAYERS = 3 AREAS OF
ANALYSIS

EXTERNAL ENVIRONMENT
Macro-environment facing all firms:
Political trends
Economic trends
Socio-cultural & demographic trends
Technological trends
(Environmental)
(Legal)
And then - what do these trends mean for the company?
What are the implications?
Source: Johnson & Scholes (2002)

(PE)STEL framework
Political
Government stability
Taxation policy
Foreign trade
regulations
Social welfare policies

Economic
Business cycles
GNP trends
Interest rates
Money supply
Inflation
Unemployment
Disposable income
(implies demand for
products & services)

PE(ST)EL FRAMEWORK
Socio-cultural
Population demographics
Income distribution
Social mobility
Lifestyle changes
Attitudes to work and
leisure
Consumerism
Levels of education

Technological
Government spending on
R&D
New discoveries/
technological developments
Speed of technology
transfer
Rates of obsolescence

PEST(EL) FRAMEWORK
Environmental
Environmental
protection laws
Waste disposal
Energy consumption
Re-cycling

Legal
Monopolies legislation
Competition law (in
USA: Anti-trust)
Employment law
Health and safety
Product safety

SWOT ANALYSIS:
Opportunities & Threats
O & T facing all firms in an industry sector
Some pointers
be brief, punchy, specific
think hard
group sub-points under main heading

Strong xyz means an opportunity to ....

DONT put possible strategies in O&T!

INDUSTRY ANALYSIS

INDUSTRY ATTRACTIVENESS

For any company - profitability

determines an industrys attractiveness

DETERMINANTS OF INDUSTRY
PROFITABILITY
Profits for a firm are determined by:
The value of products to customers (i.e. how much they
will pay)
Competitive intensity /rivalry
Bargaining power of producers relative to their:
Suppliers
Buyers (customers)

And the structure of the industry

INDUSTRY ATTRACTIVENESS:
DIFFERENT INDUSTRIES, DIFFERENT RETURNS
Median return on equity (%), 1999-2005
Household & Personal Products
Pharmaceuticals
Tobacco
Food Consumer Products
Securities
Diversified financials
Beverages
Mining & crude oil
Petroleum Refining
Medical Products & Equipment
Commercial Banks
15.5
Scientific & Photographic Equipt.
Apparel
Computer Software
Publishing, Printing
Health Care
Electronics, Electrical Equipment
Specialty Retailers
Computers, Office Equipment

Source: Grant p66

22.7
Gas & Electric Utilities
10.4
22.3
Food and Drug Stores
10.0
21.6
Motor Vehicles & Parts
9.8
19.6
Hotels, Casinos, Resorts
9.7
18.9
Railroads
9.0
18.3
Insurance: Life and Health
8.6
18.8
Packaging & Containers
8.6
17.8
Insurance: Property & Casualty 8.3
17.3
Building Materials, Glass
8.3
17.2
Metals
8.0
Food Production
7.2
15.0
Forest and Paper Products
6.6
14.4
Semiconductors &
13.9
Electronic Components
5.9
13.5
Telecommunications
4.6
13.1
Communications Equipment
1.2
13.0
Entertainment
0.2
13.0
Airlines
(22.0)
11.7

INDUSTRY ATTRACTIVENESS:
PROFITABILITY OF GLOBAL INDUSTRIES

% RETURN ON
INVESTED CAPITAL,
1963-2003

Viability means:
ROCE > Cost of capital

INDUSTRY ATTRACTIVENESS:
Some conclusions
The profitability of an industry is not random
It depends on influences on that industrys structure

Dominance of major players

Economies of scale & cost structures
Product differentiation & level of competition
Customer preferences & niche markets

Industry structure drives competitive behaviour &

.industry profitability

THE SPECTRUM OF INDUSTRY STRUCTURES

Perfect
Competition

Oligopoly

Duopoly

Monopoly

Concentration

Many firms

A few firms

Two firms

One firm

Entry and Exit

Barriers

No barriers

Product
Differentiation

Homogeneous
Product

Potential for product differentiation

Perfect
Information flow

Imperfect availability of information

Information

Significant barriers

High barriers

ACTIVITY
Identify one example of each:
- perfect competition
- oligopoly
- duopoly
- monopoly

PORTERS 5 FORCES:
DRIVERS OF INDUSTRY
PROFITABILITY

PORTERS FIVE FORCES OF COMPETITION:

DRIVERS OF INDUSTRY PROFITABILITY
SUPPLIERS

Bargaining power of suppliers

POTENTIAL
ENTRANTS
Threat of
new entrants

INDUSTRY
COMPETITORS
Competitive
Intensity
(rivalry)
Bargaining power of buyers
BUYERS

NOTE: Competitive
Intensity is determined
by the other 4 forces +
industry structure

POTENTIAL
SUBSTITUTES
Threat of
substitute
products

THE 5 FORCES
THREAT OF SUBSTITUTES
Competitive pressure depends on:
Price & performance characteristics of substitutes (petrol, diesel, hybrids)
Buyers propensity to substitute (e.g. train for car, plane for train)

THREAT OF NEW ENTRANTS

Barriers to entry:

Capital requirements (new aircraft manufacturers)

Economies of scale
Absolute cost advantage (access to low-cost raw materials)
Product differentiation (brand loyalty built up over decades)
Access to channels of distribution (major distributors taken)
Legal and regulatory barriers (govt licences, patents)
Retaliation (power of key players to lower prices)

THE 5 FORCES
BARGAINING POWER OF SUPPLIERS
Key issues:
Ease of switching between suppliers
Relative bargaining power

Large customers have b/power over small suppliers

Suppliers form cartels to sustain margins (OPEC)

Suppliers of high tech, high value added, sophisticated

components may have high b/power (F1 sequential
gearboxes, touch technology for SMART phones)

THE 5 FORCES
BARGAINING POWER OF BUYERS (CUSTOMERS)
Buyers price sensitivity
Commodity products: buyer can switch
Differentiated product /service: less likely to switch
Price rivalry on end-products (cars) implies buyer price
sensitivity on components (tyres, seats, windscreens)

Relative bargaining power

Size & number of buyers versus suppliers (buyer concentration
lowers margins of suppliers: supermarkets)
Potential for vertical integration (bringing in-house)

THE 5 FORCES:
COMPETITIVE INTENSITY
Concentration of rivals
4-firm concentration ratio (market share of 4 key players) indicates
market control
Dominance of a few large rivals implies non-price rivalry (Cocacola vs Pepsi)

Diversity of competitors
Similar companies implies cosy rivalry (US car market in 1970s)
Diverse companies, intense rivalry (EU car market)

Product differentiation
Products largely indistiguishable(commodities) means price rivalry
If differentiated, price rivalry weak (BMW)

CRITIQUE ...
Porters framework assumes:

Industry structure drives competitive behaviour

Industry structure is (fairly) stable

But, competition also changes industry structure:

Schumpeterian Competition A perennial gale of creative

destruction market leaders overthrown by innovation
Hyper-competition Intense and rapid competition moves
continuously creating new competitive advantages and destroying
existing competitive advantages

Implications:

With 5 forces framework

INDUSTRY STRUCTURE

COMPETITIVE
STRATEGY

Under dynamic competition

COMPETITIVE STRATEGY

2013 Robert M. Grant

www.contemporarystrategyanaly

INDUSTRY STRUCTURE

23

COMPETITIVE ADVANTAGE

Doing something that the customer values

but doing it better than competitors

COMPETITIVE ADVANTAGE:
IDENTIFYING KEY SUCCESS FACTORS
We look at sources of competitive advantagethe
key success factors
What is the basis of competition? (BoC)
what is in the mind of customers in choosing
between you & your competitors?
Key Success factors (KSFs):

given the BoC, what do you (and your

competitors) have to do to be successful?

also called Critical Success Factors (CSF)

BUILDING COMPETITIVE ADVANTAGE:

KEY SUCCESS FACTORS
resources, skills and capabilities of companies
(in an industry) ...that are essential to deliver
success. profitably
applies to all competitors
To identify KSFs, look at:
basis of competition
competitive environment