Sample Assignment - Strategic Management Assignment

BABS‐STRATEGIC MANAGEMENT

The external environmental change is one of the major influences upon the performance of any organisation and at the same time it is largely beyond the control of management. In fact, for some companies, it is so turbulent that sometimes it appears to be hostile to their smooth operation.

The future can not be foreseen. So the analysis of the external environment can never be complete because there will be usual irresistible changes. The purpose of external analysis is to understand as much as possible about the external business environment, how it is changing and the forces driving the change. The analysis is likely to take place at three levels‐ changes in macro environment, changes in the industry and the changes in the operating environment. A variety of widely used analytical tools and frameworks are available to attempt an assessment of the external environment. In practice, some of these tools will prove to be powerful in generating insights for a successful business strategy formulation. However, the choice of appropriate tools depends on the requirements of the context and data available.

EXECUTIVE SUMMARY

A

sound knowledge about the forthcoming future, gathered from an extensive analysis of the external environment will assist the management formulating strategy to grab new strategic opportunities and defend upcoming threats leading the organisation to its desired success.

A

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Acknowledgement

I would like to express my gratitude and thanks to our faculty Dr. Rajendra Kumar for his constant support and helping hand in preparing this coursework.

Special thanks to our course administrator Mr. Greg Vincent for providing us with all the academic guidelines.

Thanks to the IT Manager, LSC, London, for his helping hand in internet surfing and printing. Thanks to the library in charge and all other staffs for their guidance. Finally, Thanks to my fellow classmates as well for their inseparable support.

Hasan Riaz

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CONTENTS Brief Description of the Topic

iv

Key Factors to Be Discussed

iv

Approaches & Sources of Data

v

Learning Aids

v

Introduction

1

Identical Layers in Business Environment

2

The External Environment

3

Significance of External Environmental Analysis in Successful Business Operation

4

Levels of External Environmental Analysis

4

Suitable Analytical Tools & Frameworks to Support Different Levels of External Environmental Analysis

5

Tools for Analysing the Remote Environment

6

Significance of Analysing the Remote Environment

11

Tools for Analysing the Company Specific Industry

15

Significance of Analysing the Industry Environment

20

Tools for Analysing the Operating Environment

22

Significance of Analysing the Operating Environment

29

Analysing the Overall External Environment

35

Other External Considerations in Strategy Development

38

Observations & Recommendations

40

Conclusion

41

Appendices

42

List of References

48

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CO

BRIEF DESCRIPTION OF THE TOPIC

A model of the elements of the strategic management by Johnson, Scholes and Whittington (2005) (See Appendix1) suggest that there are three elements under strategic management i.e. strategic position (strategic analysis), strategic choice and strategy into action (strategic NTENTS implementation). Each of these elements is also three important phases of strategic planning. The topic of the given coursework is based on the ‘Strategic Position (Strategic Analysis)’ phase of strategic planning process. Under the strategic analysis there are three key factors: (a) The environment within and surrounding the organization (b) Strategic Resources, competencies and capabilities (c) Expectations and Purposes of the organisation. The coursework requires detailed study of the significance of external environmental analysis, identification of suitable tools and frameworks for environmental analysis, observation of key external issues affecting the success of organisations and examine the factors unavoidable in strategy development process.

KEY FACTORS TO BE DISCUSSED ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ ƒ

This paper attempts discuss the following issues: Three Layers in Business Environment The External Environment and its Constituents Importance of External Analysis in Successful Business Operation Levels of External Environmental Analysis Suitable Analytical Tools & Frameworks to Support Different Levels of External Environmental Analysis Tools for Analysing the Remote Environment Significance of Analysing the Remote Environment Tools for Analysing the Company Specific Industry Significance of Analysing the Industry Environment Tools for Analysing the Operating Environment Significance of Analysing the Operating Environment Analysing the Overall External Environment Other External Considerations in Strategy Development

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APPROACHES & SOURCES OF DATA

Information was obtained from a variety of sources. These sources include: textbook information, academic journals, magazines, newspapers, corporate articles, previous research papers, electronic booklets, private and public websites, TV programmes, etc. Some potential elements of external environment were discussed. Thus identifying the suitable tools and frameworks for external environmental analysis, the discussion proceeded. I had to use some critic statement in favour and against of some corporate entities for illustration purpose only (where appropriate) for which I anticipate apology under any inconvenience. Though necessary attempts were taken to avoid error & plagiarism, there might be some inconvenience for which I anticipate apology.

LEARNING AIDS • • • • • • • • • • • • •

Understanding the importance of different layers in environment; Learning about the factors that constitute external environment; Gathering knowledge about successful corporate strategies; Importance of different levels in external business environment and how does they affect decision making; Exploring the available tools and frameworks for external analysis; Understand which tools and frameworks can be utilized in various situations; Understanding the role of government and economy in business; Learning about socio‐cultural and technological impact on business; Gather knowledge about industry competitive factors; Learning about skills and capabilities required to compete in an industry; Learning about how to identify competitor’s weakness and grab opportunity; Understanding the factors that affect the relationship between organisations and its customers; Understanding how to grab opportunities and defend threats;

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Introduction The

purpose

of

this

coursework

is

to

examine

the

multidimensional impact of forces external to business environment and demonstrate their importance as an analytical issue while formulating an effective organisational strategy.

This brief report defines the layers of business environment and looks at the constituents of external environment. Different levels of the external business environment are identified followed by a widespread study of suitable tools and frameworks for environmental analysis. The importance of each level in external environment is described with a relevant reference to the corporate affairs.

Finally, the pathway to identifying opportunities and threats in the external environment, exploiting strategic gap in the industry or market and postulating possible future scenarios is advised. Some other external considerations in strategy development are also explained. HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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Identical Layers in Business Environment According to Johnson, Scholes and Whittington (2005), Hitt (2002) and Marketing Teacher (2000) there are three identical layers in the business environment (See Appendix2): The Macro Environment

The Micro Environment

Infra Firm Environment

Figure: Layers in Business Environment by Michael A. Hitt (2002) Source: Hitt, Michael A. (2002), Creating Value, Blackwell Publishing, Canada

ƒ The Macro Environment: This consists of political structure and ideology of the host government, economic dimensions of the market, socio‐ cultural environment, demographic extent, technological infrastructure, legislative boundaries, national objectives, ecological factors and the natural environment. ƒ The Micro Environment: This layer basically consists of the industry or sector, the market (buyers or customers) and the competitors. However, this also includes suppliers, intermediaries, distributors, retailers, financial institutions, advertisers, tangible and intangible service providers, etc. ƒ Infra Firm Environment: Infra firm consists of different departments within the organisation, their activities related to the creation and delivery of product or services, resources, competencies and capabilities of the HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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firm. Men, money, machinery and materials are generally attributed as components of this environment.

The External Environment The external environment comprises of macro and micro environment. Every business is affected by the actions of other players within the external environment who does not hold a direct control on business but plays vital role in formulating a successful business strategy (Scott, 2005). Organisations are influenced by forces in these two layers of business environment. All businesses run in a changing world. However, the changes in external environment are beyond the control of management and are subject to forces of macro and micro environmental forces (Parrish, 2003). Changes in these environments may affect the company or even the total industry in a large scale (Scholte J. A., 2005). The key drivers of change in the environment differ from sector to sector, country to country. Therefore they cause different impact on one organization to another (Johnson, Scholes and Whittington, 2005).

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Significance of External Environmental Analysis in Successful Business Operation Jack Welch, Former CEO of General Electric Company, believes, “When the rate of Change inside the company is exceeded by the rate of change outside the company, the end is near” (Wilson and Gilligan, 2005). An effective business strategy formulation requires an extensive study of external environment of the enterprise. All corporate strategists regard the environment as uncertain (Lynch, 2003). The development of any universal strategy applicable to all ventures or industries is impossible though specified framework can be devised followed by a widespread study, reaction and response to the changes in external environments (Sadlar, 2002). The purpose of the external analysis is to identify what may affect the future of the enterprise as a whole from outside itself (Macmillan and Tampoe, 2000).

Levels of External Environmental Analysis A theory of Lynch (2003) suggests that ‘Although there are no absolute rules, it is usually the case that the customer comes first, the immediate competition second and the broader environment surrounding the organisation then follows behind this. Macmillan and Tampoe (2000), Johnson, Scholes and Whittington (2005) and Global Management Consulting (2007) consider external analysis at three levels: ƒ The Remote Environment: General changes in macro‐environment; ƒ Company Specific Industry: Changes within the industry; ƒ The Operating Environment: Activities of immediate competitors, market expectations, actions of strategic groups and other specific changes within the firm’s immediate external environment.

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Suitable Analytical Tools & Frameworks to Support Differe nt Levels of External Environmental Analysis The range of analytical tools, techniques and frameworks available to support external analysis is very large. The choice of appropriate tools depends on the requirements of the context and the data available (Raisel and Friga,2001). It may also depend to some extent on preferences for the schools of strategic thought (Macmillan and Tampoe, 2000). Each of the schools of thought suggests a different set of questions for strategic analysis to answer. Some of the most commonly used tools for analysing the external environment are: ƒ For Analysing the Macro Environment: PESTEL Analysis, Porter’s Diamond, The Four Links Model, E‐S‐P Paradigm, etc. ƒ For Analysing the Company Specific Industry: Porter’s Five Forces, Industry Life Stage Analysis, Porter’s Model of Industry/ Market Evolution, Industry Success Factors Analysis, etc. ƒ For Analysing the Operating Environment: Competitor Analysis, General Electric’s Multifactor Portfolio, BCG Matrix, Positioning Analysis, Market Intelligence Model, Market Commitment Model, etc. ƒ To Evaluate the Overall External Environment: Opportunity & Threat Analysis, Strategic Gap Analysis, Scenario Planning Model, etc. Strategic tools and frameworks should be effective at answering some particular types of questions (Global Management Consulting, 2007): ƒ ƒ ƒ ƒ ƒ ƒ ƒ

Is there a market for our products? How many competitors will we face? Who are they? Is this industry growing? Declining? Which are the most important industry trends? Best practices? Which are the key strategic factors for success in this industry? Is the economic and political system stable? Who are our customers? Where are they? What do they need?

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Tools for Analysing the Remote Environment ƒ PESTEL Analysis – Analysing the Macro Environment The PESTEL Framework is a commonly used and immensely valuable technique for analysing the external environment (Gregory, 2000). It is particularly important to look at the future impact of environmental factors, which may be different from their past impact (Lynch, 2003). It categorises macro environmental influences into six major types and covers just about everything that can affect the organisation from outside. 1. Political Factors

° ° ° ° ° ° ° °

International Trade Regulations Government Stability Foreign Trade Regulations Social Welfare Policies Taxation Policy Pressure Groups (E.G. Chamber Of Commerce) Special Interest Groups (E.G. Anti Smoking Society) Control Over Managerial & Marketing Autonomy

2. Economic Factors

° ° ° ° ° ° ° ° ° ° ° ° ° ° °

Economic Growth (GDP) Savings and Investment Availability GNP Trends Interest Rates Inflation Per Capita Income Business Cycles Disposable Income Taxation Exchange Rates Labor Cost Employment Levels Monetary Policies Growth Rates of Specific Industry Government Spending,

3. Social & Demographic Factors

° ° ° ° ° ° ° ° °

Population Demographics Income Distribution Social Mobility Lifestyle Changes Attitude Towards Work and Leisure Consumerism Societal Values Norms Customs

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° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° °

Education Fashion & Hypes Living Standards Health Consciousness Welfare & Safety Needs Leisure Attitudes Technological Skills Gender Roles History Institutional Network Social Organization & Structure Levels of Education Population Growth Population Age Mix Ethnic & Racial Makeup Educational Groups Household Patterns Geographical Shifts in Population

4. Technological

° ° ° ° ° ° ° ° ° °

Government Spending on Research Government And Industry Focus on Technological Effort Rates of Obsolence Industry Focuses on Technological Efforts New Inventions & Developments Access to Internet Rate of Technology Transfer Changes in IT Access to Cell Phones Adoption of New Technology.

5. Environmental

° ° ° ° ° °

Environmental Protection Laws Waste Disposal Energy Cost Availability Of Raw Materials Cost of Energy Anti Population Pressures & Green Movement

6. Legal

° ° ° ° ° ° ° ° °

Competition Law Employment Law Health and Safety Product Safety Regulations & Standards Company Law Import Barrier Consumer Protection Labor Law Taxation Law

Figure: A Combination of PESTEL Frameworks by Brooksbank (2002), Johnson, Scholes and Whittington (2005) and Kotler and Armstrong (1996) Source: (1) Brooksbank, R. (2002), Hot Marketing, McGraw‐Hill Professional, USA (2) Johnson, G., and Scholes K. and Whittington R. (2005). Exploring Corporate Strategy, 7th edn, Financial Times Prentice Hall, London. (3) Kotler, P. and Armstrong, G. (1996), Principles of Marketing, 7th edn, Prentice Hall, N.J., U.S.A. HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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ƒ Porter’s Diamond – The Determination of National Advantage Porter’s Diamond is another framework developed by Michael Porter to understand the impact of macro environmental factors on the competitive environment (Johnson, Scholes and Whittington, 2005). Michael Porter (1998) suggests that there are inherent reasons why some nations are more competitive than others and why some industries within nations are more competitive than others.

Figure: Porter’s Diamond

Source: Porter, Michael E. (1998), On Competition,

Harvard Business School Press , USA

For Example, Korea has a national advantage in Information and Telecommunication Technology. Current IT landscape in Korea indicated various factors that can enhance Korea's competitive advantages. (National IT Strengths & Weaknesses, 2002) The briefanalysis below is based on the Porter’s Diamond Framework for determining national advantage.

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ƒ

Figure: Korea’s national advantage in Information and Telecommunication Technology source: National IT Strengths & Weaknesses (2002) [online] (cited 13 December, 2007 at 3:46 pm)

ƒ The Four Links Model – Analysing Co‐operation Lynch (2003) claims, ‘As well as competing with rivals, most organisations also co‐operate with others, e.g. through informal supply relationships or through formal and legally binding joint ventures. Until recently, such links were rarely analysed in strategy development’. The four links model analyse the informal co‐operative links and networks, formal co‐operative links, complementors, government links and networks. The objective of such an analysis is to establish the strength and nature of the co‐operation that exists between the organisation and its environment. Informal co‐operative links and networks

Government links and networks

The Organisation

Complementors

Formal co‐operative links

Figure: The Four Links Model source: Lynch, R. (2003). Corporate Strategy, 3rd edn, Financial Times Prentice Hall, England. HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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ƒ E‐S‐P Paradigm – Analysing the Role of Government Koopman and Montias (1971) recommended a diagram named E‐S‐P Paradigm which analyse the environment of the nation, its system of government and its policies. Government can stimulate national economies, encourage new research projects, impose new taxes and introduce many other initiatives that affect the organisation and its ability to develop corporate strategy; in order to analyse the effect E‐S‐P diagram can be used. (Lynch, 2003) COMPONENTS ° ° °

Human Resources Natural Resources Stage of Economic Development

°

Culture and History

°

Capitalist: laissez‐ faire Socialist: dirigiste Mixed

° °

OUTCOMES °

Environment (E) Background Characteristics of a country

°

°

Systems (S) The country’s system of government

° ° °

° ° °

Macroeconomic Microeconomic Education, Health, Social

°

FDI and Competition

°

Policies (P) The main Government Policies

° °

Level and structure of output: agriculture, industry, service Attitudes to work, wealth, etc.

Structure of decision taking Role of free market in allocating resources Desire for international commerce Nationalisation Policy

Extent and type of government intervention Controls exerted Performance expected from industry

Figure: E‐S‐P Paradigm by Koopman and Montias (1971)

Source: Adapted from Koopman, K and Montias, J.M. (1971) ‘On the description and comparison of economic systems’ in Lynch, R. (2003). Corporate Strategy, 3rd edn, Financial Times Prentice Hall, England.

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Significance of Analysing the Remote Environment ƒ To Understand Political Structure & Ideology: A firm’s functional decisions need to be altered following the developments in political and legal environment of the country. For example, the Chinese governments decision to shift new investments away from overheated economic areas specially Hong Kong and to limit foreign participation in the stock market during 1997 affected the businesses those had a huge investment in China. (Graham, 1997). ƒ To Learn about Economic Dimensions of Market: Economic factors provide stratigists with the knowledge of overall economic scenario of the market and formulate their pricing strategy, consumer market segmentation, take financial decisions and forecasting revenue. For example, the UK government’s recent proposal (BBC ONE News, 2007, November 25) of increasing capital gain tax from current 10% to 18% will affect the small business and entrepreneurs if the new regime is taken into action. According to a report (Duncan, 2007) the rising mortgages and falling house prices in UK caused fall in number of people shopping for Christmas in the capital and sales edged forward at their slowest rate more than previous years. It had prompted chains such as Debenhams, Oasis and Top‐shop to cut prices. Many other stores were sending out thousands of online vouchers, with discounts up to 60% to win back shoppers. ƒ Assessing the Financial Policy of the Capital Market: In 1999 and the early part of 2000 the world stock markets were driven higher and higher with the investors love‐affair with the technology stocks. But, by early 2003 the stock market lost some 50 % of their value and technology stocks lost far more. The internet and telecommunications companies were the biggest HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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victim many of which lost 90% of their market valuation which forced them scale down their development plans and many smaller companies went bankrupt (Johnson, Scholes and Whittington, 2005) ƒ Gathering Knowledge about Socio‐cultural Background: Changes in people’s tastes and preferences can influence purchasing power towards certain goods and services. A survey of the Consumer Price Index has looked at changes in peoples tastes over the last 30 years. Shopping baskets today contains more fat‐free foods than in 1960s when housewives were filling their baskets with fatty butter, sponge cakes and high‐fat milk. (The Mirror, 2001) ƒ Analysing Pace of Change in Technological Infrastructure: Technology is the foundation of today’s fastest growing companies providing growth in every major industrialized nation. (Couillard, 2006) Companies continue to turn towards technology as they seek a competitive edge by becoming more flexible and efficient. The role of technology is quite visible in many service organisations where machines and technology have changed the nature of work. A relevant example can be the introduction of Automatic Teller Machines (ATMs) has replaced low skilled jobs and placed more emphasis on high skilled jobs. (Khosrowpour, 1994) ƒ To Consider the Legislative Boundaries & National Objectives: Some legislative boundaries and the national economic goal affect the operation of business. For example, the legal restriction on smoking in the public places caused drop of sales of tobacco in UK (Financial Times, 2007). ƒ To Study the Demographic Environment: ‘People make up markets’. So, a potential marketer should look at the following demographic factors to be successful in identifying needs and wants and satisfy them. These variables are population growth, population age mix, ethnic & racial makeup, educational groups, household patterns, geographical shifts in population, HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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etc. For example, McDonald’s use age and life‐cycle segmentation strategy to target children, teen, adult and seniors with different ads and media. Its ads for teens feature dance‐beat music, adventure and fast‐ paced cutting from scene to scene; ads for senior are softer and more sentimental (Kotler and Armstrong, 1996). ƒ

Identifying the Influences of Major Regulators: Organisations must have strategy to encounter a lot of regulatory agencies and commissions set up to enforce trade policies and regulations like trade commission, financial regulatory agencies, Environmental Protection Agency, Consumer Affairs, etc. For instance, TESCO, Britain’s biggest supermarket, sold alcohol below cost price all the time. On the month of November, TESCO, Sainsbury’s and ASDA offered lager at just 22p a can. Because of the health hazard of alcohol consumption, the deep discounting promotions strategy of these supermarkets were threatened by the British health minister Ben Bradshaw who warned of imposing law to stop the supermarkets selling alcohol below cost price (Blunden, 2007).

ƒ Understanding the Activities of Lobby Groups and their Impacts: The activities of lobby groups are able to influence the values of customers and thus change the ground rules within which an enterprise operates. For instance, Following a declaration of The Global Islamic Community Forum on February 12, 2007 that “McDonalds French fries are ‘HARAM’ (Prohibited by Islam) as they are fried in pig’s lard before they are brought to McDonalds”, many Muslim customers of McDonalds in USA began to avoid McDonalds fries. However, after some months McDonalds could ascertain that there was no involvement of pig’s lard in their food preparation process. (GICM, 2007). Since the loyalty of Muslim Customers’ towards French fries once lost, it is difficult for McDonalds in USA to regain the lost popularity among Muslims. HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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ƒ Environmental and R&D Policy of the Host Government & Pressure Groups: Host government and environmental pressure groups sometimes become threat to a company or industry concerning the damage of environment caused by the factory or R&D. For instance, Ship breaking industry in India and Bangladesh had undergone a red alert by Greenpeace in 2005 for emission of deadly chemicals or due to the common explosions caused by the torching of residual fuels from uncleaned vessels. (Greenpeace, 2005) ƒ Seeking the Environmental Resources and Support Required by the Enterprise: Every company should evaluate the availability and cost of natural resources required by it before starting a venture in any specific geographic location. ƒ Analyzing Home Demand Conditions: Home demand conditions provide the basis upon which the competitive advantages of an organisation are figured. For example, the Japanese customers’ high expectations of electrical and electronic equipment have provided an impetus for those industries in Japan leading to global dominance of those sectors. (Johnson, Scholes and Whittington, 2005) ƒ Labour Policy and Industrial Relations: Governments set the framework for labor relations through legislation and regulation. Usually, employment law would cover issues such as minimum wages and wrongful dismissal. For example, in UK the government upholds labour rights through Industrial Relations Act 1971. ƒ To Identify Related and Supporting Industries: The presence of related and supporting industries is advantegeous for the growth of a particular industry (Inkpen and Ramaswamy, 2006). For example, In Germany, the chemical industry, synthetic dyes industry, textile industry and textile

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machinery industry underpin them, benefit from one another. (Murmann, 2003)

Tools for Analysing the Company Specific Industry ƒ Porter’s Five Forces – Analysing the Sources of Competition A number of years ago, the renowned business strategist and one of the world’s best academic’s Michael E. Porter identified five competitive forces that influence planning strategies in a model called ‘Porter’s Five Forces’ (Kurtz and Boone, 2005). ‘Porter’s framework remains useful tool for getting an analytical grasp on the state of competition and the underlying economics within an industry. It also encourages the strategists to look outside the small circle of current competing rivals to other actors and influences that determine potential profitability and growth (Harvard Business School, 2005)

Figure: Porter’s Five Forces by Michael E. Porter (Illustration) Source:http://www.usdoj.gov/atr/public/hearings/single_firm/docs/219395_8.gif HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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ƒ Industry Life Cycle Analysis– Life Stage Analysis of an Industry Macmillan and Tampoe (2000) claims ‘Analysis of life stages may give useful insights in those industries where there is a discernible and predictable life cycle pattern. Life cycle may form a useful basis for analysis if, for instance, competition is based on the introduction of new products or if an industry as a whole is moving from maturity towards decline.’ An industry undergoes the following phases of life‐cycle (Wells, 1998) ° Development – Birth of the industry; ° Growth – The rate of sales growth is high all over the industry; ° Stakeout – Growth rate slows and firms fall under competitive pressure; ° Maturity – Minor growth but there are plenty of profitable opportunities, so firms battle over share of a relative stable customer base; ° Saturation – Growth and Sales come from only demographic changes. Companies are well established; ° Decline – Demand drops off. Cost control is critical. There are no real attempts to make changes; ° Extinction – Most companies have left the industry. Some sales still remain.

Figure: Industry Life Cycle Source: http://www.enotes.com/small‐business‐ encyclopedia/industry‐life‐cycle HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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Competitive

Life Stage Development

Position Dominant

o

Grow Fast

Growth o o

Grow fast Attain Cost Leadership

o o o

Strong

o o

Differentiate Grow Fast

o o o

Satisfactory

o o o

Differentiate Focus Grow Fast

o o o

Weak

o o

Focus Grow with industry

o

Very Weak

o o

Find niche Grow with industry

o o o o

Grow Fast Catch up Differentiate

Differentiate Focus Grow with industry Harvest, catchup Find and hold niche Turnaround Turnaround Consolidate

o o o

Maturity

Decline/Aging

Defend position Attain cost leadership Review

o

Reduce Cost Differentiate Grow with industry

o

o o

Defend position Renew Grow with industry

o

Find and hold niche Grow with industry Harvest profit

o o

Consolidate Cut costs

o o o o

Harvest profit Find niche Grow with industry Harvest profit Turnaround Find niche Consolidate

o

Divest

o o

Withdraw Divest

o

Withdraw

o o o

o

Figure: The A.D. Little Competitive Position/Industry Maturity Index Source: Macmillan, H., and Tampoe, M. (2000). Strategic Management, Oxford University Press, New York.

ƒ Porter’s Model of Industry / Market Evolution – Identifying Required Strategies at Different Stages of Evolution of an Industry Michael Porter suggests three main stages in the evolution of an industry market (Lancaster, Massingham and Ashford, 2002): ° Emerging Industry ° Transition to Maturity ° Decline

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According to Porter each of these stages has its own particular characteristics, some of the more important of which are listed for each stage: ° Emerging Industry a. Uncertainity among buyers over: ‐ Product Performance ‐ Potential Application ‐ Likelihood of obsolence b. Uncertainity among buyers over: ‐ Customer needs ‐ Demand Levels ‐ Technological Developments ° Transition to Maturity a. b. c. d. e.

Falling industry profits Slow‐down in growth Customers knowledgeable about products and competitive offerings Less product innovation Competition in non‐product aspects

° Decline a. Competition from substitutes b. Changing customer needs c. Demographic and other macro‐environmental forces and factors affecting markets

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Porter then uses the characteristics of each stage to suggest the following strategies as being appropriate to each: Strategic Position of Organisation

Stage of Industry Development

Growth

Maturity

Leader

‐ Keep ahead of the field

‐ Cost Leadership ‐ Raise Barriers ‐ Deter Competitors

Follower

‐ Imitation at lower cost ‐ joint ventures

‐ Differentiation ‐ Focus

Decline ‐ Refine Scope ‐ Direct Peripherals ‐ Encourage Departures ‐ Differentiation ‐ New opportunities

Figure: Industry Life Cycle and Strategic Positioning Source: Lancaster, G., Massingham L.,and Ashford R. (2002) Essentials of Marketing, 4th edn, McGraw‐Hill, Berkshire. ƒ Industry Success factors Analysis – Identifying the Key Factors for Success in the Industry Key factors for success (KFS) are those resources, skills and attributes of the organisation in the industry that are essential to deliver success in the market place (Lynch, 2003). When undertaking an strategic analysis of external environment, the identification of KFS for an industry may provide a useful starting pont. For example, in the steel industry ‘labour cost’ is a important factor whereas in cosmetics and perfume industry it might be a less important factor than other areas. Therefore, ‘low labour cost’ would be key a KSF for steel industry.

So, the steel KSF in the industry would require the following

environmental analysis (Lynch, 2003): ° General wage level in the country; ° Government Regulations and Attitudes to worker redundancy, because high wage cost could be reduced by sacking labours ° Trade Union Strength HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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Significance of Analysing the Industry Environment ƒ To Forecast New Entrants in the Industry and Create Barriers: When the barriers to entry are low and the demand is high, the industry should expect many new entrants (Alkhafaji, 2003) For example, Philips has got a huge market share in all over the world and because of it mass production it can achieve economies of scale which creates barrier for other companies to enter in the lighting industry (Electro Pages, 2007). ƒ

To Evaluate Substitutes from Different Industry: Products can not only be substitutes, but complements as well. For example, the introduction of multimedia cell phoned had massively replaced the demand for Mp3 players. (Christensen and Maskell, 2003)

ƒ Analyzing the Rate of Industry Growth: If a firm maintains a growth rate lower than the industry growth rate, it loses its market share. For example, in a industry growing 5% a year, a firm starting with a 10% market share, would need to raise its market to 13% share over a five year period to maintain a 10% growth rate.( McDonald, 1979) ƒ Understanding the Impact of Brand Image to cope up with Buyers’ Bargaining Power: In a highly competitive clothing industry ‘The House of Gucci’, better known as simply ‘Gucci’ is an iconic fashion and leather goods label based at Florence in Italy. with a luxury branding strategy ‘Gucci’ brand is considered one of the most famous, prestigious, and easily recognizable fashion brands in the world (Adamson, 2007) ƒ Identify the Stage of Industry Life Cycle: Most products, services and the industries supplying them have a life cycle from birth, through growth, then to maturity and eventual decline (Macmillan and Tampoe, 2000). A simple example of these dynamics comes from the “typewriter” industry (See Appendix 7). The advent of the manual typewriter was a true HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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breakthrough. Then came IBM with a gigantic innovation strategy from outside the industry displacing the manual technology and creating a new ‘electronic typewriter’ industry. The word processor followed, driving IBM’s business into obsolescence. And then of course the computer, Microsoft’s Word and desktop printing. (Kalpan, 2007) ƒ Availability of Suppliers and their Bargaining Power: Sometimes companies from different industry pose threat to the enterprise. For example, steel is one of the secondary key inputs in the oil industry. In terms of purchasing steel from the available suppliers, Venture Production, one of the North Sea oil producers competes not only with other regions in the oil industry, they have to compete with Toyota, the Chinese, the aviation industry and the shipbuilding industry. Possible steel crisis at the time of peak activity would severely dent the project timetables and balance sheets of the sector. (Akilade, 2007 ) ƒ Evaluating Access to Distribution Channels: Access to low cost and well‐ organized distribution channels is one of the components of efficient market characteristics. A study showed that 42% of the joint ventures entered by the foreigners in US over 1971/83 period were for access to suitable marketing and distribution channels and close to 60% of US joint ventures in Japan were for marketing and distribution channels (Julian, 2005)

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Tools for Analysing the Operating E nvironment ƒ Competitor Analysis: Competitor Intelligence – A Framework for Analysing the Competitors Competitor Intelligence (Grant, 2005) involves the systemic collection and analysis of public information about rivals for informing decision making. It has three main purposes: ° To forecast competitors’ future strategies and decisions ° To predict competitors’ likely reactions to a firm’s strategic initiatives. ° To determine how competitors’ behavior can be influenced to make it more favourable.

STRATEGY How is the firm competing?

OBJECTIVES What are competitor’s current goals? Is performance meeting these goals? How are its goals likely to change?

ASSUMPTIONS

PREDICTIONS What strategy changes will the competitor initate? How will the competitor respond to our strategic initiatives?

What assumptions does the company hold about the industry and itself?

RESOURCES & CAPABILITIES What are the competitor’s key strength and weaknesses?

Figure: Competitor Intillegence ‐ A Framework for Competitor Analysis Source: Grant, Robert M. (2002), Contemporary Strategy Analysis, 6th edn, Blackwell Publishing, Boston, USA

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ƒ McKinsey / General Electric’s Multifactor Portfolio Matrix – Analysing and Evaluating Strategic Business Units Working in conjunction with McKinsey & Co., General Electric (GE), USA has developed this popular multiple factor screening method (Lancaster, Massingham and Ashford, 2002). In the GE matrix, strategic business units are evaluated using the two dimensions of market attractiveness and competitive position.

In order to use this technique, the strategic marketing planner must first determine the various factors contributing to market attractiveness and business position. GE’s Product / Market Attractiveness

GE’s

Factors:

Factors:

° Size

° Market Share

° Growth Rates

° Share Growth Rate

° Competitive Diversity and Structure

° Product Quality

° Historical Profit Margin

° Brand Reputation

° Technological Requirements

° Distribution Network

° Social Impacts

° Promotional Effectiveness

° Environmental Impacts

° Productive Capacity

° Legal Impacts

° Productive Efficiency

° Energy Requirements

° Unit Costs

Competitive

Position

° R&D Performance ° Managerial Personnel

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Compiling the GE matrix: The five steps in compiling the GE matrix are: 1. Identify strategic business units; 2. Determine factors contributing to market attractiveness; 3. Determine factors contributing to business position; 4. Establish ways of measuring market attractiveness and business position 5. Rank each strategic business unit according to whether it is high, medium or low on business strength and again on market attractiveness.

Market Attractiveness Score

HIGH

SBU 1 MEDIUM

SBU 3 LOW

SBU 2 STRONG

SBU 4 MEDIUM

WEAK

Competitive Position Score

Figure: Illustrative Presentation of a GE Matrix

Source: Lancaster, G., Massingham L.,and Ashford R. (2002) Essentials of Marketing, 4th edn, McGraw‐Hill, Berkshire.

ƒ Boston Consulting Group’s Growth Share Matrix –Assessing the Need for Financing in Diversified Corporations. ‘The usefulness of BCG Matrix lay in using it to plot the relative positions of business units within a portfolio. This made it possible to identify winners (market leaders) and to determine whether a balance existed between units in the four quadrants. The theory is that business units in fast growing industries need a constant input of capital to enable them to expand their capacity. Business units in slow growing industries on the other hand, are expected to generate a positive cash flow’ (Karlof, 1993). HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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BCG matrix is used to assess the need for financing in diversed corporations. The growth rate of a business unit’s market is plotted on one axis (usually the vertical one) against the business unit’s share of that market on the other axis. According to which cell of the matrix the products or businesses are calculated to lie, they are classified as being ‘Dogs’ , ‘Cash Cows’, ‘Problem Children/ Question Mark (?)’ or ‘Stars’:

Figure: BCG’s Growth Share Matrix Source: http://www.netmba.com/strategy/matrix/bcg/

° Business units with a large market share in growth sectors are called ‘Stars’ ° Units with a high market share in well established industries are called ‘Cash Cows’ ° Units with small market shares in fast‐growing industries are called ‘Question Marks (?)’ °

Units with a low market share in a stagnant market are called “Dogs”

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ƒ Positioning Analysis – Analysing the Product or Service Features and All Other Marketing Mix elements to Fit a Particular Segment A positioning analysis is done to identify how important is price, service, the technical features, etc are, to be successful in the market‐place (Karlof, 1993). The first is to try to identify the demands that the customer make on company’s product or services and ask customers to rank them in order of importance. Next, the customers are asked about the company’s performance to meet their demand. Companies need to identify their strong

Importance

points as well as competitors’ weak points.

D

A

C

B Performance

Figure: Four Quadrants of Positioning Analysis Source: Karlof, Bengt (1993), Key Business Concepts: A Concise Guide, Thomson Learning, London °

Quadrant A: Things which customers regard as important and which the company does well are plotted in this quadrant‐those characteristics that have established the company’s position and must be maintained.

°

Quadrant B: Things that the company is good at, but which are not so important are plotted in this quadrant. If the competition is just as good in quadrant A and the company is better on some point in quadrant B, that point may tip the scale in the customer’s choice of the product.

°

Quadrant C: Things which the company does not do well but which do not matter so much to customers.

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° Quadrant D: Things which the company does not do well but needs to be changed by product development and /or advertising are plotted in this quadrant. ƒ Market Intelligence Model– Analysing the Aggressive Strategies Undertaken by Competitors Market intelligence model helps to determine if any competitive new products are ready for launch, what extent a competitor can hold out against heavy discounting, if the competitor has the capability to roll out its products on a national launch (Paley, 1999). Assessing reliable market intelligence helps a company in the following ways: ° Developing defensive strategies to counter competitive moves, or ° Designing offensive ( a competitive attack ) strategies that move the company into new market segments by feeding information to product developers (R&D) or marketers about customer trends and problems. Market Intelligence

Clarification of Objectives

Choosing the Enemy

The Four Main Attack Strategies

Figure: Market Intelligence Model Source: Lynch, R. (2003). Corporate Strategy, 3rd edn, Financial Times Prentice Hall, England.

The Most Influential in Strategy Development, But Also the Most Uncertain

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ƒ Market Commitment Model– Analysing the Long‐term Commitment to the Market Place as a Competitive Advantage Market

Commitment

Model

developed

by

Michael

De

Kare

‐Silver focuses on competitive advantage in performance, service, emotional connection with customers, and price. It instructs companies on how to develop a long term vision along with the necessary commitment to see it through, and demonstrates the link between a company's ability to connect with its customers and its ability to anticipate new opportunities (Kare ‐Silver, 1998) At the centre of the model is the long term commitment to the marketplace in which the company competes. Surrounding the central commitment are the four ‘prime axes’ of competitive advantage: price, emotion, service hustle and performance (Macmillan and Tampoe, 2000)

Low Value Premium Shared

Service Hustle

Comprehensive Available Personalized Symbiotic

Price

Recognition Design Innovative Political

Commitment

Emotion

Performance

Functionality Realiability Speed Convenience

Figure: The Market Commitment Model source: Kare‐Silver, Michael De (1998), Strategy in Crisis, New York University Press, New York, USA

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Significance of Analysing the Ope rating Environme nt ƒ For Immediate Response to Changing Needs of Customers: An example of Toyota, the ever successful automaker in the world can illustrate this point. Toyota realized success lies not in managing inventory but in eliminating it. It started thinking about pulling inventory based on immediate customer demand rather than pushing inventory system that anticipates customer demand. So Toyota introduced Just‐in‐Time manufacturing system that gives its customers the right to choose what they want, how and when they want it. This revolutionary system enabled the company cutting its inventory cost at a nominal level and thus proving Toyota‐ an operational excellence as a strategic weapon (Liker, 2004). ƒ To Assess the Relative Competence of the Enterprise Against its Competitors: A theory of Kay (1993) claims that organisational success derives from competitive advantage of the firm which is based on distinctive capabilities most often derived from the unique character of a firm’s relationships with its suppliers, customers, or employees, and which is precisely identified and applied to the relevant market. For example, in 1981 Honda and Yamaha both had 60 models of motorbikes. Honda held a prestigious brand image for its superior quality. Suddenly, Yamaha declared that it would be the world’s largest motorcycle manufacturer. Honda counterattacked Yamaha using TQM as a competitive weapon. Over the next 18 months Honda introduced 118 models of motorbikes. On the other hand, Yamaha could mange only 37 changes to its productline. Thus, implementing a product development and benchmarking strategy Honda successfully captured two third of the market share (Zairi, 1998). ƒ Grab a Large Share of the Market with a First Mover Advantage: The idea of First Mover Strategy is that the initial occupant of a strategic HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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position or niche gains access to resources and capabilities that a follower has to work hard to gain. For example, the online auction site eBay was a first mover that has proven to be successful with a first mover strategy (Kurtz and Boone, 2005). Another example is First Direct motor insurance company that grabbed the opportunity of motor insurance industry and came out with successful market share. (Macmillan and Tampoe, 2000). ƒ Saving Time and Money as an Efficient First Follower: Late starters can avoid the mistakes of the leaders saving both time and money with efficient launch. (Macmillan and Tampoe, 2000). For example, Apple which had adopted the first mover strategy in personal computer failed terribly in its Newton handheld computer project. Firm such as Microsoft thrive on a second mover strategy, observing closely the innovations of first movers and then improving on them to gain advantage in the (Kurtz and Boone, 2005) ƒ Understanding the Leading‐edge Applications of Technology in the Enterprise as well as in the Industry: Successful Firms all over the world now invest a large amount in developing and implementing state of the art technologies in their enterprise. They move toward real‐time technological infrastructures so that they can adapt quickly to changing market conditions and serve their customers better. For example, Shell has officially launched the start of a new construction phase at the Shell Eastern Petrochemicals Complex (SEPC) which is the largest‐ever chemical investment in Singapore where the company has signed a deal with Yokogawa Electric Corp. to provide the company with automation systems for the project. By implementing a automation system Shell plans to reduce construction cost and time through implementing an effective process automation strategy. (Process Engineering, 2007)

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ƒ Adopting Best Practice Analysing the Competitors’ Strategy: In a highly competitive industry, the key characteristics of a company’s external environment are determined by the behavior of a few rivals possibly a single firm. For example, in household detergents, Unilever’s strategies are determined by the strategies of Procter & Gamble. The same happens to Coke and Pepsi. (Grant, 2002) ƒ Minimizing Product or Service Price Compared to the Market: Keeping price lower at beginning to acquire market share is a common but most effective strategy which is called penetration pricing strategy. After developing portable compact disk player in 1980 Sony estimated that the estimated cost per unit would be $500 per unit. But the company took a penetration pricing strategy to introduce the product to the market selling it at $250 per unit only. (Schlegelmilch, Keegan and Stoettinger, 2001) ƒ Choosing the Best Alternative to Reduce Operation Cost: A firm could be the lowest cost producer, yet not offer the lowest price product or services. That firm would enjoy profitability above the average in the industry. (Macmillan and Tampoe, 2000). For example, Implementing a cost leadership strategy, Ford Motor Company launched “Model‐T” in 1918 as a standardized car and become market leader in USA. (Adcock, Halborg and Ross, 2001) ƒ To Attract the Market through Unique Offering: The value added by the uniqueness of a product may allow the firm to charge a unique price for it (Quick MBA, 2007). For example, after the successful launch of “Model‐T”, General Motors Corporation counterattacked Ford in 1927 by introducing the new model “La Salle” which was completely different from “Model‐T”. There was a good response from the market and the company was able to

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beat Ford in sales with its successful differentiation strategy. (Adcock, Halborg and Ross, 2001) ƒ To Identify Quality & Cost Effective Suppliers: Good quality and cost effective supply can reduce production cost. A long term relationship with suppliers can help companies get raw materials at lower price and thus achieve cost leadership. A better negotiation and control over the suppliers can be formed. For example, Wal‐Mart can achieve cost efficiency because of its long term relationship with suppliers and control over them. (Wal‐Mart’s Cost Leadership Strategy, 2004) ƒ Analysing Life Cycle of a Product to Introduce Innovation at the Right Time: Life cycle can be a good foundation for analysis if competition is based on innovation of product.

A typical example can be Apple’s

innovation and design strategy that breaks the industry norm. Apple has stayed ahead in the MP3‐player market since October 2001 by giving customers more functionality and additional storage capacity at ever lower prices. That has made it tough for competitors like Sony, Dell and Creative to gain the holds. (D’Aveni, 2007) ƒ Understanding Customer Perceived Value of Products or Services: The ability of a company to provide superior value to its customers is regarded as a successful competitive strategy. By adding more value to products and services through either quality improvements or support services, companies should improve customer satisfaction in order to strengthen relationship and build customer loyalty (McIvor, 2005) ƒ Anticipating Future Needs: Companies should try to figure out why customers move from being happy to unhappy. They should try to predict future needs of customers and bring appropriate changes in products and services wherever needed. (Shiba and Walden, 2001)

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ƒ Outsourcing Business Functions to Secure Investment for Growth: Organisations can outsource some business functions at which they are not efficient at and invest more at which they are competent at. For example, in early 2004 BT and HP announced an agreement of strategic alliance as a part of their outsourcing strategy. As per the agreement BT would manage HP's voice and data networks and product support callcentres in Europe, Middle East and Africa (EMEA). On the other hand, HP would manage the desktops and helpdesk for all BT's employees as well as the company's mid‐range servers and those of its customers. The deal will run for seven years and the approximate revenue generated of $1.5bn is expected to be split 50/50. (The Register, 2004) ƒ Reviewing the Probable Strategies and Chances of Success of each Principal Competitor: In 2005, Beijing‐based computer maker Lenovo acquired IBM Corporation’s personal computer division including the brand name “Think” to form the third‐largest PC maker in the world. The motive behind this acquisition strategy was to compete with Dell and Hewlett‐Packard in US market (Musil, 2005) Companies like Dell and HP have to understand all its competitors’ strategies and defense them formulating new strategies. ƒ Postulating Possible Future Scenarios: An assessment of the likely effects of each possibilities within and outside the company should be done to identify the actions necessary to survive and succeed. (Macmillan and Tampoe, 2000) ƒ Targeting a Lucrative Market Segment: Procter & Gamble was among the first with secret, a brand specially formulated for a woman’s chemistry, packed and advertised to reinforce the female image (Kotler and Armstrong, 1996) . The company succeeded to market its brands targeted to women with a keen advertising strategy. HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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ƒ Effective Positioning of Product or Services: While positioning a product or service for a target market, it should be kept in mind that the feature of the product or service should be something important to the market. For example, Volkswagen followed a positioning by feature strategy in its advertising line which was “Think Small”. (Rogers, 2001) ƒ To Recognize the Rapid Changing Cycle of Competition: Johnson, Scholes and Whittington (2005) examined that some industries and sectors are characterized by rapid pace of change to the extent that competitive advantage on a particular basis will not last for any significant period of time. ƒ Exploit Opportunities to Increasing Market Share: An example of a joint venture strategy by Nestlé and General Mills in ready to eat cereal market in USA provides a good example of this. Kellogg (US) used to dominate the world’s ready to eat breakfast cereal market. In 1989 Nestlé (Switzerland) and General Mills (US) agreed a joint venture to attack the market. The objective of the new company were to achieve by the year 2000 global sales of US$1 billion and within this figure to take a 20% share of European market. In 1997, Kellogg was the market leader worth US$9 billion at retail selling prices. By 2002 the company could no longer survive as a market leader. Its biggest rival General Mills had finally taken over with a share of 33% while Kellogg’s share dropped to 30%. GM had achieved this important strategic breakthrough by a series of product launches in a 15‐ year period in a market that was growing around 2 percent p.a. (Lynch, 2003) ƒ Analyzing the Co‐Operative Environment: Lynch (2003) proposed that co‐ operation between the organisation and others in the environment may help achieve competitive advantage, produce lower cost, help deliver sustainable relationship with those outside the organization. HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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ƒ

Considering the Role of Customer Service & Quality: A study claims that future competitive advantage for UK retail banks will only be achieved through quality and customer service ‐ such that everyone who works for a bank will truly care about their customers and offer discretionary effort for the fulfillment of customer needs. (Shepherd and Mookherjee, 2007)

Analysing the Overall E xternal Environment After a good deal of environmental scanning using the tools and frameworks discussed above, the firm will be able to find out what important factors lay in the macro, industry and operating environment that affect the operation of the firm. Though external trends are not under the control of management (Stahl and Grigsby, 1997), a good collection of these external factors will guide the organisations to anticipate and respond to external trends by: ° locating opportunities and threats in the environment; ° identifying strategic gap in the environment; and ° Realize the possible future of the organisation and draw strategic plans for different scenarios;

ƒ Opportunity & Threats (OT) Analysis– Analysing the prospects and pressures in the environment An opportunity is an issue or condition in the external environment of the firm that may help it reach its goal. On the other hand, A threat is an issue or condition in the external environment that may prevent the firm from reaching its goals (Stahl and Grigsby, 1997). Factor under opportunity and threats can be outlined as follows (Kotler and Armstrong, 1996; Stapleton and Thomas, 1998; Johnson, Scholes and Whittington, 2005; Miller, 2000; Cateora and Graham, 2005) HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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Opportunities ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° °

High Demand of product or service Expansion to new geographic locations Down‐sizing of competitors Low interest rates New segment offer growth potential High Market Growth Government subsidiary Acquisition Takeover Joint venture or merger Technological Development Innovation Niche Markets Export / Import Strategic Alliances Product Development Partnerships New Efficient Distribution Network Seasonal Demand Diversification Development in e‐Commerce Loosening of regulations Removal of international trade barrier A market led by weak competitor Volumes production due to mass demand (Economies of scale) Change in Lifestyle Customized production capability Just in time delivery Cost efficiency

Threats ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° ° °

Expansions of competitors or substitutes New Competitor in home market Price war with competitors High Interest Rates Market Decline Alternative Products /Substitutes Criticisms by outsiders Government Barrier New Entrants Joint venture or merger of competitors New Marketing Campaign of Competitors Political Interruption New Legislation Competitor Intentions Economic Slowdown Substitute Technology Obstacles Supplier Shortage Lack of technological know‐how Foreign Economy Demand decrease Price Sensitive Market Intense Competition Competitor’s innovation Competitor’s brand image Competitor’s excess to superior distribution channels Higher Tax New Regulations Increased trade barriers Change in lifestyle

ƒ Strategic Gap Analysis– Analysing growth opportunity in a new or existing market or industry A strategic gap is an opportunity in the competitive environment that is not being fully exploited by the competitors (Johnson, Scholes and Whittington, 2005). For example, Apple launched the iPhone in June 2007, carving out a new ultra premium niche. (See Appendix 5) That was short‐lived though, as Apple quickly dropped the price by $200 in September (D’Aveni, 2007)

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By using the tools of external analysis managers can identify:

° opportunities In other strategic groups or strategic spaces: e.g. deregulation of market, advances in IT, etc.

° opportunities In the chain of buyers: Customers can be motivated by some other groups; e.g. students are influenced by their teachers, etc.

° Opportunities for offering complementary product or services: e.g. A book retailer can have consultation service for book recommendation for specific topic.

° opportunities New market segments: e.g. Air India attract customers by low price offering.

ƒ Scenario Planning– Assessment of possible future difficulties and formulate alternative strategy to overcome them By exposing line managers to alternative scenarios, organizations can reduce the risk of ignoring the small environmental changes that are the advance warning for major discontinuities (Ringland,2006). It is sometimes argued that it is so difficult to forecast the future that it is better not to attempt forecasting at all. The task is then to undertake an assessment of the likely effects of each scenario on the company and to identify the actions necessary to survive and succeed (Macmillan and Tampoe, 2000)

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Other External Development

Considerations

in

Strategy

ƒ Ansoff’s Product‐Market Growth Matrix

Figure: Ansoff’s Product‐Market Growth Matrix Source Inkpen, A. and Ramaswamy, K. (2006), Global Strategy: Creating and Sustaining Advantage Across Borders, Oxford University Press, USA

ƒ Porter’s Generic Strategies

Figure: Porter’s Generic Strategies Source: Porter, Michael E. (1998), On Competition, Harvard Business School Press , USA

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ƒ Stakeholder Analysis

Figure: Stakeholder Analysis Source: http://www.stsc.hill.af.mil/CrossTalk/2000/12/smith.html

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Observations & Recommendations It does require no more evidence that analysis of external forces is obligatory irrespective of any business within any industry. The aim of external analysis is to take into stock the current and conceivable future business situation in the strategy formulation process. The analysis should not be limited to examinations of past events and ways of thinking. It is essential to break out the current mould and examine alternative routes and ideas. The most useful tool recommendable for macro environmental analysis is the ‘PESTEL Framework’ that can provide an overall picture of the variety of forces at work around an organisation. This can give idea about the key drivers of change within the macro environment and provide basis for examining the future impact of environmental forces on both industries (or sectors) and organisations within industries. A functional tool advisable for understanding the competitive forces within the industry environment would be ‘Porter’s Five Forces Analysis’, this will involve an examination of buyers, suppliers, new entrants, substitutes and the competition in the industry. An effective model for specific competitive advantage of rival companies is the ‘Competitor Analysis: Competitor Intelligence’. Suggested tool for analysing product or service features to fit a particular segment of the market is ‘Positioning Analysis’. Although there is no absolute rules, it might be the case that the analysis of customer comes first, the immediate competition second, the industry third and the broader macro environment then follow behind this. The process of strategy formulation should consider some other factors like ‘Ansoff’s Product‐Market Growth Matrix’, ‘Porter’s Generic Strategies’, ‘Drivers of Globalisation’, ‘Stakeholder Analysis’ and ‘Distributor Analysis’. Thus provided with a profound knowledge of the external business environment, strategies for winning in the marketplace can be generated and adopted.

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Conclusion Revealing the above discussion, it is obvious that, no organisation can succeed in the battle of competition if they do not hold a clear awareness and understanding of the changing trends in external forces of business environment. Opportunities can only be identified and upcoming threats can only be defended with proper knowledge and acquaintance of the key factors that dominates the external environment. Organisations should develop strategies keeping the forthcoming opportunities, threats and other factors into consideration. Such strategies will enable an organisation to match fit between its capabilities and opportunities to serve the needs of customer better than its competitors. Therefore, the statement can certainly draw up, “Analysis of the external environment is crucial to the lasting success of organisations.”

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Appendices Appendix 1 Strategic Capability The Environment

The Strategic Position

Business Level Strategies

Corporate Level & International

Developmen, Directions & Methods

Expectations & Purposes

Strategic Choices

Organizing

Strategy into Action

Enabling

Managing Change

Figure: A Model of the elements of the strategic management by Johnson, Scholes and Whittington (2005) Source: Johnson, G. and Scholes K. and Whittington R. (2005). Exploring Corporate Strategy. 7th edn. Prentice Hall, England, P.16.

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Appendix 2

Figure: The Organisational Environment by Marketing Teacher (2000) Source: Marketing Teacher (2000) ‘The Organisational Environment’. [online] (cited 6 December, 2007 at 3:59 pm)

Appendix 3

Figure: The Business Environment by The Stairway Consultancy

Source: The Stairway Consultancy, ‘Developing Strategy’ [online] (cited 10 December, 2007 at4:30 pm) Available From < http://www.thestairway.co.uk/developing‐strategy.html>

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Appendix 4

Figure: Building Leadership Brands by Ulrich and Smallwood Source: Ulrich, D. and Smallwood, N. (2007), ‘Building a Leadership Brand’, Harvard Business Review, July – August, 2007

Appendix 5

Figure: Mapping the Cell Phone Market by D’Aveni, R.A. Source: D’Aveni, R.A. (2007), ‘Mapping Your Competitive Position’, Harvard Business Review, November, 2007 HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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Appendix 6

Figure: How Apple Set the Pace with iPod Source: D’Aveni, R.A. (2007), ‘Mapping Your Competitive Position’, Harvard Business Review, November, 2007

Appendix 7 Word Processor Electronic Typewriter Manual Typewriter

Microsoft Word & Desktop Printing

Figure: Replacement of Typewriter Industry by Modern Computer by Soren Kaplan Source: Kalpan S. (2007), ‘Innovation Lifecycles’, InnovationPoint, [online] (cited 10 December, 2007 at 3:59 pm) Available from

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Appendix 8

Figure: Porter’s Five Forces by Michael E. PorterSource: HASAN RIAZ LSC Student # 0673MSMS1007 UWIC Student # 07004470

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Appendix 9 How scenario planning can significantly reduce strategic risks and boost value in the innovation chain Source: Daum J.H. (2001), How scenario planning can significantly reduce strategic risks and boost value in the innovation chain, Juergen Daum, 08 Sep, 2001 [online] (cited 15 December, 2007) Available from

Industrial value chain processes no longer dominate value creation in the developed economies. Today it is innovation, it is seeking new ways of meeting market demands, that is yielding the highest return on investment ‐ much more than improving incrementally a company’s existing production line. And that means that companies in nearly all industries have to invest into systematic innovation and related intangible assets like R&D. The problem with these investments is, that they generate a financial return only after a considerable amount of time has passed and that they are often much more subject to external influences, such as changes in the market or customer preferences, than investments in tangible assets. And these influences can have a dramatic impact on the value of these investments. Innovation investments are therefore usually associated with large inherent risks. When a pharmaceutical company starts to develop a new compound, it does not know, if these typically very large investments will generate any benefit in the future. Success often is dependent on many factors – internal factors such as the skills and knowledge of researchers and developers, and external influences such as technology trends, demand and price developments etc.. From stock options valuation we know, that the higher the risk, the higher the possible return. And the value of a stock option can be exponentially increased, if you are able to limit the downside, the inherent risk. There exists also a second value lever, which is the identification and leverage of sudden opportunities. And one very powerful technique to limit risks from external influences and to identify future opportunities is scenario planning.

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