Chapter 5 - Understanding the external environment Flashcards
What is a Strategic Drift?
It is a situation that occurs when a successful company responds very slowly to the external environment and still continues with their same strategy that has served for many years in the past.
This mostly occurs due to changes in the technological environment. But also, institutional blindness or delusion of grandeur can lead to strategic drift.
e.g. LEGO adapted themselves towards changes in the external environment as kids grow up faster and get used to more technology in their childhood → they escaped Strategic Drift through implementing new toys and cooperations with companies such as Disney or Microsoft.
Name 7 Symptoms of Strategic Drift!
- Highly homogenous paradigm/culture
- Strong power blockages to change
- Lack of market information
- Little toleration of questioning/challenge
-“ We have tried this before, and it did not work” - Deteriorating performance
- Reliance on price/cost/competition
Name the 6 factors of the DESTEP model!
Demographic
Economic
Sociocultural
Technological
Ecological
Political
Explain the 6 factors of the DESTEP model in detail!
1) Demographic
Why are people important (in terms of businesses)? - Because their needs are the reason why businesses exist and why new markets get developed. If demographic situations change also the markets will change.
Some very important demographic trends that have an influence are:
- World population growth
- Changing age structure
- Changing family structures
- Geographic shifts in population
2) Economic
Factors that affect consumer purchasing power and spending patterns.
A company should always know about the circumstances of a country / environment, e.g. how many people will be willing / able to spend money on their products. Important criteria therefore are income tax, VAT, unemployment, inflation
3) Sociocultural
Factors that affect society’s basic values, preferences and behavior. People are part of a society or cultural group where they share beliefs and values, e.g. symbols may carry a negative meaning in another culture.
4) Technological
A technological development can create the emergence of opportunities for a business. Watch out! Every new technology will replace an older one.
5) Ecological
Ecological concerns have grown a lot in recent years. Shortage of raw materials and water draw a lot of attention to renewable resources and pollution avoidance. Also, people focus on giving products a second lease of life (second-hand)
6) Political
Business is influenced and limited by political environment including laws, regulations by government and pressure groups. Be informed about the political environment before entering the market.
What are the trends for the 6 steps of the DESTEP model?
Demographic trends → demographics
Economic trends → purchasing power, inflation, interest rates
Societal trends → dual learning, working from home
Technological trends → online business, electric engines
Ecological trends → re-use and recycling
Political trends → movement to the left, taxes
What is a Product/Market matrix? Describe in detail!
It helps companies to understand where they are positioned today and to get a better understanding of interesting growth options for the future.
Horizontal dimension:
- Different markets or market segments a company can address
Vertical dimension:
- Different products or services it can offer
Describe the 3 steps how to use a Product/Market matrix.
1) List out the different possibilities on the two dimensions (horizontal and vertical). This helps the company to position itself in the matrix
2) Look at future ambitions and growth objectives to find out if the current position is still sufficient, or if being active in different cells is required.
3) Analyze the different P/M combinations. Criteria can be the size of each P/M combination, the growth perspectives, the profitability, the competences needed to be successful
Describe Porter’s Five Forces of Competition Framework.
The model assess the market attractiveness by focusing on the competition.
Attractive industries are in general industries where competition is low.
Competition can be divided into three types of competition.
1) Rivalry among existing firms → internal competition (Force 1)
2) Threat coming from potential entrants and substitutes → potential competition (Forces 2 and 3)
3) Pressure set by suppliers and buyers → external competition (Forces 4 and 5)
→ all forces together give the total degree of competition
Describe Potential competition! (Forces 2 and 3 // Potential entrants and Substitutes)
Force 2: Entry barriers for potential competitors
- capital required: in some industries the initial investment to enter the market is very high, e.g. airline industry or energy industry
- scale economies: In some industries companies are required to operate on a large scale in order to be cost-efficient, e.g. automotive industry at least 1000 cars a day
Not only in production but also in other areas such as buying, distributing. - overcapacity: means you have some unused capacity
- learning curve: building up experience - the more experience you build up the more efficient you will become (new competitors will not have that experience / efficiency yet)
- shared costs
- product differentiation: this is linked to building up a strong brand and therefore make your customers be loyal to you
- switching costs: effort for customers it takes to switch from one supplier to another, e.g. with a telecom operator for your mobile phone contract
- privileged positions: certain positions that provide an advantage, e.g. having access to certain raw materials or having patents
- government: linked to regulation; e.g. food industry where you have strict regulations that also require self-audits
- product proliferation: companies constantly watching the market and new needs coming up to be the first ones to provide it
Possible reactions from existing competitors
- price reduction
- increased advertising budget
- increased quality
- warranty extension
- easier credit
- brand responding
- launch the product of the new generation
- launch fighting brand
Possible reactions from existing competitors
- predation
- capacity extension
- obtain exclusive distribution
Force 3: Substitutes
Every product can be substituted, which means every product is replaceable.
The threat of substitutes can come from every corner
- it can be a similar product (but better)
- or a total new unexpected version of the product
Describe External competition! (Force 4 and 5 // Suppliers and Buyers)
The bargaining power Buyers and Suppliers have depends on:
- the number and relative importance of Buyers/Suppliers
- the potential number of Buyers/Suppliers
- the importance of the supplied product in the cost, realization of the competitive advantage and compared to substitutes (think of the quality and if you replace the product with one from another supplier does it do bad on your quality maybe?)
- the importance of switching costs
- the technical and financial knowledge of the Buyers/Suppliers and their integration possibilities
- possibilities for substitution
Describe Internal competition! (Force 1 // Rivalry among existing firms)
Which factors make rivalry worse?
- market is stagnating or declining and companies want to keep with their turnover; competition will be tougher and this results mostly in a price competition
- competitors have the same strength
- high inventory cost; everyone wants their inventory to be sold to not be left with high costs
- cyclical demand / seasonal sales e.g. Christmas decoration
- if products are impossible to be differentiated, customers will see them as commodity → usually price competition arising
What advantages arise from having competitors?
- one company creates a standard in the market against which you differentiate your product (followers take advantage of the first initiating company to see what maybe has to be done better and then will follow up)
- competitors can help you to overcome seasonal peaks, e.g. hotels send customers to other hotels if they are fully booked
- competition helps you stay motivated and not fall asleep
What helps to guarantee to stabilize the industry? → How to lower internal competition!
- pricing umbrellas to avoid reputation retaliation or revenge, e.g. with lowering the prices you will not do it if you know your competitors will go lower than you do after
- announce price competition in advance
- price leadership acceptance
- explicit collusion (formal and informal)
Which aspects belong to Customer analysis?
- How many are there?
- Which customers are large / medium or small?
- Which customers are new, which ones have been around for a while and which ones did we lose and why?
- Their perceptions
- Their needs
- Their professional developments
- Their problems
- Their personnel/decision-making
- Our image/the image of our customers
- Their attitude concerning our products/services
- New needs
- The performance level of our products
What does STP stand for?
Segmenting, Targeting and Positioning
STP is a tool to understand the market structure and to position and reposition your own company
What is segmentation about? Describe in detail!
Segmenting means splitting up the market and clustering the customers according to their needs.
Two important things about segmenting:
- The different segments must be intuitively understood; too complex will not work
- Make sure to embrace all management levels; not only marketing is important but also pricing, operations, logistics, HRM, …
If segmenting is not done well, you risk doing some cosmetic marketing!
