Lesson 3: Analysing The Environment Flashcards
What are the levels of analysing the environment?
Macro-environment
Industry or sector
Competitors
Markets
Organsation
What is the PESTEL model?
Checklist to give overview of overall business condition.
1) Political
- Government stability, tax politics, foreign trade politics, social welfaire politics
2) Economic
- Market trends, GNP trends, interest level, money supply, unemployment rate, available income
3) Social
- Demographic trends, income allocation, social mobility, life style, family tradition, attitude towards work/spare time, habits of consumption, level of education
4) Technological
- Research resources, focus on technology, new developments, diffusion of new technology, obsolescence of technology
5) Environmental
- Protection laws, prohibition against pollution, handling of waste, energy policy
6) Legal/legislation:
- Competition laws, employment laws, health and safety laws, product safety
Create a picture of the future
Focus on the most important factors and the most likely developments for a particular industry?
What will impact in next 4/5 years
What can we conclude on the Pestel analysis?
1) Which of the 6 PESTEL factors are in the future the most significant for the industry?
2) How will the development in these variable be within the future?
3) What are the consequences of this for the industry over the next 3-5 years?
What are the key drivers of change?
1) Globalisation
Utilisation of global cost reduction and resource
Scale advantages in purchase, production, distribution, sales, services, marketing and administration
Satifsfy global customer
Accommodating the global competitor
2) Developing new technologies
Product technology, production technology, information technology, organising technology.
3) Political condition
National politics and legislation, international organisations and legislation, international trade agreements, grass-roots movements
Political, ideological and religious movements
What is scenario building,
1) Construction of scenarios from below:
Few overall major factors of importance
Favorable and non-favorable development in these factors
Combination of the factors
Gathered in 3-4 future scenarios
2) Construction of scenarios from above
An optimistic scenario and a pessimistic scenario with 2 more middle oriented scenarios. Each scenario focus on a specific theme.
What is identification of the industry?
1) What is the product / service = which needs does it cover
2) Who are the competitors
3) Who is the customer
What is Porters Five Forces Model
What are the main forces in an industry?
Is the industry attractive = can a monopoly be made?
Can it be made attractive through a restructering?
1) Potential entrants
2) Suppliers
3) Rivalry
4) Suppliers and customers
5) Substitutes
What are the potential entrants in P5F?
Economics of scale Capital requirement Access to suppliers/customers Access to distribution channels Expected retaliation Legislation
What is rivalry in P5F?
Number and size Differentiation Growth within the industry Share of fixed costs Share of fixed cost Exit barriers or sunk costs
Suppliers & customers in P5F?
Number and concentration Differentiation Relative size Switching cost Access to information Threat of forward and backward integration
What is subsitutes in Porters 5 forces?
Product substitution
Ohter subsitution
Do without product
Alternatives of customers
What conclusion can we make on the five forces analysis?
1) How strong are each of the competitive forces in the future?
2) How attractive is the industry overall based on the above assessment?
3) Can the strength of each of the 5 competitive forces be changed in the favor of the company through a clear generic competitive strategy
4) Which of the sub variables can be changed and what counter moves can be expected from significant players within the industry?
What is the economy of the industry?
How profitable is the industry?
- Gross margin, operating margin, return on assets, return on equity, equity ratio,…
What are the future earnings of the industry
What is the future growth in the industry
What is the future need for capital in the industry.
What is the product lifecycle curve?
1) Development phase:
Few customers, few competitors, no differentiation yet
2) Growth phase
Growth in number of customers, increase in number of competitors, differentiation begin to take place, fight over market share through differentiation, investment in product- and market development
3) Shake out and maturity phase
Increasing selection between buyers, still arrival of new competitors, increasing product differentiation, fight over market share through price competition, it still pays off to invest in market share
4) Decline phase
Saturation among buyers, strong rivalry among competitors, battle for market share, focus on efficiency and low unit cost, time to harvest
What can we conclude on the PLC analysis?
1) What phasee is the industry/product in?
2) How attractive is the industry/product?
3) What is the next stage of competition within the industry and for the product
4) What actions does our firm need to do based on the analysis?
What are strategic groups?
Identify our closest competitors
Estimate the likelihood of firms change between groups
What “macro” conditions can change the industry structure?
Are there competitor holes in the industry?
Strategic groups are a group of firms within an industry that follows the same competitive strategy or meet the same customer needs
What are dimensions for identification of strategic groups?
Similarity in products/functionality Similarity in prices and quality Geographical diffusion Types of market segments Types of disribution channels Size of the organisation
How can we apply the concept of strategic groups?
Identify a number of close competitors?
What are the possibilities of moving between groups?
Are there attractive free positions within the market?
What is market segmentation?
We do market segmentation in order to design our product and services so that they match our customers as good as possible.
We also do market segmentation in order to communicate and market our products and services as efficient as possible
Market segmentation can be deducted from similarities between customers
Market segmentation is more narrow than strategic groups.
What are critical success factors?
Critical success factors = CSFs are those product features with which an organisation must outperform the competition because they are particularly valued by a group of customers
Examples of critical success factors are:
Functionality, quality and price, durability, security, service and consultancy, terms of delivery and payment, precision in quality and delivery
What is strategic canvas?
Identify what the most important critical success factors for your customers
Ask your customers to prioritise them;
Ask your customers to grade how they evaluate your company’s perfomance on the CSF
Also ask them how they evaluate your closest competitors on these CSF?
Map the results in a strategic canvas
Improve your own performance on those CSF that your customers prioritise and where your company preforms compared with your competitors
What is the economic evaluation of significant customers and competitors?
How big is the total turnover of the most important competitors/customers/suppliers
How is the cost structure of the most important competitors/customers?
How is the profit of the most important competitors/customers
What are the needs for investment = amount of assets?
What are the income margins of the most important competitors and customers today in the future
What is the return on investment of the most important competitors and customers today and in the future?
What is the competitor analysis?
What drives the competitor?
Goals for the future - vision
What does the competitor do now and what can it do in the future?
The present strategy
What perception does the competitor make of himself?
Assumptions
What strengths and weaknesses does the competitor have?
Capabilities - resources and competences
What is the response profile of the competitor?
Is the competitor satisfied with his current position?
What are the most likely strategic actions of the competitor?
Where is the competitor vulnerable?
What will provoke the strongest retaliation from the competitor?
What is neoclassical theory all about?
Investigate how products are distributed on different types of markets
Investigate different types of markets: monopoly, duopoly, oligopoly and full competition
Distinguish between homogenous and heterogeneous markets
Looking at the possibilities of monopoly competition
The most efficient type of market for distribution of products are markets under full competition seen from a society point of view
The theory helps the government to regulate markets in order to become fully efficient
How do we describe the firm?
Firms are conceptualised as equal and they have the same access to knowledge and technology
The firm is described as a function of production
Otherwise the internal part of the firm is a black box
The firm (the manager) has only one goal, namely maximizing profit
Neoclassical theory can be applied in order to find the optimal combination of production factors
Transactions are assumed to be free of cost
Transactions and decisions do not take any time = no frictions
How do we describe market behaviour in neoclassical theory?
Firms optime their production and supply
Market behaviour is determined by supply and demand
The price coordinates supply and demand and thereby also the amount of production
Firms can make most profit in a monopoly situation
Firms located in markets under full competition have the lowest profit.
What assumptions does the neoclassical theory build on?
People have full knowledge and therefore learning does not happen
Human beings have unlimited information handling and decision making capacity
Human beings have a clear function of preferences
Humans beings are capable of optimising according o their function of preferences
Decision making is based on an ideal rational decision making model = economic man model
This model assumes that we are aware of all alternatives in a decision making situation and that we calculate all alternatives and select the optimal alternative.
Economic man model = Always choosing the optimal solution
What is the neoclassical theory as a research program?
The basic assumption that the program is based on is that firms and human beings act fully rational and that they maximize their profit.
The theory investigate optimisation in different types of markets and production situations
A situation of decision making is organised in a way that there is only one dimension of optimisation.
What is the structure of conduct performance paradigm?
A model to test empirical observation concerning the efficiency of different markets.
Basic conditions on the supply side concerns access to raw materials, technology and production capacity.
Basic conditions on the demand side concerns price elasticitiy, substitutions and rate of growth
Market structure concerns the firms pricing, product strategy and investment plans
Conduct (behavior) concerns the firms pricing, product strategy and investment plans
Performance output) concernts production, employment and equity
Causality between structure, conduct and performance
What is the structure of conduct performance paradigm?
Conduct = function of structure
Performance = f(Structure, Conduct) = Q(Structure)
The industrial structure determines the performance of the industry = the profit
What is the influence of the SCP paradigm?
Porter turns the neoclassical theory and the SCP paradigm upside down in his own theory with the Five Forces model
He shows us how structure and conduct can be applied in order to create a monopoly like situation for the firms
In connection to this, Porter shows how entrance barriers and substitutions have an important impact on the proiftability of the industry.
What criticism can be made against neoclassical theory?
It is a static theory
Assuming both profit maximization and full rationality at the same time make it difficult for the theory to explain how equilibrium is reached
The theory does not say anything about how firms develop over time
The theory does not say anything about the firms except that it is a production function
The theory has a reductionistic view on firms and human beings
The theory is especially good for applicaiton in industries with many firms and heterogeneous products.
