Lesson 3: Analysing The Environment

Question 1

What are the levels of analysing the environment?

Answer 1

Macro-environment

Industry or sector

Competitors

Markets

Organsation

Question 2

What is the PESTEL model?

Answer 2

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

Question 3

What can we conclude on the Pestel analysis?

Answer 3

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?

Question 4

What are the key drivers of change?

Answer 4

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

Question 5

What is scenario building,

Answer 5

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.

Question 6

What is identification of the industry?

Answer 6

1) What is the product / service = which needs does it cover
2) Who are the competitors
3) Who is the customer

Question 7

What is Porters Five Forces Model

Answer 7

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

Question 8

What are the potential entrants in P5F?

Answer 8

Economics of scale
Capital requirement
Access to suppliers/customers
Access to distribution channels
Expected retaliation
Legislation

Question 9

What is rivalry in P5F?

Answer 9

Number and size
Differentiation
Growth within the industry
Share of fixed costs
Share of fixed cost
Exit barriers or sunk costs

Question 10

Suppliers & customers in P5F?

Answer 10

Number and concentration
Differentiation
Relative size
Switching cost
Access to information
Threat of forward and backward integration

Question 11

What is subsitutes in Porters 5 forces?

Answer 11

Product substitution
Ohter subsitution
Do without product
Alternatives of customers

Question 12

What conclusion can we make on the five forces analysis?

Answer 12

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?

Question 13

What is the economy of the industry?

Answer 13

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.

Question 14

What is the product lifecycle curve?

Answer 14

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

Question 15

What can we conclude on the PLC analysis?

Answer 15

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?

Question 16

What are strategic groups?

Answer 16

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

Question 17

What are dimensions for identification of strategic groups?

Answer 17

Similarity in products/functionality
Similarity in prices and quality
Geographical diffusion
Types of market segments
Types of disribution channels
Size of the organisation

Question 18

How can we apply the concept of strategic groups?

Answer 18

Identify a number of close competitors?
What are the possibilities of moving between groups?
Are there attractive free positions within the market?

Question 19

What is market segmentation?

Answer 19

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.

Question 20

What are critical success factors?

Answer 20

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

Question 21

What is strategic canvas?

Answer 21

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

Question 22

What is the economic evaluation of significant customers and competitors?

Answer 22

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?

Question 23

What is the competitor analysis?

Answer 23

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

Question 24

What is the response profile of the competitor?

Answer 24

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?

Question 25

What is neoclassical theory all about?

Answer 25

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

Question 26

How do we describe the firm?

Answer 26

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

Question 27

How do we describe market behaviour in neoclassical theory?

Answer 27

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.

Question 28

What assumptions does the neoclassical theory build on?

Answer 28

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

Question 29

What is the neoclassical theory as a research program?

Answer 29

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.

Question 30

What is the structure of conduct performance paradigm?

Answer 30

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

Question 31

What is the structure of conduct performance paradigm?

Answer 31

Conduct = function of structure

Performance = f(Structure, Conduct) = Q(Structure)

The industrial structure determines the performance of the industry = the profit

Question 32

What is the influence of the SCP paradigm?

Answer 32

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.

Question 33

What criticism can be made against neoclassical theory?

Answer 33

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.