The external context of strategy Flashcards
Political …
…highlights the role of the sate and other political forces.
Economic…
…factors such as exchange rates, business cycles and differential economic growth rates around the world.
Social…
…cultures and demographics.
Technological…
…the internet, nano technology, the rise of new composite materials.
Ecological…
…‘green’ environmental issues, such as pollution, waste and climate change.
Legal…
…legislative and regulatory constraints or changes.
What is a limitation of using a PESTEL framework?
Analysing these factors and their interrelations can produce long and complex lists.
Can overcome PESTEL producing long lists by…
…first identifying the key drivers for change to focus on which PESTEL factors are most important.
Scenario analyses…
…carried out to allow for different possibilities and help prevent managers from closing their minds to alternatives.
Scenario analyses steps:
- Define scope - whether global or regional whilst considering the time span.
- Identify key drivers for change - - use PESTEL to determine which will have the a major impact.
- Identify key uncertainties
- Develop initial scenario themes
- Check for consistency and plausibility
(Shoemaker actually offers 10 steps)
The uses of scenario planning:
- Early warning signal
- Assess robustness of core competencies
- Evaluate risk
- Sets off exploration and contingency planning - so doesn’t matter if the scenarios do not come to pass
The three ways of scenario planning:
- Intuitive - major themes present themselves
- Heuristic - select two most important uncertainties
- Statistically - - combine outcomes for all key uncertainties
Limitations of scenario planning:
- Managers tend to ignore the ‘optimistic’ and ‘pessimistic’ in favour of the ‘middling’ - thus 2 or 4 should be considered to overcome this
- Shoemake found students were over confident
- Students over predicted - K&T refer to this as the “conjunction fallacy” which contradicts the laws of probability
- Tendency to look for confirming evidence
The Five Forces framework helps identify the… . The …. can be used to help set an agenda.
…attractiveness of an industry. … various critical issues that have been identified… .
The Five Forces are…
- Threat of entry
- Threat of substitutes
- Power of buyers
- Power of suppliers
- Intensity of rivalry
(Porter, 2008)
The threat of entry is low where:
Porter:
1. Supply-side economies of scale - lower cost per unit
2. Demand-side benefits of scale - buyer’s willingness patronise the company
3. High customer switching costs
4. High capital requirements
5. Unequal access to distribution channels
6. Restrictive government legislation
ES:
7. High experience curve
8. Expected retaliation
9. Differentiated product/service - undifferentiated commodities reduce customer loyalty
Substitutes are products or services that … to an industry’s products or services, but…
…offer a similar benefit…, ….have a different nature.
The threat of substitutes is high if:
Porter:
1. There is an attractive price-performance trade-off to the industry’s product
2. Buyer’s cost of switching to the substitute is low
ES:
3. There are extra-incumbency effects - substitutes come from outside the industry
The power of buyers is high where:
P:
- Concentrated buyers
- Undifferentiated products/services
- Low switching costs
- Can credibly threaten to integrate backwards
The buyer group is sensitive if
- Product represents a significant fraction of cost structure
- Earn low profits - thus under pressure to trim purchasing costs
- Quality is little affected by product
To integrate backwards means to…
…purchase suppliers (perform activities up the value chain).
The powerful buyers have… . They should be distinguished as… .
…negotiating leverage. …‘strategic customers’.
The power of suppliers is high where:
P:
- Concentrated suppliers
- Differentiated products
- High switching costs
- Can credibly threaten to integrate forward
- No substitutes e.g. well-trained pilots
- Doesn’t depend heavily on its most profitable industry
To integrate forwards means to…
…directly distribute (perform activities down the value chain).
Intensity of rivalry is greatest if:
P:
1. Competitors are numerous or of equal size- hard to avoid poaching
2. Industry growth is slow - any growth is likely to be at the expense of a rival
3. High exit barriers - incumbents fight to maintain market share
ES:
4. High fixed costs - requires high investment so companies seeks to spread costs and engage in price wars
5. Low differentiation - only way to compete is on price
Engaging in a price war results in… . Though this can be overcome if the organisation serves needs of … .
…zero-sum competition. ….different customer segments.
Porter explains that the framework can reveal potential strategies:
- Positioning opportunities - spot an industry that is specifically attractive to them (they might possess a unique capability).
- Re-divide the profit pool- by neutralising supplier and buyer power, scare entrants through R&D, and limit substitutes
- May discover latent customers - thus expand the profit pool
Strengths of the FF framework:
- Identifies the attractiveness of industries
- Good starting point to identify the right strategies
- Easy to apply to all organisations
Critiques of the FF framework:
- Co-operation - assumes a competitive environment where a company can only succeed at the expense of others, but there are complementary products (sixth force)
- Dynamism - uses static analysis of the industry and ignores trends
- Complexity - industries and customers may not be homogenous
There is … between competitors.
…heterogeneity…
The power of the five forces typically varies with …
…the stages of the industry life cycle.
Limitations of the product life cycle:
- Companies do not predictably flow through the stages - they can in fact ‘de-mature’
- ‘maturity mind-set’ - - can leave managers complacent and slow to respond to new competition
A strength of the industry product life cycle:
Reminds managers that conditions are likely to change over time
Blue oceans are…
…
