External Analysis

LPS

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Strategic Decision-
Making Process

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Hierarchy of Strategy

Environmental
Variables

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 Strategic
Management
Process:
Components

Generic Business Enterprise Model

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 Identify relevant elements: PESTEL Analysis

Consider the general environment surrounding many

businesses under six main headings:
– Political
– Economic
– Sociological
– Technological
– Environmental
– Legal.

Key point: useful checklist.

PESTEL Analysis
Political Technological
•Government policies •Research funding
•Government term and change •Maturity of technology
•Trading policies •Information and communications
•Funding, grants and initiatives •Intellectual property issues
•Lobbying groups (home/global) •Global communications
Economic
Environmental
•Specific industry factors
•Ecology
•Market routes and distribution trends
•Pollution conditions
•Customer/end-user drivers
•“Green” energy
•International trade/monetary issues
•Energy conservation
Social •Waste handling
•Lifestyle trends / Demographics
Legal
•Brand, company, technology image
•Regulatory bodies and processes
•Fashion and role models
•Competitive legislation (Anti-Trust)
•Ethnic/religious factors
•Labour market legislation
•Ethical issues
•Product safety and approvals

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Scanning the Societal Environment: STEEP Analysis

Scanning the Task Environment

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 Domain Weak Signal Who Saw It Who Missed It
Technological Digital revolution Apple and iPod Music industry
White LED lighting LED companies Light bulb manufacturers
Open-source software Linux, IBM Microsoft and Sun Microsystems

CD-ROM encyclopedias Microsoft Encyclopedia Britannica

Rapid spread of GSM Nokia Iridium
Economic Overnight package delivery FedEx, UPS USPS, United Airlines
Search engine potential Google Microsoft

Discount point-to-point Southwest, Ryanair and United, Delta, Lufthansa

airlines EasyJet
Societal Sports and New Age drinks Snapple, Gatorade Coke, Pepsi (initially)
Popularity of reality shows Reality show producers Game shows
Age compression and Bratz (fashion dolls) Mattel (Barbie)
demand for sophisticated
dolls
Political Generic AIDS drugs in Indian pharma companies Major global pharma companies
Africa
Social discontent in Prez Hugo Chavez Establishment (PSU: PDVSA,
Venezuela (nationalizing oil industry) Petroleum of Venezuela)

Weak Signals
People Build s/w better, together

• “Net generation” 3D Print

• 24x7 “mobile” workforce

• Knowledge via MOOCs Open Source
• Sharing not consuming • Software
• Sustainability • Hardware
• Physibles

Technology
• Broadband access
• The Cloud
• Mobile phones
• Internet of Things Finance
• Big Data • Microlending/microfinance
• 3D printing • Crowdfunding/equity/P2P
• Robotics/AI • Non-fiat cryptocurrencies
• VR/AR • Mobile money/payments
(Virtual/Augmented Reality)

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 Forecasting the Environment

 Time Series Analysis: Examines the effect of selected trends on key

business variables (costs, sales, etc.).

 Delphi Technique: Pool the opinions of experts about the nature of

trends.

 Judgmental Forecasting: Obtain information from a variety of sources,

although conclusions can be difficult.

 Multiple Scenarios: Managers formulate competing scenarios

concerning trends and developing contingency plans accordingly.

Types of Futures

 Possible - “might” happen (future knowledge)

 Plausible – “could” happen (current knowledge)

 Probable - “likely to” happen (current trends)

 Preferable - “want to” happen (value judgements)

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 Diamond Industry Scenarios

Source: McKinsey, “Perspectives on the Diamond Industry”, Sep. 2014

Types of Futures

“Wildcard” Possible

Scenario

Plausible

Probable

Preferable

Today

Time

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 Why Scenarios? (Ranges of Usefulness)

Uncertainty

F S H

Predictability

Forecasting Scenario Planning “Hoping”

t
Distance into “the future”

K. van der Heijden, 2009

Impact-Uncertainty Classification

Critical Important Critical

High Planning Scenario Scenario
Issues Drivers Drivers
I
M
Important Important Important
P Planning Planning Scenario
Mod
A Issues Issues Drivers

C
T Monitor Monitor
Monitor & re-
Low assess

Low Moderate High

UNCERTAINTY

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 Strategic Foresight: Understand the Organization

Pitch message here Pragmatists

Fence-Sitters Bridge Builders

RATS FROGS
- can smell the cheese, - get it, and can use
but jump ship; have the system, very rare
good organizational
diagnostics
Don’t Get It Get It

Laggards True Believers

VULTURES LEMMINGS
- don’t bother, they - will follow you
are looking for you blindly
to fail

Ideologues

Andy Hines, 2003

Porter’s 5 Forces

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 Porter’s Approach to Industry Analysis
New Market Entrants
•entry ease/barriers
•geographical factors
•incumbents resistance
•new entrant strategy
•routes to market

Supplier Power Competitive Rivalry Buyer Power

•brand reputation •number and size of firms •buyer choice
•geographical coverage •industry size and trends •buyers size/number
•product/service level quality •fixed vs. variable cost bases •change cost/frequency
•relationships with customers •product/service ranges •product/service importance
•bidding processes/capabilities •differentiation, strategy •volumes, JIT scheduling

Product and Technology

Development
•alternatives price/quality
•market distribution changes
•fashion and trends
•legislative effects

Porter’s 5 Forces
Analysis of Online Retailing Industry
1. Comparison sites
gives price variations 1. Low barriers to entry
in different sites Threat of 2. New technologies can be disruptive
2. Buyer has complete New 3. Less brand loyalty towards online shops
information Entrants 4. High probability of new entrants
3. Wide buying options (High) 5. Can utilize economies of scale
available 6. Can come up with better range of
4. Lot of product review products
sites
5. With social media, 1. Large number of
word of mouth Buyer Industry Supplier
suppliers
becomes an important Power Rivalry – Power 2. Global distribution
feedback point. (High) (High) (Low) networks
intensifying
competition
3. High bargaining
1. More choices in online stores and
power of big shot
cheaper prices
retailers
2. Lack the touch and feel factor Threat of
3. Large presence of physical retailers and 4. Less differentiation
Substitutes in product
shops (Moderate) 5. Focus on low prices
4. Online shopping becoming increasingly
lead to low customer
widespread
loyalty

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 Six Forces Model

Global Athletic Shoe Industry: Porter’s Industry Analysis

Rate each competitive force as high, medium, or low in strength.

 Rivalry is high (Nike, Reebok, New Balance, Converse, and Adidas are strong
competitors worldwide),
 Threat of potential entrants is high (the industry has seen clothing firms such as
UnderArmour and Fila as well as specialty shoe brands like the wildly popular
Vibram Five Fingers shoes),
 Threat of substitutes is low (other shoes don’t provide support for sports
activities), bargaining power of suppliers is medium but rising (suppliers in
Asian countries are increasing in size and ability),
 Bargaining power of buyers is medium but increasing (prices are falling as the
low-priced shoe market has grown to be half of the US-branded athletic shoe
market), and
 Threat of other stakeholders is medium to high (government regulations and
human rights concerns are growing).

 Based on current trends in each of these competitive forces, the industry’s level
of competitive intensity will continue to be high
 sales increases and profit margins should continue to be modest for the
industry as a whole.

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 Limitations of Porter’s Model

 Assumes the existence of a clear, recognizable industry

 Addresses only firms in an industry and does not consider partner
firms
 Does not account for the fact that large firms may be able to modify the
industry structure
 Assumes industry factors, not firm resources, comprise the primary
determinants of firm profit
 Difficult to apply to firms operating in multiple countries where industry
environments vary considerably

Industry Competitive Structure

 Fragmented industry consists of a large number of small or medium-sized

companies, none of which is in a position to determine industry price.

Ex: agriculture, dry cleaning, health clubs, real estate brokerage, and sun-
tanning parlors.

 Consolidated industry is dominated by a small number of large companies

(an oligopoly) or, in extreme cases, by just one company (a monopoly), and
companies often are in a position to determine industry prices.

Ex: aerospace, soft drink, wireless service, and small package express
delivery industries.

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 Faang-tastic five
Facebook, Amazon, Apple, Netflix and Google

Five US tech companies have a combined market value of $3.25tn

– more than the UK's 100 biggest companies combined

Apple vs. Google vs. Facebook vs. Amazon

The Lines Between Software and Hardware Continue to Blur

Google and Amazon vs Apple:

• Google and Amazon ramp up h/w to boost customer
loyalty and to extend control over their software services.
• Collide with Apple, which is responding by building more
of its own s/w to make its devices stand out.

Google vs Apple:
• Google purchased Motorola Mobility - plans to release
new Android devices (attack Apple's iPhone).
• Amazon escalated the tablet wars with Kindle Fire – and
also, testing its own phone.

Facebook Vs Google:
Google's rivals want to undercut the web-search giant
through mobile search on smartphones and other devices,
and a slew of search services that allow recommendations
from friends (Facebook).

WSJ, 2012

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