Analysing the organisation’s
external environment
Layers of the Environment
The PESTEL framework categorises environmental
influences into six main types:
political, economic,
social,
technological,
environmental legal
PESTEL provides a comprehensive list of influences on the
possible success or failure of particular strategies
• Political Factors: For example, Government policies,
taxation changes, foreign trade regulations, political risk
in foreign markets, changes in trade blocks (EU).
• Economic Factors: For example, business cycles, interest
rates, personal disposable income, exchange rates,
unemployment rates, GDP trends.
• Socio-cultural Factors: For example, population changes,
income distribution, lifestyle changes, consumerism, changes
in culture and fashion.
• Technological Factors: For example, new discoveries and
technology developments, ICT innovations, rates of
obsolescence, increased spending on R&D.
• Environmental (‘Green’) Factors: For example, environmental
protection regulations, energy consumption, global warming,
waste disposal and re-cycling.
• Legal Factors: For example, competition laws, health and
safety laws, employment laws, licensing laws, IPR laws.
Key drivers for change:
• The environmental factors likely to have a high impact on the
success or failure of strategy, and may provide opportunities
for innovation
• For example, the birth rate is a key driver for those planning
nursery education provision in the public sector.
• Typically key drivers vary by industry or sector.
• Apply selectively –identify specific factors which impact on
the industry, market and organisation in question.
• Identify factors which are important currently but also
consider which will become more important in the next few
years.
• Use data to support the points and analyse trends using up to
date information
• Identify opportunities and threats – the main point of the
exercise!
Scenarios are detailed and plausible views of how the
environment of an organisation might develop in the future
based on key drivers of change about which there is a high level
of uncertainty.
• Build on PESTEL analysis .
• Do not offer a single forecast of how the environment will
change.
• An organisation should develop a few alternative scenarios
(2–4) to analyse future strategic options.
Scenario analysis
• Identify the most relevant scope of the study – the
relevant product/market and time span.
• Identify key drivers of change – PESTEL factors that
have the most impact in the future but have
uncertain outcomes.
• For each key driver select opposing outcomes where
each leads to very different consequences.
Scenario analysis
• Identify the most relevant scope of the study – the
relevant product/market and time span.
• Identify key drivers of change – PESTEL factors that
have the most impact in the future but have
uncertain outcomes.
• For each key driver select opposing outcomes where
each leads to very different consequences.
Scenario analysis
• Pierre Wack
• Michael Jefferson
• Shell
Future Scenarios for the Financial sector
An industry is a group of firms producing products and
services that are essentially the same. For example,
automobile industry and airline industry.
A market is a group of customers for specific products or
services that are essentially the same (e.g. the market for
luxury cars in Germany).
A sector is a broad industry group (or a group of markets)
especially in the public sector (e.g. the health sector)
Porter’s five forces framework helps identify the attractiveness
of an industry in terms of five competitive forces:
• the threat of entry,
• the threat of substitutes,
• the bargaining power of buyers,
• the bargaining power of suppliers and
• the extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.
The Threat of Entry & Barriers to Entry
• The threat of entry is low when the barriers to entry are high and vice
versa.
• The main barriers to entry are:
Economies of scale/high fixed costs
Experience and learning
Access to supply and distribution channels
Differentiation and market penetration costs
Government restrictions (e.g. licensing)
• Entrants must also consider the expected retaliation from organisations
already in the market
Threat of Substitutes
Substitutes are products or services that offer a similar benefit to an
industry’s products or services, but by a different process.
Customers will switch to alternatives (and thus the threat increases) if:
• The price/performance ratio of the substitute is superior (e.g.
aluminium maybe more expensive than steel but it is more cost
efficient for some car parts)
• The substitute benefits from an innovation that improves customer
satisfaction (e.g. high speed trains can be quicker than airlines from
city centre to city centre)
The bargaining power of buyers
Buyers are the organisation’s immediate customers, not necessarily
the ultimate consumers.
If buyers are powerful, then they can demand cheap prices or
product / service improvements to reduce profits .
Buyer power is likely to be high when:
Buyers are concentrated
Buyers have low switching costs
Buyers can supply their own inputs (backward vertical integration)
The bargaining power of suppliers
Suppliers are those who supply what organisations need to produce
the product or service. Powerful suppliers can eat into an
organisation’s profits.
Supplier power is likely to be high when:
The suppliers are concentrated (few of them).
Suppliers provide a specialist or rare input.
Switching costs are high (it is disruptive or expensive to change
suppliers).
Suppliers can integrate forwards (e.g. low cost airlines have cut
out the use of travel agents).
Rivalry between competitors
Competitive rivals are organisations with similar products and
services aimed at the same customer group and are direct
competitors in the same industry/market (they are distinct
from substitutes).
The degree of rivalry is increased when :
Competitors are of roughly equal size
Competitors are aggressive in seeking leadership
The market is mature or declining
There are high fixed costs
The exit barriers are high
There is a low level of differentiation
5 Forces analysis
• Apply at the most appropriate level – not necessarily the
whole industry. E.g. the European low cost airline industry
rather than airlines globally.
• Note the convergence of industries – particularly in the high
tech sectors (e.g. digital industries - mobile
phones/cameras/mp3 players).
• Note the importance of complementary products and services
(e.g. Microsoft windows and McAfee computer security
systems are complements). This can almost be considered as a
sixth force.
Implications of 5 Forces
• Identifies the attractiveness of industries – which
industries/markets to enter or leave.
• Identifies strategies to influence the impact of the forces, for
example, building barriers to entry by becoming more
vertically integrated.
• The forces may have a different impact on different
organisations e.g. large firms can deal with barriers to entry
more easily than small firms.
The Value Net
An Industry Life Cycle
Strategic groups are organisations within an industry
or sector with similar strategic characteristics, following
similar strategies or competing on similar bases.
• These characteristics are different from those in other
strategic groups in the same industry or sector.
• There are many different characteristics that distinguish
between strategic groups.
• Strategic groups can be mapped on to two dimensional
charts – maps. These can be useful tools of analysis.
Characteristics of Strategic Groups
Indian Pharmaceutical Industry
Uses of ‘SGA’
• Understanding competition - enables focus on direct competitors within
a strategic group, rather than the whole industry. (E.g. Tesco will focus on
Sainsburys and Asda)
• Analysis of strategic opportunities - helps identify attractive ‘strategic
spaces’ within an industry.
•
• Analysis of ‘mobility barriers’ i.e. obstacles to movement from one
strategic group to another. These barriers can be overcome to enter more
attractive groups. Barriers can be built to defend an attractive position in
a strategic group.
Market Segmentation
A market segment is a group of customers who have similar needs that are
different from customer needs in other parts of the market.
• Where these customer groups are relatively small, such market segments
are called ‘niches’.
• Customer needs vary. Focusing on customer needs that are highly
distinctive is one means of building a secure segment strategy.
• Customer needs vary for a variety of reasons –these factors can be used to
identify distinct market segments.
• Not all segments are attractive or viable market opportunities – evaluation
is essential.
Typical Basis of Market segmentation
A strategic customer is the person(s) at whom the strategy is
primarily addressed because they have the most influence
over which goods or services are purchased.
Examples:
• For a food manufacturer it is the multiple retailers (e.g.
Tesco) that are the strategic customers not the ultimate
consumer.
• For a pharmaceutical manufacturer it is the health
authorities and hospitals not the final patient.
Critical Success Factors
• Critical success factors are likely to be an important source of
competitive advantage if an organisation has them (or a
disadvantage if an organisation lacks them).
• Critical success factors are those factors that are either
particularly valued by customers or which provide a significant
advantage in terms of cost.
• Different industries and markets will have different critical
success factors (e.g. in low cost airlines the CSFs will be
punctuality and value for money whereas in full service
airlines it is all about quality of service).
Blue ocean thinking
• ‘Blue oceans’ are new market spaces where competition is
minimised.
• ‘Red Oceans’ are where industries are already well defined
and rivalry is intense.
• Blue Ocean thinking encourages entrepreneurs and managers
to be different by finding or creating market spaces that are
not currently being served.
• A ‘strategy canvas’ compares competitors according to their
performance on key success factors in order to develop
strategies based on creating new market spaces.
In Summary:
• Environmental influences can be thought of as layers around an
organisation, with the outer layer making up the macro-environment, the
middle layer making up the industry or sector and the inner layer strategic
groups and market segments.
• The macro-environment can be analysed in terms of the PESTEL factors,
from which key drivers of change can be identified. Alternative scenarios
about the future can be constructed according to how the key drivers
develop.
• Industries and sectors can be analysed in terms of Porter’s five forces –
barriers to entry, substitutes, buyer power, supplier power and rivalry.
Together, these determine industry or sector attractiveness.
In Summary:
• Industries and sectors are dynamic, and their changes can be analysed in
terms of the industry life cycle, comparative five forces radar plots and
hypercompetitive cycles of competition.
• In the inner layer of the environment, strategic group analysis and market
segment analysis can help identify strategic gaps or opportunities.
• Blue Ocean strategies characterised by low rivalry are likely to be better
opportunities than Red Ocean strategies with many rivals.
• The most important reason for environmental analysis is to identify
OPPORTUNITIES AND THREATS
SPF 2022
Questions?
Seminar2
For the global pharmaceutical industry consider:
PESTEL analysis
5 Forces analysis
Significant Market Segments
Likely future Scenarios
Key threats and Opportunites
Next seminars’ preparation
Week 3, Exploring Strategy Ch 4 Case study: H&M p.573
Assessing
capability (1) https://ebookcentral.proquest.com/lib/gcal/reader.
action?docID=5987036&ppg=600
Week 4, Review ES Chapters 4 Intro. to assessments
Assessing Exploring Strategy Ch 5. Case study: Manchester
Capability (2) United p.599
Organisational https://ebookcentral.proquest.com/lib/gcal/reader.act
ion?docID=5987036&ppg=626
Governance
and Purpose
