The document discusses tools for conducting external analysis, including PESTEL, Porter's Five Forces framework, industry life cycles, and strategic group, market, and segment analysis. PESTEL involves analyzing political, economic, social, technological, environmental, and legal factors in the macro-environment. Porter's Five Forces examines competitive rivalry, potential new entrants, substitutes, suppliers, and buyers. Industry analysis also considers life cycles and competitive dynamics. Competitor profiling involves strategic groups and evaluating market segments. External analysis breaks down the external environment to understand industry trends and competitive forces.

1. EXTERNAL ANALYSIS AbhishekSrivastav

2. LearningOutcomes After studying this topic you should be able to: Understand the role of external analysis in strategy formulation. Use a range of tools to analyse an organisation’s external environment. Explain the limitations of these analytical tools and the role of more subjective analytical approaches.

3. Link to overall strategic management “Strategic management includes understanding the strategic position of an organisation, strategic choices for the future and managing strategy in action (Johnson et al., 2008:12).” Strategic position identifies the impact of External environment Strategic capability Expectation and influence of stakeholders on strategy

4. The Business Environment (Johnson et al. 2008: 54) The macro-environment Industry (or sector) Competitors The Organisation 2-4

6. Micro-environment – this is the operating environment or industry sector in which the firm competes. It addresses a range of issues such as suppliers, customers, competitive intensity, threat of new entry and of substitute products arising (i.e. the ‘five-forces’ analysis).

7. Competitor analysis – seeks to understand the rival offers from other firms seeking to serve the same customers and to out manoeuvre their managers with our innovation and competitive moves.

9. The PESTEL Framework The PESTEL framework categorises environmental influences into six main types: Political - Economic Socio-cultural Technological Environmental Legal PESTEL analysis evaluates the broad societal trends that affect many industries. It identifies current and future developments that will shape the micro-environments of each industry sector.

10. Good PESTEL Analysis Focuses on society wide. Based on sound research of actual issues. Provides evidence from the research to validate points made. Future oriented. Interpretive and not descriptive

11. Major Risk Like the old-fashioned SWOT technique, PESTEL helps us make lists Lists can help us think, but… A list should be the beginning, not the end of thinking Harrison (2003: Ch 2) integrates this with industry and company analysis Johnson et al. (2008:55-59) look at the way PESTEL factors combine… then at key drivers and trends of business change

12. Key Drivers and Scenarios Planning Key drivers for change are environmental factors that are likely to have a high impact on the success or failure of strategy. Scenarios are detailed and plausible views of how the business environment of an organisation might develop in the future based on key drivers for change about which there is a high level of uncertainty.

13. Industries and Sectors Analysis An industry is a group of firms producing the same principal product or service. The industry analysis involves identifying Competitive forces Industry life cycles Competitive cycles Porters five forces framework has two main aims: To understand the drivers of competitive behaviour in the sector and; To evaluate the long-run profit potential of the sector

14. The Five Forces Framework (Johnson et al. 2008: 60) Potential entrants Competitive rivalry Buyers Suppliers Substitutes

16. Differentiation

17. Switching costs

19. Expected retaliation

21. Differentiation in product

22. Few substitutes

23. A few big suppliers

25. Industry growth rate

26. High fixed costs

27. High exit barriers

29. Undifferentiated product

30. Per cent of cost

31. Low margins (buyer)

33. Price performance is high

34. Degree of differentiation

35. Technological innovation

36. Price performance relationshipsSubstitute 5

37. Evaluation of the Five Force Model DISADVANTAGES ADVANTAGES Firms industry environment is a small determinant of that firm’s profitability Suppliers of complementary products are ignored Highlights the need to disaggregate broad industry groupings and examine competition at segment or strategic group level Assumes all business relationships are competitive. Assumes industry boundaries are stable over time, ignoring innovation and entrepreneurship. (Grant 2005) Identifies drivers of competitive behaviour. Indicates trends in profitability. Highlights strategies to alter industry structure. (Lynch 2000)

38. The IndustryLife Cycle (Johnson et al. 2008: 68) 2-15

39. Cycles of Competition (Johnson et al. 2008: 69) 2-16

40. Competitors analysis This involves the analysis of strategic groups, market segments and strategic customers. Strategic groups Strategic groups are organisations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases. Benefits identifying strategic group analysis Understanding competition Analysis of strategic opportunities Analysis of mobility barriers

41. Strategic Group Analysis (SGA) “A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimensions1.” Porter (1980), p.129. Motor Industry Broad Narrow Global full-line producers The key to the strategic group concept is that differences in profitability between groups persists because of the existence of mobility barriers that stop firms entering or moving between groups and thus competing away profit differentials. Regional Broad-line Product Range Luxury producers National Niche- specialists High performance sports National Global Geographic Scope 1. “strategic dimensions” refers to any significant criteria for grouping firms, e.g. segments served, branding, cost position, etc.

43. Extent of geographic coverage

44. Number of segments served

46. Marketing effort

47. Extent of vertical integration

48. Product quality

49. Technological leadership

50. Organisational size2-19

52. Key variables to determine:

53. Overall size

54. Market shares of key competitors

55. Growth rates/trends

56. Segments (relative growth rates)

57. Profitability

58. Existing/likely competitors

60. Market segment analysis A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market. Market segment analysis Identify key segmentation variables Construct a segmentation matrix Analyse segment attractiveness Identify KSFs in each segment Choose between broad or narrow segment focus.

61. Some Bases ofMarket Segmentation (Johnson et al. 2008:77) 2-23

62. Summary External analysis involves four main areas: PESTEL factors, Industry analysis, competitor profiling and market analysis. The macro-environment can be analysed in terms of PESTEL factors. Industries and sectors can be analysed using Porter’s Five Forces model. Industry changes can be analysed through industry life cycle & hypercompetitive models of competition. The inner layer of the environment can be analysed with strategic group analysis, market and segment analysis.

63. Reading materials Required reading: Johnson et al (2008), chapter 2. Recommended reading: Porter, M.E. (1980). Competitive Strategy: Techniques for analysing industries and competitors. Free Press: New York. Chapters 1 & 3 Harvard Business Review (1991). Michael E Porter on Competition and Strategy. Harvard Business Press, pp3-11

64. Assignment Case Study 1 Using the data from the case study assignment, carry out for the tourism industry: A PESTEL analysis A five force analysis and what do you conclude? How does the changes in the PESTEL and five forces impact on TUI What are the relative strengths and weaknesses of the TUI