STRATEGIC MANAGEMENT SUMMARY NOTES

STRATEGIC MANAGEMENT SUMMARY NOTES •PESTEL helps to provide a list of potentially important environmental issues that influence an organisations strategy •PESTEL analysis looks at the key drivers for change; ie it looks at the trends and opportunities in the business environment •It categorizes environmental factors into six key types: Political Factors:

Economic Factors:

Social Factors:

Technological Factors:

Ecological Factors:

Legal Factors:

•Examples include: -Taxation changes -Foreign trade regulations •Examples include: -Interest rates -Personal disposable income -Exchange rates -Unemployment rates •Relates to changing cultures and demographics •Examples include: -Changes in culture and consumption patterns -Lifestyle changes -Ageing population •Relates to new discoveries and technological developments •Examples include: -Developments on the internet •This refers to  ‘green’  environmental  issues •Examples include: -Pollution -Waste & Recycling -Energy consumption •Includes legislative and regulatory constraints or changes •Examples include: -Competition law -Trade law -Employment law

•When using the PESTEL analysis it is important to identify factors which are important currently, but it is also important to consider which factors will become more important in the next few years •External  Factor  Evaluation  Matrix  (EFE  Matrix)  – Steps to a structured PESTEL Analysis: 1. List key external factors – the key drivers for change 2. Weight from 0-1 in terms of strategic importance 3.  Rate  effectiveness  of  firm’s  current  strategies  in  addressing  external  factors  (1.  Poor  to  4.  Superior)   4. Multiply weight by rating 5. Sum weighted scores 6. The total weighted score will range between 1-4. 1=poor response, 4=very effective response to environmental factors.

STRATEGIC MANAGEMENT SUMMARY NOTES

Scenarios: •Scenarios are plausible views of how the environment of an organisation might develop in the future based on the PESTEL Analysis •An organisation will typically develop a few alternative scenarios (2-4) to explore and evaluate strategic options. This should include both potential positive outcomes and consequences that may arise from each scenario.

Industries/Sectors/Competition & Markets: Industries, markets & sectors defined: •An industry is a group of firms producing products and services that are essentially the same -EG Automobile industry •A market is a group of customers for specific products or services that are essentially the same -EG Market for luxury cars •A sector is a broad industry group. It is used often in the public sector. -EG Health sector Competitive Forces in an Industry – Porter’s  Five  Forces  Framework: •Porter’s  five  forces  framework  helps  identify  the  attractiveness  of  an  industry  in  terms of five competitive forces: Competitive •Competitive rivals are organisations with similar products and services aimed at the

STRATEGIC MANAGEMENT SUMMARY NOTES Rivalry:

Threat of New Entrants:

Threat of Substitutes:

Buyer Power:

Supplier Power:

same customer group and are direct competitors in the same market -EG Coca Cola & Pepsi •The degree of rivalry increases when: -Competitors are aggressive -The exit barriers are high -There is a low level of differentiation •Barriers to entry are the factors that new to be overcome by new entrants if they are to compete. The threat of entry is low when the barriers to entry are high. •The main barriers to entry include: -Economies of scale & Fixed costs -Experience and learning -Legislation or government restrictions (eg licensing) -Access to supply and distribution channels •Substitutes are products or services that offer a similar benefit to consumers •Customers will switch to alternatives if: -The price or performance of a substitute are superior -The substitute benefits from an innovation that improves customer satisfaction •If buyers are too powerful, then they can demand cheap prices or product/service improvements which may reduce the organisations profits •Buyer power is likely to be high when: -Buyers have low switching costs (eg ease of switching from mac to pc) -Buyers can supply their own inputs (eg buy own water) -The buyers are concentrated (ie few of them) •Powerful suppliers can reduce an organisation’s  profits •Supplier power is likely to be high when: -The suppliers are concentrated (ie few of them) -Suppliers provide a specialist or rare input -Switching costs are high

•Implications  of  Five  Forces  Analysis: -Identifies which markets are attractive to enter, or which markets the organisation should leave -The five forces have different impacts on different organisations. That is, large firms can deal with barriers to entry more easily than small firms •Issue  in  Five  Forces  Analysis: -Converging industries: EG High tech organisations, where industries overlap (eg mobile phones, cameras, etc) -Complementary organisations: may enhance the attractiveness of a business to customers or suppliers (eg Microsoft and McAfee computer security systems) Types of Industries: Monopolistic Industry:

-An industry with one firm and therefore no competitive rivalry -It is a firm with a dominant position in the market -EG Google

STRATEGIC MANAGEMENT SUMMARY NOTES -Not all segments are attractive or viable market opportunities – evaluation is essential Bases for market segmentation:

Critical Success Factors (CSFs): •Critical success factors are those factors that are particularly valued by customers and/or provide a significant advantage in terms of cost •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) Blue Ocean Thinking: •Blue Oceans are new market spaces where competition is minimized •Blue ocean thinking involves management thinking outside of the square to be different by finding or creating market spaces that are not currently being served Red Oceans: •Red Oceans are where industries are already well defined and rivalry is intense.

Strategic Capabilities: Resource-Based View (RBV) of the firm: •The resource-based view of strategy asserts that the competitive advantage and superior performance of an organisation are explained by the distinctiveness of its capabilities

STRATEGIC MANAGEMENT SUMMARY NOTES

Benchmarking: •Benchmarking is a means of understanding how an organisation compares with other competitors. It is a way of diagnosing strategic capabilities -Industry sector benchmarking: compares performance against other organisations in the same industry against a set of performance indicators -Best in class benchmarking: compares  an  organisation’s  performance  and  capabilities  against  the  ‘best   in  the  class’, even if they are found in a slightly different industry

The Value Chain (Developed by Porter): •The value chain describes the categories of activities within an organisation which together create a product or service. -It helps understand how the activities link in together to provide the organisation and customer with value. -It helps identify activities where the organisation has particular strengths or weaknesses -It helps look for ways to enhance value or decrease cost in value activities (eg outsourcing) •The value chain consists of five primary activities (which are directly concerned with the creation or delivery of a product or service), and four support activities (value activities) which help to improve the effectiveness or efficiency of primary activities

The Value System: •The value system comprises the set of inter-organisational links and relationships that are necessary to create a product or service -Competitive advantage can be derived from linkages within the value system