Strat Mgt External

PESTEL, Five Forces, Strategic Groups, SWOT O/T

PESTEL stands for

Political, Economic, Sociocultural, Technological, Environmental, Legal

Layer of analysis for PESTEL

The macro-environment (outermost layer)

Political factors

Government stability, policy, trade restrictions, political risk, government intervention

Economic factors

Growth, recessions, inflation, interest rates, exchange rates, commodity and input prices

Sociocultural factors

Demographics, consumer attitudes, health concerns, lifestyle trends

Technological factors

Innovation, new processes, new product uses, disruptive technology

Environmental factors

Climate change, emissions, sustainability concerns, natural resource availability

Legal factors

Laws and regulations (safety, health, environmental, trade law)

Two columns of the class PESTEL chart

How is each change impacting the industry? How is each change impacting the firm?

Scenario: A government bans exports of natural gas

Political

Scenario: A new law requires phasing out a gasoline additive

Legal

Scenario: Consumers worry a chemical causes cancer

Sociocultural

Scenario: A recession cuts demand from manufacturers

Economic

Scenario: A new process converts a product into plastics

Technological

Scenario: Concern over carbon emissions drives demand for cleaner fuel

Environmental

Blockbuster vs. Netflix lesson

Failing to respond to macro trends (especially technological and sociocultural) can destroy an industry leader

PESTEL is internal or external?

External

The Five Forces

Threat of new entrants, Bargaining power of suppliers, Bargaining power of buyers, Threat of substitutes, Rivalry among existing competitors

What Five Forces describes

Industry rivalry and intensity of competition, industry profitability, and market attractiveness

What Five Forces CANNOT tell you

Which specific firm will win, a firm's internal strengths, or how the industry will change over time

Threat of new entrants is LOW when

Entry requires high capital, government licensing, economies of scale, strong brands, or access to distribution

Supplier power is HIGH when

Few suppliers, inputs are critical or a large share of costs, high switching costs, suppliers could integrate forward

Buyer power is HIGH when

Few or large buyers, products are standardized, low switching costs, buyers could integrate backward

Threat of substitutes is HIGH when

Substitutes from other industries meet the same need at a good price-performance ratio with low switching costs

Rivalry is HIGH when

Many or equal competitors, slow industry growth, commodity products, high fixed costs, high exit barriers

Substitute vs. rival

A rival makes the same product; a substitute is a different product from another industry that meets the same need

Columns of the class Five Forces chart

Most relevant factors from the checklist; Overall impact (positive or negative; degree)

Strong forces mean

Lower industry profitability and a less attractive industry

Medium-competitive firm in an attractive market

Can generate a lot of profit

Medium-competitive firm in an unattractive market

Will probably lose money

How to be profitable in an unattractive market

Have a clear competitive advantage and a clear right to win as a market leader

Value Net model adds

Complementors (players whose products increase the value of yours)

Scenario: Entry needs licensing and big infrastructure; customers switch easily; growth slowed; suppliers fragmented. Strongest force?

Buyer power

Total Available Market (TAM)

Total market demand for the product or service; the potential scale of the market

Serviceable Available Market (SAM)

Portion of the TAM targeted by your products within your geographic reach

Serviceable Obtainable Market (SOM)

Percentage of the SAM you can realistically capture (the target market)

Penetrated Market (PM)

Your current sales, customers, user base

Strategic group

A set of firms within the same industry that pursue similar competitive strategies or occupy similar competitive positions

Step 1 of strategic group mapping

Identify the industry

Step 2 of strategic group mapping

Choose two dimensions that differentiate firms

Three requirements for map dimensions

Independent, strategically meaningful, and vary across competitors

Step 3 of strategic group mapping

Plot each firm on a two-dimensional graph

Step 4 of strategic group mapping

Use different-sized circles to show relative market size or revenue

Step 5 of strategic group mapping

Interpret the clusters that emerge as strategic groups

Strategic group mapping primarily helps understand

Intra-industry mobility barriers and rivalry clusters

Mobility barriers

Obstacles that make it difficult to move from one strategic group to another

What a strategic group map tells you

Closest competitors, who competes directly, which groups are protected, white spaces, difficulty moving between groups, which groups are vulnerable

White space

An unoccupied area on the map, a possible market gap

Who is a firm's main competitor on the map?

Firms in the same strategic group (closest on the map)

Airline example: Spirit

Limited network, ultra-low cost

Airline example: Delta and United

Extensive network, premium service (same strategic group)

Competitive intelligence

Information about rivals useful in anticipating their next strategic moves

Signals a rival may make a strategic move

Pressure to improve financial performance, seeking more market standing, public statements of intentions, competitive intelligence profiles

Competitor analysis: FIRST ask

Their business aims, assumptions, capabilities, and current strategy

Competitor analysis: THEN ask

Are they happy? How will they act? What could change? Where are they vulnerable? What would provoke a serious response?

Where to look externally

PESTEL, Five Forces, strategic groups, competitive environment

Opportunity

External and positive

Threat

External and negative

Rule for opportunities and threats

Should begin with "The external environment…" and should not mention the company

Health-conscious consumers usually come from which analysis?

PESTEL (external)

"Consumer demand for low-sugar beverages is increasing" is…

Opportunity

Scenario: A student lists "intense competition" as a weakness. Why is it wrong?

Competition is external, so it is a Threat, not a Weakness

Scenario: "Commodity prices for sugar and aluminum fluctuate significantly"

Threat

Scenario: "Advances in zero-sugar sweeteners improve product quality"

Opportunity (external technology change)